Fiscal Policy Questions

Following an argument with a friend, who’s persuaded that Paul Krugman’s pro-fiscal stimulus arguments are all based on a sound empirical basis, I did a little brushing up on the debate last night. I’m not only trying to persuade my friend, but I’m trying to get my thoughts about the recession in order for my political economy class this fall. Feedback, particularly correction of errors, is requested, as are answers to my questions (all in bold).

The basic fiscal argument is that fiscal policy works because the private sector has stopped spending and investing (aggregate demand has fallen), and is effectively just sticking the money under their mattress.

The basic monetarist argument is that people don’t put their money under their mattress when they stop spending, but in the bank, so if spending falls, savings rise, which reduce interest rates on borrowing, which increases investment, which ultimately increases spending. In other words, fiscal policy stimulus can’t work because it just diverts money from private spending/investment (I/S) to public I/S. I.e., it crowds out private I/S rather than increasing total I/S.

Krugman argues that stimulus doesn’t crowd out private I/S, but actually crowds in private I/S because of the multiplier effect of public I/S–because every dollar borrowed and spent creates more than one dollar in value, that stimulates further private I/S.

on the contrary, there’s crowding in, because a stronger economy leads to more investment. So fiscal expansion increases future potential, rather than reducing it.

Of course that argument depends upon the assumption that fiscal stimulus actually leads to a stronger economy, which is, in fact the central question–if crowding out occurs, then stimulus won’t lead to a stronger economy. So it’s a bit circular to say that crowding out won’t occur because stimulus creates a stronger economy

Setting that problem aside, let’s assume for the moment that Krugman’s basic argument that fiscal stimulus strengthens the economy, which leads me to the following questions.

1. There’s nothing approaching consensus on the size of the multiplier effect of public I/S. Robert Barro argues, based on a study of WWI, for about 0.8, which would mean stimulus hurts rather than helps. German economist Volker Wieland calls it 0.5-0.6 (although he’s talking about permanent, rather than temporary spending)/. The Obama administration is calling it 1.5, but frankly there are few historical examples of presidential administrations choosing realistic budget numbers (for example, the CBO is normally much less optimistic in their estimates of future than the OMB). Does it make any sense to place much faith in a policy when the experts are in so much disagreement about whether it will have positive effects or not?

2. Even if public I/S is positive, so that it does crowd in private I/S isn’t the crucial comparison between the multiplier effect of marginal public I/S and marginal private I/S? That is, don’t we need to compare the multiplier effect of the next dollar in government spending vs. the dollar in private spending it will (if only temporarily*) displace? On what basis is the assumption made that the public I/S has a higher multiplier effect than the private I/S? Or am I missing something, and that’s not relevant?

3. If that’s all correct, doesn’t it mean Krugman’s crowding-in argument still depends on the basic fiscal belief that people are just “putting their money under the bed?” Because that’s the only way I can see a (presumed) positive multiplier effect from public I/S being, with any certainty, greater than what’s coming from the private sector. Is there any real empirical evidence that during this recession people in fact were just sticking their money under their mattresses, or did it it actually result from a vast disappearance of wealth (albeit paper wealth), effectively reducing the money supply dramatically?

4. Krugman’s argument seems to suffer from a paucity of empiricism because there is such a paucity of historical examples of fiscal policy working. In fact Cowen says there are no such examples. Nevertheless Krugman argues that it’s only because the stimulus was never big enough. Cowen asks whether we really want to take the risk of that much government borrowing/indebtedness based on an unproven theory. Krugman seems sure that’s not a risk. Doesn’t Cowen have the upper hand on this argument? It’s not as though Krugman’s argument is the consensus in the discipline, or anywhere near the consensus–isn’t he asking us to take a huge risk on theory that is historically unproven, that requires assumptions that are strongly disputed, and whose multiplier effects are so wildly uncertain?

Of course it’s necessary to note that Krugman is making this argument specific only to the zero-interest-rate bound. He’s agreed that monetary policy works in normal recessions, but that this recession isn’t normal, with the primary evidence being that we’re up against the zero-interest-rate bound. So in normal times fiscal policy might crowd out investment, but in this particular type of situation it doesn’t because there’s no private borrowing for I/S to be crowded out. Does this save Krugman’s theoretical argument, or is there still a flaw there? If it does save his theoretical argument that fiscal policy works, does it actually prove that fiscal policy works better than monetary policy in that case? (The argument seems to be that monetary policy has no more tools when the zero-interest-rate-bound is hit, but Quantitative Easing seems to me to demonstrate that this is untrue (and see Lucas)–in fact Krugman’s own well-known arguments about the policy effects of creating inflation, or at least inflation fears, seem to me to demonstrate that simply creating more money, which the Fed is effectively able to do, continues to be a viable alternative).

