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Feb. 14 1997 3:30 AM

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(posted Thursday, Feb. 13)

Green Cheese and Keynes

Professor Paul Krugman ("The Dismal Scientist") has done me the honor of another attack, this time for an alleged vulgarization of the great British economist John Maynard Keynes.

The odd thing is that Paul and I actually agree, more or less, on the policy question. I favor a low interest rate. Paul doesn't say quite as much. But he does concede that it is OK, intellectually speaking, to quarrel with Alan Greenspan's judgment. This may be the closest I'll get to having Paul's explicit endorsement on this important issue, and I'll take it with pleasure.


Paul and I also agree that the way to get lower interest rates is for the Federal Reserve to cut them. This is what the German central banker Hans Tietmayer always calls, with severe disapproval, "the easy way out." I definitely favor the easy way out when it is available.

Our argument begins with Paul's assertion that Keynes had some contrary and different view. Krugman seems to be saying that Keynes overlooked the importance of monetary policy to the determination of the interest rate. He writes that Keynes held a "liquidity preference" theory of the interest rate, according to which, in Krugman's version, markets for money and bonds determined the interest rate, with monetary policy playing no visible role.

This misrepresents Keynes, who understood central-bank powers extremely well. Among other things, Keynes had wielded those powers himself, for all practical purposes, at the British Treasury during World War I. Later, he was a vociferous opponent of tight British monetary policy during the 1920s.

Liquidity preference, though important in Keynes, is not a full theory of the interest rate. It is only a theory of the "demand for money"--of the choice between holding illiquid bonds and liquid cash. In order to get from money demand to a full theory of the interest rate, you need a theory of money supply. Keynes was well aware of this, and his view of the supply situation was more or less the same as Paul's or mine. The central bank supplies the liquidity (money) that speculators demand. The terms on which it does so, combined with the demand conditions, together determine the interest rate.


Keynes therefore understood perfectly well that a low interest-rate policy requires an accommodating central bank. If people increase their demand for money, then either interest rates must rise, cutting investment, or transactions must fall, cutting output and employment--unless the central bank acts. The problem, Keynes wrote, was that "people desire the moon"--a perfectly safe place to store their wealth. The solution, in Keynes' own metaphor, is to persuade them that "green cheese" is nearly as good, and to have a green-cheese factory--a central bank--conveniently at hand.

Now, if Keynes' interest-rate theory is not so easily written off, perhaps we should also look again at that paradox of thrift. That argument which holds that the attempt to raise saving will end up lowering national income, because consumption will fall, and with it profits, output, and employment. Was Keynes also right when he warned against excessive saving?

Paul shrinks from this view. He wants to maintain the tidy and comfortable belief, beloved by Victorians of all epochs, that thrift is always a virtue. I know that he also strongly favors a reduction in the federal budget deficit, precisely because that represents a rise in so-called "national savings." Paul agrees that such a rise in national savings might have some tendency to depress the economy, along lines of Keynes' multiplier model. But since--according to Krugman--the Federal Reserve can control output and unemployment, he believes that this tendency is easily offset by cuts in interest rates to hold employment steady.

This is Paul's second error, in my view. It is one thing to assume that the Federal Reserve could in principle always lower interest rates enough to offset the depressing effects of tax increases and spending cuts. But, in fact, there is no assurance that Greenspan and his colleagues have any actual intention of behaving in this way, nor any persuasive evidence that they have done so in the past. Paul's statement that this is "simple" and "reasonable" does not make it right.


Paul seems to regard Alan Greenspan as an ideologue who actually does control the unemployment rate according to the dictates of some economic theory. Greenspan himself has repeatedly denied this, and I believe him. I think that Greenspan is a nimble political figure, no more nor less. That being so, the main reason we have high interest rates is that the forces favoring them are more powerful than the forces opposed. This, I believe, is the deplorable truth.

