Is the Treasury View essentially that savings and lending must be equal and that, therefore, the government can’t stimulate spending because it must borrow to do so, which is only redirecting money that would have been saved privately, anyway?
Yes
If so, is this built upon a naive accounting understanding that asserts this accounting identity? Yes And is this essentially saying that the velocity of money is a constant?Essentially, or at least that velocity can’t be changed by fiscal policy
Does Brad’s story correctly show how, via lending practices, the velocity of money can be increased, thus demonstrating that, in practice, at any given moment savings doesn’t necessarily equal spending and that therefore during a recession when savings suddenly increases, the government can increase spending with fiscal policy that basically increases the velocity of money?Yes, except that the accounting identiy always holds, although intended saving may not equal intended investment
Is the central insight of Keynes (called Keynes’s ?General Theory”?) that recessions are no more and no less occasions when, for whatever reason, a sufficiently large portion of the agents in an economy decide to save instead of spend? I’d say the central insight is that these decisions don’t automatically translate into higher investment
If so, is it accurate to characterize this view as notably modern in its scientific empircism because it simply describes something in basic terms and disregards, for example, why people are suddenly saving?Certainly, Keynesians tend to be more empiricist than the classical school. I’ll let the philosophers decide whether this is modern
In contrast, is it correct to characterize the pre-Keynesian theory of recessions as being a product of the business cycle—that booms happen when there’s a sufficiently large misallocation of capital which is necessarily followed by the bust when this misallocation starts to be corrected?The Austrian theory is something like this, but the classical view is that unemployment can only arise from excessive real wages
Or is this boom/bust theory of recessions distinct from, but similar to, the theory of business cycles? Am I wrong to conflate the two?I don’t think so: if it weren’t for recessions, no-one would care much about the business cycle/

That’s the problematic bit. If businesses can’t or won’t run up their little deficits then savers, who were providing the deficits in the past, must be holding on to an equivalent amount of money they can’t lend to anyone. What happens to that money?

Admittedly a suprising number of non-economists don’t think like that, in that they don’t automatically wonder what happens to money that isn’t spent. Not knowing who wrote the swimming pool analogy in the first place makes reconstructing the thinking behind that story rather difficult – I might have entirely misunderstood what the authors were trying to get at.

Please, let me try to help with this. Here’s my Argument Outline:

Main Point 1. The amount of water in the pool just represents the money supply. What we really care about in an economy is the amount of stuff and services we can buy with our money: the only reason a million dollars is so valuable is because someone could buy a lot of stuff with it. But what we really care about in an economy is the goods and services we buy. When more money flows into our hands, we can buy more and better things, and life is better; when less money flows into our hands, we can’t afford to buy as many things, and life is worse. The momentum of the water represents this flow of money to buy things: when we get paid for work, the money flows in, and when we pay for stuff, the money flows out. End with some kind of “surely this is obvious” statement.

Main Point 2. The more people who have money flowing through their hands, because of working and spending, the better the economy will be. So a good economy is like a Jacuzi: lots of money flows into your hands for the work you do, and you can spend that money. A bad economy is like a stinky pool that’s had standing water sitting in it for months: not much money is flowing, and lots of people end up unemployed.

Main Point 3. Demand naturally changes over time, and this causes slumps in business profit for different industries. Some industries depend on others, so a natural change in demand can cause many large industries to slump at the same time. This is all a natural result of markets, where demand is not constant.

Main Point 4. A multi-industry slump causes a downward spiral. During a general slump, a recession, it’s in each business’s self-interest to lay off employees, because they can’t afford them. However, this means that most businesses are firing people, who therefore no longer have any money to spend at these businesses. That means even less profit, which means a bigger slump, which means even more businesses will have to lay off employees. The end result is very high unemployment, which means very little money is changing hands, which means the economy’s in bad shape.

