Arnold Kling  

My Current Outline

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Consumers or Businesses?... Fraud and Punishment...

For my talk at the anti-stimulus conference. Still a work in progress.

I am now told that I have 15 minutes. My guess is that if I were paid $100 for every minute that my co-panelists exceed that limit, I would make thousands of dollars. But I will stick to the limit. Giving a short talk requires much more preparation than giving a long talk. It's a good discipline. Also, trying to stick to a time limit by talking fast is self-defeating. People will remember what you say more easily if you speak slowly and dramatically, rather than hurriedly.

1. Three main points: this is a big bill, but not a big stimulus; a better approach would be to cut the employer contribution to the payroll tax; the economics profession is in turmoil--no economist should be expressing opinions with great confidence.

2. Larry Summers famously said that the criteria for stimulus is fiscal policy that is timely, targeted, and temporary. The spending in this bill is partisan, pandering, and permanent.

3. Alice Rivlin, who is even more of a Democrat than Summers, points out that the bill contains both stimulus proposals and proposals for what she calls "transformational spending." I call it Radical Reconstruction. She is in favor of it, but she points out that it is not an emergency. She would have it taken out of the stimulus bill and considered separately. Whether or not you favor those spending priorities, it is wrong to put it on a fast track, with no hearings, no cost-benefit evaluation, and no deliberation.

4. For a real stimulus, I prefer Bryan Caplan's idea of a cut in the employer contribution to the payroll tax.

5. At first, cutting the amount that employers have to contribute to the payroll tax will put more money into businesses. Eventually, businesses will start to compete for workers, and unless the tax cut is reversed it will feed into wages.

6. For now, though, wages will not change. That means that the cost of hiring workers will drop, so businesses will do more hiring.

7. More importantly, profits will increase. I think that policymakers should be focused on profits in the nonfinancial sector, not on trying to revive banks and lending. When profits are low, businesses do not want to borrow, and investors do not want to lend. It is futile to prop up failed banks and plead with them to lend. The rest of the economy needs to step over the corpses of the failed banks, and profits are the key.

8. Profits are the most cyclical component of income. The latest data we have is for the third quarter of 2008. It shows that relative to the same period in 2007, wage and salary disbursements are up 3 percent, while profits are down 9 percent. The profit collapse is going to be even more dramatic when we have data for the fourth quarter.

9. When Larry Summers said that the stimulus should be targeted, he was thinking that it should go to those consumers who will spend the most money. I disagree. At this stage of the business cycle, the best target for a stimulus is profits. If you are against profits at this point in a recession, then you hate capitalism.

10. Again, it's futile to try to prop up banks and lending. Nobody wants to go on another borrowing binge. The path to recovery is to restore profitability to business and make hiring workers worthwhile. That is why cutting the employer contribution to the payroll tax is such a good idea.

11. Why do so many other economists have such different ideas? The economics profession is in turmoil. We did not see this coming, we have different opinions about what to do about it, and none of us has solid evidence to back our opinions.

12. Keep in mind, though, Herbert Stein's remarks that (i) Economists do not know very much but (ii) Non-economists know even less about economics than economists do.

13. Why is there so much support for a big stimulus, as opposed to a small stimulus? Because small stimulus efforts have a track record of not working. That's worrisome.

14. Back in the 1970's when I went to graduate school, the MIT guys and the Chicago guys disagreed strongly. Franco Modigliani, an MIT guy, once asked rhetorically of the Chicago guys, do you think that the Great Depression was just an outbreak of laziness?

15. As I was leaving graduate school, the MIT guys and the Chicago guys were starting to paper over their differences. The didn't resolved them. They just put them aside and focused on refining their mathematical methods.

16. In the current crisis, the unresolved disagreements from the 1970's have come back. Kevin Murphy (Chicago guy), says that every $100 of additional government spending produces a net social loss of $80. Brad DeLong (MIT guy, teaching at Berkeley), say that every $100 of additional government spending produces a net social gain of $87. (I won't have time to go into why they differ)

17. I'm an MIT guy, but I am more skeptical about stimulus than DeLong--I may be even more skeptical than Murphy. I think it's dangerous to go back to 1970's thinking. The economy has grown much more complex. For example, in 1950, 4/5 of the labor force had no more than a high school education. In 1970, 2/3 of the labor force had no more than a high school education. Today, only 1/2 of the labor force has no more than a high school education. My one-liner is that I cannot see unemployed investment bankers driving bulldozers on highway projects.

17. In general, with a heterogeneous work force, re-employment is going to require subtle, local adjustments. As I see it, the market mechanism is better suited than Washington to making those types of adjustments.