In October 1993, recall, Congress took drastic action to raise "national saving" by cutting the expected future budget deficits in half. But the Federal Reserve then raised interest rates, beginning in February 1994, an action rationalized by entirely spurious fears of inflation. The raising of interest rates went on for 18 months, was never fully reversed, and actually raised federal spending on interest payments by enough to wipe out a large part of the deficit reductions.

That 1994 experience proved that one cannot rely on the Federal Reserve to offset the workings of the paradox of thrift. That being so, excess saving is a danger, just as Keynes warned. Analytically, Keynes' theory is right and Krugman's revision of it is based on a false premise. And the way to get lower interest rates and more investment and durable consumption spending and lower unemployment, all of which I favor, is not to increase thriftiness or to cut deficits. The essential thing is to get the Federal Reserve to bring interest rates down.

Paul and do I agree on one other thing. It is very hard to improve on Keynes, and more people should read him. When they do so, they will find that parable of the widow's cruse--a marvelous tidbit on the rewards of vigorous consumption spending as opposed to parsimony, niggardliness, and thrift. But, speaking of vulgarity, they ought to know that this is not from some "old folk tale," as Krugman writes. The source is actually the Bible: 1 Kings 17:16. "And the barrel of meal wasted not, neither did the cruse of oil fail."


You'd think a good Keynesian economist would know that.

--James K. GalbraithLBJ School of Public AffairsThe University of Texas at Austin


What a great job of compiling America's top philanthropists in the "Slate 60"! However, there are a couple of things I wanted addressed: Why Paul Mellon is missing from the list? And Walter Annenberg? Also, Lebanese Prime Minister Rafik Hariri donated $10 million to the Boston University School of Management last year for its new building. That is a big donation from a foreign politician.

No. 113, Alfred Slifka, does not belong to a New York City family of real-estate developers and investment managers. Instead, Slifka is a Bostonian who owns Global Petroleum Corp., New England's largest distributor of gasoline.

Hope you can correct the errors.

--York Lo

Ann Castle's reply: One of the important lessons I've learned since we started the Slate project is to be open to change, especially in an entrepreneurial effort like this one. Another equally important message is that no matter how carefully we try to craft categories of giving, human behavior refuses to be comprehensively categorized. I find that reassuring.

We didn't include the Hariri gift because it came from a non-American citizen. There were several very large ones made both in the United States and outside the United States last year. We may consider changing that guideline this year, or we may do a feature on gifts from non-American citizens to institutions here and abroad.

We also decided to list gifts only in the years the actual gift was announced, not when payments were made on previously announced pledges. This accounts for a number of missing foundation gifts. I did not do a mailing last year to private foundations (or to anyone, for that matter) to compile the list; I've changed that procedure this year. I relied on what I could find in public sources, and sometimes foundation gifts are not as well-publicized. We were quite open about this in the Introduction to the "Slate 60."

As for the background on Slifka, I took that information straight from a news story. I have learned that I need to verify everything and that even the most reliable sources are occasionally wrong.

We will stick with our decision to list gifts as they are announced, and won't list gifts made to create or add to private foundations. Again, we may address this type of giving in a separate feature. We will only list gifts from a private foundation to an actual grantee. We are always looking for ideas of how to make the "Slate 60" even more useful than it has proved to be so far.

In Defense of the New York Suburbs

Attention really should be drawn to Nicholas Lemann's incredible article on suburban New York, "The Suburbs Have Won." If I was forced to pick one (and only one) favorite bit, I think I would have to go with the equation of Starbucks coffee shops with sophistication--perhaps the single most novel, irreverent idea I've ever read in Slate. (Not that I wouldn't be mighty tempted by Lemann's pining for "a Merchant-Ivory-type movie theater," mind you.) You, of course, are free to dive in and pick your own favorite strand of drivel.

