Tag: anklebiting

What We Talk About When We Don’t Talk About Demand

There sure are a lot of ways to not say aggregate demand.

Here’s the estimable Joseph Stiglitz, not saying aggregate demand in Vanity Fair:

The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. … There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization… (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.

This sounds reasonable, but is it? Nick Rowe doesn’t think so. Let’s leave aside globalization for another post — as Stieglitz says, it’s less important anyway. It’s certainly true that manufacturing employment has fallen steeply, even while the US — despite what you sometimes here — continues to produce plenty of manufactured goods. But does it make sense to say that the rise in manufacturing productivity be responsible for mass unemployment in the country as a whole?

There’s certainly an argument in principle for the existence of technological unemployment, caused by rapid productivity growth. Lance Taylor has a good discussion in chapter 5 of his superb new book Maynard’s Revenge (and a more technical version in Reconstructing Macroeconomics.) The idea is that with the real wage fixed, an increase in labor productivity will have two effects. First, it reduces the amount of labor required to produce a given level of output, and second, it redistributes income from labor to capital. Insofar as the marginal propensity to consume out of profit income is lower than the marginal propensity to consume out of wage income, this redistribution tends to reduce consumption demand. But insofar as investment demand is driven by profitability, it tends to increase investment demand. There’s no a priori reason to think that one of these effects is stronger than the other. If the former is stronger — if demand is wage-led — then yes, productivity increases will tend to lower demand. But if the latter is stronger — if demand is profit-led — then productivity increases will tend to raise demand, though perhaps not by enough to offset the reduced labor input required for a given level of output. For what it’s worth, Taylor thinks the US economy has profit-led demand, but not necessarily enough so to avoid a Luddite outcome.

Taylor is a structuralist. (The label I think I’m going to start wearing myself.) You would be unlikely to find this story in the mainstream because technological unemployment is impossible if wages equal the marginal product of labor, and because it requires that output to be normally, and not just exceptionally, demand-constrained.

It’s a good story but I have trouble seeing it having much to do with the current situation. Because, where’s the productivity acceleration? Underlying hourly labor productivity growth just keeps bumping along at 2 percent and change a year. Over the whole postwar period, it averages 2.3 percent. Over the past twenty years, 2.2 percent. Over the past decade, 2.3 percent. Where’s the technological revolution?

Just do the math. If underlying productivity rises at 2 percent a year, and demand constraints cause output to stay flat for four years [1], then we would expect employment to fall by 8 percent. In other words, lack of demand explains the whole fall in employment. [2] There’s no need to bring in structural shifts or anything else happening on the supply side. A fall in demand, plus a stable rate of productivity increase, gets you exactly what we’ve seen.

It’s important to understand why demand fell, but from a policy standpoint, no actually it isn’t. As the saying goes, you don’t refill a flat tire through the hole. The important point is that we don’t need to know anything about the composition of output to understand why unemployment is so high, because the relationship between the level of output and employment is no different than it’s always been.

But isn’t it true that since the end of the recession we’ve seen a recovery in output but no recovery in employment? Yes, it is. So doesn’t that suggest there’s something different happening in the labor market this time? No, it doesn’t. Here’s why.

There’s a well-established empirical relationship in macroeconomics called Okun’s law, which says that, roughly, a one percentage point change in output relative to potential changes employment by one a third to a half a percentage point. There are two straightforward reasons for this: first, a significant fraction of employment is overhead labor, which firms need an equal amount of whether their current production levels are high or low. And second, if hiring and training employees is costly, firms will be reluctant to lay off workers in the face of declines in output that are believe to be temporary. For both these reasons (and directly contrary to the predictions of a “sticky wages” theory of recessions) employment invariably falls by less than output in recessions. Let’s look at some pictures.

These graphs show the quarter by quarter annualized change in output (vertical axis) and employment (horizontal axis) over recent US business cycles. The diagonal line is the regression line for the postwar period as a whole; as you would expect, it passes through zero employment growth around two percent output growth, corresponding to the long-run rate of labor productivity growth.