18. More broadly, any sensible economist has to be really uncertain about the impact of these policies.

19. Recap: big bill, small stimulus; recovery will require that businesses are restored to profitability (meaning the businesses in the nonfinancial sector; the financial sector needs to shrink); a cut in the employer contribution to the payroll tax would help with profits and also encourage hiring; economists are not certain about which course to take; if you hear someone who sounds certain, that person is probably not a very good economist.

This is closer to a script than an outline. If I just read1-19 slowly, it would take about 10 minutes. If some points require more elaboration, then other points probably have to be cut.


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COMMENTS (12 to date)
Radford Neal writes:

You say... The rest of the economy needs to step over the corpses of the failed banks.


Wouldn't the most direct way to do that be to just start new banks? Why is no one (as far as I can see) considering that?

Andrew Chesley writes:

Because you can't just start new banks. Banks require deposits which require confidence in the banks ability to protect your assets, which new banks won't have. We have to work with the banks that we have.

John Alcorn writes:

Arnold: Your 19-point draft outline/script effectively distills and integrates quite a range of your blogposts on the stimulus -- But I still think that you should make more explicit that the stimulus involves a permanent power shift to government (a recurrent point in your blogposts). Although it is broadly true that "no economist should be expressing opinions with great confidence," nonetheless the point about concentration of power is straightforward and solid. Why not make it a counterpoint to the tribal quarrels among economists?.

Greg Ransom writes:

Non-economists who read Hayek knew a bust was coming.

A non-economist like Henry Hazlitt could see through the economic and scientific fraud which is Keynesian economics.

A non-economist who has read Hayek knows much more about the limitations and scientistic fallacies than does your average economic professor at a top 5 graduate school.

Understanding the scientific limitations and scientific fallacies of modern macro is _not_ that hard.

And thousands of non-economists understand these fallacies and limitations better than do the MIT and Chicago economists.

Arnold wrote:

"Keep in mind, though, Herbert Stein's remarks that (i) Economists do not know very much but (ii) Non-economists know even less about economics than economists do."

Dan writes:

@ Andrew Chelsey/Radford Neal

Another alternative is to allow stronger existing banks, i.e. JP Morgan Chase and/or successful regional banks, to take market share from the failing giants.

Bailouts aside, I think we've been seeing this happen to some degree. No need for new banks and no confidence issues.

Maniel writes:

As one of the unwashed (non economists), it appears to me that we (government, business, and consumers) fell in love with debt. Now that that romance is over, business and consumers are reducing debt and increasing savings, setting the stage for a recovery. Higher government spending and debt will only delay that recovery.

David W writes:

You can't just start new banks? Then where did they all come from?

Gary Rogers writes:

Recently you have been emphasizing the need for profits. Although you include that in your talking points, I do not think it gets enough emphasis. Here is my thinking:


  • The primary need for stimulus is to stop the downward cycle of a bad economy that causes layoffs, which causes the economy to get worse causing more layoffs. If we can save the jobs, we will be OK.

  • Companies will not hire or keep workers if they cannot make a profit on the work the employees do.

  • Any company that knows they can make more money by hiring will hire.

  • The primary test of a stimulus component is how it makes it more profitable for companies to hire more workers.

  • The second test for each and every component of the stimulus package is how much will it add to an already dangerous debt. This weighed against its ability to make it profitable for a company to hire should be the deciding factor.

hacs writes:

what do you think about stimulating the reinvestment of gross profits, complementing your suggestion?

cato writes:

i would try a little anger in your speech. people remember that more than any technical points.

and i would firmly emphasize the power shift to government that is occuring in the "crisis" there may be dispute about other macroeconomic facts. there is no dispute about the growing size of government and how much power each individual there holds, without having the incentives or wisdom to spend it wisely.

Patrick writes:

It seems more than a little unstructured. The content is good, but if I heard this speech, not sure what I would take away from it.

guthrie writes:

I agree with John and Cato (Gary's post offers good points too)... I think you might be able to insert a comment on the massive shift from the private to public sector in between points 2 and 3, or 9 and 10.

I like 2's alliteration... that'll land.

That's a good instinct on keeping it slow. Some other staging suggestions:

Make an effort to look the moderator in the eye from time to time. If there's an audience, pick an audience member and 'see' them (do this a few times, with different people). If you look like you're reading from a list, even if you've memorized it, people will disengage. 'See' the other people there and you will look 'engaging' and that will interest them. Looking people in the eye will also help relax you, and keep you 'present'.

Keep your hands away from your face.

If you gesture, make sure you gesture slowly (or slower than usual). Sharp, jerky movements are unnecessary and will distract your audience.

Keep your head as still as you can while you are talking. This helps draw focus.

The more relaxed you are, the more 'in control' you will seem.

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