I wrote my last, and I thought best, summary blog piece "Stimulus RIP" in November 2010, (all my stimulus posts here), but a previous 2009 post seems to be behind a new outburst of blog activity. I won't get it all, but some contributors are David Glasner, Scott Sumner, Kantoos , Brad DeLong and of course, Paul Krugman
Some response seems called for.
Let's be clear what the "fiscal stimulus" argument is and is not about.
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course. A good test: If China offers to deliver an infrastructure project at half price, but no "jobs" will be "created," do you still want it? If you say "yes, even more" than it's infrastructure. If you say "no, we need to create jobs" then it's stimulus.
The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. Yes, endorsed by Krugman because it "feels like a job" (his back must not hurt like mine does) and by DeLong: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."
The "targeted," "infrastructure," and the whole worthy apparatus to monitor the wisdom of "stimulus" spending (see John Taylor) is, in the Keynesian model, beside the point, or at best a smokescreen to befuddle the ignorant masses. It would in fact be better if the money were stolen. Thieves have high marginal propensity to consume, and they can get that "spending" out fast in an economy with few "shovel-ready" projects.
Stimulus is a remarkable proposition, because micro fallacies morph into macro wisdom. We all lambaste mayors who tax small businesses (or borrow against future taxes) to build showpiece "jobs" projects. This way lies Buffalo. Yet for the economy as a whole, stimulus says, it's true. The hurricane should have been bigger, so the government would have spent more money to rebuild. Many stimulus advocates point to WWII spending. Think about what that means: all those tanks, ships, and airplanes on the ocean floor were not a terrible economic sacrifice we paid to win a desperate war. Every ship the Germans sunk let the government buy another ship, and gain a ship and a half worth of GDP in the process!
Such paradoxes are sometimes true in macroeconomics and finance -- for example, we can individually sell stocks, but collectively we can only drive down prices. But you can see how hard the proposition is once you understand it and pull back the smokescreen-- and how delectable "stimulus" is for politicians who love to build those "jobs" projects even when they are a net drain.
I've been off this issue for a while, mainly because fiscal stimulus is so clearly off anyone's policy or economic agenda. The US is not about to deliberately borrow another few trillion dollars a year and send it down whatever rathole is handy in the name of stimulus. The Administration won't even use the word "stimulus" anymore. Europe is even less likely to do it. Krugman, amazingly, thinks Greece should be spending more.
Everyone else sees our task as avoiding a global sovereign-debt crisis.The fascinating macro economic question is why our "short run" recession seems to be turning in to "long run" stagnation and slow growth. Lack of government spending is not high on most people's lists.
So, fiscal stimulus doesn't seem worth much blogging effort to me. It's just off the menu. We might as well debate a gold standard vs. bimetallism.
The state of affairs
Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now, as typically happens after any event makes the news.
Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't. Some of those models have huge holes in them (the standard IS LM model, which even Krugman admits is "ad hoc"). Some don't. The rather mysterious "New Keynesian" stimulus models could use a lot of investigation (More in an upcoming post.)
Even if stimulus works, when and for how long? A lot of models give more stimulus when interest rates are stuck at zero. But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates. Surely too much spending eventually leads to debt crises or strangling taxation, but when? (Then, advocates usually want inflation and devaluation, but that has a limit as well.)
The facts are far from decisive. The right says: "The government spent like a drunken sailor and we still had an awful recession. Stimulus Failed" The left says "It would have been way worse without the stimulus." History does not paint a clear picture either. GDP rose a lot along with Government spending at the beginning of WWII. GDP didn't fall like a stone at the end of WWII. Economists are producing hundreds of papers and volumes of studies for us to sort through, which I'll review in the future, but cause and effect will always be hard to tease out in economics.
So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works. That's what makes being an economist fun! There is a lot that well-read thoughtful economists can do to summarize and contribute to this debate.
What help do we get from Krugman to help us understand this debate, sort out the assumptions and the facts?
- Here: "Lucas/Cochrane made simple, fail-an-undergrad-quiz-level, errors."
- Here: "The nonsense problem" Cochrane and Luas don't have a "defensible model."
- Here: "The great Lucas made a nonsense argument by any standard"
- Here: "Oh, and the Cochrane-Fama thing ...there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean"
- Here: Again, "no model".