Main Point 5. What the economy needs in a slump is for someone to take the reins, buy a lot of stuff, invest in building a lot of stuff, and generate some momentum again. However, each business won’t do this, because they’re each making very little profit, so it’s in their own self-interest to fire people and reduce their costs. They each can’t afford to buy and build.

Main Point 6. What we need is somebody to step in and stand up for the public interest by buying goods and services from American businesses. Our government often sucks at standing up for our interests (this is a sop to conservative moderates), but it’s the government’s job. This is the main reason why put up with having a government: it’s supposed to provide our society with the services it needs, like roads and post offices and spending during a slump, when private industry won’t do it or can’t do it.

Main Point 7. The government doesn’t have to worry about profit, so it has no excuse for inaction. Therefore, the government should increase its spending, to generate some demand and momentum again. Once momentum picks up, businesses will be able to hire more people again, and we’re back to a growing economy.

Main Point 8. Supply side economics just looks at how much money’s in the pool. Demand side economics looks at whether that money is actually flowing into the hands of hardworking Americans: are enough hardworking people employed to keep the money flowing? (I hate that “hardworking Americans” phrase, but it’s not inherently a damaging frame, so I borrowed it.)

…

Notice I avoided, say, a discussion of teleology. I don’t think it’s reasonable to expect an “average person” to wade through the intricacies of the policy. The Everyman’s version of the Treasury View gets annihilated as soon as we remind people that what they really want from an economy is employment, dollars flowing in that they can spend.

In doing so here, I’m hoping to get some sanity-checking on each of the pieces—that others would read what I’ve written and, for example, tell me where I obviously don’t understand something or that it’s shaky. Also, to help me fit the pieces together in a natural way. Finally, to make sure that I understand and am fairly presenting the intuitive, Treasury View.

So, for example, here are some specific questions I’d ask about what I’ve written so far:

Is the Treasury View essentially that savings and lending must be equal and that, therefore, the government can’t stimulate spending because it must borrow to do so, which is only redirecting money that would have been saved privately, anyway?
If so, is this built upon a naive accounting understanding that asserts this accounting identity? And is this essentially saying that the velocity of money is a constant?
Does Brad’s story correctly show how, via lending practices, the velocity of money can be increased, thus demonstrating that, in practice, at any given moment savings doesn’t necessarily equal spending and that therefore during a recession when savings suddenly increases, the government can increase spending with fiscal policy that basically increases the velocity of money?
Is the central insight of Keynes (called Keynes’s ?General Theory”?) that recessions are no more and no less occasions when, for whatever reason, a sufficiently large portion of the agents in an economy decide to save instead of spend?
If so, is it accurate to characterize this view as notably modern in its scientific empircism because it simply describes something in basic terms and disregards, for example, why people are suddenly saving?
In contrast, is it correct to characterize the pre-Keynesian theory of recessions as being a product of the business cycle—that booms happen when there’s a sufficiently large misallocation of capital which is necessarily followed by the bust when this misallocation starts to be corrected?
Or is this boom/bust theory of recessions distinct from, but similar to, the theory of business cycles? Am I wrong to conflate the two?
Similar to my thoughts about Keynes’s recession theory via a via empiricism, is it accurate to characterize the pre-Keynesian recession theory I just described as being pre-empiricist in that it describes this process in teleological terms using teleological assumptions?
Assuming that Keynes’s recession theory is true, isn’t it also the case that there are, nevertheless, bubbles where capital is misallocated and that, following those bubbles, this capital needs to be reallocated? How does this relate to Keynesian recession theory? Are recessions that correlate to this process subsets of the set of all kinds of recessions?
How does the savings rate and trade account balance fit into this? Short-term and long-term?
As I understand it, stimulus spending, when it’s contributes to (or is) the deficit, is paid for by borrowing—is it correct to say that this borrowing is the sale of Treasury Bonds? Who buys them? How does who is buying (domestic or foreign) them affect things?
And, finally

What does what I’ve written here indicate about my comprehension of all this? Am I close to getting it right? On the right track? How can I structure what I know, with these pieces, to create a narrative that describes to the average person the fundamental concepts involved (of both sides), the arguments, and why the Keynesian view is correct?

