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Brad DeLong on fiscal policy
Brad thinks I am too pessimistic about the prospects for a fiscal-led recovery:
But surely we believe that if the U.S. government were to follow the Countrywide plan--to send its representatives out onto the streets to have them walk up to people and say: "Here's $500,000. You can have it if you go buy a house"--then that would drive a recovery, right? I mean it drove a recovery in 2003-2006, didn't it?
Even the Austrians believe that spending--in their case, driven by credit-expansion created by the malefactors of fractional-reserve banking--works. So why can't the government do what fractional-reserve bankers can?
Here is the link.
Posted by Tyler Cowen on December 25, 2008 at 08:02 PM in Economics | Permalink
Comments
Why do they think it will work here when it did not work in Japan? Are there really positive NPV projects to be financed by the US government? Exactly what controls does the government have?
Like always, this will simply help connected people-likely the already rich.
Posted by: nonotyetsure at Dec 25, 2008 8:16:38 PM
What's going to be important now is monetary and fiscal policy working in close conjunction - the gov't allocating funds to where the fed thinks it will be most successful going by what their figures show - it's not just targeting 'spending' or 'investment' but doing it in ways that have a lasting and positive impact on the strongest sectors of the U.S. economy. (These happen to be sectors owned by the rich, yes, but given that our economy is demand-constrained, stock losses aren't affecting just the rich. For as much as we'd like to think wealth doesn't trickle down, it's a symbiotic relationship, aggregate stock wealth and our incomes. Let it help the rich if in the long run it's going to help people like me.
Nonotyetsure, Japan has the kereitsu system, their government is highly interventionist but the success of their industry and business sector is largely determined by the stakeholders that make up 70% of this system -- they're also not as open to foreign intervention or assistance, so Japan is a different case.
Posted by: spin at Dec 25, 2008 9:59:04 PM
I just wonder if that solves the tight fisted bank problem. Once we blow our wad, then that money get locked away in some vault. And it puts another 2 trillion on the Federal tab.
Posted by: R Pointer at Dec 25, 2008 10:05:02 PM
Can't we just print dollars and use them to buy US government debt? Won't that put billions of dollars out there that would have to spent on US assets and US goods? Don't we have TEN TRILLION dollars in debt to buy?
Isn't this what we need to be doing to end the deflation? And can't we do the opposite when signs of inflation pop up?
Is there some reason this wouldn't work?
Posted by: Alan Brown at Dec 25, 2008 10:08:57 PM
Uhm, the recovery was aided and abetted by the Fed driving interest rates down, not by the government
walking up to would-be home buyers and giving them checks. The big shift in government spending from 2003-2006 was on the American, er Iraq War. Maybe he thinks that sparked the recovery, but no Austrian does.
Now for the kicker:
Even the Austrians believe that spending--in their case, driven by credit-expansion created by the malefactors of fractional-reserve banking--works. So why can't the government do what fractional-reserve bankers can?
Let's parse this. First, fractional-reserve bankers are not malefactors, the 100% reserve school aside.
In fact, free banking is consistent with the right to make banking contracts allowing fractional reserves. Historicaly, banking developed with fractional reserves; and banks have served as growth-promoting financial intermediaries, not as money warehouses.
Second, there's a massive difference, both economically and morally, between the government stealing money from Peter to give to Paul to buy a house, and a banker making a loan to Paul to buy a house, which has been facilitated by the savings of Peter and other customers, who deposit their savings into the bank.
The latter operation involves capitalist-savers investing money with an entrepreneur (who is probably also a saver-capitalist) to meet consumer demand on the market. The essence of the capitalist process is that savings are accumulated and invested (by suppliers of present goods) in advance of the sale of the final product, and the factors of production (demanders of present goods) are paid in advance, and don't have to wait.