1960 recession

1969 recession

1980 and 1981 recessions
1990 recession

2001 recession
2007 recession

What you see is that in every case, there’s the same clockwise motion. The initial phase of the recession (1960:2 to 1961:1, 1969:1 to 1970:4, etc.) is below the line, meaning growth has fallen more than employment. This is the period when firms are reducing output but not reducing employment proportionately. Then there’s a vertical upward movement at the left, when growth is accelerating and employment is not; this is the period when, because of their excess staffing at the bottom of the recession, firms are able to increase output without much new hiring. Finally there’s a movement toward the right as labor hoards are exhausted and overhead employment starts to increase, which brings the economy back to the long-term relationship between employment and output. [3] As the figures show, this cycle is found in every recession; it’s the inevitable outcome when an economy experiences negative demand shocks and employment is costly to adjust. (It’s a bit harder to see in the 1980-1981 graph because of the double-dip recession of 1980-1981; the first cycle is only halfway finished in 1981:2 when the second cycle begins.)

There’s nothing exceptional, in these pictures, about the most recent recession. Indeed, the accumulated deviations to the right of the long-term trend (i.e., higher employment than one would expect based on output) are somewhat greater than the accumulated deviations to the left of it. Nothing exceptional, that is, except how big it is, and how far it lies to the lower-left. In terms of the labor market, in other words, the Great Recession was qualitatively no different from other postwar recessions; it was just much deeper.

I understand the intellectual temptation to look for a more interesting story. And of course there are obviously structural explanations for why demand fell so far in 2007, and why conventional remedies have been relatively ineffective in boosting it. (Tho I suspect those explanations have more to do with the absence of major technological change, than an excess of it.) But if you want to know the proximate reason why unemployment is so high today, there’s a recession on still looks like a sufficiently good working hypothesis.

[1] Real GDP is currently less than 0.1 percent above its level at the end of 2007.

[2] Actually employment is down by only about 5 percent, suggesting that if anything we need a structural story for why it hasn’t fallen more. But there’s no real mystery here, productivity growth is not really independent of demand conditions and always decelerates in recessions.

[3] Changes in hours worked per employee are also part of the story, in both downturn and recovery.

Do Prices Matter?

Do exchange rates drive trade flows? Yes, says Dean Baker David Rosnick. Prices matter:

What happens to the economy as the dollar falls? …Over time, Americans notice that British goods have become more expensive in comparison to domestically produced goods. In other words, the price of U.S.-made sweaters becomes cheaper relative to the price of sweaters imported from Britain. This will lead us to buy fewer sweaters from Britain and more domestically manufactured sweaters.

At the same time, the British notice that American goods have become relatively inexpensive in comparison to goods made at home. This means it takes fewer pounds to buy a sweater made in the United States, so the British will buy more sweaters made in the United States and fewer of their domestically manufactured sweaters.

While American producers notice the increased demand for their exports, allowing them to raise their prices somewhat and still sell more than they had before the dollar fell. Similarly, for British exporters to continue selling they must lower prices.
Thus, as everyone eventually adjusts to the fall in the dollar, the trade deficit shrinks. This is not new economics by any stretch…

Indeed it’s not. Changes in prices induce changes in transaction volumes that smoothly restore equilibrium, is the first article of the economist’s catechism. But how much a given volume responds to a given price change, and whether the response is reliable and strong enough to make the resulting equilibrium relevant to real economies, are empirical questions. You could tell a similar parable about an increase in the minimum wage leading to a lower demand for low-wage labor, but as I’m sure Dean folks at CEPR would agree, that doesn’t it mean it’s what we actually see. You have to look at the evidence.

So what’s the evidence on this point? Dean Rosnick offers a graph showing two big falls in the value of the dollar after peaks in the mid-80s and mid-2000s, and falls in the trade deficit a few years later, in the early 90s and late 2000s. Early 90s and late 2000s … hm, what else was happening in those years? Oh, right, deep recessions. (The early 2000s recession was very mild.) Funny that the same guy who’s constantly chastising economists for ignoring the growth and collapse of a huge housing bubble, when he turns to trade … ignores a huge housing bubble.