Lemann then goes on to explain that New York has no suburbs that are "truly hip." He doesn't favor us with a definition of "truly hip," but he is kind enough to drop some clues: "[A] truly hip suburb (no, that's not oxymoronic--go visit West Lake Hills, Texas, or Berkeley or Topanga, Calif.), where there would be leaflets stapled to the telephone poles and vegetarian restaurants and rave clubs, is completely out of the question in New York." Never having been to either West Lake Hills or Topanga, I can only go on the little Lemann gives us to grasp what makes a place "truly hip," but let me go ahead and see if I don't have the whole picture--uh, upper-class, white, Protestant children with dreadlocks, tattoos, and nascent heroin addictions playing in bad rock bands named after legendary 1970s TV sitcoms? Bookstores with lots of Noam Chomsky? Loud, irony-free discussions of Irony? Burrito delivery? Am I in the ballpark? Close? Well, gee, I guess if that's "truly hip," then suburban New York does come up sorely.

What can I tell you? The New York suburbs are largely the product of the migration of white-ethnic Catholic, Jewish, and African-Americans (and now Asian-Americans and Latinos) from the city of New York. People who were (or are), by and large, at most one generation removed from poverty. People who were (or are), as they say, shaped by that experience. If one judges their communities by the standards of middle- and upper-class WASP bohemians from Middle America (Starbucks coffee shops and vegetarian restaurants), yeah, they're going to come up short.

Since Lemann's claim to fame is that he wrote a 408-page book explaining to prep-school-educated liberals that many black people used to live in the South, this refusal to address basic sociology is glaring. There are a lot of awful things to be said about suburban New York, but Lemann is clearly not the person to make the case for or against a region of the country he simply does not understand. And, of course, it isn't all bad.

Take, for instance, oh, food. The food here is really good. Really, really good. Turns out the rest of America isn't full of bakeries and pizzerias. And 24-hour diners and delicatessens that cut giant chunks of meat with scary slicing machines. Not to mention the thousands of fine, relatively inexpensive ethnic restaurants. I realize that Lemann is partial to giant, homogenized chains, but some of us are still content to eat in independently owned restaurants. I guess we're just not as "sophisticated."

Then there's the matter of our cultural influence, which is huge (and by no means entirely benign), even if its full magnitude isn't always appreciated by the NPR crowd. Nassau County alone has given the world Eddie Murphy, Howard Stern, Rosie O'Donnell, and Jerry Seinfeld--four comedians, who for better or worse, probably shape the cutting edge of our national culture more than Charlotte, N.C.; and Berkeley, Calif.; and Austin, Texas; and all the truly hip suburbs with "a patina of sophistication" combined.

Lemann's silly, misinformed article completely ignores issues of class and ethnicity while presenting the giant chain stores of mall America (Borders, Starbucks) and the passing trends of middle America upper-class youth (leaflets on telephone poles, Anglophile raves) as some sort of ideal. His problem with the suburbs of New York would seem to be that they have too much New York and not enough suburb. All in all--just a really dumb piece.

--Michael Langnas

West Lake Hills Is Not Hip

I can't think of a more sophisticated way to begin, so I'll just blurt it out: West Lake Hills, Texas, is in no way, shape, or form a hip suburb, no matter what Nick Lemann says in "The Suburbs Have Won." I'm from West Lake Hills. I left my parents and brother behind when I moved five years ago, but I still visit frequently, and I have to tell you, there's not a vegetarian restaurant in sight. A notice for a rave party would send an army of cell-phone-waving parents into the school counselor's office and church hallways demanding action. (After, of course, said parents learned what a rave party was.)

West Lake Hills is a pretty place, lots of wood, stone, and gorgeous views of Lake Austin. The new Albertson's supermarket is great fun to shop in--good coffee, fresh herbs, and reasonably good focaccia bread. But in all that lovely, expensive real estate, there's no edge, no irony, no one dressed in black, even. It's certainly no Berkeley. Which, I suspect, is why my parents still live there. It's also why I don't.

