Archive for the ‘economists’ Category

Rose Friedman

December 23rd, 2009 No comments

Somehow I hadn’t realized that Rose Friedman died this fall. John Taylor has a good one-page note on her and “TV Ears”. She sounds like such a fun person to know.

Categories: economists Tags:

Marxists Obituarized Admiringly: Andrew Glyn

April 30th, 2009 No comments

(April 30–revised, see below)
From National Review:

Andrew Glyn is not a household name, and until I read his obituary yesterday in The Times of London I had never heard of him. But what an illuminating document that obituary proves to be, a perfect little insight into the age. The opening sentence informs that Glyn “was one of Britain’s most prominent Marxist economists who produced searching critiques of capitalism,” going on to salute him as “one of the finest of Oxford dons.”… Think of the abuse of privilege. Think of the false pretences. Think of the damage he did spouting rubbish year after year to students who would be expected to parrot it back to him. To one student, he is supposed to have said, “the three greatest men who ever lived were Lenin, Trotsky and Charlie Parker,” – a sentence that the obituary writer hilariously links to “his depth of knowledge.” Some of the unfortunate students will have recovered freedom to think for themselves, but some will be permanently damaged. The obituary writer does in the end concede that Glyn “will to some extent be deemed to have backed the wrong ideological horse” — that “to some extent” is a qualification that goes so far beyond hilarious that it is almost majestic.

Dr. Stern writes in an AER article:

This is dedicated to my close friend,
distinctive and distinguished economist and fine man,
Andrew Glyn, who died on December 22, 2007, and whose
funeral took place in Oxford, UK, on the same day as the
Ely Lecture, January 4, 2008.

I decided to delete my strong comments on Dr. Glyn. I don’t believe in De mortuis nil nisi bonum,
but I don’t know why he was divorced. I am skeptical, though, of how good and kind a person is if I then discover that he is divorced. Lots of people are charming when being charming has low cost and aids their social position, but cheat on their wives, molest their children, and neglect their parents.

I also think it is important not to praise someone as a good teacher when he teaches pernicious rubbish, even if he teaches it persuasively. A person can be nice and still be a Leninist, just as he can be nice and still be a Nazi. The comparison is by no means too strong. In fact, there is much more excuse for someone who was a Nazi in the 1930s than a Leninist in the 1980s. In the 1930’s the Nazis were thuggish and autocratic, but the horrors of WW 2 and the Holocaust were still to come. By now the excesses of Communism– not just the political murders, but the millions killed by collectivization– are well known. In fact, even by 1922 the crimes of Lenin and Trotsky were well known. I can understand why Communists would praise Dr. Glyn, but those of us who fall into one of the categories of people his heroes liked to kill shouldn’t praise him.

Categories: economists, liberals, universities Tags:

Pro-Monopoly Economists

March 1st, 2009 2 comments

As Prof. Mankiw notes, it’s strange to see well-known economists supporting the bill in Congress to eliminate the secret ballot in union elections, allowing instead for the union organizers to pressure workers to sign cards publicly that the organizers then collect and turn in. I wonder if those economists would also oppose the secret ballot in Congressional elections?

As Prof. Mankiw notes, unions are cartels of labors, so a second question is why economists like those cartels. Unions get a special exemption from anti-trust laws, but they are just monopoly sellers of labor. They aren’t even cartels that redistribute income from rich to poor— they do the opposite. Unionized workers are, I think, on average richer than the average person, so when they get higher wages by restricting the amount of labor hired those workers who lose their jobs in the industry end up with lower wages, and also end up paying the higher prices for things such as cars that the unions produce.

Anyway, here are the economists who signed the open letter that I’ve heard of in a scholarly context:

Katharine Abraham, University of Maryland
Philippe Aghion, Massachusetts Institute of Technology
Kenneth Arrow, Stanford University
Jagdish Bhagwati, Columbia University
Rebecca Blank, Brookings Institution
Joseph Blasi, Rutgers University
Alan S. Blinder, Princeton University
William A. Darity, Duke University
Brad DeLong, University of California/Berkeley
John DiNardo, University of Michigan
Henry Farber, Princeton University
Robert H. Frank, Cornell University
Richard Freeman, Harvard University
James K. Galbraith, University of Texas
Robert J. Gordon, Northwestern University
Lawrence Katz, Harvard University
Dani Rodrik, Harvard University
Jeffrey D. Sachs, Columbia University
Robert M. Solow, Massachusetts Institute of Technology
Joseph E. Stiglitz, Columbia University
Peter Temin, Massachusetts Institute of Technology
Lester C. Thurow, Massachusetts Institute of Technology
David Weil, Boston University
Categories: economists, liberals, monopoly, unions Tags:

