Arnold Kling  

An Anti-Stimulus Conference

Good Luck, Jeremy Stein... Obama's New Deal...

See the invitation below. My theme will be "what certified macroeconomists think about the stimulus bill."

Economic Recovery:  
Free Markets vs. Big Government

Why the Stimulus Won't Work--Panel 1
Burton Folsom, Charles Kline Professor of History, Hillsdale College
J.D. Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy,
Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation

Arnold Kling, Adjunct Scholar, Cato Institute and Member, Mercatus Center Working Group on Financial Markets

Market-Based Solutions--Panel 2
William Beach, Director, Center for Data Analysis, The Heritage Foundation
Mario Rizzo, Associate Professor of Economics, New York University
Luigi Zingales, Professor, Booth School of Business, University of Chicago

Keynote Address and Luncheon
Donald Boudreaux, Chairman and Professor, Department of Economics, George Mason University

Tuesday, February 10, 2009
8:30 am Registration
9:15 am Why the Stimulus Won't Work--Panel 1
10:45 am Market-Based Solutions--Panel 2
12:30 pm Keynote Address and Luncheon

Hyatt Regency Washington on Capitol Hill
400 New Jersey Avenue, NW
Washington, DC

Please RSVP by Tuesday, February 3, 2009.
For additional information, please contact Ann Bula.
Call: (202) 608-1524 Fax: (202) 675-1778 Email:

A certified macroeconomist is someone who can go through the list of Nobel Laureates, identify which ones were cited for their contributions in macro, and briefly explain those contributions. I can think of only one journalist, David Warsh, who could pass as a certified macroeconomist. Most of the people who get TV time and press coverage for their macroeconomic views are not certified macroeconomists.

I am not trying to claim that certified economists have all the answers. On the contrary, I want to emphasize what certified macroeconomists don't know and what we disagree on. But the gaps in our knowledge do not mean that the answers are to be found elsewhere. As the late Herbert Stein once wrote,

1. Economists do not know very much.
2. Other people, including the politicians who make economic policy, know even less about economics than economists do.

from Washington Bedtime Stories, p. xi.

The outline for my talk is a work in progress. So far, I have

1. Most certified macroeconomists support a large stimulus. A smaller number are opposed to any stimulus. An even smaller number support a small stimulus.

2. The main reason for supporting large stimulus rather than small stimulus is that small stimulus efforts have a track record of failure. That's the logic that gave us the Somme Offensive.

3. You can support a large stimulus but still have strong reservations about this bill. Certified economists I would put in this category include Larry Summers (no longer free to say so in public), Alice Rivlin, Martin Feldstein, and Jeff Sachs.

4. The bill serves two purposes. stimulus; and Radical Reconstruction. It's not mostly stimulus, with a little bit of other stuff thrown in. It's mostly other stuff, with a little bit of stimulus thrown in. That means a ginormous amount of other stuff.

5. Certified macroeconomists were taken by surprise by what has happened. A lot of people saw the boulder of the housing bubble ready to roll down the mountain. Hardly anybody foresaw the financial avalanche that would ensue.

6. Certified macroeconomists were badly polarized in the early 1970's, with Chicago types essentially denying the idea of involuntary unemployment and the MIT types clinging to macroeconometric models. By the late 1970's, the arguments were over. The models had all sorts of problems, and everybody gave up on them, although people had different reasons for doing so. Methodologically, everyone agreed to work on irrelevant math probems, and substantively everyone agreed that reasonably stable money growth would lead to a reasonably stable economy.

7. We had reasonably stable money growth under Greenspan and Bernanke (at least that is what most people would have said at the time), but look what happened.

8. So now, it's back to the early 1970's, with Chicago denying reality and MIT back to thinking in terms of macroeconometric models.

9. But the economy is different from what it was 35 years ago. Distribution of labor force by educational attainment.

10. What harm could a stimulus do? Murphy's priors vs. DeLong's.

11. An alternative stimulus: a 50 percent reduction in the employer's contribution to the payroll tax (would cost about $250 billion per year it is in effect)

Can I get through that in half an hour? (or less--assume that the other panelists are long-winded). Should I try to add anything about Minsky? Or Jeremy Stein?

I need to give people three things to remember. If I had to choose now, those three things would be: (1) For certified macroeconomists, a large stimulus is not a tried and true remedy. It is a gamble (2) The stimulus bill is large, but it is not a large stimulus. (3) A cut in the employer contribution to the payroll tax would be much more timely, more targeted, and temporary

Comments and Sharing

COMMENTS (20 to date)
John Alcorn writes:

Arnold: (1) Your three take-away points are apt. The sketch of intellectual history in macroeconomics is deft, but not crucial for policy persuasion purposes if your time is short. Isn't one of your themes missing? -- namely, that the stimulus effects of the bill are a gamble, whereas the massive transfer of power to the government is a sure thing. (2) Will the conference be broadcast on the net? Can GMU interest C-SPAN in filming it?