[Addendum: Related question–At the zero-bound, is fiscal policy stimulative with certainty, because “more spending” is necessarily more stimulative than “not more spending”?

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*Because even if gov’t I/S ultimately crowds in, the immediate effect of borrowing that dollar has to be that it’s pulled from the private sector.

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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28 Responses to Fiscal Policy Questions

  1. D. C. Sessions says:

    The “crowding out” model assumes that savings=investment=spending, which is demonstrably not true. Right now, for instance, businesses are sitting on historically high cash reserves which they are not reinvesting in their businesses because (they report) there’s no demand to justify increasing production.

    Instead, they’re trying to find something safe to put the money into. The ultimate “safe” vehicle is cash, but that’s a zero-rate instrument. The next safest is top-grade bonds (notably US Treasuries), which are currently in such demand that they’re paying historically low interest rates. Not long ago, mortgages were considered extremely safe, but for some reason opinions have changed on that front.

    If you’re going to argue that saving money by buying US Treasuries results in spending, I think there’s a step missing. Keynes and Krugman fill that step by having the Government take advantage of the demand for Treasuries by using them to put people to work, ideally on valuable public investments (education, bridges, roads, water systems, etc.)

    If you’re going to reject the Keynsian bridge over that gap, though, you’ll need to provide another.

  2. James Hanley says:

    businesses are sitting on historically high cash reserves which they are not reinvesting in their businesses

    A) Historically high by real or nominal value?

    B) Sitting on as in “stuck in a vault” or sitting on as in “stuck in a bank”? Those are two different things, with different implications.

  3. D. C. Sessions says:

    Historically high relative to the size of the business. It’s enough that several I know of are sweating hostile leveraged takeovers, in part because the buyout could be financed by the company’s own savings and in part because the remainder could be financed very inexpensively.

    Sitting as in “held as highly liquid securities such as Treasury bonds.” (Cash or cash equivalents.) Actual primary investment operations such as venture capital are quite tight right now — I know several small startup operations that simply can not get funding even though they’re making money. The demand for security is just too great for any of the entities which have money to risk it on actual investment.

  4. Scott Hanley says:

    My untrained thought is similar to DC Sessions’s first objection. Can you really equate savings, investment, and spending in that way? In dollar amounts, perhaps, but in equivalent effects on the economy? That would seem to imply that financing the growing federal debt or bidding up stock prices is just as helpful as producing more goods and services. Doesn’t it matter what’s being invested in? Is buying Treasury bonds all that much better than stuffing the money under a pillow?

  5. James Hanley says:

    Historically high relative to the size of the business

    Objection. Nonresponsive. Still doesn’t say whether it’s nominal or real.

    Sitting as in “held as highly liquid securities such as Treasury bonds.”

    Oh, so they’ve already loaned it to the government to use–so what’s the problem and why do we need more loaning to the government?

    hostile leveraged takeovers, in part because the buyout could be financed by the company’s own savings and in part because the remainder could be financed very inexpensively.

    Eh, that’s neither spending nor investment?

    Can you really equate savings, investment, and spending in that way?

    Yes, pretty much. At least over the middle to long run. There may be stickiness in the process, but the number of things you can do with money are really pretty limited, and it all comes back around unless you stick it under the mattress or burn it, and businesses rarely do either of those as it’s not to their advantages.

    That would seem to imply that financing the growing federal debt or bidding up stock prices is just as helpful as producing more goods and services.

    Helpful to whom? What’s your standard of measurement here? Remember that full employment and NGDP are no more than proxy measurements of a good economy. I think you’re worried about whether what a business does with their cash is “good for the economy” rather than worrying about whether it’s good for that business.

  6. Scott Hanley says:

    I think you’re worried about whether what a business does with their cash is “good for the economy” rather than worrying about whether it’s good for that business.

    Indeed I am, and I’ll use full employment as my proxy measure, since corporate profits, high stock markets, and dwindling deficits tend to correlate with high employment.

