LeRoy_Was_Here
Senator
A very interesting column, by a very good economist:
How National Belt-Tightening Goes Awry
By ROBERT J. SHILLER
WHY is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?
Maybe it’s because we have the wrong metaphor stuck in our minds, and it’s framing policy choices in a misleading way.
Clearly, metaphors and other symbols carry real weight in our thinking, as has been shown by George Lakoff, a cognitive linguist at the University of California, Berkeley, and Mark Johnson, a philosopher at the University of Oregon. In their 1980 book, “Metaphors We Live By,” they argue, “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”
Our metaphors are like the icons on our computer screen, little pictures by which we condense complexities into manageable packets to refer to in our decision-making. Our brains may be hard-wired for them.
Consider our current thinking about taxes and government spending. We seem caught up in a “family belt-tightening” metaphor, in which the nation is a family that has outspent its income and is trying to get back in control. The family must cut profligate spending, save and pay down debts. It’s a powerful thought, of course, because we know that mismanagement of household finances can lead to a family’s ruin.
But perhaps the most important lesson conveyed by the great economist John Maynard Keynes is that this metaphor, when applied to the national economy, is fundamentally misleading: what is smart for the family is not smart for society as a whole. This idea, sometimes known as the paradox of thrift, is that when we all tighten our belts at once, the economy is so weakened that we end up failing to save more, and instead are all worse off. When that happens, some collective action — government stimulus — is needed.
Unfortunately, econometric research can’t prove definitively whether Keynes is right. That is because any rigorous, scientific, controlled experiment is impossible — especially one involving a suitably large sample of whole nations. Hence, abstract theory, intuition and metaphors loom especially large in our thinking.
I have previously argued in this column that a different approach, a “winter on the family farm” metaphor, should be stressed in bad times. When winter comes, and there aren’t the usual jobs in planting and harvesting, we should all keep busy anyway. We should demand that everyone help out with long-term projects on the farm, like fixing the barn, digging a well or building a fence. The farm requires that all members pay a sort of tax, by donating labor.
IN the early 1940s, William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.” It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged. In other words, the “balanced-budget multiplier” equals one. Like the farm in winter, the nation — through taxation — can require full employment, and does not need to go into debt to stimulate the economy.
Consider some measures proposed in France by its new president, François Hollande. He said during his campaign that he wanted to deal with his nation’s high unemployment rate, which has hit 10 percent, by hiring 60,000 teachers and to raise taxes by putting a 75 percent tax rate on incomes of more than a million euros.
If that higher tax, combined with the additional tax revenue from the new teachers, matched the increase in expenditures, the balanced-budget theorem would apply, causing a one-to-one effect on the economy. (The effect might be even greater than one to one, given that the tax increases would focus on high-income people, and the new teachers would be more likely to spend their money immediately.)
Surprisingly, Mr. Hollande’s policy has been criticized as profligate. But if his tax increases matched the cost of the teachers, there would be no increase in the French national debt. Instead, people who are now idle would have jobs, and young people would receive a better education.
Another criticism has been that the French government is already too large. General government final consumption expenditure, the actual amount that national and local governments spend on goods and services, was 25 percent of France’s gross domestic product in 2010, much larger than the 17 percent in the United States. And if a balanced-budget stimulus raised French G.D.P. by 5 percent, the theorem implies that the government would temporarily account for 29 percent of G.D.P. [(25 + 5)/(100 + 5) = 29 percent].
But what would be wrong with that, on a temporary basis? Government stimulus does not mean government control of our lives, as some seem to believe. Remember that when a central government provides funds for teachers, it doesn’t need to take control of their hiring and supervision, which can be delegated broadly to all the separate communities and schools, and parents can be given some choice of teachers.
Fiscal stimulus is often called ineffective for relatively open economies because it can “leak” to other nations. France has such an economy. It is relatively small when compared with that of the surrounding European Union, and its imports account for 28 percent of G.D.P. If France tried to stimulate its economy by cutting taxes, leaving its expenditures constant and thus raising the national debt, leakage would occur because its people would spend a good deal of that money abroad. At least in part, the government would be stimulating other countries’ economies instead.
But if France followed a balanced-budget stimulus strategy, there should be no such leaks, according to the theory of Mr. Salant and Professor Samuelson. If the government spent the stimulus money directly on hiring teachers, and not at all on imports, it would create one more euro of G.D.P. for every euro it spent. And there should be no change in the French people’s own expenditures, whether on imports or domestic items, because after-tax income would be unchanged.
The April 2012 World Economic Outlook from the International Monetary Fund endorsed balanced-budget stimulus, but, beyond this, there is hardly ever any mention of it these days. The concept of Mr. Salant and Professor Samuelson remains, unfortunately, almost forgotten. And the family belt-tightening image continues to dominate public discussion worldwide, making the public-stimulus debate largely off-center and irrelevant.
Clearly, if we want to garner public support for some much-needed balanced-budget stimulus, we have to work on our metaphors.
