“Re-Breaking Bones” is the opposite of what should be done

A guest post by Mark Sadowski

(Mark put up this long comment in my “On breaking bones” post. It clearly should be post on its own.)

Edward Lambert:
“As it is, Christina Romer is telling us not to fear an economic correction as long as its recovery is done correctly. It is like re-breaking a bone to set it straight. If the re-breaking of a bone is not done, the bone won’t work correctly in the future. It is proper medicine. You will be better off going through the moment of extra pain…My prescription is to re-break the economic bone which has not set correctly, and this time let’s be aggressive in setting straight better wages and labor share from the start. The idea of re-breaking the economy may sound crazy to you, but the methods of medicine have a greater wisdom than what I see currently among economists.”

If you listen to Christina Romer’s speech (Edward has a fondness for posting videos rather than papers, precisely because I believe he hopes no one will take the time to view them) she says in her list of strategies:

“Avoid crises if possible.”

“End crises quickly if they do happen.”

“Use monetary and fiscal policy aggressively.”

and

“Avoid self-inflicted wounds.”

This is exactly counter to Edward Lambert’s perscription of re-breaking the economy.

One key to understanding Edward Lambert’s views is that he considers himself to be a follower of “Institutional Economics”. Paul Krugman had this to say about Institutional Economics recently:

 “…Before I turn to Syll’s critique, let me summarize my understanding of one of the great turning points in the practice of economics – the turn away from institutional economics in the 1940s and 1950s. Until that time, institutional economics – generally taking the form of long, discursive books rich in historical detail – had been a strong presence in U.S. thought. But then came Samuelson and associates, and models took over.

Why did this happen? It wasn’t, as some might imagine, about free-market ideology: Samuelson started with Keynesian macro (or “Keynesian” macro, if you feel the urge to claim that the master meant something different), and in fact faced a fierce campaign by right-wingers to keep his work out of the schools. No, what happened was the Great Depression.

Think about it. Here we had an utter catastrophe, and people wanted answers: how could this happen, what can we do? Institutional economics replied, in effect, by saying “Clearly what is happening is a complex process with deep historical roots. We need to address those complexities. It would be foolish to expect easy answers.” Meanwhile, American Keynesians said, “We have inadequate demand. Increase government spending!”…”

So you see, indifference to adequate aggregate demand stimulus has apparently always been a key feature of Institutional Economics.

Some other keys to understanding Edward Lambert’s economic views:

1) His model of “Effective Demand” misappropriates its name chiefly from Keynes, but also from Michal Kalecki. In Lambert’s model, labor share of income acts as a constraint on employment and capacity utilization which he terms the “effective demand limit”. But if you actually read Keynes’ General Theory (Chapter 3) you’ll find that “effective demand” is simply the intersection point between the aggregate demand and aggregate supply curves. Keynes argues that effective demand can be increased through monetary stimulus and public works projects. Similarly, Kalecki argues that effective demand can be increased through aggregate demand stimulus. This of course runs completely counter to Lambert’s claim that effective demand is a limit to employment and capacity utilization against which aggregate demand stimulus is totally ineffective.

2) Edward Lamberts’ model of “Effective Demand” is originally derived from the work of Boddy and Crotty (1975), Boddy (2007) and Goldstein (1986, 1996). Rather than link all three I’ll simply link the most recent paper.

Boddy shows through careful examination of the research evidence that labor share of income can be described as a function of employment and industrial capacity utilization. Once again Lambert perverts this, this time by inverting cause and effect. In his model, employment and capacity utilization are functions of the labor share of income. The fact that this runs counter to his own sources and a large body of research evidence seems to be of no concern to him, since he is not interested in the truth, only in advancing his own model of “Effective Demand”.

3) If you examine his blog posts, you’ll find that Edward Lambert’s main public policy perscription is the reduction of aggregate demand stimulus, specifically by ending QE and raising interest rates. Given what we know from the research evidence, this is exactly the opposite of what should be done if one’s goal were to raise labor share of income, as Lambert repeatedly claims.

I have a hard time reconciling all of this with the idea that Lambert’s intentions are good and that it is his thinking that is simply muddled. How can one so blatantly misapprehend Keynes and Kalecki, or Boddy, Crotty and Goldstein? There is something seriously amiss here.