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Their weird obsession
Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
That's Dani Rodrik and do read the whole thing, if only to see where the title of this post comes from. I may be reading him incorrectly, but I believe he is claiming that a complete ban on imports would raise U.S. gdp by trillions.
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
Addendum: Rodrik responds: "I am writing all this partly in response to Tyler Cowen's comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory." I would not use the word "any," but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong. I am well aware of the hypothesis that import substitution, during WWII, helped Mexico recover from the Great Depression and I do not attach it zero credence. But I still think, to quote myself, that: "this is the worst policy idea floated in recent memory." It is important not to let Rodrik change the terms of debate by ascribing the "any" position to me.
Posted by Tyler Cowen on December 5, 2008 at 11:00 AM in Economics | Permalink
Comments
You're probably right that Dani should add even stronger language to his post, but he makes it amply clear in my view that this is a terrible idea.
But you're right to put some focus on the shortcomings of the theoretical apparatus. This is the time to do it, when economists haven't sold their soul yet.
Posted by: mk at Dec 5, 2008 11:16:47 AM
"Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?"
I think the sentence is, firstly, absolutely correct, and, secondly, unnecessary. Rodrik knows this. As he clearly states in the end of his classic paper "Skeptics Guide to the Cross-National Evidence":
"Let us close by restating our objective in this paper. We do not want to leave the reader
with the impression that we think trade protection is good for economic growth. We know of no
credible evidence--at least for the post-1945 period--that suggests that trade restrictions are
systematically associated with higher growth rates. What we would like the reader to take away
from this paper is some caution and humility in interpreting the existing cross-national evidence
on the relationship between trade policy and economic growth."
Trade barriers do not lead to systematically higher growth rates, hence there is no reason to believe that protectionism in general is good. What Rodrik is talking about, however, is the multiplier. And it's the multiplier in the context of recession, that is, in a context of unused productive inputs, and primarily labour. Unemployment is a bad, and if that can be reduced through expansionist policies, and these expansionist policies are more efficient with protectionism than without, it does give an incentive for protectionism. Short-term, however, but still protectionism.
Or, in Rodrik's own words:
"So unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism. Not a pleasant choice."
Rodrik is indeed fully aware of the deleterious effects of protectionism in the present circumstances, and fully admits that it would be "unpleasant". Your sentence is correct, Tyler, but not necessary.
Posted by: Tord Steiro at Dec 5, 2008 11:19:32 AM
I don't understand economics, but doesn't the fact that we are actually importing money to finance the import of goods pose a serious problem for Rodrick's theory?
Posted by: Phil at Dec 5, 2008 11:19:44 AM
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
You are well within the line by asking that.
I don't see what Rodrik has done, except push the Keynesian analysis to its logical conclusion. Krugman is literally saying we don't have tradeoffs right now (because of idle resources). And the "green jobs" folks are claiming free lunches too. (In fact Amory Lovins goes further and claims his efficiency plans etc. represent a "lunch you get paid to eat.")
If the goal is to "boost spending" in order to "create jobs," and that's the extent of the analysis, then banning all imports is for the faint of heart. The real way to rescue the economy is to ban the use of machinery.
Posted by: Bob Murphy at Dec 5, 2008 11:20:42 AM
Maybe I'm being too kind to Republican party economists, but I don't think any reputable one claimed during the last decade or so that cutting taxes would lead to an increase in revenues greater than the amount taxes were cut by. There may have been a bunch of different reasons cited for tax cuts among such people, but I don't think this was one of them.
That said, Rodik's hypothesizing notwithstanding, I don't think there's a substantial number of economists in the Democratic party who believe the Keynesian multiplier is a cure-all. It seems like most are saying that since monetary policy seems impotent right now, fiscal policy in the form of increased spending is all that's left before we drive off a cliff.
Posted by: Brian J at Dec 5, 2008 11:20:56 AM
Obviously the propensity to consume is not invariant with the availability of imports. But that isn't the real problem. The proposal involves the government borrowing a bunch of money and spending it.
This will either come from domestic sources, in which case we wonder how much consumption we gain when the government is taking the same amount out of circulation by selling bonds; or else it has to come from abroad, in which case we wonder where these foreigners will be acquiring the requisite dollars now that we no longer buy anything from them. Mere inflation of the money supply could also work, of course, but only in the short term - and would merely represent the government transferring wealth from savers to the government budget in a less direct fashion.
The more general fallacy is that Rodrik seems to treat 'credit' as some sort of natural resource rather than something that must ultimately be balanced by saving/investment.
Posted by: bbartlog at Dec 5, 2008 11:31:21 AM
So was Smoot-Hawley good for FDR's New Deal Keynesianism?
Posted by: liberty at Dec 5, 2008 11:55:10 AM
Maybe I'm being too kind to Republican party economists, but I don't think any reputable one claimed during the last decade or so that cutting taxes would lead to an increase in revenues greater than the amount taxes were cut by. There may have been a bunch of different reasons cited for tax cuts among such people, but I don't think this was one of them.