Still, isn’t the picture is basically consistent with the story that when the dollar declines, US imports get more expensive and fall, and US exports get cheaper and rise? Not necessarily: Dean’s Rosnick’s graph doesn’t show imports and exports separately. And when we separate them out, we see something funny.

Click the graph to make it legible.

In a world where trade flows were mainly governed by exchange rates, a country’s imports and exports would show a negative correlation. After all, the same exchange-rate change that makes exports more expensive on world markets makes imports cheaper here, and vice versa. But that isn’t what we see at all. Except in the 1980s (when the exchange rate clearly did matter, but not in the way Dean Rosnick supposes; see Robert Blecker) exports and imports very clearly move together. And it’s not just a matter of a long-term rise in both imports and exports. Every period that saw a significant fall in imports — 1980-1984; 2000-2002; 2007-2009 — saw a large fall in exports as well. This is simply not what happens in a world where prices (are the main things that) matter.

(This discrepancy between real-world trade patterns and the textbook vision applies to almost all industrialized countries, and always has. It was noticed long ago by Robert Triffin, who brought it up to argue that movements in relative price levels did not govern trade patterns under the gold standard, as Ricardo and his successors had claimed. But it is just a strong counterargument to today’s conventional wisdom that exchange rates govern trade.)

So if changes in exchange rates don’t drive trade, what does? Lots of things, many of them no doubt hard to measure, or to influence through policy. But one obvious candidate is changes in incomes. One of the big advances of the first generation of Keynesian economists — people like Triffin, and especially Joan Robinson — was to show how, just as prices (the wage and interest rates) fail to equilibrate the domestic economy, leaving aggregate income to adjust, relative prices internationally don’t equilibrate the global economy, leaving output or growth rates to adjust. In the short run, business cycle-type fluctuations reliably involve changes in investment and consumer-durable purchases larger disproportionate to the change in output as a whole; given the mix of traded and non-trade goods for most countries, this creates an allometry in which short-run changes in output are accompanied by even larger short-run changes in imports and exports. For a country that runs a trade deficit in “normal” times, this means that recessions are reliably associated with smaller deficits and booms with larger ones. In the long run, there is also a reliable tendency for increments to income to involve demand for a changing mix of goods, with a greater share of demand falling on “leading sectors,” historically manufactured goods. (The flipside of this is Engels’ law, which states that the share of income spent on food falls as income rises.) Given that both a country’s mix of industries and its trade partners are relatively fixed, this creates a stable relationship between relative growth rates and trade balance movements. Neither of these channels is perfectly reliable, by any means — and the whole point of the industrial policy is to circumvent the second one — but they are still much stronger influences on trade flows than exchange rates (or other relative prices) are.

So with that in mind, let’s look at another version of the graph. This one shows the year-over-year change in the trade balance as a share of GDP, the same change as predicted by an OLS regression on total GDP growth over the past three years, and as predicted by the change in the value of the dollar over the past three years. [1]

It will be legible if you click it.

Not surprisingly, neither prediction gives a terribly close fit. But qualitatively, at least, the predictions based on GDP do a reasonable job: They capture every major worsening and improvement in the trade balance. True, they under-predict the improvement in the trade balance in the later 80s — the Plaza Accords mattered — but it’s clear that if you knew the rate of GDP growth over the next three years, you could make a reasonably reliable prediction about the the behavior of the trade balance. Knowing the change in the value of the dollar, on the other hand,wouldn’t help you much at all. (And just to be clear, this isn’t about the particular choice of three years. Two years and four years look roughly similar, and at a one-year horizon exchange rates aren’t predictive at all.)

Here’s another presentation of the same data, a scatterplot comparing the three-year change in the trade balance to the three-year growth of GDP (blue, left axis) and three-year change in the exchange rate (red, right axis). Again, while the correlation is fairly loose for both, it’s clearly tighter for GDP. All the periods of strongest improvement in the trade balance are associated with weak GDP growth, and vice versa; similarly all the periods of strong GDP growth are associated with worsening of the trade balance, and vice versa. There’s no such consistent association for the trade balance and changes in the exchange rate.

