To Stimulate or Not to Stimulate?

From Russ Roberts:

Seems to me that there is no evidence that having the federal government borrow lots of money and spending it has been very effective. Certainly, the predictions of the effect of that spending by its proponents have been very inaccurate.

From Brad DeLong:

The situation cries out for aggressively expansionary monetary and fiscal policy.

Appropriately, even though he wasn’t responding to DeLong, Roberts titled his blog post, “When Dogmas Collide.” So who’s dogma has the upper hand? I tend to side with Roberts, finding the Keynesian approach that DeLong calls “macroeconomics 101,” but I’ll admit that the current situation, coupled with my own incomplete understanding of macroeconomics, makes me nervous enough that I don’t hold great confidence in my position.

Unfortunately, Roberts is correct to write of “dogmas”–I’m not finding much in the economic blogosphere that approaches good direct thoughtful consideration, analysis, and rebuttal of each others’ sides on this issue. One without rancor (or at least minimal rancor), but where each side tries to explain very clearly where they think the other side is wrong.

I wonder if I could get Roberts and DeLong to do that here?

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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3 Responses to To Stimulate or Not to Stimulate?

  1. Michael Heath says:

    Roberts:

    Seems to me that there is no evidence that having the federal government borrow lots of money and spending it has been very effective.

    Arguments from ignorance are never compelling. I went to your linked cite in hopes of finding Roberts had first considered the evidence and found Mr. Roberts doubling down on his argument:

    Seems to me that there is no evidence that having the federal government borrow lots of money and spending it has been very effective. Certainly, the predictions of the effect of that spending by its proponents have been very inaccurate.

    We have in fact, at least (these are what I read) reports from the CBO and the Blinder/Zandi study that provide very compelling explanations for the results we’ve seen to date which also put Roberts’ honesty into question since the predictions of the stimulus were pretty spot-on in light of state contractionary policies working against federal stimulus. Especially within the perspective of the fact our labor market’s been weak for 10 years (underemployment), coupled to a financial crisis, coupled to a housing market with factors not strongly linked to fiscal or monetary policy and is considered the biggest suppressant to growth, and again – coupled to relatively recent state laws which force states to act in a contractionary manner at the exact point that demand is vulnerable. Roberts instead ignores these qualifiers to make buttress what appears to be an ideological position rather than understand objective truth.

    A better argument would be to confront these studies and refute them within the context of the particulars of the nature of the economy entering the last recession and its performance since then.

    Roberts argument is also not compelling because it defectively conflates strategy with execution, a popular response by economic illiterates whose political ideology can not reconcile to basic economic principles. The fact is we knew in advance that the results of the stimulus would not be sufficient because it was: too small, too late (it should have begun in early-2008 rather than late-Spring of ’09), too heavily weighted towards actions we can predict have a smaller stimulative impact (especially given low effective tax rates), relatively low taxes on the high-end of income encouraged continued saving which suppressed government stimulative spending further (see successful tactics from the late-80s and early-90s), didn’t confront the reality of an already structurally weak labor market, and state contractionary policies. Running huge deficits during the up part of the business cycle in the 2000s to fund relatively non-stimulative fiscal policies like the war in Iraq also suppressed our response.

    China’s response to the past recession provides an illustrative example of a country who responded in an economically literate manner like Obama attempted to do, but unlike Obama was able to actually execute a competent plan consistent with an economic-friendly strategy where Obama was thwarted by the economic illiterates running the Republican party – i.e., our response was defectively compromised. Rather than an opposition party which keeps their opponents honest in solving the problem rather than defectively favoring Democratic constituencies like unions, the Republicans instead pulled the Democrats into a far worse response than what basic economics dictate. From my perspective both China and the U.S. responses once again validated both Keynesian economics and sound monetary policy, at least in the text-book fashion as I was taught it at MSU which I’ve observed continually validated since then.

  2. Michael Heath says:

    Here’s a great graph illustrating job performance: http://goo.gl/qhIHh. The bottom of this dip was right about the time Barack Obama was inaugurated. It should also be noted that in Jan-09 it was not known employment was sloping down so steeply during at least the past quarter (Q4’08). So no, a compromised and late response in ’09 is not a failure of economics but instead of political will to work in the national interest rather than work for one’s ideology or financial constituents.

    If there’s a valid criticism to be made of the Democrats it’s that they either didn’t continue to pound on the damage Republican obstructionism was having on our economy after the stimulus was passed or that they should have ignored addressing other fundamentally crucial issues like healthcare costs and energy policy. I make the former criticism but not the latter, in spite of it helping them lose seats in ’10, since I believe it’s possible to do multiple things at once. In fact we must given how long we’ve procrastinated about fundamentally critical issues.

