Arnold Kling  

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Lectures on Macroeconomics, No... Smart Stimulus...

Paul Krugman says that we need a big fiscal stimulus. He writes,


Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years

Krugman says a lot more, but I have quoted the key part of the argument. An unemployment rate of 9 percent for two years would be a really long, large deviation from full employment. [UPDATE: A new CBO forecast says that the unemployment rate will exceed 9 percent early in 2010. That is not the same as saying that it will average 9 percent for the next two years. On the other hand, Mark Zandi seems to be even more pessimistic than Krugman.] I think that (a) we are unlikely to have such a long, large deviation and (b) if we do, it will be because the structural adjustments required in the economy are larger and more difficult than I realize. Cyclical unemployment, which means workers laid off from temporarily-depressed durable goods producers, is unlikely to be so bad. And that is the type of unemployment that fiscal stimulus is most likely to be able to correct. The efficacy of fiscal stimulus for dealing with structural unemployment is extremely doubtful.

Hal Varian wants to see more private investment. To the extent that structural unemployment is the problem, I think that private investment is more likely to redeploy workers in a constructive, long-term way.

Foreign Policy looks at five prophets of doom. Thanks to Mark Thoma for the pointer. Except for Robert Shiller, all of them say that we have to pay for our sins of bubbles and over-consumption. Like the character Apollo Creed [a commenter points out that it was Clubber Lang, not Apollo Creed] in one of the Rocky movies, their forecast is for pain. They convey the sense that good times are an illusion and now we must suffer for that illusion. This resonates with the sentiment in a popular type of religious sermon, even if there is little, if any, economics behind it.

UPDATE: Jane Shaw writes,


By asking the taxpayers to rev up those projects, the [university] administrators are essentially saying that if state taxpayers can't afford a project, some mythical "federal taxpayer" can.

Read the whole thing. Many people are saying that a key component of the fiscal stimulus should be support for state governments, so that they do not have to reduce spending. Yes, from a Keynesian perspective, you always want to transfer wealth from the prudent to the profligate. But from any normal perspective, you don't.


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CATEGORIES: Macroeconomics



COMMENTS (16 to date)
Joe Marier writes:

Your last point may be worth expanding upon. I think that however many straight quarters of economic expansion that we had was setting us up for big trouble, and that Greenspan monetarily suppressed a mild recession in late 2005 that would have been an excellent reality check. I'm not sure that's the same thing though.

But were the good times an illusion, or not?

Blake writes:

I believe the forecast for pain was from Clubber Lang (Mr. T) in Rocky III, not Apollo Creed. It went something like this:

Journalist: What's your prediction for the fight?
Lang: Prediction?
Journalist: Yes. Prediction.
Lang: Pain.

Apollo Creed would have said something much more theatrical than that.

Gary Rogers writes:

I like Barack Obama's analogy of our economy as a sick patient that needs immediate attention. I would take this further and say that our leading economists are like doctors prescribing blood letting to purge bad humors and herbal potions to stimulate the soul of this sick patient.

MattYoung writes:

I clicked ito Jane Shaw, and I wonder how building brick building helps when brick buildings are the most likely to be disintermediated in education due to the networking revolution.

Maniel writes:

Gary Rogers wrote: "I like Barack Obama's analogy of our economy as a sick patient that needs immediate attention."

More debt (sometimes referred to as "stimulus") is a highly dubious "cure" for the problem (sickness) that, until now, our economy has been driven by debt and that we have been driven by government to take on debt and have driven our government to take on debt. A return to sound economic practices in the public and private sectors would encourage investors in the short and benefit our economy in the long term.

Randy writes:

It was while reading Hal Varian's article that I started looking for the "why". Why do stimulus? So people have stopped spending... so what? The why, of course, is unemployment. When people stop spending on the things that people are making, the people that were doing the making become unemployed. But this just brings up another why? Why go to great effort to put the unemployed back to work? The last time I checked (about 5 years ago) there were more people working (in outside of the home employment) as a percentage of the population then at any time in history. So I'm thinking... seriously, why not just let the unemployed sit it out for awhile? In short order people will start demanding the things they have been putting off and/or the unemployed will find ways to produce something else that people will demand. Either way, time is the cure, not stimulus.