With the right parsing, this could be argued to be true. But high profile politicians frequently made this exact claim. And very few people in the media, and certainly no right leaning economists, called them on it. I believe John McCain was one of the most recent to do so.
Posted by: mpowell at Dec 5, 2008 12:30:02 PM
Yeah, no imports or a vast reductions of imports is a good idea. Just take a look at Cuba, it worked so well for them. Shouldn't Cuba be rolling in the money?
Posted by: torris187 at Dec 5, 2008 12:51:19 PM
"And very few people in the media, and certainly no right leaning economists, called them on it."
With the right parsing, you could claim this to be true.
Posted by: MM at Dec 5, 2008 1:06:58 PM
"In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit."
Shame on you Dani, a deficit can be a good thing or a bad thing. It is a bad thing if it is due to government spending or frivolous consumer spending. It is a good thing if it is due to direct foreign investment and savvy consumer spending. The latter is more common in the US.
Posted by: torris187 at Dec 5, 2008 1:08:03 PM
But whatever limited success the Laffer curve proponents claimed for it was based entirely upon Keysean deficit spending. In essence the Laffer curve is basically Keysean with its emphasis on creating deficits through tax cutting. The increased spending that accompanied the Reagan and Bush tax cuts were bonuses.
Posted by: ken at Dec 5, 2008 1:17:50 PM
what am i missing, isn't this what happened with capital gains tax revenues after the rates were cut? are you comparing the expected revenue under the old rates against the revenue collected with the new rates? that's not right, is it? you just compare old revenue to new, if it went up, you're collecting more and, thus, didn't lose anything. put another way, you can claim to know what expected revenue would have been if the old rates had still been in place, but you really don't, that's a different universe (that's why it's merely expected revenue).
Posted by: dj superflat at Dec 5, 2008 1:47:01 PM
"So unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism. Not a pleasant choice. "
Unfortunately, protectionism is more likely to happen unless this mess is quickly resolved; It happened before and it will happen again. We need global cooperation and tradeoffs that benefit the developed and developing nations.
Posted by: dkahn at Dec 5, 2008 1:49:15 PM
Republican economists are just as whoresome as their lefty counterparts; they're just quibbling about numbers.
Posted by: MHodak at Dec 5, 2008 1:51:52 PM
Having the Republicans in power wasn't good for anybody.
Posted by: carping demon at Dec 5, 2008 3:09:33 PM
if we eliminate imports then the prices of our goods will go up, thus the marginal propensity to consume will go down. If the marginal propensity to consume goes down then so does the multiplier. you can't adjust one part of the multiplier without affecting the others.
Posted by: physecon at Dec 5, 2008 3:09:47 PM
Exactly, eliminating imports drives prices through the roof, reducing real (inflation adjusted) consumption, and lowering the effective multiplier. Lets ban imports from China and give some boost, months or years in the future to US manufacturing, but in the mean time let everyone shopping at WalMart (which is apparently everyone right now) pay way higher prices. Attention jobless WalMart shoppers: we've just forced you feed, clothe, and otherwise equip your family at twice the price you did last year! Your tax rebate gets only half as far as it did last time! But don't worry, eventually the CEOs and the Union workers will make a windfall killing without having to compete for your business!
Posted by: Adam at Dec 5, 2008 3:23:28 PM
I have a better idea. Set t=0, c=1 and m=0 to get infinite output!
Posted by: Joen at Dec 5, 2008 3:53:07 PM
Wouldn't a ban on imports erase a substantial number of the jobs created by Honda, Toyota, Nissan, Wal-Mart, Best Buy, etc.
Posted by: huh at Dec 5, 2008 5:21:27 PM
I'd like to know what kind of "science" is Macroeconomics, when one can hold onto these theoretical models, arrive at ridiculous conclusions which one knows to be false, and yet continue to use the same models? What are the underlying clearly stated assumptions for the model to work? If you cant answer this question, this is not science, its pseudo science.
Posted by: Tushar at Dec 5, 2008 6:48:51 PM
"Having the Republicans in power wasn't good for anybody."
With this group, I think that's not too far from the truth, but isn't the usual line to add "except the top X percent"? Where X is a slowly decreasing number?
Posted by: PFJ at Dec 5, 2008 8:54:24 PM
Academics love crises because it means people actually start listening to their wacky ideas and models.
Why are you enabling Rodrik?, he is obviously insane, the best thing to do is ignore him.
Posted by: Paul N at Dec 5, 2008 9:17:14 PM
Tyler, you know full well Dani is not advocating protectionism. So you have effectively wasted his time and yours when you are on the same side. Instead, you are trying to score points off him because you dislike his broader scepticism over standard trade theory's assertion that protectionism is always and everywhere inefficient. Transparent opportunism on your part.
Posted by: Chris at Dec 5, 2008 9:24:46 PM
Microeconomists for lunch, eh?
Posted by: rluser at Dec 6, 2008 3:12:51 AM