  3. James Hanley says:

    Michael, :

    Roberts argument is also not compelling because it defectively conflates strategy with execution, a popular response by economic illiterates whose political ideology can not reconcile to basic economic principles

    That has an element of truth, but it’s rather ironic because conflating strategy with execution is precisely what Keynesian macroeconomists like Krugman and DeLong do. The argument that “if government spends enough it will stimulate enough” is a perfect conflation of strategy and execution, as, in general, is any advocacy of a policy that says “if government just passes law X, then Y will happen,” where Y is essentially a magical outcome. It’s really not economic illiteracy that leads to the conflation of strategy and execution but political illiteracy, because the conflation depends on a failure to analyze how politics works. In fact one of the anti-Keynesian arguments is that even if stimulus works in theory, it’s unlikely to work in fact because it requires more sophisticated execution than government is likely to manage. Any political/economic theory that doesn’t take into account imperfect government performance is very limited in value.

    And if you think Roberts’ political ideology is not reconcilable with basic economic principles, I’d begin by reminding you that he knows rather more about economics than either you or I. I don’t know just where he stands insofar as professional reputation, but he’s far from an idiot. Rather it sounds like he’s not reinforcing the economic principles you like–but it’s worth pointing out that the theory of Keynesian counter-cyclical policy is A) not proven, and B) not unanimously agreed upon in the profession. So when you say, for example, that China responded in “an economically illiterate manner,” you’re really only demonstrating that you only know one portion of the field of economics, and that’s hardly a demonstration of economic literacy.

    within the perspective of the fact our labor market’s been weak for 10 years (underemployment), coupled to a financial crisis, coupled to a housing market with factors not strongly linked to fiscal or monetary policy

    Uh, huh. All those various problems, but all government needs to do is to spend more money to set everything right? I’m reminded of the old saying that for every problem there is a solution that is neat, simple and wrong.

    Arguments from ignorance are never compelling.

    You’re awfully quick to jump to the conclusion that he’s arguing from ignorance rather than arguing that the evidence isn’t persuasive.* That’s quite an uncharitable approach, especially as you fail to demonstrate certain types of awareness as well. Are you aware that the CBO study that said while the Obama stimulus would help over the short term, it would actually do more harm over the long term than doing nothing? Have you considered any critiques of the Blinder/Sandi study?

    The fact is we knew in advance that the results of the stimulus would not be sufficient because it was: too small,

    That’s true only if the theory is right. The accuracy of the theory is still debatable, and I remain unpersuaded.

    too late (it should have begun in early-2008 rather than late-Spring of ’09)

    Assuming the theory is right, “too late” only makes sense in the case where the economy is already recovering, so that stimulus becomes expansionary. Otherwise what you’re saying is “the stimulus didn’t happen soon enough in the recession, so the economy got too bad for it to work,” which suggests the theory is wrong. I don’t think that much should be read into your point here, but that’s the actual implication. Assuming the theory is correct, however, yes, it should begin sooner. But that’s one of the pragmatic problems with the theory–it’s critically dependent on persuasion of an ideologically diverse committee that action needs to happen right now.

    , too heavily weighted towards actions we can predict have a smaller stimulative impact (especially given low effective tax rates),

    Again, this is part of the problem with the theory. It’s designed for a world where politicians don’t make mistakes. Krugman, DeLong, et. al., say “if gov’t stimulates, economy will recover,” then they say, “no, no, not that way, yur duin’ it roonnnnggg!” Of course gov’t’s doing it wrong–doing it wrong is the necessary outcome of working through the political process, and until stimulus advocates figure that out instead of sticking to their candy machine theory of gov’t, they’ll always be advocating fantasy policies.

    relatively low taxes on the high-end of income

    A budgetary problem, not, I think, an economic problem.

    encouraged continued saving which suppressed government stimulative spending
    further

    First of all, savings get spent, just by someone else. Second, government stimulative spending comes from savings (loans to the government). If there’s logic in this point, I’m dull enough that I need to have it spelled out for me.

    didn’t confront the reality of an already structurally weak labor market,

    How does stimulus policy do that? As I understand it, stimulus policy creates jobs, but it’s understood that most of those jobs will be temporary, to wither away as the economy picks up and creates other jobs. But I’m not seeing what stimulus policy would necessarily change the structural weakness for the better. I’m open to further explanation here, but if there’s a theory of how stimulus can fix structural problems I’m unaware of it. In fact one argument against stimulus is that the problem is restructuring, not simply diminished demand, and stimulus doesn’t address the restructuring problem.

    and state contractionary policies.

    That happens in every recession, automatically. It’s just part of the macroeconomic structure, no? If the Keynesian theory is correct, all that matters is aggregate demand, and not specific elements like this.

    Running huge deficits during the up part of the business cycle in the 2000s to fund relatively non-stimulative fiscal policies like the war in Iraq also suppressed our response.

    On that point we’re fully agreed. There’s nothing positive to be said about the Bush deficits.

    ________________________________________________________
    *I think you use the concept of argument from ignorance wrongly. It’s not an argument that “the evidence doesn’t currently show X,” but that “I don’t understand X, so no evidence for X is conceivable.” Roberts may suspect that about Keynesian stimulus, but he didn’t say it here.

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