Fiscal Policy Calvinball
Tyler Cowen endorses this from Arnold Kling:
From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.
Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill:
Of the remainder, a very large portion consists of temporary expansions of social safety net programs to help take care of the most vulnerable. Again, the economic logic of this seems to me to withstand Cowen’s complaints—there’s no evidence that needed economic restructuring involves getting people who’ve lost their jobs to go without food or basic health care. And even if it didn’t, the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.
What we’re left with then, it seems to me, is a relatively narrow disagreement about a minority of ARRA funds. It’s useful to have an argument about that stuff. The “race to the top” education money, for example, strikes me as sound public policy that has relatively little to do with economic stimulus and was just smuggled into the bill because the White House likes the idea. And on down the list. But the policy as a whole is what it is.
Meanwhile Cowen repeats his earlier complaints that “current GDP measures and projections aren’t picking up how well the stimulus is or isn’t working.” There are, of course, longstanding criticisms of GDP as a measurement of economic success or failure. And those criticisms have a lot of truth to them. But I don’t understand why it would make sense to suddenly drop GDP as a metric for this specific purpose—especially in the absence of any viable alternative proposal. The shortcomings of GDP are well-known, as are the arguments for sticking with it anyway. Nothing I can see about the financial crisis has suddenly made it a more inadequate measurement. Meanwhile, as Ryan Avent says this whole thing seems to involve inventing a brand new macro theory to specifically deal with the current recession.
23 Responses to “Fiscal Policy Calvinball”
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October 2nd, 2009 at 10:48 am
“the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.”
There can’t be any humanitarian logic. Liberals are interested only in quantitative measurements. At least that’s what I read somewhere.
October 2nd, 2009 at 11:23 am
The government is either (a) permanently shifting resources from the private sector to government
This better be what we’re doing, because nothing else will work.
The consumer will be a net saver for years to come. The current account deficit will be smaller. That leaves only the government to increase spending or otherwise we have a decrease in aggregate demand and at least ongoing deep recession for the foreseeable future.
October 2nd, 2009 at 11:24 am
Kling is separating bailouts from stimulus. Bailout simply pay off the losers for past bad bets. His point is, where is the restructuring?
October 2nd, 2009 at 11:32 am
If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them.
We could make a very big dent just by reversing the Reagan/Bush tax cuts. Most of that money has been funneled into speculation and asset inflation anyway. So big, progressive tax cuts would also improve our economic structure.
October 2nd, 2009 at 11:34 am
tax increases not tax cuts.
October 2nd, 2009 at 11:44 am
It seems to me that the Kling/Cowen line of reasoning with regard to shifting resources from the future to the present only seems to make sense (ie, to be a problem with ARRA) if there is no such thing as the business cycle.
If the business cycle didn’t exist, but instead the private sector were a steady producer and consumer of resources, and the only thing that changed with time was the public sector, then we’d have to be worried that additional goverment stimulus now would have a equal and opposite effect at some point in the future.
But of course the business cycle does exist, and the whole point of doing government-led fiscal stimulus during a recession is that we’re trying to pull up the trough of the cycle, and pay for it with a comparative flattening of the next cycle peak.
This, of course, is just good policy, not the deeply troubling problem that Kling/Cowen seem to be suggesting.
October 2nd, 2009 at 11:45 am
Tyler wants to stand with the people who are arguing the ‘hangover’ theory without actually embarrassing himself by actually arguing for such a stupid idea. Which is why his posts on this always rely on suggestion and and implication, not pie charts.
October 2nd, 2009 at 12:08 pm
(a) permanently shifting resources from the private sector to government…
Under Bush and the GOP Congress, we increased government without shifting resources. Instead, we cut taxes and issued bonds. The Dems may very well be “tax and spend”, but the Republicans are “borrow and spend” … something that is vastly worse.
October 2nd, 2009 at 1:11 pm
Um, Kling isn’t inventing a brand new branch of macro, but I guess that’s rude to point out to people like Cowen.
October 2nd, 2009 at 1:15 pm
Apparently the “new macro” doesn’t involve intertemporal substitution and consumption smoothing. So I guess we can toss out transversality conditions and Euler equations. Perhaps that’s not a bad thing after all.
October 2nd, 2009 at 1:17 pm
I cannot once recall either Kling or Cowan expressing a concern about the Iraq Stimulus Plan of 2003-2007. Not once.
October 2nd, 2009 at 1:26 pm
The “recalculation” theory is not new, nor did Arnold Kling invent it. It’s just Greg Mankiw’s “sticky information” theory, which is a variant on the typical neo-Keynesian “sticky-price” and “sticky-wage” theories.
October 2nd, 2009 at 1:58 pm
Shhh. It’s rude to mention this.
October 2nd, 2009 at 3:15 pm
No, that’s not right. Kling’s is trying to come up with a form of real business cycle theory that offers a non-absurd explanation for unemployment. Kling, and standard real business cycle types, believe recessions result from the need to reallocate resources from one part of the economy to another. But whereas standard real-business cycle theory says that unemployment then results from people choosing leisure over work (which is the patently absurd part), Kling accepts part of the standard neo-Keynesian story that unemployment happens because its easier to lay people off than to cut their wages.
What he doesn’t accept, as is quite clear in the quote above, is that there are knock-on effects that lead to underemployment of labour and capital that were perfectly well deployed at the former level of aggregate demand. This is because, as a sort-of-Austrian GMU type, Kling doesn’t believe aggregate demand is a valid concept – demand for different goods and services has to be considered seperately. In his view the fact that demand for these goods and services was affected means straightforwardly that those resources were not well deployed.