    Now, if all those private uses of money are essentially equivalent, what does that do for the standard argument that government spending is less efficient than private investment? It strikes me as inconsistent to say, in regards to private uses, that it makes no difference how the money is used, use is use — but when the government touches it, it is used less efficiently.

    And I know that you prefer private spending to government spending. If there’s reason to prefer private use to government use, then surely there must also be cause to say that not all private spending and investment can have the same outcomes, isn’t there?

  7. D. C. Sessions says:

    Objection. Nonresponsive. Still doesn’t say whether it’s nominal or real.

    Pick one and use it for the other. A ratio between two measurements with the same dimensions is dimensionless.

    Eh, that’s neither spending nor investment?

    Having a high percentage of your company’s market value consist of a horde of cash equivalents is an indicator of how much you have sitting around as cash instead of being invested in the business itself. Please recall that your thesis is that saved money gets invested in productive use — but this strongly suggests that productive uses for money are hard to find.

    Which would be a rather classical economic analysis, by the way, going back to John Stuart Mill: when there’s a general glut, it’s stupid to invest in production.

  8. James Hanley says:

    I’ll use full employment as my proxy measure, since corporate profits, high stock markets, and dwindling deficits tend to correlate with high employment.

    Yeah, but trying to create full employment at some particular given moment in time does not necessarily correlate with the health of a business, and so does not really correlate with the health of the economy.

    If there’s reason to prefer private use to government use, then surely there must also be cause to say that not all private spending and investment can have the same outcomes, isn’t there?

    Sure, but the reason we prefer private spending to government spending is because private spending tends to create higher value (i.e., subjective value, which of course is the only kind). So applying that same standard to private spending and investment we conclude that the best outcome of private spending and investment is creating higher subjective value.

    Pick one and use it for the other. A ratio between two measurements with the same dimensions is dimensionless.

    Eh, explain to me how that applies–I’m not sure what your two measurements with the same dimensions are. To make up some numbers, if my business previously had a record high cash on hand of 5,000 nominal dollars, but that equated to 1,000 1990 dollars, and now I have 10,000 nominal dollars but it equates only to 800 1990 dollars, then I don’t actually have a record high amount of cash reserves. It’s easy enough for someone to say I have twice as much cash on hand as ever before, but it’s not really true.

    Please recall that your thesis is that saved money gets invested in productive use — but this strongly suggests that productive uses for money are hard to find.

    Ah, so you, from outside the company, are the best judge of whether a corporate takeover is a productive use of the company’s cash or not? That’s a bit snarky, but seriously, this is the problem of publicly directed investment–people who are neither managers nor stockholders (people with no direct potential to gain, and who themselves risk nothing) substituting their judgment about the productivity of investments for the judgment of those in better position to make such judgments. Hayek’s “Fatal Conceit” is at play here.

    Granted that many corporate takeovers are actually bad decisions (humans are frustratingly fallible, but that’s no good reason to assume others would make better decisions from their external positions), when you buy another company you are getting equipment, supply chains, inventory, productive workers, knowledge, location, etc. Businesses like to expand–if they buy another company that’s an indicator that they’ve decided that’s their most cost-effective way to expand.

  9. Scott Hanley says:

    Sure, but the reason we prefer private spending to government spending is because private spending tends to create higher value

    Yes, that’s not the part I’m questioning. What I don’t understand is how one can simultaneously believe this and still subscribe to a crowding-out theory that strongly posits that it doesn’t matter how money gets used, and that spending, saving, and directly investing all have the same (collective) result (at the macro scale).

  10. D. C. Sessions says:

    Eh, explain to me how that applies–I’m not sure what your two measurements with the same dimensions are.

    Cash (or equivalents) on hand vs. your choice of: market capitalization, sales, forward profits, quarterly retained earnings, … Not sensitive to the currency used because it’s a ratio of two measurements in the same currency at the same time.

    Companies with plenty of money to finance expansion, not using it for expansion because they already have more capacity than demand.

    Ah, so you, from outside the company, are the best judge of whether a corporate takeover is a productive use of the company’s cash or not?

    Please don’t project. This is the corporate management, whose job it is to make the most profitable use of the company’s resources, stating that they can’t find a more productive use of cash on hand than to either keep it as cash equivalents or put it in low-yield bonds rather than invest it in their own business. This, to the extent that they worry about the company having so much cash on hand that a hostile takeover would pay for itself out of that same cash. I make no statement about the best use of the cash other than to defer to those same people — those private parties whose fiduciary responsibility is that “best use” — to whom you also generally defer.

