Streetwise Professor

I know that Emerson said that a foolish consistency is the hobgoblin of little minds.  But it is nonetheless true that blatant inconsistencies are frequently the best way to identify lazy thinking, or say-anything-to-get-what-I-want expediency.  To my eyes, the inconsistency of some stimulus advocates suggests that their arguments are faulty, and perhaps are being, ahem, adjusted, to rationalize their personal policy preferences.  

Some weeks ago Robert Barro argued that the “multiplier effects” of stimulus expenditures were likely to be very small–likely below one.  He based his argument on an empirical analysis of spending in WWII.  In response, prominent supporters of the stimulus package (including Krugman and DeLong) harrumphed that this was a bad comparison because (a) there are diminishing returns to stimulus spending, and (b) the WWII stimulus was far in excess of that contemplated by Obama.  (This was pre-budget, BTW.)  The stimulucrats argued that the bang-for-the-buck of government spending substantially smaller (as a fraction of the economy) than WWII spending would be far higher than Barro documents.  

Weeks have passed, and there is no evidence that the stimulus is having any effect.  If you really believe that “animal spirits” and confidence are important, or that people are at all forward looking, the mere passage of the stimulus should have sparked economic activity, or led to increases in variables that are responsive to changed expectations about future economic activity–like the stock market, or corporate bond spreads.  The market, we all know, is in the tank (even taking into account today’s rally).  Bond spreads are blowing out.  (The credit spreads on the big banks that are major derivative counterparties have reached record levels-surpassing the levels seen at the height of the post-Lehman panic.)  The markets, apparently, believe that the stimulus is anything but.

So what do Krugman and other stimulus advocates deduce from all of this?  That the stimulus was way too small.  We need to go large!  (I am sure you are shocked! Shocked!)  

But, pardoning my impertinence, if there are diminishing returns to the stimulus (the stick they used to beat back Barro), and the existing stimulus (plus the prospect for a further spending splurge as proposed in the budget) is having no demonstrable stimulative effect, wouldn’t that mean that a bigger “stimulus” wouldn’t have any demonstrable effect either?  

So, I guess we have the Goldilocks Theory of Macroeconomic Stimulus.  $800 Billion is TOO SMALL!  The 2009 equivalent of WWII spending is TOO BIG!  We have to find Mama Bear’s Stimulus, which is JUST RIGHT!

The logical basis for this theory escapes me at the moment.  The stench of expediency is palpable.  

Or maybe (to rub it in), they are proposing the stimulus equivalent of the Laffer Curve.

Some aphorisms come to mind:

• When all you have is a hammer, everything looks like a nail.
• Insanity is doing the same thing over and over and expecting to get a different result (H/T Einstein).
• When you are in a hole, stop digging.  
• A fanatic is somebody who never changes his mind, and never changes the subject (H/T Churchill).

The unbounded confidence in rather hazy Keynesian ideas also puts me in mind of die-hard adherents of climate modeling, who also appear to be (a) largely impervious to contrary evidence, (b) dead set on rationalizing, no matter how inconsistently, things that contradict their theories, and (c) extremely shrill in excoriating anyone who has the temerity to point out these contradictions.

As Kuhn noted, of such things, scientific revolutions are made.  And not a moment too soon.  To the Barricades!