Russell writes:

I read a (pathetic amount of ?) lot of economics blogs on a daily basis, and throughout the economic meltdown I have come to believe very few people know anything. There are those who know something that is extremely important (Taleb, Kahneman, Roubini) but still somewhat impractical in the short-run, and those with the courage to say, "I don't know" (Kling, and Russ Roberts). Murphy and Delong have been useful as well, but Delong is so shrill that I find him quite objectionable (but not on the Krugman, I am the greatest living human being and anyone who disagrees with me is a maggot, level).

The economics profession is making a mockery of itself (macro, anyways), but Arnold Kling you are a bright light of hope that humility and thoughtfulness can win out in the long run. Kudos to you sir. I'm sorry that aren't more honest people like you out there.

Craig writes:


Please pay a visit to Bloggingheads soon. I read econlog regularly but found your explanation of the crisis to Will W. very useful to pass along to lazier folk. And it certainly helped me begin to piece things together.

Greg Ransom writes:

OK. "Modern" macroeconomics is cargo cult astrology, filled with "idiot savant" math bullies and ideological cranks.

We got it.

One very simple question.

Why isn't Roger Garrison the God of all macroeconomists right now?

Maniel writes:


In my view, the private economy carries the government (i.e., government spending) on its back. To slow down a race horse, we increase the load it has to carry. The so-called "stimulus" increases government spending and simply adds to the already heavy load. Reducing taxes is fine, but for the long term, reducing spending is essential. Bills and debts have a way of coming due. What the current administration is proposing is unaffordable, counter-productive, and very discouraging to long-term investors.

Thanks for listening.

Greg Ransom writes:

I think you need to be more upfront in explaining to American's that modern macro really lacks _any_ scientific claim upon the public.

Hayek had the courage to say so in the 1970s when it mattered then.

Who will say it now?

Jacob Oost writes:

From what I know about the Chicago school, I don't think they deny reality, rather I think they discuss how an economy would function in the absence of certain government restraints.

Could you elaborate what you meant by Chicago denying reality?

Bill Woolsey writes:

Lucas didn't deny reality.

He recognized the problem. Output 8% below long term trend within six months.

He rejected market clearing as a solution. Deflation is no more feasible today than in the Great Depression.

He recognized that velocity is much lower. And advocated quantitative easing to offset the drop in velocity.

I suppose we could say that Lucas' macro work since the seventies didn't add anything to what Milton Friedman could have said in the sixties.

And maybe there are some people people who have continued with the new classical/real business cycle approach that insist that it is policy relevant.

But not Lucas.

The New Keyesians have been more consistent. They have determined (somehow) that this recession will last a long time, so that fiscal stimulus, even at this late date. will help things. The
problem with fiscal stimulus is that it takes too much time to actually implement. That is an issue
with short recessions.

Federal funds targetting implemented through open market purchases of T-bills has broken down. The new Keynesians, for no reason I can see, are identifying this with monetary policy and so monetary policy has failed. Or so they say.

In my view, the "failure" is in academic finance and financial economics, including money and banking.

I really don't think there is a lot of puzzle as
to why a collapse of the financial sector would cause a drop in aggregate demand. Various elements of AD are plausibly related. And from
a "monetarist" perspective, that money demand would rise and velocity fall isn't too much of a
suprise either.

The version of monetarism that was based on finding the fixed velocity is long gone.

It is the finance people for whom this is an intellectual crisis.

Steve Spiller writes:

Arnold - I hope that you and Don will video tape the panels and keynote address and make them available to those of us who are unable to attend.


Floccina writes:

(3) A cut in the employer contribution to the payroll tax would be much more timely, more targeted, and temporary

Why not permanently eliminate the payroll tax for workers and employers? If that is too much how about eliminate the payroll tax for workers making less than 25K per year or so?

IMO this is a tax cut that may pay for itself in the long run because it begins to erode the idea that SS is a retirement plan were those who paid in more should get more out and were the retirement age cannot rise because heck I paid into it under an agreement.

fundamentalist writes:

Greg Ransom: "Why isn't Roger Garrison the God of all macroeconomists right now?"

Excellent point. I haven't read anyone who knew more about macro than Garrison. One of the major problems with modern mainstream macro is that economists have no knowledge of the history of economics. If they knew that history as well as Garrison and other Austrians, they would realize they have to go back to the 1930's and pick up the threads that Keynes abandoned. They have to introduce real capital and a sound theory of money.

Charlie writes:

Can Don Boudreaux pass that test? Does he have any macro publications?

tom writes:

"Excellent point. I haven't read anyone who knew more about macro than Garrison. One of the major problems with modern mainstream macro is that economists have no knowledge of the history of economics. If they knew that history as well as Garrison and other Austrians, they would realize they have to go back to the 1930's and pick up the threads that Keynes abandoned. They have to introduce real capital and a sound theory of money."