    This strongly suggests to me that an infusion of savings into the system won’t do much more than depress the interest paid on Treasury bonds, which is already approaching zero. What happens past that point?

  11. James K says:

    DC Sessions:

    Please don’t project. This is the corporate management, whose job it is to make the most profitable use of the company’s resources, stating that they can’t find a more productive use of cash on hand than to either keep it as cash equivalents or put it in low-yield bonds rather than invest it in their own business. This, to the extent that they worry about the company having so much cash on hand that a hostile takeover would pay for itself out of that same cash.

    The deal can only pay for itself if all that cash can be put to a more productive use than its already being put to. In other words those hostile takeovers are the market trying to re-equilibrate.

  12. D. C. Sessions says:

    Again, your changing the subject. For present purposes it doesn’t matter if a wave of corporate raiding would somehow be a Good Thing; the point is in support of the (far) above statement that corporate cash holdings are at record levels — and the management of the companies in question don’t see productive uses for more of it.

    Note that this is a fear of corporate raiding. Also note that despite the current relative ease of mounting corporate raids, we’re not seeing that wave, and so even by your “it would be a productive use of corporate cash” it appears that it’s not more productive than putting money in Treasuries.

  13. James Hanley says:

    D.C.,

    A) You’re still waffling on the “record amounts of cash” business.

    B) Here’s the rub–the businesses, you say, can’t find more productive uses for their cash, but somehow the government could. This is where the ideal fallacy comes slipping in. Anyway, your argument about this terrible business of them holding their extra cash in government securities is rather ironic. You’re complaining that they have so much cash they don’t have anything to do with it but loan treasury bonds, so you are an advocate of fiscal policy–you want the government to borrow that money and put it to work, which the government would do by…..selling more treasury bonds. It sounds to me as if those businesses that are holding their cash in government securities are in fact doing exactly what you want, so where’s the objection?

    Scott, the idea that it does matter where money gets spent assumes that those whose money it is actually have the best ideas about how to spend it. I’ve made no implication that it doesn’t matter how the money gets spent. I’m just saying that you, me, and the federal government, sitting outside those businesses, are not really in good positions to say what the best use of their money is.

    Imagine XCorp succumbs to our pressure and puts its extra cash on hand to work by hiring more people. Those people make stuff that isn’t really demanded and goes unsold. So either XCorp lays those people off again or it keeps on paying them to make stuff nobody wants. In the first case nothing has really been gained (the workers gained temporarily, as did the grocery stores, etc., they patronize), but there’s not necessarily any net gain to the economy; it’s just a transfer. In the second case, XCorp continues destroying value in order to keep people working; that can only work to its long-term detriment.

    Aha, you say, that’s exactly your point. Things are so bad that businesses can’t find places to invest and get real value in return, so a) something has to be done, and b) government is the one to do it. But a) doesn’t follow from the premise. Sometimes it is better to do nothing, to sit and wait. And b) doesn’t follow from a). The claim that government has some superior sources of investment that businesses don’t have is magical thinking. And if the government does have some things it can be investing in productively–infrastructural things come to mind–it should be doing that regardless of whether there’s a recession. (Well, that’s not strictly true. Things being cheaper in a recession, government should probably hit some of those projects then, to gain the benefit at lower cost. But that’s not strictly a “recovery” issue; just a standard investment issue.)

    As to hostile takeovers, takeovers happen all the time. They’re a normal part of a capitalist economy–if businesses are “publicly” owned, in the sense of anyone being eligible to buy their stock, takeovers are a continuing possibility. Why that’s suddenly a bad thing now is not explained by either Scott or D.C.–the badness is assumed, but without any clear reason given.

    And I still have no real answers to my questions, only irrelevant objections. Come on James K, AMW, I need some answers here.

  14. Dr X says:

    The basic fiscal argument is that fiscal policy works because the private sector has stopped spending and investing (aggregate demand has fallen), and is effectively just sticking the money under their mattress.

    I think this is an oversimplification that ignores critical contingencies that are part of the argument.

    The basic argument, I believe, is that as long as you have high unemployment, the economy is producing at less than full capacity. If you effectively shoot your wad with monetary stimulus to increase borrowing-investment-employment to no avail, as we saw in 2008, then government borrowing and spending can pick up the slack, increasing q demanded, giving producers a reason to produce, halting deflationary pressure and increasing employment.