Posner and Judicial Writing

February 12th, 2009 No comments

It seems that Judge Posner is having a good influence on judicial writing. The 7th Circuit Lott v. Levitt opinion (via Volokh Con.) written by Evans with Ripple and Sykes signing on, is clear, pleasant, and uses contractions, even in an opinion whose subject is the fine detail of choice of law and writing pleadings:

The principle of waiver is designed to
prohibit this very type of gamesmanship—Lott is not
entitled to get a free peek at how his dispute will shake out
under Illinois law and, when things don’t go his way, ask
for a mulligan under the laws of a different jurisdiction. In
law (actually in love and most everything else in life),
timing is often everything. The time for Lott to ask for
the application of Virginia law had passed—the train
had left the station.

Categories: economists, international law, writing Tags:

Krugman, Barro, and Crook

February 11th, 2009 1 comment

Clive Crook wrote an FT column
about economists blogging, citing Barro and Krugman as examples of economists who went to extremes. Part was this:

I had thought they would at least agree that raising trade barriers at a time like this must be a bad idea. Then I read Paul Krugman, Nobel laureate, Princeton professor, and New York Times columnist, explain that raising tariffs – though perhaps unwise for other reasons – “can make the world better off”. “There is a short-run case for protectionism,” he went on, “and that case will increase in force if we don’t have an effective economic recovery programme.” What are his readers to make of this? Are all the economists who say otherwise just wrong?

This impression of disarray – that economics has nothing clear to say on these questions – is not the fault of economics as such. It is a mostly false impression created by some of its leading public intellectuals, Mr Krugman among them.

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party. Mr Krugman agrees with liberal Democrats about most things, and for the rest gives as much cover as the discipline of economics can provide – which, given its scientific limitations, is plenty. He does this even on matters where, if his scholarly work is any guide, the economics is firmly against his allies. Liberal Democrats are protectionists. Mr Krugman is not, but politics comes first.

The syndrome affects economists on the right as much as on the left. Just as there is a consensus among economists that protectionism should be opposed, most economists believe that a powerful fiscal stimulus is both possible and desirable in present circumstances, and that the best stimulus would include big increases in public spending. Yet recently, Robert Barro, a scholar with conservative sympathies, wrote in the Wall Street Journal that this view was an appeal to “magic”.

The problem is not that Mr Krugman questions the consensus on trade (if indeed he does), or that Mr Barro questions the consensus on fiscal policy (as he certainly does). It is that both set the consensus aside so carelessly. In doing so, these stars of the profession destroy the credibility of their own discipline. Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the other are further polarised; and in the middle, those of no decided allegiance conclude that economics is bunk.

What is interesting is not that article (which is wrong on Barro, I think), but the responses of Professors Krugman and Barro. Mr. Crook displays the correspondence in The Atlantic. Barro and Crook had a polite exchange of emails discussing their disagreements. Krugman said,

Clive used to be a reasonable guy; in his mind he probably still is a reasonable guy. But he has misunderstood what it means to be reasonable. He now apparently believes that it means declaring, in all circumstances, that Democrats and Republicans are equally in the wrong, even if the Democrats are talking Econ 101 and the Republicans are being led by the crazy 36.

And it means hysterical attacks on yours truly for actually taking sides in this debate
, with the ostensible basis for the denunciation being a wonkish blog post — it says so in the title — in which I acknowledge that there is a potential short-run argument for protectionism, while making it clear that I’m not in favor of acting on that argument. He doesn’t actually take on my argument; he just insists that the only reason I might possibly have said anything like this is partisan bias, as opposed to an attempt to be intellectually honest.

That’s interesting in itself. But now let us proceed to Paul Krugman’s argument for protectionism.

Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes. And I do think it’s important to be honest about the second yes.

So Krugman not only thinks that there is an economic case for buy-American, but that it’s important to stress it. And while we should “be upset” about the buy-American policy, that’s just an emotional response– the “economic case” is in favor of it.

The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story.

But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response.