I'm convinced one of the main reasons Austrian economics is easily dismissed is that the policy recommendations are always going to be essentially the same. Cut taxes, cut regulations, minimize government, let the market sort it out from there. A tenth grader with a speech impediment could give policy advice like that, it makes the idea of government pro activity moot (bad for politicians) and the idea of solving problems on a grand scale for society moot (bad for economists).

CBDenver writes:


You hit the nail on the head in your comment that politicians and economists dismiss the simple answers (cut taxes, regulations, and the size of government) because that would not leave them with much to do to "solve" the problems (that they create in the first place). Sorry to say that with your clear thinking, you'll never make it in politics or as a government economist! :-)

Rares Marian writes:

If those simple things would help, what would they look like inside out?

If govt won't get out of the way of common sense how do we peons make up the difference?

If the driver is asleep at the wheel, what should the passengers do?

It's a sort of other side of the box problem, but it is solvable. What do we do short of rebooting the universe?

If we know the machine will do something retarded how do we compensate or take advantage of the mistakes so our fellow citizens don't have to suffer as much?

David Heigham writes:

Arnold Kling

My working definition of a useful expert is someone who is appalled at his own ignorance of the subject, but even more appalled at the ignorance of the others present. You qualify in macro in almost any company. In your company, I fail on the second point.

That said, I have never understood how our macro theory work came to be so blinkered. The models had all sorts of problems; so we gave up on them. But Wynne Godley and John Taylor have models which do function reasonably well. Robert Lucas seems to be alone in regarding stimulus as being about putting monetary demand into the economy: why is he alone on something so obvious? Etc.

We had reasonablty stable monetary growth under Greenspan? We knew it was reasonably steady; but did we have any reason for regarding the divergence of the monetary indicators as stable?

Why are we talking about the size of stimulus in relation only to the US economy? We all know that the only context in which a demand stimulus has any chance of working is global. Isn't the question how much of what global stimulus should be in the USA?

The immediate stimulus in the package for the US economy is small. The reconstruction parts of the package are only desirable as demand stimulus if we both expect demand in the US economy to be significantly below productive capacity in two years time (my guess is yes), and that the spending will then be financable without creating unwelcome inflation (deponent guesseth ?). What is the US government relying on for demand stimulus now? Just a placebo effect? Quantitative easing? And what magnitudes should they have in mind?

I look forward to your talk; and in a lesser degree to the reports of the Conference.

Eric Rasmusen writes:

I've collected some economists-on-stimulus links at

Sorry- I don't have you yet ,though I would if I got round to it. What I really want, though, is links to pro-stimulus good economists. They are surprisingly hard to find, especially given how the media is sayin we all support the stimulus. If you know of links, pass them along please. I, by the way, might well not count as "certified economist" by your definition-- it is a good definition of "certified macroeconomist", though.


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Tim writes:

Mr. Kling:

I am not an economist but do understand business to an extent.

I wonder what part of the current stimulus package actually generates real economic value for the country and what is just for temporary stopgap measures?

I would be interested in obtaining a transcript of the conference.

Andy writes:

A couple things:

For any of those that put Macro down and pin it towards the complex mathematical equations, just remember that mathematics is THE universal language. Spend some time learning Macroeconomics and its mathematical implications, review the work and research that esteemed macroeconomists have put so much of their life into and then you'll actually have respect for the study. Even still, learning this stuff will make anyone more able in helping our economic downturn.

If any blame is to be made towards our economic downturn, look no further to the moral hazard in our financial sector. With all this moral hazard within finance, one can see that there is a need for a credible threat, that is, someone or something needs to regulate financial institutions from time to time. This falls perfectly on the government.

Greenspan and Bernanke take a lot of heat for the moral hazard and economic downturn. Both of these individuals are very smart. It is only unfortunate that they followed economic theories in their occupation to make this country better off, and were then hit with a recession that was caused by some variables omitted from theory(stupid human behavior coupled with the combination of financial and fiscal irresponsibility)

Government in a democratic society is meant to remedy market failures. Every so often free markets will cause failures, inefficiencies and negative externalities. Well, it seems that there is a lot of that going on now. It is the government's job and responsibility to fix our economic downturn. Lets hope that they can do this without politicians making a giant mess of things. Government on the other hand can also be the cause of free market failures. Its a two way street.

If any of you are actually scared of too much power being transfered from society to the government, then get a bunch of your friends and go beat up some police officers. Someone may get shot, but hey, freedom isn't free now is it?

And for everyone that hates paying taxes, how much are you willing to pay for your childrens' education? For roads and their maintenance? Some people don't make enough money to send their kids to a private school, or to finance their own stretch of highway. For these you need government, and there needs to be taxes in place. Go to any western European country and observe their public schools. They seem to do a reasonable job.

I agree with Kling for the most part. I just think macroeconomics deserves a little more respect. Its not perfect, and it is complex. But its a good start, and we're probably better off because it as compared to if it were absent.

And everyone, don't forget that you live better than two-thirds of the rest of the world. Quit your bitching.

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