Hope this helps. Sorry if I’ve overwhelmed you.

If that’s his point, couldn’t he just say that a possible world is where no one works and where there is no economic activity, which is obviously different from the actual world?

Anyway, I want to know what happens to Alice when she’s a real estate agent and doesn’t know how to build a deck (or how to cook).

Being the ignoramus that I am, I am more convinced by the explanation of the boom-bust cycle in terms of misallocation of resources. Given two economies, one which allocates its resources effectively during period P (the ant) and one which does not (the grasshopper), there will presumably come a time when the ant’s economy outperforms the grasshopper’s. If that’s the case, how does one think this outperformance should manifest itself? Surely a less rapid increase in the wealth of the grasshopper’s economy. And presumably resources can be so badly misallocated that there is at some point a large decrease in the wealth of the grasshopper’s economy.

Now I think the US economy has really badly misallocated resources over a period of 25 years. Maybe there are economic policies which will diminish the bad effects; but if there are economic policies which could just remove them, then the efficient allocation of resources doesn’t matter in the first place, and we could all just party (which I don’t believe).

Only, if as with a swimming pool (and ignoring evaporation etc) the level of economic activity is constant in any case.

Well, yeah, didn’t I make it clear that I understood that? (I’m sorry I’m so prolix; it makes it difficult for people to even bother reading my comments and, when they do, to pay enough attention to what I’m saying.)

Isn’t it odd that the same people who seem to assume that the level of economic activity is roughly constant—because they seem to be supply-side biased; if the supply is there, the activity will utilize it—are the same people who bemoan the lazy poor?

I think that it’s not that helpful to characterize Brad’s argument as “showing that the amount of economic activity is constant”. That’s implicit in his argument, but his argument is showing that the ways in which money moves around in the economy can be altered such that it increases economic activity. The Treasury View is wrong in that it assumes a static amount of activity; but asserting that the amount can change does not alone explain why stimulus spending is possible.

Which seems commonsensically true;

Only, if as with a swimming pool (and ignoring evaporation etc) the level of economic activity is constant in any case. That’s why (assuming you have been following the news lately) the metaphor is so obviously wrong.

In this context, the point that Brad is making is that the level of economic activity is not constant. When Beverley hires Alice, there is no offsetting loss of activity somewhere else because Alice was unemployed in the first palce.

I’d like to understand these issues well enough to be able to write an accurate presentation of the basic issues, defend the stimulus, and rebut the Treasury View, that I can send to some friends and relatives. I’ve got a number of facts and portions of theoretical frameworks bouncing around in my head that give me a partial, incomplete comprehension. I feel like I’m close to something that is more complete and competent, but I need help putting it together.

I think I’m pretty representative in this. When I read the blog posts and resulting comments on these issues, I see a lot of fragmentary understanding and related counter-arguments. People really need something that lays the basic ideas out in a fairly simple and relatively unbiased (and by that, I mostly mean that implicit assumptions and things like that shouldn’t be implicit and should be explained, with opposing theories also presented—people can still take a stand on what they think is true and correct) manner.

@3, bad Jim said:

“When I was a student at Berkeley, I was told that there was a physical hydraulic model of the economy in the basement of Barrows Hall complete with Keynesian pump-priming. I never saw it, to my regret;”

Yes, there were several of them. They were in the stalls behind the door labeled “Men”.

Have a nice day,
Antti

What’s great about this analogy is that the bottom of the pool, cast in concrete and completely immutable, represents the distribution of wealth, something that in the real world, has changed shape dramatically since 2000.

To be fair, isn’t it possible that these folk think that the “shape [and depth] of the pool” might be altered by other processes and their arguments are very short-term?