Okay– so the economic case against protectionism is not determinative here– we are in a special situation.

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole.

And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.

Now ask, how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.

Let’s be clear: this isn’t an argument for beggaring thy neighbor, it’s an argument that protectionism can make the world as a whole better off. It’s a second-best argument — coordinated policy is the first-best answer. But it needs to be taken seriously.

Let me restate his argument. Every country needs fiscal stimulus because of the recession, and that’s the most important thing. But countries won’t enact fiscal stimulus unless they can be protectionist too, because they’re selfish. So, since protectionism isn’t as bad as lack of government spending, it’s worth having trade barriers so as to get the government spending.

This is, actually, saying that beggar-thy-neighbor policies are a good thing. He is saying that if every country tries to beggar every other by buy-domestic policies, they’ll all be better off in the end than if they didn’t. He’d prefer having the same amount of government spending without the buy-domestic policies, but he doesn’t think that’s possible politically.

After a couple more paragraphs saying that we have to consider the political economy, we come to his bottom line:

But there is a short-run case for protectionism — and that case will increase in force if we don’t have an effective economic recovery program.

His argument has three problems (aside from its premise that the stimulus package is a good thing and should pass). First, it’s not plausible that the stimulus package will shrink much if it is less protectionist, and his argument depends on there being enough shrinkage to counteract the bad allocative effect of protectionism. Second, if we’re talking political economy, we should bring in the fact that allowing protectionism into a stimulus bill will result in it being more distorted to serve special interests rather than having the single objective of serving the public interest of Keynesian stimulus. Third, an economist should start by making the economic arguments clear, rather than mingling them with the politicking, compromise, and buying-off-of-interests arguments. Politics requires compromise, but an op-ed piece does not. In fact, even in politics, you start off the bargaining by taking your preferred position– you don’t start by offering your opponent something halfway towards his position. In fact, you might want to start with something more extreme than your preferred position.

In this particular case, of course, the buy-American provisions weren’t in there to garner moderate and conservative support for a bill that wouldn’t pass otherwise– they were an actual hindrance towards compromise. Krugman’s got it exactly backwards– the buy-American was bad economics *and* bad politics.

Note what Greg Mankiw says,

Matthew Yglesias says that my stimulus proposal is “a pretty good idea” but also says “it’s wildly impractical” because it is “so outside the ballpark of what congress is prepared to consider.”

Let me reply by quoting Milton Friedman:

The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is “politically feasible” and then to recommend it.

Keynesian Stimulus Grand Links Accumulator

January 30th, 2009 No comments

I think a link page for the stimulus would be useful, so here it is. I’ll update this as links accumulate. What I’d like to pin down here is economists of at least some name for research— which for me, practically here, just means that I’ve heard of them— who I conclude would prefer no stimulus bill at all to the stimulus bill that Congress has passed. I have not included the many economists who have written ambiguously that stimulus might well be appropriate, or that if we are going to have a stimulus it ought to be tax cuts rather than spending, or that a properly designed stimulus is just what we need, since that is not at all the same as saying that they support a bill similar to what Congress has come up with. Government failure is half the applicable theory here, and a lot of economists seem to go out of their way to avoid talking about the real world stimulus bills.

Please excuse me, anyone, if I’ve mischaracterized you here. I’d be happy to have a definite statement putting you as PRO, CON, or Undecided. Just email me at Also, please excuse my not including you if you are a Cato signer I left off. I’m including only a few people on the lists below whom I’ve not heard of via academia and scholarship. Thus, for example, Bruce Bartlett and Megan McCardle don’t count. And of course Administration officials don’t count, so I haven’t bothered to look for the views of Christina Romer or Lawrence Summers.

In an earlier posting of this webpage, I remarked on how few pro-stimulus economists I had found. Then I found the January 27 CAPAF letter, which evens things up considerably. It’s still true that I haven’t found much web or journalism presence of economists saying they support the stimulus. Link suggestions for them are welcomed.

Economists on the Stimulus:

  • For the stimulus:
    1. Menzie Chinn, Wisconsin

    2. A collection of lots of Brad DeLong posts, mostly reacting to other economists (January 2009)
    3. Robert Frank, Cornell
    4. Paul Krugman: January 19, 2009,
      Getting fiscal
      , Nobel laureate in international trade.