The government (a court 'n cop monopoly that steals two different ways, by taxation and inflation) is a criminal gang, and so operates in a completely different way. It demands present goods and takes them at gun point. It supplies nothing in exchange, unless the operations (like kidnapping and mass murder, and paying for a little Keynesian R&D at the People's Republic of fill-in-the-blank School) of a criminal gang are your idea of a supply chain.
Government spending is not done by entrepreneurs trying to intuit shifting patterns of consumer demand and to profit from supplying services that meet them, and with savings supplied by capitalists. No, government spending is perpetrated by politicians, planners, and bureaucrats, none of whom are investing a dime of their own savings. Instead they are "funded" by Other People's Money, from whom it was stolen.
Government spending can't possibly meet any sort of market test, unlike a banker making a mortgage loan to Paul with savings supplied by Peter and friends.
Keynesians have a quasi-religious, almost mystical faith in government to spur economic growth, cure recessions, and do other stuff as well, like educate people. It's all malarky and an illusion; and none of it is consistent with individual liberty or natural rights. So the taxpayers of California (who number some of my extended family) are getting ripped off. What else is new?
Posted by: Bill Stepp at Dec 25, 2008 11:03:21 PM
Mr. DeLong is fond of tearing apart Mr. Cowen's ideas and all we get to hear back from Cowen is a link to the slaughter house. Is there an explanation for this?
Posted by: Michael at Dec 25, 2008 11:03:58 PM
I think DeLong is right, and so is everyone else, but maybe they aren't explaining themselves clearly.
When the problem with the economy is that too much money has been invested in unproductive assets, having the federal government invest more money in unproductive assets might help. The economy might not overshoot itself as much in correcting the problem. This would save people from unnecessary pain. But as it stands now, we are expecting state governments to increase taxes on productive assets. Maybe even go bankrupt. Also, the federal government is already massively in debt itself and can't afford to loose its credit-worthiness. What we have to worry about is a tipping point, where productive assets are taxed so much that they can no longer sustain the system. This is something I've thought of since reading Finer's "The History of Government.'
That's what everyone is arguing about, even though they can't voice it.
At what point are taxes so high that the government is no longer sustainable? How close to that point are we? Can we afford to try and "soften the blow" of a recession? Why do so many people think it is impossible for the United States government to go into default when the states that make up our country are close to going into default? What would a federal default be like?
Posted by: Jason at Dec 26, 2008 12:17:22 AM
Y'know, all this criticism of Austrian economics makes me wonder who doesn't understand it: me or the critics. I mean, the Austrian's explanation of the "business" cycle is very simple: the government fucks up the market, the market thinks there's more spare value for buying things, people buy things (or manufacturers make new products), only to find out that the value isn't there, and so they have to spend less and liquidate the things they bought.
Is there a single recession or depression that doesn't describe?
It's like the old joke, where Keynes goes to the von Mises and says "How come you're standing up here clean and dry while we're dirty and sweaty down in the ditch?" Von Mises puts his hand on a nearby tree and says "Hit my hand with that shovel". Keynes does, von Mises pulls his hand away, and Keynes' hand gets a right stinging. Keynes understands, and goes back down into the ditch. Marx asks ""What did he say?" Keynes looks around, doesn't see a tree, puts his hand on his face and says "Hit my hand with that shovel..."
How many more times do we need to run this experiment, getting the same result every time? We NEEEEEEEEEEED separation of state and economy. Yes, the government needs to tax; it should tax all of something. Not sure what, but it should be something that doesn't distort the operation of the market.
Posted by: Russell Nelson at Dec 26, 2008 1:03:16 AM
Do we need any more proof that Brad DeLong doesn't have a clue where it comes to the macroeconomics of Hayek and Garrison?
Let's speak honestly.
Brad DeLong doesn't know Hayekian economics, Brad DeLong doesn't understand Hayekian economics, and Brad DeLong should stop pretending to the world that he does.
Posted by: PrestoPundit at Dec 26, 2008 1:39:13 AM
"Isn't this what we need to be doing to end the deflation? And can't we do the opposite when signs of inflation pop up?
