Streetwise Professor

February 9, 2009

Cracker Jack Keyensianism

Filed under: Economics,Politics — The Professor @ 8:33 pm

Harvard’s Robert Barro calls the stimulus bill the worst legislation since the 1930s.  (I think he is being VERY kind.)  Stanford’s John Taylor is also scathing in his criticism.  (Aren’t both “saltwater economists”?  They certainly aren’t bilgewater economists.)

What I find so troubling is that the intellectual footings of this policy are so shaky, not to say non-existent.  The arguments for the stimulus package are as substantial as the toy in a box of Cracker Jack.  Constant invocations of “increasing aggregate demand.”  Aggregate demand is a metaphor, at best, and far more insubstantial than the other metaphors economists use.  It is a modeling device that is convenient for analyzing some problems, but its connection with the real economy is even more tenuous than our other conventional modeling devices.  

There is no such thing as “aggregate output.”  There are many industries, many goods, many sectors, all of which rely on specialized resources that are not readily redeployable among them.  Directing–via coercion–spending to one sector or another is likely to worsen resource misallocations, rather than mitigate them.  I find it particularly bizarre that some of the stimulus appears to be directed at supporting industries and sectors that resources should leave (e.g., construction, automobiles).  We almost certainly built too many houses (due to perverse monetary policy, as John Taylor explains it), so resources should leave that business.  Why stimulate it?  

Moreover, the arguments don’t even seem to be directed at the right question.  They seem to be answering the question: “How can we best increase current measured output?”  I have problems with both “current” and “measured.”  What is the future cost of an increase in current output?  What is the true value of the “measured” “output”?  Much of the argument seems to ignore costs–when it doesn’t confuse costs for benefits.  

The most grounded Keynesianism relies on the notion of price and wage rigidities to explain how “deficiencies in aggregate demand” can lead to suboptimal outcomes.  But, presumably these rigidities reflect information and contracting problems, and are close to the constrained best in some way; those focusing on these rigidities seem to have fallen for the Nirvana fallacy, and believe that because something is not first best it can be improved upon.  That’s not true.  Bad things can be made worse.  It does not follow, moreover, that a particular “stimulus” package will improve welfare even if such rigidities exist.  If prices and wages do not reflect opportunity costs because of such rigidities, government directed spending can exacerbate distortions in resource allocation.  (To make sense as a measure of welfare, GDP or another measure of aggregate output relies on prices reflecting the appropriate marginal costs and benefits.  But with rigidities, they don’t so reflect these margins.)

I agree with Taylor and others that we should attack the source of the problem–the financial and banking markets.  The unveiling of the Geithner plan has been delayed, but it apparently includes a mix of not so bad and bad.  It may do some good.  I doubt the stimulus bill will; indeed, I believe it will make things worse.  Moreover, it will likely interfere with addressing the banking problem by dramatically increasing federal indebtedness, thereby raising the cost of financing the recapitalization of the financial system.  

Compounding all this is the dishonest agitprop and partisan demonization being used to sell the stimulus.  When walking off a plane this afternoon into Hobby Airport in Houston, my ears were bombarded with Obama’s speech.  My first reaction–an unconscious one, certainly, because I had little time to absorb the content, and based completely on the tone of voice and phraseology–was to have flashbacks to films of a Nuremburg rally.  Reading the details does little to dispel my initial visceral response.   As Mark Steyn wrote, the “Hope, Not Fear” trope of the campaign has been inverted.  In 2001 Bush was flayed for “talking down the economy”–he was a piker compared to Obama.  We are about to be buffaloed into spending huge sums for largely useless purposes by demogogic phrases and comic book economics.  This cannot work out well.

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1 Comment »

  1. […] here’s Craig Pirrong: There is no such thing as “aggregate output.” There are many industries, many goods, many […]

    Pingback by Demand for Commodities Is Not Demand for Labor « Organizations and Markets — February 10, 2009 @ 9:07 pm

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