If you want to be able to read the graph, you should click it.

The fit could be improved by using some measure of disposable income — ideally adjusted for wealth effects — in place of GDP, and by using some better measure of relative prices in place of the exchange-rate index — altho there’s some controversy about what that better measure would be. And theoretically, instead of just the three-year change, you should use the individual lags.

Still, the takeaway, if you’re a policymaker, is clear. If you want to improve the trade balance, slower growth is the way to go. And if you want to boost growth, you probably are going to have to ignore the trade balance. Personally, I want door number two. I assume Dean Rosnick doesn’t want door one. But what I’m not at all sure about, is what concrete evidence makes him think that exchange-rate policy opens up a third door.

[1] Technicalities. I separately regressed the changes in imports and exports (as a percent of GDP) over three years earlier, on the percentage change over the same period in GDP and in the Fed’s trade-weighted major-partners dollar index, respectively. It’s all quarterly data, downloaded from FRED. The graphs shows the predicted values from the two regressions. This is admittedly crude, but I would argue that the more sophisticated approaches are in some respects less appropriate for the specific question being addressed here. For example, suppose hypothetically that a currency devaluation really did tend to improve the trade balance, but that it also tended to raise GDP growth, raising imports and offsetting the initial improvement. From an analytic standpoint, it might be appropriate to correct for the induced GDP change to get a better estimate of the pure exchange-rate effect. But from a policy perspective, the offsetting growth-imports effect has to be taken into account in evaluating the effects of a devaluation, just as much as the initial trade-balance improvement. Maybe we should say: Academics are interested in partial derivatives, policymakers in total derivatives?
EDIT: Oops! How did I not notice that this article was by somebody named David Rosnick, not Dean Baker? Makes me feel a bit better — I know Dean does share this article’s basic view of trade and the dollar, but I would hope his take would be a little less dependent on textbook syllogisms, and a little more attentive to actual patterns of trade. Clothing from the UK is hardly representative of US imports; to the extent we do import any, it’s like to be high-end branded stuff that is particularly price-inelastic.

FIRE in the Whole

Maybe the most interesting paper at this past weekend’s shindig at Bretton Woods was Duncan Foley’s. [1] He argues, essentially, that it’s wrong to include finance, real estate and insurance (FIRE) in measures of output. Excluding FIRE (and some other services) isn’t just conceptually more correct, it has practical implications — the big one being that an Okun’s law-type relationship between employment and output is more stable if we define output to exclude FIRE and other sectors where value-added can’t be directly measured.

It’s a provocative argument. He’s certainly right that the definition of GDP involves some more or less arbitrary choices about what is included in final output. (The New York Fed had a nice piece on this, a couple years ago, which was the subject of the one of the first posts on this humble blog.) However, I can’t help thinking that Foley is wrong on a couple key points. Specifically:

While in other industries such as Manufacturing (MFG) there are independent measures of the value added by the industry and the incomes generated by it (value added being measurable as the difference between sales revenue and costs of purchased inputs excluding new investment and labor), there is no independent measure of value added in the FIRE and similar industries mentioned above. The national accounts “impute” value added in these industries to make it equal to the incomes (wages and profits) generated. Thus when Apple Computer or General Electric pay a bonus to their executives, GDP does not change (since value added does not change–the bonus increases compensation of employees and decreases retained earnings), but when Goldman-Sachs pays a bonus to its executives, GDP increases by the same amount.

This seems confused on a couple of points. First, unless I’m mistaken, value-added in FIRE is calculated exactly in the way he describes — sale price of output minus cost of inputs. (The problem arises with government, where there is no sale price.) Second, I’m pretty sure there is no difference in the way wages are treated — total incomes in a sector always equal the total product of the sector, by definition. There is a question of whether executive bonuses are properly considered labor income or capital income, but that’s orthogonal to the issues the paper raises, and is not unique to FIRE. In any case, it is definitely not correct to say that higher compensation implies lower earnings in non-FIRE but not in FIRE.

