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Brad DeLong and Kevin Murphy, in English

 John Cochrane Muses on Monetar... Timely? Temporary?...

\$100 of Government SpendingMurphy's EstimatesDeLong's Estimates
Keynes Effect\$50\$150
Housework Effect-\$25-\$30
Galbraith Effect-\$25\$0
Feldstein Effect-\$80-\$33
The Bottom Line-\$80\$87

I explain here. [UPDATE: I made two errors in the initial numbers. I believe it is correct as of Jan. 27, 1:40 PM EST]

Jason Briggeman writes:

Arnold, would you mind providing the arithmetical equation that gets to "The Bottom Line" from the numbers provided? Pure addition doesn't work and it was tough to parse it from your article.

writes:

DeLong's numbers do not strike me as being very persuasive.

In order to make his numbers come out right, DeLong assumes that government inefficiency will be zero.

Even assuming that there is \$800 billion in "low hanging fruit" out there for government spending, the idea that the stimulus package actually passed is going go consist entirely (or even mainly) of that fruit seems implausible.

The idea that government inefficiency will be at or near zero is even more implausible once you realize he's assuming that 150% of the stimulus will go to idle resources. Basically what he is arguing is that there are all these great public works projects out there, and it just so happens that the best people to work on them were the very people who were currently unemployed. Oh, and we can expect that the government stimulus will include spending for only those programs.

Arnold Kling writes:

Jason,
the formula is addition. I just mistyped one of the numbers. Corrected now. Sorry!

John V writes:

Arnold,

This may seem like dumb question but I'd appreciate it if you could clarify:

DeLong's \$150 means he's using a multiplier of 1.5, correct?

So \$100 in spending yields \$150 of output, then isn't the net only \$50? or do you mean \$150 net...or IOW...\$250 of which \$100 is simply government spending?

I ask this because I was under the impression that a multiplier of 1.5 meant \$100 becomes \$150...meaning only a net of \$50.

This would make your Adjustment for DeLong negative. Please explain. I'm probably not the only one who is wondering this.

Thank you.

John V writes:

On a follow-up thought, is the whole \$150 supposed to a net because the resources are all supposedly unemployed?

That might be the gist that clarifies it somewhat. But still, are we supposed to not count the original \$100 spent by the government because that money was supposedly not being employed in a way to drive up aggregate demand?

BTW, if this is "economics", I've been reading the wrong books.

Arnold Kling writes:

John V,

DeLong says that \$100 of government spending will create \$150 worth of output produced by unemployed resources. You can think of this as \$100 of purchases of the output of people who are now unemployed, plus multiplier effects that generate another \$50 of output. Or you can think of this as government generating \$50 of new output and displacing \$50 of output that would have been produced for the private sector, with another \$100 worth of multiplier effects, for a total net increase of \$150.

Jason Briggeman writes:

Thanks, Arnold - but you may wish to check column 2 as well :)

Lord writes:

I do wonder about the inefficiency of patching a pothole versus repairing a suspension system again.. and again.. and again. The former seems far more efficient to me, but hey it is me spending the money on the repair so that must make it efficient, no? One must admit there are diminishing returns though as all the potholes get filled.

It shouldn't matter whether the resources are currently employed or not as much as whether there are other unemployed resources available. That is the power of markets, to put those to use.

writes:

Arnold:
You left the right angle bracket off the opening table tag (i.e., <table<tr><th>\$100 of...), which causes the page to display incorrectly in IE.

Yancey Ward writes:

Indeed, DeLong's entire argument seems in a fantasy land. Like Blackadder, I don't see how you target all this low hanging fruit with every bit of the stimulus bill, and even then, there is literally no way to actually target the money at the so-called idle resources. Most of the government money will be spent employing people who have not lost their jobs and would not have lost their jobs without the stimulus, unless you believe unemployment is going to 50% without it, but if that is the case, then the stimulus should be 8 trillion dollars instead.

I am coming to believe that people like DeLong and Krugman are insane.

Willem writes:

One big plus for DeLong is the fact that he actually gets his feet dirty in the blogosphere. I can think of a certain '08 Nobel laureate who is mainly commenting on the behavior of others, while doing the exact same thing himself.

So +kudos both for Brad and Arnold and -kudos for Paul.

von Pepe writes:

I think DeLong drastically overstates their ability to target the underemployed resources. I think Arnold and other economists think that I-banker to road paver in Michigan is so funny (obvious) that most people don't quite get the micro point.

It has been easy for me to get the point. I would hope Arnold can expand on the importance of savings. Why do I ask this? Well, I analyzed myself (for real).

I am on Wall St and I think there is a high liklihood I will lose my job. I believe I have about 2 years of savings before I lose my apartment. I have been planning for this possibility. Do I move to Michigan to pave roads or do I stay in NYC and live off savings waiting for a job? Almost for sure I stay in NYC unemployed and looking (hoping for a recovery). A lot of finance people already laid off are writing off 2009 and just travelling...not everyone blew their bonus!

I think DeLong is too ivory tower on this and certainly there seems to be an assumption of homogenity of labor.

Bottom line, many will live off savings (unemployment benefits) in the recession and not take the lower wage or make the difficult move. I don't think DeLong has an answer for this, besides calling me a bonehead.

Bill Woolsey writes:

I must admit that I generally ignore the existence of people like Pepe. "I can just live off my savings until I find a good job. I have written off working in 2009."

Of course, I haven't worried one bit about unemployed high income finance people from Wall Street either. If the increase in the unemployment rate were fully accounted for them being unemployed, I would say--it is the least they deserve.

Perhaps I will modify my lectures on structural unemployment to emphasis such examples more (leaving aside their just desserts.)

Anyway, if resources are pulled from other employments to the government projects, then what they used to produce is starved for reasources. The firms can try to bring in other workers. Or they won't and there will be shortages of their products. Those who would have bought those goods have money. What do they spend it on? Or else, the prices of those products rise. The demand for substitute products rise. This raises profits (or reduces losses) in those sectors and they they hire more labor (or layoff less.)

This is all standard in thinking about how the economy responds to shifts to demand.

Let's try an analogy. Increased foreign imports "destoys" employment in import competing industries. So, it reduces total employment and production, right? Wrong, it is matched by either increaed imports or a net capital inflow and increased consumption or else investment.

There is a balancing. It is a shift of demand. Of course, the process is painful because the resources are not easy to shift.

Anyway, to claim that the stimulous program (if it is timely and fianced out of new money or released money hoards,) won't work because labor is heterogeneous is to say that all of this talk about the increased exports or the impact of net capital inflows that offset jobs lost to imports is so much wind.

Using government projects to try to reduce structural unemployed is probably futile, and
undersirable if it is effective. (Use tax and
subsidies to offset the shifts, if you really want, and realize you are keeping resources producing less important stuff.)

But then, the argument in favor of this fiscal stimulous is that there is something more than structural unemployment going on.

The expanding industries where the structurally unemployed are supposed to go are missing. I think housing production needs to be reduced. Where should the resources go? The only reason they should go anywhere is because there is something better for them to do. Otherwise,
more and more houses should be produced until
housing is free and no longer scarce.

Government projects create a place for them to go.

Monetary policy aims to put them back into private activity.

Deflation will put them into private activity as well.

Fiscal policy is about avoiding the deflation combined with a claim that montary policy can't work.

If you believe the delfation must have already occured, then it is all structural uemployment.

If you believe monetary policy can work, why fiscal policy?

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