    The neo-Keynsians argue that, in reality, prices are stickier than they are in theory. So when demand is low, unemployment high and effective interest rates of 0% aren’t spurring investment in production, you can, some would say should, use fiscal stimulus up to the point that stimulus hits the inflation barrier. We’ve had a massive fiscal stimulus. Where is the massive inflation?

    James, I think this a fairer representation of what many stimulus advocates have said.

    The basic monetarist argument is that people don’t put their money under their mattress when they stop spending, but in the bank, so if spending falls, savings rise, which reduce interest rates on borrowing, which increases investment, which ultimately increases spending.

    Except that we saw that interest rates at nearly 0% producers were not increasing investment in production with attendant hiring that the monetary argument would predict. As DC points out, savings does not= investment in production. Producers have to see increased demand or they will be pushing a rope, as far as they’re concerned.

  15. James Hanley says:

    Dr. X,

    Are my questions really so tough that no one will address them? Pointing out that my very brief description of the basic argument of fiscal policy isn’t particularly nuanced doesn’t really get us anywhere. And frankly I don’t see that your restatement changes much–all you add is the “shot our wad with monetary stimulus,” which is just the zero-bound argument again. You’re restating the theory, not defending it.

    Your response also avoids dealing with the real question of whether government can in fact effectively pick up slack. You say it can, but that’s just repeating the claim, not demonstrating evidence for it or rebutting the questions about the validity of the claim (if the multiplier is below 1 there is no picking up of slack). Repeated statements of “government can” are not in fact persuasive evidence that government can.

  16. Dr X says:

    The basic monetarist argument is that people don’t put their money under their mattress when they stop spending, but in the bank, so if spending falls, savings rise, which reduce interest rates on borrowing, which increases investment, which ultimately increases spending.

    James,

    I’m doing my best to understand your argument.

    Am I correct that you believe that people who stop spending do so by choice–that they have the money to spend, but they choose to tighten their belts and save what they haven’t spent? If so, I’d agree that some people do that, if they’re working and haven’t seen their income cut. But if spending falls because more people are unemployed, I can’t see how their reduced spending transfers to savings. They’re not working and they’re not earning, so they don’t spend or save. If we’re discussing huge, sudden jumps in unemployment, that’s a great deal of money that drops from spending without shifting into savings/investment. The zero-sum transfer occurs with full-employment, but when employment is high, it’s no longer a zero-sum situation.

    I’m not giving you data, but to begin with, I’m logically questioning the theoretical assumption that a zero-sum transfer from spending to savings occurs when savings falls due to unemployment/falling wages. It seems to me that we’d have a wash if we were in a time of full-employment environment or if the government spent more by taxing more, rather than borrowing more from those who aren’t investing in production/hiring.

  17. Dr. X says:

    “The zero-sum transfer occurs with full-employment, but when employment is high, it’s no longer a zero-sum situation.”

    That should read:

    The zero-sum transfer occurs with full-employment, but when unemployment is high, it’s no longer a zero-sum situation.

  18. James Hanley says:

    Dr. X,

    If people lose their jobs and stop spending, those same people will not have an increase in savings. Agreed.

    But what happened to the money they would have made? Are others enjoying it (bosses making more, perhaps)? In that case it is just a shift in spending, not a decline. In that case, the only way an economic decline can happen is if they neither spend that money that’s been shifted themselves nor increase their savings (from which others will borrow and spend it). That’s what I mean by someone “putting it under their mattress.” In that case, a fiscal policy that pulls it out from under their mattress might make sense–but is there any real evidence that anyone is holding onto money that’s neither being spent nor saved?

    On the other hand, if no one else is enjoying that money they would have made, then it’s just disappeared from the economic system. And in that case, monetary policy is what’s called for.

  19. James Hanley says:

    The zero-sum transfer occurs with full-employment, but when unemployment is high, it’s no longer a zero-sum situation.

    By saying it’s not a zero-sum situation, you’re saying there’s less money out there,* and that means monetary policy is the prescription.

    *Unless you’re actually claiming it’s a positive-sum situation, but I think we can exclude that as a probability.

  20. Scott Hanley says:

    I have only the dimmest familiarity with the concept of the velocity of money, but it seems to me this discussion has been assuming that v is constant under all circumstances. But if money that is saved under conditions of falling demand is invested less eagerly than it otherwise would have been, doesn’t that reduce v and thereby weaken the equivalency assumption?