Gary Rogers writes:

I hope Manial recognizes that we agree completely. The reason I like the sick patient analogy is that it gives a framework for looking at the proposed cure. To say that we have a sick economy so we need to stimulate is highly dubious, as he says. Our problem is, in fact, the ill effects of years and years of stimulation that has left us over leveraged and unable to withstand deflation or fight inflation. The solution is not more debt. This is why I like to ridicule economists that would propose a solution that is no more advanced than 18th century blood letting.

Greg Ransom writes:

You can't get around the fact that a Fed/finance/bad regulation/Ponzi induced bubble will create overproduction in such things as housing, house building, the finance industry and the mortgage business, etc. -- driving prices after the bust _below_ what they would have been without the bubble and bust.

Re Hayek's rendering of the oint in _The Pure Theory of Capital_:


"The decisive fact .. is that the effect on prices of these changes in quantities brought about by monetary influences will be in exactly the opposite direction from the direct effect on prices of these same monetary change. We may suppose, for instance, that, at the point where a net addition to the total money stream makes its first impact on the commodity markets, there will result an increase first of the prices and then the output of the commodities affected The effect of this increase in output will be that, as soon as the addition to the money stream cease, the prices of these commodities will fall relatively to the prices of all other commodities and will reach a lower level than prevailed before the monetary change."

Joe Drouillard writes:

Obama is speaking tommorow (Thursday Jan 08, 2009) at George Mason on the economy. Can we read anything hopeful in this???


PS: Love Econalk

Grant writes:

Arnold says,

They convey the sense that good times are an illusion and now we must suffer for that illusion. This resonates with the sentiment in a popular type of religious sermon, even if there is little, if any, economics behind it.
Are we sure about that? If people's houses were not so overvalued, would they not have thought they had less savings, and consumed less (both houses, and other goods and services)?

Steve Roth writes:

"from a Keynesian perspective, you always want to transfer wealth from the prudent to the profligate"

You mean, from WalMart shoppers to Prada shoppers? Isn't that what we've been doing for the last 28 years?

I don't think that's what Keynes was recommending.

I like Barack Obama's analogy of our economy as a sick patient that needs immediate attention.

Then remember: 'First, do no harm.'

Bob Murphy writes:

[Several] say that we have to pay for our sins of bubbles and over-consumption....They convey the sense that good times are an illusion and now we must suffer for that illusion. This resonates with the sentiment in a popular type of religious sermon, even if there is little, if any, economics behind it.

Mr. Kling, capital theory. Capital theory, Mr. Kling.

Doug Tengdin writes:

Wasn't it Keynes who criticized the Austrians for treating the economy like a morality play, rather than as a technical issue that must be managed? It seems to me that moralizing over excessive consumption is just "this-worldly asceticism" of Max Weber.

What is needed is a cyclical adjustment away from finance and construction and into something else. But no one knows what that "something else" will be. In 1932 and 1947 in Denmark, the Depression and postwar recession led to Legos. I'm encouraged that Arnold doesn't think the adjustment will take long. But why doesn't he think so?

Maniel writes:

Gary Rogers wrote: "I hope Manial recognizes that we agree completely."

Let me say that I disagree completely with how you spelled my name, but I will defend to the death your right to do that, since very few spell it correctly.

Otherwise, thanks. It's nice to find agreement, even within a small minority.

Vasco writes:

I'm only an undergraduate who has only had Macroeconomics at an Intro level so far, so feel free to come bearing down on me with the might of your Professorial wisdom, but it does seem to me that you're a bit cognitively dissonant when it comes to macro-economics. You criticize (rightly in my view) Keynesian remedies like "transfer[ing] wealth from the prudent to the profligate", but yet your economic analysis is thoroughly seeped in Keynesianisms like "full employment" and "multipliers". Correct me if I'm wrong, but doesn't Neoclassical macroeconomic theory imply that markets are never out of equilibrium when considering time and uncertainty, and so it doesn't make sense to talk of the economy being outside of "full employment"?

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