Is there some reason this wouldn't work?"
Its a process that is not that controllable because inflation/deflation are the result of people's expectations and feeling about an economy and currency. Its not a tap of water that you can just turn on/off.
The current scenario ... it is stagflation. Very high inflation and recession. And there is only one way then to end the recession and that is to radically increase interest rates which will lead to a massive depression. I have no idea why people believe that inflation will lead to economic growth.
Posted by: assman at Dec 26, 2008 3:03:29 AM
Sorry, I meant there is only one way to end the inflation and that is to radically raise interest rates
Posted by: assman at Dec 26, 2008 3:12:05 AM
I am utterly astounded that a credentialed academic economist would write that. I had to go read it for myself to make sure I wasn't missing some context.
People behaved as they did in 2003-2006 because they believed that had more wealth, mostly wrapped up in their houses, than they actually did. Many people may have had $500K in equity on paper, but the economy never had the real productive capacity to transform all those $500K paper profits into real things worth $500K at 2003-2006 prices.
The government can undertake an effort to fool people into thinking they are wealthier than they actually are for even longer. (For example, by printing money and hoping people don't notice the inflationary impact. Or by borrowing money from abroad and hoping that people don't look at the liability side of their balance sheet.) But that won't actually create any new real productive capacity. And it will make the fall all the harder when they must eventually adjust their lifestyles to the real productive capacity of their society.
Isn't economics supposed to be all about scarcity? I know Brad really, really wants to justify all the spending the Democrats want to shower on their interest groups, but he's a serious enough economist that I didn't think he would stoop to fantasy economics to do it.
Posted by: David Wright at Dec 26, 2008 5:08:55 AM
David Wright makes a good point. I 'd also add: Does it not matter that raising the price of houses will attract more resources into the housing market? Oh wait. Does DeLong's proposal assume that $500,000 is just the right amount to validate the existing level of resources into the industry without attracting more? In that case, the existing housing stock would be optimal and the construction workers, etc. would be idle. So where are we? How does one tell the difference between a smart person's off-hand joke/comment from a real proposal??
Posted by: Mario Rizzo at Dec 26, 2008 9:39:52 AM
I have a great idea for stimulating the economy. Let's have the government hire street gangs who otherwise would be engaging in negative externalitilies and have them throw rock or bricks at glass windows everywhere they can find them.
The owners would then have to hire Corning and their ilk to make new windows and install them.
How big is the Keynesian multiplier then?
Posted by: Bastiat rolling over in his grave at Dec 26, 2008 10:33:27 AM
There are no trillion dollar good investments right now. There are plenty of trillion dollar investments that have failed or are failing. We will have deflation until this changes. Don't economist call this the margin? That the margin sets the price?
Posted by: Huggy at Dec 26, 2008 11:32:19 AM
My New Year's Resolution is to stop being such a jerk on the Internet. So does that mean I can speak freely regarding DeLong for a few more days?
Now maybe DeLong is correct vis-a-vis the ever subtler positions of Tyler on fiscal stimulus. (Like Shrek the ogre, Tyler's views here are like onions.) But as far as the standard Austrian position, the "recovery" induced by Greenspan's 1% rates sowed the seeds for our current disaster. Now perhaps DeLong realizes that, and is just trying to make the point that we could get GDP growth temporarily, if we really wanted it.
But there's an even more fundamental mistake in DeLong's post. He's talking about Cowen's views on fiscal policy, and to rebut that, he brings up an injection of new fiat money into the credit markets. Doesn't DeLong know the difference between fiscal and monetary policy? This guy is an English professor, right?
Posted by: Bob Murphy at Dec 26, 2008 12:14:44 PM
Mr. DeLong is fond of tearing apart Mr. Cowen's ideas and all we get to hear back from Cowen is a link to the slaughter house. Is there an explanation for this?