It seems to me that there is a valid & important point here, but Foley doesn’t quite make it. The key thing is that there is no way of measuring price changes in FIRE. That’s what he should have said in place of the paragraph quoted above. The convention used in the national accounts is that the price of FIRE services rises at the same rate as the price level as a whole, so changes in nominal FIRE incomes relative total nominal income represent changes in FIRE’s share of total output. But you could just as consistently say that FIRE output grows at the same level as output as a whole, and deviations in nominal FIRE expenditure represent relative changes in FIRE prices. [2] There’s no empirical way of distinguishing these cases, it really is a convention. Doing it the second way would imply lower real GDP and higher inflation. I think this is the logically consistent version of Foley’s argument. And it would motivate the same empirical points about Okun’s Law, etc.

There’s another argument, tho, which I don’t quite have a handle on. Which is, what are the implications of considering FIRE services intermediate inputs rather than part of final output? If a firm pays more money to a software firm, that’s considered investment spending and final output is corresponding higher. If a firm pays more money to a marketing firm, that’s considered an intermediate good and final output is no higher, instead measured productivity is lower. I think that FIRE services provided to firms are considered intermediate goods, i.e. are already treated the way Foley thinks they should be. But I’m not sure. And there’s still the problem of FIRE services purchased by households. There’s no category of intermediate-goods purchases by households in the national accounts; any household expenditure is either consumption or investment, so contributes to GDP. This is a real issue, but again it’s not unique to FIRE; e.g. why are costs associated with commuting considered part of final output when if a business provides transportation for its employees, that’s an intermediate good?

He raises a third question, about the possibility that measured FIRE outputs includes asset transfers or capital gains. There is serious potential slippage between sale of financial services (part or GDP, conceptually) and sale of financial assets (not part of GDP).

Finally, it would be helpful to distinguish between services where measuring output is practically difficult but conceptually straightforward, and FIRE proper (and maybe insurance goes in the previous category). It seems clear that capital allocation as such should not be considered as part of final output. Whatever contribution it makes to total output (modulo the deep problems with measuring aggregate output at all) must come from higher productivity in the real economy. The problem is, there’s no real way to separate the “normal service” component of FIRE from the capital-allocation and representation-of-capitalist-interests (per Dumenil and Levy; or you could say rent-extraction) components.

But whatever the flaws of the paper, it’s pointing to a very important & profound set of issues. We can’t bypass the conceptual challenges of GDP, as Matt Yglesias (like lots of other people) imagines, with the simple assertion that labor is productive if it produces something that people are willing to pay for. Producing a consistent series for GDP still requires deliberate decisions about how to measure price changes, and how to distinguish intermediate goods from final output. Foley is absolutely right to call attention to these problems, that most social scientists are happy to sweep under the rug [3]; he’s right that they’re especially acute in the case of FIRE; and I think he’s probably right to say that to solve them we would do well to return to the productive/unproductive distinction of the classical economists.

[1] I wasn’t there, but a comrade who was thought so. And he seems to be right, based on the papers they’ve got up on the website.

[2] Or you could say that FIRE output is fixed (perhaps at 0), and all changes in nominal FIRE output represents price changes. Again, this problem can’t be resolved empirically, nor does it go away simply because you adopt a utility-based view of value.

[3] Bob Fitch had some smart things to say about the need to distinguish productive and unproductive labor.

Roubini, Deflationist

Last week, Nouriel Roubini wrote a somewhat puzzling op-ed in the Washington Post, in support of a payroll tax cut as a stimulus measure.

It’s a rather strange argument, or mix of arguments, since he’s never clear whether it’s a demand-side or supply-side policy. For example, he argues both that the cut should be higher for low-income workers (since they have a higher propensity to consume), and that “to maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees.”

But let’s take the supply-side half of Roubini’s argument at face value. Suppose a payroll tax cut lowered the cost of labor to employers. Is it so obvious that would increase employment?

The implicit model Roubini is using is the one every undergraduate learns, of a firm in a perfectly competitive market with increasing marginal costs. But in the real world firms face downward-sloping demand curves, especially in recessions. So the only way a reduction of labor costs can increase hiring is if it allows firms to lower costs, i.e. contributes to deflation. Does Roubini really think that more deflation is what the economy needs? (Does he even realize that’s what he’s arguing?)