  21. James K says:

    James Hanley:

    I don’t have all of the answers to your questions (I am after all, a micro guy), but here’s my best shot:
    4: Krugman’s argument is that monetary policy works better than fiscal, but you can’t use monetary policy when interest rates are 0 because you can’t cut rates further than that. So fiscal is the only option you have. The important point is that fiscal policy has to be effective for this argument to work.

    2: There are macroeconometric estimates out there as to the size of the multiplier for different kinds of spending (I know Michael Heath has cited some before), but whether those estimates are any good is an open question, the range of estimates for multipliers is very wide, wide enough that 1 tends to fall inside the range. And oddly enough the size of multipliers seems to correlate with ideological views. Funny how that works.

    3: I don’t know.

    1: Well that’s the rub, isn’t it? The way the debate shakes out all the people who are relaxed about greater government spending advocate stimulus, and those who are worried about greater government spending oppose it. In Bayesian terms, if everyone’s falling back on their priors that implies there’s very little evidence to work with.

    Macro has a serious data problem, especially when it comes to figuring out how to get out of a deep recession. The reason is that your only data points are severe recessions, and then you have to work out how to attribute what comes next to the multiple policy initiatives that were implemented (governments never do just one thing in response to a recession). In short there’s too much noise to extract a signal.

    As to the policy implications of this, I would advise that if you’re not sure which will work better (austerity or stimulus), try the one that doesn’t require billions of dollars especially when you’re running a massive deficit.

  22. Dr. X says:

    By saying it’s not a zero-sum situation, you’re saying there’s less money out there,* and that means monetary policy is the prescription.

    Up to the point when monetary policy doesn’t result in borrowing and investing in production. If producers don’t see demand increasing, they’re not going to borrow and ramp up production. At that point, the government can do the borrowing and spending and put more money out there.

  23. James Hanley says:

    Dr. X–You are definitely assuming an “under the mattress” scenario, that there is money out there that the private sector is doing nothing with. But as I asked in my original post, is there actual evidence for that? Or is there just theory and hearsay? If businesses are buying government securities, as D.C. Session suggested, then businesses are not sticking their money under the mattress, and they’re already doing the lending to the government that stimulus advocates are demanding.

    James K–Thanks. I appreciate that you’re a micro guy, both in the sense that I recognize macro isn’t really your thing and in the sense that I like micro approaches better than macro approaches. I guess that’s part of why I keep asking the question about whether there’s really money going completely unused in the private sector–from a micro perspective businesses doing nothing at all with their money just doesn’t make sense.

    Scott, two responses: First, you’re leaving interest rates out of your equation–falling interest rates should lead to money being invested just as eagerly. That’s pretty much the purpose of interest rates. Second, Friedman argued–contra Keynes–that velocity was generally stable. That hasn’t always held true, I don’t think, but unless there’s some data out there I’ve missed (heh, and that probability isn’t nearly low enough) velocity doesn’t tend to move rapidly up and down. I’m at home and don’t have the right book here to check that, so I hold that argument without great confidence. But that is to say that you’re right that velocity is important; but that it probably is stable enough that we can just say ceteris paribus and set it aside.

  24. James K says:

    James Hanley:

    from a micro perspective businesses doing nothing at all with their money just doesn’t make sense.

    Keynesian macro doesn’t have micro foundations, which is to say none it makes any sense from a micro perspective. Which means either micro theory is missing something, Keynesian macro is substantially false, or there some means of reconciling them (possibly using game theory).

  25. Lance says:

    As a mere physics and math guy I must confess to not really following this economic discussion very well. I will say that it suffers from a complete lack of numbers on both sides of the discussion.

    Shouldn’t arguments about quantities like money supply and economic growth be accompanied by numbers of some sort?

    Otherwise it looks like a hand waving philosophical discussion from where I’m sitting.

  26. James K says:

    Ideally yes, but as a matter of practice the numbers are too weak to draw meaningful conclusions from. This is the essential problem with macroeconomics.

  27. James Hanley says:

    This is the essential problem with macroeconomics.

    That’s part of why I find Krugman’s definitive assertions so problematic. He writes as though there is neither real controversy within macroeconomics nor any doubt about the certainty of macroeconomic conclusions. Some of his opponents may be no less arrogant about their own counter-arguments, but at least as a practical matter their arguments promote more caution about policymaking.

  28. James K says:

    Agreed. The number of things I will assert with high confidence in economics are few and far between. Nothing to do with economic growth appears on my list.

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