    5. Jeff Sachs, Columbia University, in the Huffington Post.

    6. Joseph Stiglitz, Nobel laureate in information economics.

    7. Janet Yellen, Berkeley.

    8. Many people signed a January 27 2009 CAPAF letter in favor of the Recovery and Reinvestment Act of 2009. Here I list only those I’ve heard of via academic channels whom I don’t list elsewhere on this webpage. There are dozens of others on the list.
      1. Kenneth Arrow, Nobel;
        Lawrence Klein, Nobel;

        Eric Maskin, Nobel;

        Daniel McFadden, Nobel;

        Paul Samuelson, Nobel MIT;

        Robert Solow, Nobel MIT;

        Franklin Fisher, MIT;

        Laura Tyson;

        Sandeep Baldiga, Northwestern;

        William Baumol, Princeton;

        Peter Berck, Berkeley;

        Michael Bernstein, Tulane;

        Rebecca Blank;

        Guillermo Calvo;

        Paul Davidson;

        Hadi Esfahani, Illinois;
        Marianne Ferber, Illinois;

        Michael Intriligator, UCLA;

        Lawrence Katz, Harvard;

        David I. Levine, Berkeley (not the Wash. U. one who is anti-) ;

        Richard Murnane, Harvard;

        John Roemer, Yale;

        T. Paul Schultz, Yale;

        Sherrill Shaffer, Wyoming;

        Mark Thoma, Oregon;

    9. A November 19, 2008 open letter supporting a particular kind of stimulus bill was signed by many economists, including George Akerlof, Paul David, Sanford Jacoby, Gavin Wright, Gary Burtless, Peter Diamond, Laurence Kotlikoff, Julie Nelson, Peter Temin, Ann Markusen, and Susan Helper. It advocated a quick $400 billion bill with 4 specific kinds of spending. Quite possibly those people favor the actual bill that passed, but there are lots of people who would support ideal bills but oppose the actual bill, so I’m not listing them.
  • Against:
    1. Gary Professor Becker (Chicago, Nobel Laureate, labor economics, Jan. 11).
    2. Professor Robert Barro, Harvard. Also this interview.
    3. Willem Buiter, with close attention to who would buy US debt.
    4. John Cochrane (Chicago, Jan. 29)
    5. Tyler Cowen on lack of empirical support(December).
    6. Professor Eugene Fama (Chicago, January 29)
    7. Professor Martin Feldstein (Harvard,January 30). Keynesian, but against.

    8. David Friedman, blog post.

    9. Kevin Hassett (AEI)
    10. Robert Higgs, newspaper op-ed.
    11. David Henderson
    12. Robert A. Lucas (Chicago, Nobel laureate in macro)
    13. Kevin Murphy, Chicago, WSJ with Becker.
    14. Eric Rasmusen, Keynesianism and
    15. Russell Roberts, Wash. U. , blog.
    16. A Cato Ad against stimulus was signed by me and lots of people. Here I list only those I’ve heard of via academic channels whom I don’t list elsewhere on this webpage. There are dozens of others on the list.
      1. Mark Bils, Univ. of Rochester;

      2. Bruce Benson, Florida State University;

        Michele Boldrin, Washington University in St. Louis;

        Donald Boudreaux, George Mason University;

        James Buchanan, Nobel laureate;

        Bryan Caplan, George Mason University;

        Barry Chiswick, Univ. of Illinois at Chicago;

        Lloyd Cohen, George Mason University, email;

        Daniel Feenberg, National Bureau of Economic Research;

        Kenneth Elzinga, Univ. of Virginia;
        Paul Evans, Ohio State University;

        John Garen, Univ. of Kentucky (pdf essay);

        Michael Gibbs, Univ. of Chicago;

        Earl Grinols, Baylor University;

        Ronald Heiner, George Mason University;

        Jason Johnston, Univ. of Pennsylvania;
        Boyan Jovanovic, New York University;
        Jonathan Karpoff, Univ. of Washington;

        Nicholas Kiefer, Cornell University;
        Daniel Klein, George Mason University;

        Deepak Lal, UCLA;

        David Levine, Washington University in St. Louis;

        Stan Liebowitz, Univ. of Texas at Dallas;

        John Lott, Jr., Univ. of Maryland ($8,700 cost per taxpayer);

        Henry Manne, George Mason University;

        John Matsusaka, Univ. of Southern California;

        Tim Muris, George Mason University;

