Arnold Kling  

Boudreaux vs. Macro

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Don Boudreaux writes,

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.

If it comes from taxes, the value of Jones's stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.

Don is tossing out every macroeconomics textbook written since 1950. Which may be the right thing to do. Macroeconomics is something like the evil twin of classical economics.

Classically, we say that work is bad and leisure is good. Resources are limited and wants are unlimited. Macro says that we need to "create jobs." The entire edifice of macro is a monument to what Bryan Caplan scorns as "make-work bias."

Classically, we say that saving is good, or at least an acceptable option for consumers. Macro says that if consumers don't spend like drunken sailors, terrible things will happen.

Classically, we have nothing good to say about government deficits. Macro says that government deficits provide "stimulus."

I am not sure that classical economics is entirely right and that modern Keynesian macro is entirely wrong. I think that if we had double-digit unemployment, I would try something Keynesian. Right now, though, the big emergency is that this is an election year. As I said here, I am not favorable toward fiscal stimulus at present.

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CATEGORIES: Macroeconomics

COMMENTS (11 to date)
jb writes:

Yes, its true that borrowing from foreigners does decrease the global supply of spendable money, but it is not at all clear that the money that foreigners use to buy US treasuries would instead be used by them to buy US goods, or prop up the US economy in any meaningful way.

So while I believe he's absolutely correct about spending within the US, I'm not so sure about spending abroad.

KipEsquire writes:

Macroeconomics is something like the evil twin of classical economics.
I prefer "macroeconomics is to microeconomics what astrology is to astronomy."

Student writes:

But Don is wrong. Just WRONG!

Note, he is not saying that "fiscal policy wont create a stimulus this year" he's saying it won't work PERIOD. Ever! Unless Don is a recent convert to RBC theory, this story is just 100% wrong.

Even if you tax Smith to pay Jones, Smith's spending need not fall 1-for-1 with the tax increase. More likely, Smith will hold less cash. IOW: the tax multiplier is only a FRACTION of the expenditure multiplier.

Now, maybe there will be very little stimulus as a result, but that's an empirical argument Don does not make. Instead he simply says it wont work. That's a very strong, and very wrong, position to take.

He should phone up Robin Hanson and get some lessons on overcomming bias.

Student writes:

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Barkley Rosser writes:

Oh, this is just old Say's Law talking again. I note that the case of "newly created" is not covered. Say himself provided counterexamples to his own "law," in which people would hoard savings and not spend them.

John writes:

Arnold, how about writing or directing us to a source that explains the grain of truth in all the talk about spending as stimulus, if there is one. Is it just that everyone is blinded to the fact that Keynesianism is based on a false premise? Is it because GDP will reflect the spending stimulus even if there's no net effect (in which everyone is still blinded)?

ed writes:

This is a very odd post. Keynesian (or Neo-Keynesian) economics doesn't say we should ALWAYS increase spending or create jobs, only when we're in/approaching a recession. Does Arnold not believe in recessions?

James Hohman writes:

"Don is tossing out every macroeconomics textbook written since 1950."

But I love my Gwartney, Stroup, Sobel and Macpherson textbook!

R Cipolla writes:

(I'm a student and I'm primarily seeking information here).
I thought the current account deficit (which is a big problem right now, right?) is being caused primarily by lack of American savings. I use the equation
"savings - investments = exports - imports"
and I can totally understand the savings problem.
So if we stimulate spending won't that cause savings to drop further and the CA deficit to worsen?
So I've just always been confused by 'spending needs to be stimulated' or similar statements. Could someone explain?

fundamentalist writes:

So why isn't Kling an Austrian? It seems that Austrian macro answers these issues quite well.

chasity writes:

It seems like it should be simple doesn't it; creating more jobs equals more cash flow which in turns means more spending. I'm a graduate student taking econ right now and I don't fully understand how it doesn't work this way. I was on another blog earlier today and a table was showing how our unemployment rate was down, "Saturday, January 26, 2008
UI Claims point to a healthy labor market." If this is true, then shouldn't the economy be seeing the signs of healthier spending power?

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