This, anyway, was my reaction when I read the piece. But it wouldn’t be worth dragging out a week-old op-ed to take shots at, if my friend Arin hadn’t pointed out a recent NY Fed working paper by Gauti Eggerston making exactly this point. From the abstract: “Tax cuts can deepen a recession if the short term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures.” The paper itself involves building up a complicated model from microfoundations (that’s why Eggerston gets paid the big bucks) but the underlying intuition is the same: The only way a decrease in labor costs can lead to increased hiring is by lowering prices, and under current conditions lower prices can only mean lower aggregate demand.

As Arin points out, the incoherence of the argument for payroll tax cuts may be precisely their appeal. People who think unemployment is the result of inadequate demand and people who think it’s the result of lazy, overpaid workers (i.e. it’s “structural”) can both support them, even though the arguments are incompatible. (People who don’t scruple too much over consistency can even make both arguments at once.) But if macroeconomic policy is limited to stuff that can be supported with bad arguments, we shouldn’t be surprised if the results are disappointing. That lower labor costs don’t help in a recession is, I guess, another lesson from the Great Depression that will have to be learned again.

As for Roubini, it’s hard to improve on Jamie Galbraith’s very diplomatic judgment: I cannot discern his methods.

Those Who Forget History, Are Probably Historians

There are hardly any economists or economic historians who have contributed more to our understanding of the role of international finance in the Great Depression than Barry Eichengreen and Peter Temin. [1] So it’s disappointing to see them so strenuously refusing to learn from that history.

They start by correctly observing that the fatal flaw of the gold standard was the “asymmetry between countries with balance-of-payments deficits and surpluses. There was a penalty for running out of reserves .. but no penalty for accumulating gold.” Thus the structural tendency toward deflation in the gold standard era, and the instability of the system once workers recognized that lower wages for “sound money” wasn’t such a great deal. If Temin and Eichengreen want to draw a parallel with the Euro system today, well, I’m not sure I agree, but it’s an avenue worth pursuing. But as they want to apply it, to the US and China, it’s unambiguously wrong, as economics and as history.

“The point,” say Temin and Eichengreen, “is not to let deficit countries off the hook.” Barry, Peter — read your books! Letting the deficit countries off the hook is exactly the point. If there’s one lesson in Lessons from the Great Depression, it’s that no practical response to the crisis was possible until the idea that a trade deficit represented a kind of moral failing was abandoned. The whole point, first, of leaving the gold standard, and later, of the Bretton Woods institutions, was to free deficit countries from the obligation to “live within their means” by curtailing domestic investment and consumption.

Keynes couldn’t have been clearer on this. The goal of postwar monetary reform, he wrote, was “A system which would maintain balance of payments equilibrium without trade discrimination but also without forcing unemployment .. on deficit countries,” [2] in other words, a system in which governments’ efforts to pursue full employment was not constrained by the balance of payments. We needn’t take Keynes as holy writ, but if we’re going to analyze current arrangements in light of his writings in the 1940s, as Temin and Eichengreen claim to, we have to be clear about what he was aiming for.

One would expect, then, that they would go on to show how “global imbalances” are constraining national efforts to pursue full employment. But they don’t even try. Instead, they offer ambiguous phrases whose vagueness is a sign, perhaps, of a bad conscience: Keynes “wanted measures to deal with chronic surplus countries.” What kind of surpluses, exactly? and deal with how?

The beginning of wisdom here is the to recognize the distinction between the balance of payments and the current account. Keynes was concerned with the former, not the latter. Keynes didn’t care if some countries ran trade surpluses or deficits, temporarily or persistently; what he cared about was that these imbalances did not interfere with other countries’ freedom “to pursue full employment and progressive social policies.” In other words, current account imbalances were not a problem as long as the financial flows to finance them were guaranteed.