        David Mustard, Univ. of Georgia;

        Deirdre McCloskey, Univ. of Illinois, Chicago;

        Allan Meltzer, Carnegie Mellon University;

        James Miller III, George Mason University;

        Michael Munger, Duke University;

        Kevin Murphy, Univ. of Southern California (not the Chicago one);

        Richard Muth, Emory University;

        William Niskanen, Cato;

        Sam Peltzman, Univ. of Chicago;

        William Poole, Univ. of Delaware;

        Edward Prescott, Nobel laureate;

        Timothy Perri, Appalachian State University;

        Mario Rizzo, New York University;

        Richard Roll, Univ. of California, Los Angeles;

        Charles Rowley, George Mason University;

        Ronald Schmidt, Univ. of Rochester;

        Thomas Saving, Texas A&M University;

        Eric Schansberg, Indiana University Southeast;

        Avanidhar Subrahmanyam, UCLA;

        William Shughart II, Univ. of Mississippi (op-ed);
        James Smith, Western Carolina University;

        Vernon Smith, Nobel laureate;

        Richard Wagner, George Mason University;

        Lawrence White, Univ. of Missouri at St. Louis;

        Walter Williams, George Mason University;

    17. From the Boehner list: or blog page:
      1. James Kahn, New York University
      2. John Seater
        NC State Univ.

      3. Alan Stockman Rochester
      4. Jeff Miron, Harvard (CNN comments)
      5. David Laband, Auburn.
    18. The
      September 2008 letter on the Paulsen bank
      bailout doesn’t count, because it’s about a different issue. Whether
      someone supports spending billions on the banking system is quite
      different from whether they support spending billions for a fiscal
  • I can’t figure out whether they’re for or against:
    1. Edward Glaeser. Seems to be for some kind of stimulus, but criticizes the kind actually passed.
    2. N. Gregory Mankiw, (New York Times, Jan 10). But see at Prof. DeLong’s weblog. I should email him.
    3. Alan Viard, AEI. But see here too.

Note that TARP I, TARP II, and the stimulus bill are three separate policies, and a given economist may have any combination of views on them and be consistent in his economic outlook. I supported TARP I and oppose TARP II and the stimulus bill, for example. The list above is just about the stimulus bill.

  • World War 2: Professor
    Did World War II end the Great Depression?; Professor Paul Krugman,January 23, 2009,
    Spending in wartime,
    Professor Cowen on Barro and Krugman and
    Rasmusen on World War II as a test of Keynesian stimulus and Professor Robert Barro, Harvard (WW 2; and

    “Lessons from the Great Depression
    for Economic Recovery in 2009,”
    Christina D. Romer, Brookings Institution presentation,

    (March 9, 2009).; Thomas Sowell’s end-of-New-Deal theory.


  • Categories: Economics, Keynes, stimulus Tags:

    Keynesian Stimulus and World War II

    January 28th, 2009 No comments

    Professor Barro had a good WSJ op-ed recently on the historical evidence for the USA for fiscal policy. WW2 is the big example– maybe the only example of where people say it had an effect. He doesn’t think much of that as evidence. If WW2 is not a good example, then maybe there aren’t *any* good examples of the Keynesian effect.

    Data from the Ec. Rep. of the President is at . The Deficit/GDP ratio rose to 5.9% in 1934 (first year of the data there), to 30.3% in 1943, to 4.2% in 1976, to 6% in 1983, to 4.7% in 1992, to 3.6% in 2004, and was estimated at 2.7% for 2008 (I suppose this estimate is from January 2008).

    A stimulus extra of $400 billion per year would add about 2.9% to the budget deficit for 2009. That would take it up to 2.7+2.9= 5.6% if we use the pre-recession estimate of tax intake and GDP for 2009. We’d reach the 1934 and 1983 levels of budget deficit. Is that enough to take us out of a recession? I’d always heard that the New Deal spending was *not* enough to have much of a Keynesian effect. In that case, the best the stimulus package could hope for would be to mildly helpful– it’s not big enough to get us out of a recession.

    But was the WW2 spending helpful? It was certainly big enough–30% of GDP in 1943.
    I thought I’d look at the WW2 experience in a very simple way. The first diagram shows the unemployment rate from 1923 to 1940. What would you expect to happen in the 1940s?

