Archive for the ‘Keynes’ Category

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 1 comment

    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: