Arnold Kling  

Deficits ad Absurdum

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Brad Setser writes,


Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]

That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, "It's all fine so far."

It is amazing what happens when you assume that you live in a linear world. You say that the multiplier for government spending is 1.57.

Really? Over what range? Think of it this way: at which level of additional government spending would the path of U.S. real GDP be the highest?

(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline

If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.

So to talk about "the" multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.

The Obama Administration is being populated with outstanding academics, like Larry Summers and Cass Sunstein. It is not surprising that the academic world is expressing a lot of confidence in giving them huge amounts of power. These are people who are more than three standard deviations higher in IQ than average, but I still suspect that this leaves them more than three standard deviations below what would be needed to justify giving these technocrats $10,000 from every household in America to spend at the their discretion (I'm adding the remainder of the TARP to the stimulus, since it is getting harder and harder to distinguish the two concepts from one another). The folks working on the stimulus package are not people who have spent time in middle management in a large organization, where you see how life differs from a calculus problem or a term paper.

Right now, the typical academic cannot imagine Obama's team doing anything stupid. The upper class in Britain felt the same way about its generals in 1916.


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CATEGORIES: Fiscal Policy



COMMENTS (26 to date)
fundamentalist writes:

“These are people who are more than three standard deviations higher in IQ than average…”

Maybe we should recall that Hayek wrote in “Fatal Conceit”: intelligence is highly overrated. Most of the very intelligent people are socialists. Most university professors are socialists. Most Nobel Prize winners are socialists.

Mike Rulle writes:

Anyone who has ever tried to convert anything theoretical into a real world implementation can appreciate Arnold's comment: "The folks working on the stimulus package are not people who have spent time in middle management in a large organization, where you see how life differs from a calculus problem or a term paper."

Summers has made comments on the almost infinite need for Government to maximize spending. The manner in which he groveled before the Harvard Star Chamber on his perfectly reasonable statement while President leaves his judgments suspect to begin with (there is no "gilding the lily" on his reaction to the sexism charge--he kowtowed to ideology).

I only hope these policies do less harm than we might think---which is I actually think is likely. The Bush Administration promised/threatened more action than they delivered. The same is likely for the new group---I think.

The Snob writes:

@fundamentalist: "Most of the very intelligent people are socialists."

Data, please? I suspect that statement might be more accurately phrased, "Most of the people whose job it is to strut their alleged intelligence are socialists."

CS Lewis warned about confusing manners with morals and there is something similar with cognitive ability--there are a lot of excavation companies, plumbing supply houses, and machine shops owned by very intelligent people whose manners are not remotely BoBo.

Likewise, any publishing house or ad agency is heavily populated with drones who know their pinot gris from their gewurtztraminer, but who need to hire people to help them assemble their Ikea furniture.

None of which diminishes Arnold's point in the least. Skilled tradesmen know that no matter how much time or money you throw at a job, it isn't going to work if you don't apply the right tools and skills in the right manner.

Greg writes:

These concepts are the fundamentals of public choice, right? Good points.

It would be interesting to spend more time thinking about where the potential failure points in some of this spending are. For example, is the very idea of a smart grid likely to be flawed? Or will we instead, at the execution level, be more likely to be stuck with a "grid to nowhere"? Or is the grid fine in its own right but simply a misallocation of resources? Or some combination of the above? It's fine to say it won't work, but I'm curious about how we expect it to fail.

megapolisomancy writes:

Intelligence and exploitation are not mutually exclusive. These technocrats are preparing for massive government intervention and transfers of wealth, abusing their academic credentials to give this the semblance of necessity and good public policy.

What we need is the rule of law, not the rule of academics.

fundamentalist writes:

The Snob: "Data, please?"

I was paraphrasing Hayek in "Fatal Conceit." I don't have any data. I think he was referring to "intellectuals."

MattYoung writes:

Cole Porter got it right in his song Experiment.

Before we leave these portals
to meet our paramortals,
there's just one final massage I would give to you.

We all have learned reliance
on the sacred teachings of science,
so I hope through life you never will become,
in spite of philistines, defiant,
to do what all good scientists do.

Experiment.
Make it your motto day and night.

Experiment.

-------------------

If FDR had any greatness it was his willingness to experiment.

anonymous writes:

Reductio ad Absurdum!
Always a favorite of those with no real argument to make!

mk writes:

Very important point, Arnold. Nice post.

RJ Miller writes:

I am amazed that you find Cass Sunstein so brilliant. I find him a simpleton. You should read what he has written about the Second Bill of Rights that he thinks is necessary. It is nothing but emotion packed drivel.

I don't know much about Summers. But, I am sure, like Sunstein, he thinks he DOES posses superior intellect over us all, such that he knows what is best for us all.

Greg Ransom writes:

Let's be real. Keynesian economics is cargo cult economics.

And being a "cargo cult economist" means never having to pretend that your "economics" has any relation what-so-ever to the coordination of actual relative quantities and prices across the time structure of production and consumption.

"So to talk about "the" multiplier, as if it were linear, has to be wrong at some level."

Greg Ransom writes:

What's amazing about Sunstein is that he manages to mix in some of the dumbest stuff every thought on such subjects as distributed knowledge and the internet. High IQ and dumber than my neighbor at the same time.

It's an interesting mix.

"The Obama Administration is being populated with outstanding academics, like Larry Summers and Cass Sunstein. It is not surprising that the academic world is expressing a lot of confidence in giving them huge amounts of power. These are people who are more than three standard deviations higher in IQ than average."

Greg Ransom writes:

It's typical of intellectuals to mistake an ability to write fast with wisdom, intelligence, and understanding. Maybe I haven't read the right stuff, but I'm always amazed at the mediocrity of Sunstein's work, when you get past the volume of the output and the volume of ideas reprocessed from others.

Note well that I don't speak as anything like an authority on Sunstein's work.

Greg Ransom writes:

When Christina Romer talked about putting 3 million people to work under Obama she sounded a bit like an adviser to a Roman Emperor.

And note, Romer could be twice as smart as Sunstein, but she doesn't _sound_ twice as smart.

And among academics and intellectuals I've noticed that the _appearance_ of intelligence and brilliance is in many ways more importance than the actuality. Romer seems like she IS my neighbor -- the one advising the Emperor of Rome.

Grant writes:

Greg,

I think you'll find the entire point of intellectuals doing what they do is to signal wisdom, intelligence and understanding relative to others. Naturally one of the best way to do this is to show that you are more capable of spending others' money than they are.

Of course, certain institutions can direct the selfish motives of intellectuals into something that produces more than just the appearance of useful traits. Unfortunately politics is all about image, so I'm not seeing how that could happen in government.

Marcus Garcia writes:

I am by no means an economist and perhaps my question will do nothing more than illuminate my lack of understanding in regards to all of this government spending stimulus stuff; but here's the view from a guy on the street...

Stimulating the economy via increased government spending sounds a lot like creating jobs by burning down buildings. After all...if I burn the building down then somebody has to rebuild it right? That creates jobs right? But in the end aren't we right back where we started; net zero. (and this doesn't even account for the disruption in economic activity for the people who were in the building)

If the government stimulates the economy by spending more via an increase in taxes (now or in the future) of "X" aren't we simply increasing the government spend by "X"...which really means we subtracted "X" then just added it back in? Or worse...we subtract "X" then spend more than "X". Either way it seems like we're just moving money around without really making anything happen...other than increasing the tax burden on everybody.

Or am I just not getting it....?

Kurmudjin writes:

Marcus,

Excellent questions. You are describing Bastiat's Broken Window Fallacy in your analogy of burning buildings to create economic stimulus.

See Mises.org and search for Henry Hazlitt's Economics in One Lesson. It is available for free download or online as well as a purchased hard copy. You do not have to be a high falutin "economist" to understand the basic principles of sound economics.

Craig writes:

"If FDR had any greatness it was his willingness to experiment."

It's that 125 million Americans served as his guinea pigs that diminishes his greatness to many of us.

Mark Buehner writes:

I find that most academics you meet, particularly those considered hyper-intelligent (whether they literally are or not if often open to question, everyone assumed Al Gore had a very high IQ but it was actually lower than Bush) have a great deal of trouble accepting the implications of a chaotic and unpredictable world. Being able to have a great deal of mental control and discipline may well lead to frustration that the outside world can't be dictated to like a class full of students. The law of unintended consequences is fundamental, and that is something statists and socialists often refuse to believe or understand. Actually its the engineers who tend to grasp this intuitively. Just because something should work, doesn't mean it will work, and often you don't understand a system nearly as well as you think you do.

Andrew M writes:

Intelligence is a capacity and, as with all capacities, someone who has it may or may not exercise it.

Something that affects whether smart people exercise their intelligence is the environment they're in. Academics working in their specialties are operating in a very competitive environment--they always face very well-informed, smart, and motivated critics--and so to keep their professional reputations they have to use all the intelligence they have. But when academics shoot off their mouths at a general faculty meeting or in a letter to the local paper, they just don't have the same incentives to apply their brainpower, and so they sometimes say dumb things.

Or so I conjecture on the basis of my own experience.

big al writes:

The smarter you are... the dumber are your mistakes.

deguello writes:

"Intelligent academics" should be an oxymoronic phrase given their sordid record of support for totalitarian regimes, failed socialist economics,and demonstrated incompetence when actually running government(Best and Brightest anyone?) .The Obama goofballs, the slavish technocrats of a corrupt bipartisan plutocracy, based on deindustrialization, outsourcing, and real estate speculation,are about to plunge the USA into third world levels of inflation, poverty and political turmoil.Adios USA welcome Venezuela!

Marty writes:

Lenin was an intellectual, as was Pol Pot. With the partial exception of some in the hard sciences. the typical academic these days knows little outside a very narrow specialization, and even there, half what (s)he knows is wrong. All the rest is posing and fakery and affecting the right style, etc. Which is a large part of why Palin drove them nuts, she wouldn't play the game and seemed perfectly happy not to.

The recent Bush administration had a serious competence deficit in many quarters, but I fear we will look back on it with fondness after all the Ivy Leaguers and U of Chi types have their turn.

btb, I live in Hyde Park and I know a fair number of the people you're hearing about.

Mary T. Johnson writes:

The powers that be will have to try to use their two traditional tools, inflation and economic growth, and fail, before they will be open to pragmatic new ideas.

To get a heads up on this situation, most people are looking at the Great Depression. But you can get additional insights into the situation by checking out the Wikis for the Panic of 1837 and the Panic of 1893, both of which have some interesting parallels with our economy today not found in the Great Depression.

tjames writes:

I would think there would also be some adjustment of the multiplier based on the way the government comes up with the cash. Is the multiplier the same if

1) All of the money is borrowed domestically?

2) All of the money is borrowed from foreign entities?

3) The money is just printed?

4) The money is forcibly extracted from the citizenry before being spent?

Also, has there been any research to show the time impact of the multiplier? Particularly in the case of borrowed money, at some point down the road when the money comes due, I'd expect some sort of negative consequence, since it is basically the reverse process of extracting, rather than injecting, money into the economy. Or is the alleged multiplier arrived at by integrating the impact to the economy over all subsequent time (an obvious impossibility as we have no data past the present and quite a bit of borrowing yet to unwind)?

Jim Luckett writes:

The proposal is for the government to spend more on roads, bridges, mass transit, green technology, schools and other useful things. Not on breaking windows or burning down buildings.

The money is to be borrowed, and the Fed may or may not buy any equal amount of bonds, but if it does then the net effect is the money was printed.

The reason for the spending increase is to put unemployed resources back to work sooner than the private market would, producing things of benefit to us and future generations.

Since the private market is right now shedding workers and not making real investments and commodity prices are low and falling, and factories are idle, now would seem like a good time for producing some of the goods we consume collectively, like roads and schools. To the extent the stimulus spending causes us to make stuff with resources that otherwise would have been left idle, it's "free", meaning no private production is crowded out. Worker hours and factory hours are used productively that otherwise would have been wasted.

We can debate about the multiplier -- the multiplier is the answer to the question how much does the total output of our country increase for one unit increase in government spending at this time? If it's 1, then it means a $1 rise in govt spending increased total output of the country $1. If it's 0.8, then it means a $1 rise in govt spending increased total output 80 cents -- that being $1-worth of public goods, less 20 cents of private goods that got crowded out (someone decided not to produce something in the private sector because of the increased demand from govt. for other things). If it's 1.5 then it means the $1 of govt. purchases was all net incremental production for the country, and it produced income to those who sold it to the govt. (and their workers) so that these folks whose income was boosted went out and bought 50 cents worth of stuff they would not have bought had they not been selling that $1-worth of stuff to the govt.

Certainly, the size of the multiplier depends on the state of the economy. If there is high unemployment, the multiplier will be larger, because there are lots of idle resources available to meet the incremental demand without having to pull employed resources away from other uses. At full employment, there would be dollar-for-dollar crowding out and so the multiplier in those years is 0.

So yes, certainly the multiplier is not a constant for all stimulus spending at all times of any magnitude. If we increased govt. spending beyond the physical productive capacity of the country, we'd be in multiplier=0 territory. We're no where near that with the stimulus package now proposed.

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