    Here’s what it looks like to me. The normal unemployment rate is around 4%. If the 1938 recession (was that the “Capital Strike”?) hadn’t hit, it would have been reached in 1939. WIthout WW2 it would have been reached in 1944.

    Here’s what actually happened:

    It is worth mentioning that there was a massive government jobs program in the 1930’s, which affected unemployment. Below I graph both the civilian unemployment rate that I used above and an adjusted, higher, rate which is (Unemployed people + people in emergency govt. jobs)/(labor force). The picture is similar.

    Mark Wieczorek has a graph of the Deficit/GDP ratio 1940-2007:


  • Cowen:
    Did World War II end the Great Depression?

  • Paul Krugman,January 23, 2009,
    Spending in wartime

  • Cowen on Barro and Krugman
  • Rasmusen on World War II as a test of Keynesian stimulus and Robert Barro.
  • Mark Wieczorek,
    The National Budget, Debt & Deficit . Graphs and numbers.

  • Categories: Economics, history, Keynes, recession Tags:


    January 21st, 2009 No comments

    I’ve started reading Professor DeLong’s “The Modern Revival of the “Treasury
    ,January 18, 2009 draft. He certainly does write well.

    [T]he silliest and stupidest arguments made against
    Keynes’s policy proposals were made by the bureaucrats of H.M.
    Treasury, with their so-called “Treasury View”1 of Britain’s economic
    problems: that each extra pound sterling of British government spending
    had to be financed by borrowing an extra pound from Britain’s savers,
    which meant a pound less for Britain’s firms to invest. Hence investment
    plus government spending was constant. So fiscal policy could never
    boost employment or production no matter what.


    [I]t is as obvious a fallacy as you ever find in economics. If no
    government bureaucrat can boost employment and production even in the
    shortest run by deciding to borrow and spend more—as the “Treasury
    View” maintains—than an immediate corollary is that no private
    entrepreneur can boost employment and production by deciding to borrow
    and invest more in his firm’s capital stock.
    If the “Treasury View” is
    correct, then homebuilders’ and financial intermediaries’ decisions to build
    more homes were not the cause of high employment in the mid-2000s. If
    the “Treasury View” is correct, then venture capitalists’ decisions to
    finance internet startups and telecom companies’ decisions to invest in
    fiber optics were not the cause of high employment in the late 1990s.
    Similarly, the huge unemployment of the 1930s was not due to any
    unwillingness of businesses to invest produced by the panic of the stock
    market crash and the waves of bank runs and failures in the early 1930s.
    And the high employment and output in the 1920s was not driven by
    private business enthusiasm for investing in the “new era” technologies of
    radio, electricity, and internal combustion after World War I.


    We can immediately recognize that Fama’s argument must be wrong.
    First, it proves too much: not just that government spending cannot boost
    employment and output, but also that private enthusiasm like the
    enthusiasm for housing construction in the mid-2000s or high-tech
    investment in the late-1990s cannot boost employment and output either.

    Later in the post, Prof. DeLong mentions that if Fama is willing to use a classical full employment model, his conclusion might hold, but that Fama didn’t in his original post. Let’s try going through the story now, though.

    Case 1a. Suppose that everybody in the economy is working and there is perfect information. When the entrepreneur borrows money from the bank and hires a new worker, he must hire the worker away from an existing firm. Thus, employment does not change. Output does rise, however, because the entrepreneur wouldn’t be doing this unless he had a higher-return project than the existing firms and hence can bid away the worker with a higher wage. Or, what happens is that he bids away the capital by offering to pay a higher interest rate to the bank, which calls in its loan from some other firm, which therefore cannot afford to hire the worker any more.

    The example uses labor, but what the entrepreneur hires away might be machines, real estate, or iron ore instead.

    This story is one I use in teaching my students about opportunity cost. For Silicon Valley to grow, Detroit must shrink. It is Schumpeter’s idea of Creative Destruction from The Theory of Economic Development. There is a Circular Flow of production in the stable economy, and The Entrepreneur breaks it by diverting resources to an innovation. Brahma can’t create without Shiva destroying.

    Case 1b. Now let there be full employment, but imperfect information. The entrepreneur and the public generally think that the new project is better, but it’s actually worse. The bank knows this, but also the entrepreneur has enough capital in his firm to repay the loan even if the project goes sour.