--Jennifer Bradley

Fresh-Brewed Influence

The one issue that James J. Cramer avoids in his article "I Had Coffee With Clinton" is the fact that had he not given money to the Democratic National Committee or the president, he would not have had the opportunity to sit next to the president and discuss his stock-option idea. It's not what he may or may not have been "shaken down" for that day, but what he paid for the price of admission. Access to the president should be for all. Why are someone's ideas more important than mine because they gave money to the president or his party?

--Joe Strupek

Train in Vain

In Jacob Weisberg's review of Charles Murray's What It Means to Be a Libertarian ("The Other L-Word"), he states, "But if government can't reroute the freight train in a better direction, it's hard to see how it can derail it." As an engineer, I feel qualified to point out that rerouting requires new track and a switch (not to mention a new destination) before the train arrives. Derailing can be done with a few common chemicals or tools (remove a short section of rail), or a tow strap and vehicle (simply pull the rail out of line a few inches).

In truth, most government "programs" actually accomplish the opposite of the goals they are intended to achieve. Thus, welfare has created a group of permanent dependents, gun control has increased gun-related crime, and the war on drugs has created an immensely profitable drug trade. Weisberg incorrectly states the nonaggression principle as "no one can use force against anyone else." The proper statement is, "No one may initiate force against another." The difference is obvious when considering self-defense.

Also, in writing about Libertarianism: A Primer, by David Boaz, he states that "Boaz's model for this is the Internet" and asserts that "[h]e neglects, of course, the fact that the Internet began life as a federal defense project." Granted, the Internet's grandfather was DARPANET. This may be one of the (no more than six) cases where a government project went right. DARPANET was intentionally designed as a decentralized network in order to (as much as possible) ensure survivability in the event of World War III. The current Internet, still decentralized, has become a worldwide threat to authoritarian government, due to the free exchange of ideas it allows. This explains the recent spate of governmental (and intergovernmental) attacks on the Net.

In all, Weisberg displays an abysmal ignorance of what libertarianism is, and what libertarian goals mean to "We, the People." I suggest that he be limited to reviewing official government pronouncements in the future. This may be the only arena in which he can operate comfortably.

--Earl Warner

A Libertarian Quilt

Jacob Weisberg has it all wrong in his review of Charles Murray's What It Means to Be a Libertarian. He takes the position that he can state and judge "What is a libertarian?"--as though there were only "one type" of libertarian.

That's no more true than saying there is only one standard by which you can call yourself a Catholic, Protestant, Jew, black, white, Republican, Democrat, or any other philosophy or race.

Charles Murray's view of what it takes to be a libertarian and survive, and hope to have any impact and success in the current political arena, is far different and more appropriate than Weisberg's view. Follow Weisberg and you'll be in the sticks by yourself and getting nowhere.

--Mark Cornell

No More Hot Dogs

In "The Accidental Theorist," Paul Krugman demonstrates his penchant for naive economic analogies, ranging all the way back to the classical argument for free trade that involved wine- and cheese-producing economies. The fact that he recognizes that people will fault him on the oversimplification of his economic representations doesn't get him off the hook. The problem with these analogies, and the reason they are not immediately disposed of, is that, like Afrocentrist historical revisionism, they are so riddled with problems that one hardly knows where to begin.

Perhaps we could begin by noting that the service jobs replacing manufacturing jobs (i.e., selling hot dogs instead of making hot dogs) rarely pull the wages of the manufacturing jobs. In his earlier work he accepts models that don't even make allowance for the mechanisms of capitalism. Krugman's disdain for evidence is alarming; I can well hear him telling the hungry to simply eat more hot dogs.

Krugman asserts his argument through use of psychology, not economic reasoning. Namely, if you don't accept my argument then you are a smug, high-minded sophisticate. He is willing to disregard the growing income inequity in this country (illustrated in my article), among other issues, and practically admits that changes in his playful thought experiments would come only after cataclysmic evidence demonstrates otherwise (i.e., when they are useless). Krugman serves only himself and business concerns like Microsoft (now with its new spin-doctoring arm, Slate) that pamper him.

--Jonathan Imboden

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