In my view this is to ignore the role of money – unlike houses in Nevada money can be traded for more or less everything else (perhaps not love, except maybe in Nevada …) so demand in one part of the economy can affect demand in any other part, without any rhyme or reason. Kling has some kind of argument about why money isn’t actually as important as most people suppose, but I don’t understand it yet …
October 2nd, 2009 at 3:22 pm
How can GDP fail to pick up the effect of the Stimulus on stimulating economic activity? That’s what GDP measures – economic activity.
People have repeatedly and rightfully pointed out that economic activity is by no means the same as standard of living, and as such, GDP has numerous flaws when it is mis-used and treated as if it was a measure of national standard of living.
But what the Stimulus was directed at was the economic downturn, which is to say, at the decline in economic activity. That’s the thing that GDP does measure.
October 2nd, 2009 at 5:11 pm
[...] Addendum: Matt Yglesias comments. [...]
October 2nd, 2009 at 10:47 pm
Look at those goddamn tax cuts, Matt. That is the price Obama had to pay, $288 billion, to get elected. To beat the Master Tax Cutters, he had to play their pathetic tax cutting game. It had to be done, but it makes me sick, pissing away $288 billion in bribes. But that is the cost of Presidential elections these days. The quadrennial monster, that is really not quadrennial at all, but ever present.
And those two small balloons, the ones that should be the largest amounts, the beige and the purple, they’re getting $154B total, and that money is going out piecemeal, going out slow. Those two balloons, just the beige and purple, pretty much represent China’s stimulus -$580 billion poured instantly and directly into infrastructure, science and research, and energy.
China, more than any other country, should be going into the toilet. The major portion of their economy, exports, in one heartbeat, slashed in half. But there they are, trucking right along. Growing. Expanding. Literally planning to conquer the moon.
I don’t care about Keynes, I don’t even know who he is. I don’t like the word “stimulus,” either, it’s word a Eastern European strippers use when they ask if want a dance. “Would you like some stimulus, darlingka?” To the Chinese, this stuff is meaningless. What they do is build. Build their country, make adjustments, and build some more. The half a dozen building projects they are undertaking, each the largest in the history of mankind, are not part of their “stimulus.” The Universal National Health Care System they are bringing to 1.3 billion people, an enormous project that will cost hundreds of billions over the next 6 or 7 years, is not part of their “stimulus.” Nor do they call the tens of billions in direct subsidies, or, more accurately, cash infusions, they hand out regularly to key industries, like their soon to be monolithic auto makers, either “stimulus,” or “bailouts.”
China used $580 billion to help make a needed adjustment to changing circumstances. They added a little more here, expect -a little less there. Stimulus, by definition, is temporary. Everything the Chinese do has permanence. That they use the word at all, “stimulus,” it is almost as if they are mocking us.
October 3rd, 2009 at 9:22 am
@LFC – “Under Bush and the GOP Congress, we increased government without shifting resources. Instead, we cut taxes and issued bonds.”
Neither Cowen nor Kling are Bushies. See Kling’s later post.
‘The Dems may very well be “tax and spend”, but the Republicans are “borrow and spend” … something that is vastly worse.’
Dems are borrowing more just this year than the Reps did in 20. Not to excuse their profligacy, however…
@ISLM – “the business cycle”
No, they’re saying this is by no means a cyclic downturn. Unfortunately, the manufacturing (autos) construction, and finance jobs that got whacked aren’t going to come back for many years, if ever. The thing that’s missing from the stimulus is any meaningful attempt to create the next economy.
@Max424 – “China, more than any other country, should be going into the toilet. The major portion of their economy, exports, in one heartbeat, slashed in half. But there they are, trucking right along. Growing. Expanding. Literally planning to conquer the moon.”
That’s because they aren’t massively in debt and planning to get exponentially more massively in debt. Their consumers are saving like mad, as has their government over the years. We’re planning to fix our profligacy by switching the debt balloon from consumers to government. Somehow I doubt that’s going to put us in China’s position anytime soon.
October 4th, 2009 at 7:14 am
You lefties crack me up. Nothing new in your rants – much like Beck-Limbaugh-whoever. Overall, the left’s ignorance of economics limits any ideas they might have to shrill screeching. It is a shame. Collective principles are central to market economics. Maybe if you lefties would hunker down and think about econ, maybe about how to sell your ideas – not much chance of the second suggestion: basically, for the lefty, the idea of selling is horrible. The only way for you and the righties to get anything done is by government control. Neither side cares about people: they only care about being “righteous.”
Pathetic. Obama, who I lovingly followed for a year or more, has proven, absolutely, that “change” means more of the same.
(Though I think that his spending taxpayer monies, etc., to sell Chicago for the Olympics was a righteous payback to his pals/constituents of old.)
Strangely enough, I have found over the years, that my lefty friends resort to class politics when trapped by logic. It is sad, and revealing. Why is it that big-mouth lefties are always middle-class wankers?
October 4th, 2009 at 2:37 pm
There has been an on-going debate elswhere in the blogosphere over Kling’s “recalculation” theory. It assumes money and monetary policy do not matter–a hard sell for folks who take seriously monetary disequilibrium.
See the following:
Measurement Before Theory
Measurement Before Theory, Part 2: A Reply to Arnold Kling
Measurement Before Theory, Part 3: A Reply to Arnold Kling
Putting Klingonomics to the Test
Klingonomics 4
October 5th, 2009 at 9:55 am
I believe the stimulus was explicitly directed at (un)employment. GDP effects would be one consequence of changing the employment level through the stimulus bill.
Perhaps too picky…?
October 5th, 2009 at 2:02 pm
[...] Matthew Yglesias: Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill [...]
October 7th, 2009 at 7:29 pm
[...] You can find more discussion from Arnold Kling ([1], [2]), Ryan Avent, Robert Waldmann, and Matthew Yglesias. [...]