“Creditor adjustment” is rightly stressed by Eichengreen and Temin as a central feature of Keynes’ vision of postwar monetary arrangements, but they seem to have forgotten what it meant. It didn’t mean no one could run a trade surplus, it just meant that the surplus countries would be obliged to lend to the deficit ones as much as it took to finance the trade imbalances. As Keynes’ follower Roy Harrod put it,”The most important requirement [is] to get the United States committed to creditor adjustment. …. Creditor adjustment could be secured most simply by an agreement that the creditor would always accept cheques from the deficit countries in full discharge of their debts. … So long as their credit position cannot cause pressure elsewhere, there is no harm in allowing a further accumulation.” All of Keynes’ proposals at Bretton Woods were oriented toward committing the countries with surpluses to lend, at concessionary rates if necessary, to the deficit ones.

China today accepts American checks in full discharge of our debts; they don’t demand payment in gold. The Chinese surplus isn’t putting upward pressure on US interest rates, or constraining public spending. All Keynes ever wanted was for all surplus countries to be like China.

“Sixty-plus years later, we seem to have forgotten Keynes’ point,” Eichengreen and Temin conclude. True that.

[1] The strangely forgotten Robert Triffin is one.

[2] The historical material in this post post, including all quotes, is drawn from chapters 6 and 9 of the third volume of Robert Skidelsky’s biography of Keynes.

Keyes Is Right

Alan Keyes says, “If citizenship is not a birthright then it must be a grant of the government. And if it is a grant of the government, it could curtail that grant in all the ways that fascists and totalitarians always want to.”

In other words, the rights vis-a-vis the state we call citizenship, are prior to the legal acts that formalize them.

Joshua Micah Marshall thinks that’s “dramatically crazier than any of the opinions on offer,” since Keyes attributes the priority of citizenship, in part, to God.

But as a historical matter, Keyes is certainly right. The founding documents of political liberalism — the Declaration of the Rights of Man and Citizen, the Declaration of Independence — explicitly state that the rights of the citizen are prior to their recognition by governments. If a government fails to recognize them, it’s that government’s legitimacy that is diminished, not the rights of the citizen.

In the specific 14th Amendment context, the point is that the right of the freedmen to citizenship wasn’t created by the 14th Amendment, but already existed by virtue of their living in this country and being subject to its laws. Did Congress have the power or the authority to deny them citizenship? Seems to me the Civil War answered that question clearly in the negative. The law binds most of the time, but ultimately it derives its authority from a set of norms that are prior to it.

This is certainly how the founders of liberal political orders, here and elsewhere, understood the relationship between the rights of the citizen and the law. That’s why they were ready to overthrow existing governments by force. Of course today it’s the Constitution and the law that regulate citizenship. But it’s important to remember that the fact that we — or almost anyone else — are citizens at all is not the result of legal or constitutional acts.

EDIT: It’s funny that reference to the founding documents of political liberalism is these days almost a monopoly of conservatives. Of course it’s not so strange, since conservatism is backward-looking by nature, while progressives naturally believe in progress. But the DNA of liberalism hasn’t changed that much, and Jefferson, Madison, and Hamilton, Lafayette and Saint-Just, and other Enlightenment political figures expressed it pretty robustly.

Unlike their forebears, modern liberals tend to insist on the absolute autonomy of the law in general, and the Constitution in particular. They’re unwilling, for obvious reasons, to accept a political order grounded on divine revelation, but they don’t have any alternative ground to put it on, so it ends up floating in the air. (Carl Schmitt is very good on this.) There’s what’s useful, and there’s what’s legal, under the law as it exists; but there’s no category of political legitimacy behind the law. Given the remarkable political stability of the United States since the Civil War, and just as important, as Herbert Croly emphasized, the continuously rising standard of living here, we’ve mostly gotten along fine without one. But one suspects that it wouldn’t take that much political strain for “government by lawyers” (Croly’s phrase) to experience its Wile E. Coyote moment, when it turns out that the authority of the law wasn’t underpinned by anything but a lack of good reasons to question it. Not unlike, perhaps, what happened in the financial crisis of 2008, when it turned out that not only did the traditional tools of monetary policy not work, they’d stopped working some time before.