- Say's Law., Say's Law, Say's Law and "Economic Barbarism". I and Lucas are "propounding Say’s Law — the idea, refuted 75 years ago, that all income must be spent and hence that supply creates its own demand"
- Here: "New Keynesians understand New Classical models, but New Classicals don’t"
(The issue is how saving = investment is achieved, and what happens out of equilibrium. Keynesian models specify that "plans" depend on income, and do not have to add up via a budget constraint -- you can "plan" to consume save and pay taxes more than your income. Income then adjusts until saving equals investment. In "classical" models, "plans" are called "demands" and have to add up to income. Prices adjust to clear markets. In "new Keynesian" models, those prices are sticky. I'm simplifying drastically here for public consumption, so Brad and Paul, spare us the outburst on what a moron I am or that I didn't mention x assumption.)
"No model" is even more ridiculous. What, there is no economic model in which fiscal stimulus falls below 1.5? Or we somehow "don't have" the models in our graduate reading lists, and in the footnotes to my blog posts? "Barro, Kydland and Prescott, King and Baxter, King,Plosser, and Rebelo, Uhlig,.Taylor, don't exist?... Maybe those models are wrong. Maybe they are logically coherent but don't fit the data. But to say they don't exist is just ridiculous!
Then there are the insults and slander.The most hilarious are the doctor-heal-thyself accusations:
- Krugman calls me, by name, a "Mendacious idiot"; though hilariously swearing "I've never gone ad-hominem;"
- He writes that I rest on "credentials" to spout nonsense and "pull rank" or "argue from authority" -- Cochrane argues from authority, rank and credentials, Mr. I-have-a-Nobel-Prize-so-you're-a-moron?
- "Chicago has both forgotten basic macroeconomics and become so politicized that when it comes to policy, people literally can’t think straight" Chicago has become politicized? (Also factually untrue. Look at our faculty list. Goolsbee works here, there are many to the left of him. We hire quality, not politics.)
- He writes, in print in the New York Times, that I (we) write for "sabbaticals at the Hoover Institution and job opportunities on Wall Street?" I accept the challenge: 1040 forms at 20 paces. We'll see who gets paid how much by whom to write what.
- The first of a long set of posts complainig that Bob Lucas "smeared" Christina Romer by suggesting that maybe her defense of stimulus after about two weeks on the job might have been requested by the White House. A "Smear!" Heavens!
- He opines, "when it comes to Cochrane, or Brian Riedl, there’s no there there"
There is a lot of uncertainty in macro, both theoretical and empirical. There is a huge outpouring of serious work. How does it help at all to say your side has perfect wisdom, enshrined in a roughly 1975 vintage ISLM model, and everyone who disagrees, including Lucas, Prescott, Fama, and so forth is stupid, lying, doesn't understand econ 1, thinks 2+2=5, or in the pay of wall street? A worthy analysis investigates how sensible people can come to both views, and then isolates which assumptions or facts they differ on. (Something I haven't done here for lack of space, but will return to later.)
What is wrong with these people?
I'm not the first to notice this emptiness of argument, and they're starting to be defensive. It's ok to slander and insult, because, as Krugman writes and Delong Endorses " This is not a game, and it is also not a dinner party; you have to be clear and forceful to get heard at all." It's all necessary because "Economic policy matters" .
What self-important hogwash! Life is a dinner party -- at least if your goal is the truth, and you have a bit of humility to understand our limits and still be searching for it. Didn't your mothers tell you that? "Because it matters" is precisely why it's important to acknowledge our limitations and search politely for the answers.
Note to the blogosphere: This is not how real economists discuss things. I've had great and productive interactions with Austan Goolsbee, Mike Woodford, David and Christina Romer among many other serious economists who are favorable to stimulus. Nobody calls anyone else a moron. Normal people behave this way. They can do so even if communicating via the internet.
The question is, what is wrong with the rest of us that we pay so much attention?
Well, I'm done for a while, but I will return to stimulus soon, trying to digest the outpouring of thoughtful academic work on both sides. I realize I didn't get much into the theory or facts about stimulus, but this is a reaction blog post not an encyclopedia, so that will have to wait for another day.