Robert J. Shiller is professor of economics and finance at Yale.
How National Belt-Tightening Goes Awry
By ROBERT J. SHILLER
WHY is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?
Maybe it’s because we have the wrong metaphor stuck in our minds, and it’s framing policy choices in a misleading way.
Clearly, metaphors and other symbols carry real weight in our thinking, as has been shown by George Lakoff, a cognitive linguist at the University of California, Berkeley, and Mark Johnson, a philosopher at the University of Oregon. In their 1980 book, “Metaphors We Live By,” they argue, “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”
Our metaphors are like the icons on our computer screen, little pictures by which we condense complexities into manageable packets to refer to in our decision-making. Our brains may be hard-wired for them.
Consider our current thinking about taxes and government spending. We seem caught up in a “family belt-tightening” metaphor, in which the nation is a family that has outspent its income and is trying to get back in control. The family must cut profligate spending, save and pay down debts. It’s a powerful thought, of course, because we know that mismanagement of household finances can lead to a family’s ruin.
But perhaps the most important lesson conveyed by the great economist John Maynard Keynes is that this metaphor, when applied to the national economy, is fundamentally misleading: what is smart for the family is not smart for society as a whole. This idea, sometimes known as the paradox of thrift, is that when we all tighten our belts at once, the economy is so weakened that we end up failing to save more, and instead are all worse off. When that happens, some collective action — government stimulus — is needed.
Unfortunately, econometric research can’t prove definitively whether Keynes is right. That is because any rigorous, scientific, controlled experiment is impossible — especially one involving a suitably large sample of whole nations. Hence, abstract theory, intuition and metaphors loom especially large in our thinking.
I have previously argued in this column that a different approach, a “winter on the family farm” metaphor, should be stressed in bad times. When winter comes, and there aren’t the usual jobs in planting and harvesting, we should all keep busy anyway. We should demand that everyone help out with long-term projects on the farm, like fixing the barn, digging a well or building a fence. The farm requires that all members pay a sort of tax, by donating labor.
IN the early 1940s, William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.” It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged. In other words, the “balanced-budget multiplier” equals one. Like the farm in winter, the nation — through taxation — can require full employment, and does not need to go into debt to stimulate the economy.
Consider some measures proposed in France by its new president, François Hollande. He said during his campaign that he wanted to deal with his nation’s high unemployment rate, which has hit 10 percent, by hiring 60,000 teachers and to raise taxes by putting a 75 percent tax rate on incomes of more than a million euros.
If that higher tax, combined with the additional tax revenue from the new teachers, matched the increase in expenditures, the balanced-budget theorem would apply, causing a one-to-one effect on the economy. (The effect might be even greater than one to one, given that the tax increases would focus on high-income people, and the new teachers would be more likely to spend their money immediately.)
Surprisingly, Mr. Hollande’s policy has been criticized as profligate. But if his tax increases matched the cost of the teachers, there would be no increase in the French national debt. Instead, people who are now idle would have jobs, and young people would receive a better education.
Another criticism has been that the French government is already too large. General government final consumption expenditure, the actual amount that national and local governments spend on goods and services, was 25 percent of France’s gross domestic product in 2010, much larger than the 17 percent in the United States. And if a balanced-budget stimulus raised French G.D.P. by 5 percent, the theorem implies that the government would temporarily account for 29 percent of G.D.P. [(25 + 5)/(100 + 5) = 29 percent].
But what would be wrong with that, on a temporary basis? Government stimulus does not mean government control of our lives, as some seem to believe. Remember that when a central government provides funds for teachers, it doesn’t need to take control of their hiring and supervision, which can be delegated broadly to all the separate communities and schools, and parents can be given some choice of teachers.
Fiscal stimulus is often called ineffective for relatively open economies because it can “leak” to other nations. France has such an economy. It is relatively small when compared with that of the surrounding European Union, and its imports account for 28 percent of G.D.P. If France tried to stimulate its economy by cutting taxes, leaving its expenditures constant and thus raising the national debt, leakage would occur because its people would spend a good deal of that money abroad. At least in part, the government would be stimulating other countries’ economies instead.
But if France followed a balanced-budget stimulus strategy, there should be no such leaks, according to the theory of Mr. Salant and Professor Samuelson. If the government spent the stimulus money directly on hiring teachers, and not at all on imports, it would create one more euro of G.D.P. for every euro it spent. And there should be no change in the French people’s own expenditures, whether on imports or domestic items, because after-tax income would be unchanged.
The April 2012 World Economic Outlook from the International Monetary Fund endorsed balanced-budget stimulus, but, beyond this, there is hardly ever any mention of it these days. The concept of Mr. Salant and Professor Samuelson remains, unfortunately, almost forgotten. And the family belt-tightening image continues to dominate public discussion worldwide, making the public-stimulus debate largely off-center and irrelevant.
Clearly, if we want to garner public support for some much-needed balanced-budget stimulus, we have to work on our metaphors.
Robert J. Shiller is professor of economics and finance at Yale.