Well that one's easy. Cowen links to DeLong and some of us tear him a new one (at least in our heads) and Cowen can giggle in the privacy of his office, safe to write a non-controversial piece for the NYT. "Not that there's anything wrong wih that."
Posted by: Bob Murphy at Dec 26, 2008 12:21:29 PM
There are three crises: liquidity, solvency, and wealth. The wealth crisis is the most fundamental: we aren't as rich as we thought we were.
Posted by: Steve Sailer at Dec 26, 2008 12:22:24 PM
Steve,
There are three crises: liquidity, solvency, and wealth. The wealth crisis is the most fundamental: we aren't as rich as we thought we were.I don't think this gets said often enough. We (or more specifically, the finance and home-building industries) put vast amounts of resources into investments that were expected to pay off big time. They didn't, at all. They crashed and burned, and as a result a lot less wealth is available; people thought the pie was bigger than it was. Consumption absolutely has to drop. You can't consume resources that don't exist.
Given the vast difference between expected wealth and actual wealth (which I realized markets are still trying to calculate), if a stimulus was really going to help, could it do so significantly?
Posted by: Grant at Dec 26, 2008 3:47:24 PM
Everyone is focusing on GDP, the number.
We need to focus on what GDP attempts to represent. GDP is a fairly crude measure of what we are really interested in, which is the productivity of the nation as a whole, or the value of investing in it.
When we talk of fiscal policy, we need to spend on things that will increase the future productivity of the nation or the value of investing in it. What is not important is the "Keynesian Multiplier".
Posted by: Stanford at Dec 26, 2008 5:37:28 PM
Here is an excellent refuation of the Keynesian multiplier hornswogle.
The Keynesians go wrong in focusing on consumption, and ignoring the savings and investment that has to be done to support consumption. Barkley Rosser, you need to read this.
http://findarticles.com/p/articles/mi_m0254/is_4_60/ai_80802015
Posted by: Bill Stepp at Dec 26, 2008 6:14:32 PM
PrestoPundit,
Very well said. I'm no economist but I often read DeLong when he talks about Hayek or Austrian Econ and I wonder if he knows something fundamental about it that I have simply never heard of. I can't even begin to imagine what that is because he simply says things that make me proofread and make sure he's indeed talking about FRIEDRICH A. Hayek. And he indeed he is. No help there. So I then wonder if Hayek has some positions or tomes or books that I'm not aware of that would explain or inform what the hell DeLong is talking about. Again, no luck.
Since DeLong has surly never studied Austrian Econ as a subject area, my only guess is that his professors who covered Hayek or Austrian Econ when he was a student are to blame and he never questioned them.
That's my best guess.
Posted by: John V at Dec 26, 2008 9:32:01 PM
PrestoPundit,
Here's an example from DeLong on Hayek that makes say: "HUH?!?!"
"This Hayekian argument was, of course, dead wrong. Its problem was that it mistook value for being a fact of nature rather than a social relationship among people. The value of something is what people are willing to pay for it. If there is extra liquidity--extra real money balances--in the economy then the value of commodities in terms of nominal yardsticks will be higher and the value of liquidity will be lower--which means that the value of bonds will be higher. There is no "fall back in price to their true value."
Notice the last comment in the comment section. I was so relieved that somebody else noticed. Sadly, DeLong never addressed it.
Posted by: John V at Dec 26, 2008 9:40:53 PM
An important point about Austrian business cycle theory: it is incorrect.
Posted by: Robert at Dec 27, 2008 8:31:52 AM
John V said Notice the last comment in the comment section. I was so relieved that somebody else noticed. Sadly, DeLong never addressed it.
He did address it it seems, in typical DeLong fashoin. He "disappeared" it, presumably after reading your post here. Here is the entirety of his comments section for that linked article:
Comments on this post are closed.
Posted by: happyjuggler0 at Dec 27, 2008 10:26:33 AM