    The bank will make the loan. At first, the price of the entrepreneur’s company will rise, as will the apparent wealth of the economy. (Will the price of the existing company fall when it loses the worker? I don’t know.) Later, the failure of the project will be apparent, and it will be clear that the true wealth of the economy has fallen. The bank, however, will make a profit.

    GDP’s course is interesting. Suppose the entrepreneur uses the loan to hire workers to build houses. Those houses have high market prices, and GDP rises that year because it is measured using the price of those houses (or, perhaps, what has previously been the price of houses of that size– this works either way). Then, it becomes apparent that nobody wants to buy those houses. They have little value. The entrepreneur (or whoever bought the houses at first, if they’re not still in his inventory) gets a lot poorer. Notice, though, that GDP does not fall because of this. GDP is a flow value, and doesn’t change when the value of stocks change. Also, we don’t go back and change GDP figures just because the output turns out to be less valuable than we thought. Nonetheless, we shouldn’t think that in that mistaken year the economy was doing wonderfully. It’s as if the houses that had been built turned out to be magical castles that turn into mist when someone tries to live there.

    Something like that is what happened in the Telecom Bubble and the Housing Bubble.
    If the government did the borrowing for a stimulus package instead of the entrepreneur, then it too would have to take the worker from some existing job. Employment wouldn’t change. Output would fall, though, because projects in a stimulus package are by definition those that the government doesn’t think pass a cost-benefit test in normal times. (I’m distinguishing here between stimulus spending and normal spending.)

    We have to do these first two cases of analysis of the Treasury View to get to the more relevant cases:

    Case 2. Some of the workers the entrepreneur hires come from existing jobs, and some were not employed before. (This is the real Telecom and Housing Bubbles case, I expect.)

    Case 3. None of the workers the entrepreneur hires come from existing jobs. This is the case to understand when we come to analyze the Obama stimulus package. And, of course, we need to figure out if it is a possible case.

    I’ll need to return to thinking about Cases 2 and 3 later. I should mention, though, that I have no firm opinion on them. I do oppose the Obama stimulus, but mainly because I think the government would botch it even if it’s true that a Keynesian stimulus would be helpful now. I’m a microeconomist, so that’s what I pay most attention to. Also, though I’m a fan of Schumpeter, don’t think that I am an “Austrian School” economist. I’m not sure what that means, actually, but I associate it with a distaste for equilibrium analysis, mathematical modelling, and price theory. I am a firm believer in all those things, and proud to be part of the MIT-Chicago Synthesis which is standard among modern economists. (I’d put both DeLong and Fama in that category too, despite their disagreements about Keynesian stimulus. Their methodology isn’t all that different, just their conclusions. Though maybe I should put Fama in the old Straight-Chicago School; I’m not sure.)

    Categories: Economics, Keynes, research, stimulus Tags:

    Economists Opposing Massive Fiscal Stimulus

    January 9th, 2009 No comments

    UPDATE, JANUARY 14. I discovered that Professor Miron and Congressman Boehner have already been putting together a list of stimulus skeptics, with comments by them. It’s up at:

    I think I’m going to start collecting the names of economists who oppose the Obama plan of spending $700 billion or so for a Keynesian fiscal stimulus. I hear the media saying that economists across a wide array of views have a consensus in favor of it, and I bet that’s completely wrong. There’s Eric Rasmusen, and Greg Mankiw, and Robert Lucas, and Tyler Cowen, for starters.

    I think part of the problem is that a lot of discussion by economists is about what sort of fiscal policy is best *if* we are going to spend $700 billion. That’s different from *whether* we should. In fact, even a devotedly Keynesian economist might oppose having a government stimulus if Congress and Obama get to design it, not an academic economist. If we are thinking of having a Keynesian stimulus, I suppose giving $500 to each American is a good way to do it, especially if we make it a gift certificate that they have to spend within six months or lose. But my saying that doesn’t mean I support the idea, much less that I support $700 billion in porkbarrel spending.

    I’ll add to this list as I come across names with links.

    1. David Backus
    2. Gary Becker (Chicago)
    3. Willem Buiter

    4. Tyler Cowen (George Mason)
    5. Kevin Hassett (AEI)
    6. David Henderson
    7. Robert A. Lucas (Chicago)
    8. Greg Mankiw (Harvard)
    9. Eric Rasmusen (author of this post) (Indiana)
    10. Hal Varian
    Categories: Economics, economists, media Tags: