Archive for the ‘stimulus’ Category

The US Federal Deficit

March 25th, 2009 No comments

Heritage, via, Instapundit.

Categories: Economics, g406, stimulus Tags:

Thoughts on Macro

March 19th, 2009 No comments

Slowly, the recession and crisis are starting to become clearer. Here I’ll jot down some thoughts.

1. Why have I thought that Keynesianism had any chance of being correct? I can’t think of good theoretical foundations and there isn’t good empirical evidence. Sticky wages and prices really isn’t enough. There isn’t a simple model of the kind that I always require in microeconomics, or a simple story. But since I haven’t thought about it hard for 20 years, maybe I should now, since I have learned a lot about modelling and about the economy.

2. I’m coming to think there wouldn’t have been much of a recession except for changed expectations around October 2008. Part of the financial sector was in desperate shape, but it looks to me as if all the investment banks and big banks were in desperate shape, plus some speculative banks and companies like GM and GE, but no small banks outside of Nevada and such places. I’ve come to doubt even TARP I. Was it just that Secy. Paulsen thought that if New York banks fell, so must the world? That’s false.

3. Have we been hoodwinked by the Establishment? I suspect the rest of America has just directed billions of dollars to help New York. And not even all of New York. Not Wall Street– just the banks.

Categories: Economics, recession, stimulus Tags:

"Who I conclude"

February 17th, 2009 No comments

I have a post on the stimulus bill where I write something like:

(1) “I have listed economists who I conclude would prefer no stimulus bill at all to the stimulus bill that Congress has passed.”

That sentence bothers me. Compare it with:

(2) “I have listed economists whom I conclude would prefer no stimulus bill at all to the stimulus bill that Congress has passed.”

Which is better? We say “who would prefer”, not “whom would prefer”. In ordinary language, uneducated people, and perhaps the educated, would say “who I conclude”.

On the other hand, I think educated people would say “whom” if they were thinking hard. If “who” is to be in the accusative case, it should be “whom”. But “conclude” is not a transitive verb.

Perhaps this is how it should be:

(3) “I have listed economists who, I conclude, would prefer no stimulus bill at all to the stimulus bill that Congress has passed.”

But that doesn’t sound right to me either. Any ideas?

Categories: stimulus, words, writing Tags:

The Budget Deficit

February 16th, 2009 No comments

The budget deficit:

Categories: Economics, stimulus Tags:

Economists on the Stimulus Bill: A Few Pro, a Lot Con

February 14th, 2009 No comments

I’ve updated my stimulus aggregator. I’ve now found a few pro-stimulus economists. They’re outnumbered by those against. If anybody has evidence that any more economists support the stimulus, please let me know. By “economist” I mean somebody with a PhD who’s published something academic.

Categories: stimulus Tags:

Me on the Stimulus

February 14th, 2009 No comments

It might be convenient to collect things I’ve said about the stimulus bill that aren’t on this blog. For

What the American economy urgently needs is not Keynesian stimulus, but reform of the capital and housing markets, particularly in the rating agencies, bank portfolios, and government encouragement of reckless lending. That is where the problem started, and where it might have remained– with the mild recession of the first half of 2008– if Presidents Bush and Obama had reassured the American public rather than predicting doom. Whether Keynesian stimulus works is an open question in economics, but it is fairly well settled that what governments implement is not the nonpolitical stimulus that professors recommend. The various Congressional proposals so far are not stimulus bills at all. They are a mix of special- interest tax cuts and pork barrel spending with a general-interest layer of tax cutting on top. It would be better not to try to use fiscal stimulus at all.

From after a phone interview:

Eric Rasmussen, a free market economist at Indiana University’s Kelley School of Business warns that the money could fund economically inefficient projects.

“They tend to be projects which wouldn’t get through in normal times because they wouldn’t pass the cost benefit analysis,” he said. “It’s much more prey to special interests then something like a tax cut.”

I should remember to spell out my name for people. And to ask how they heard of me. Since she calls me “a free market economists”, it’s probably from the Cato ad.

Categories: media, stimulus Tags:

The Secret Stimulus Bill

February 13th, 2009 No comments

Update, 2:45p.m. I finally did successfully download a searchable pdf file of Part A of the bill. It’s from the Appropriations Committee website– the Speaker’s website still doesn’t work. I’ve posted part A on my website, at It’s surprising how sloppy the Congressional staff is. The file has lots of text inserts and pencilled in corrections, and no overall page numbers. And they had all night to pretty it up. Pelosi’s office staff is not competent, if they’re the ones who handled the drafting.

From Human Events:

“The American people have a right to know what’s in this bill,” Rep. Mike Pence (R-Ind) told HUMAN EVENTS after the press conference. “Every member of Congress — Republicans and Democrats — voted to post this bill on the internet for 48 hours, 48 hours ago. We’ll see if the Democrats keep their word.”

Actually — as of 5:15 pm, the Democrats had broken their word. The stimulus bill — which we still haven’t seen — will be released late tonight and will be brought up on the House floor at 9 am tomorrow.


The following statement was released by Majority Leader Steny Hoyer at 4:57 p.m.:

“The House is scheduled to meet at 9:00 a.m. tomorrow and is expected to proceed directly to consideration of the American Recovery and Reinvestment conference report. The conference report text will be filed this evening, giving members enough time to review the conference report before voting on it tomorrow afternoon.”

The Democrats finally made the bill’s language available around 11 p.m. Thursday, approximately 10 hours before members meet Friday to consider the bill …

and in another article later,

Democratic staffers released the final version of the stimulus bill at about 11 pm last night after delaying the release for hours to put it into a format which people cannot “search” on their home computers.

Instead of publishing the bill as a regular internet document — which people can search by “key words” and otherwise, the Dems took hours to convert the final bill from the regular searchable format into “pdf” files, which can be read but not searched.

Three of the four .pdf files had no text embedded, just images of the text, which did not permit text searches of the bill. That move to conceal the bill’s provisions had not been remedied this morning at the time of publication of this article. (You can find the entire bill on the House Appropriations [] website.)

From at 1:10 pm on Friday, the Human Events allegation seems to be true. I can’t even download the files myself, either from the Speaker’s office or the Appropriations Committee site.

The final language has been posted; you can find links to the various docs at the Speaker’s website. Update: The speaker’s website is apparently down. Imagine that. Docs are also available here.

The total size of the four major files is over 100MB, and consists of 1419 pages. Three of the four files are huge “scanned” PDFs, meaning they were created by printing the original document and then scanning it in again — and therefore contain no real “text” that can be easily searched. This will make our parsing process difficult and more time consuming, so we most likely won’t have our versions ready until midday tomorrow. But we’ll see…

Categories: democrats, lying, politics, stimulus 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.

"Moderates" in the Senate

February 11th, 2009 No comments

From Jonah Goldberg at NR:

Led by Republican Arlen Specter, the centrists have boldly cut (perhaps temporarily) $100 billion or so from the stimulus package, in the name of fiscal discipline. But, as liberal critics such as New York Times columnist Paul Krugman rightly point out, they’re cutting it to prove their “centrist mojo,” not because they have real concern for public policy. If the bill had started out at $1 trillion, then $900 billion in porcine outlays would be deemed the “responsible” amount to spend.

For certain Beltway centrists, the highest principle is to prove that you are attached to no p
rinciple. Rather, your duty is to split the difference between the “ideologues.” If one side says we need a 1,000-foot bridge to span a canyon, and the other side says we don’t need a bridge at all, the centrists will fight for a bridge that goes 500 feet and no farther, then pat themselves on the back.

Categories: bargaining, politics, stimulus, thinking Tags:

A Metaphor to Derail the Stimulus?

January 31st, 2009 No comments

Where Nations Go to Die is Mark Steyn at his finest. Read the whole thing, but here is the most exquisite part:

The more interviews Speaker Pelosi gives explaining how vital the STD industry is to restarting the U.S. economy, the more I find myself hearing “syphilis” every time she says “stimulus.” In late September, America was showing the first signs of “primary stimulus”—a few billion lesions popping up on the rarely glimpsed naughty bits of the economy: the subprime mortgage racket, the leverage kings. Now, the condition has metastasized in a mere four months into the advanced stages of “tertiary stimulus,” with trillions of hideous, ever more inflamed pustules sprouting in every nook and cranny as the central nervous system of the body politic crumbles into total insanity—until it seems entirely normal for the second-in-line of presidential succession to be on TV gibbering away about how vital the federalization of condom distribution is to economic recovery.

The Nietzschean Democratic Party!

Categories: Economics, humor, poetry, stimulus, writing Tags:

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:


    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: