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The best argument I've read *for* the stimulus
It comes not from a professional economist but from Warren Buffet, here goes:
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
Sadly, that's about as scientific as we've been able to get.
Posted by Tyler Cowen on January 23, 2009 at 11:08 AM in Economics | Permalink
Comments
Tyler, Would be very interested in your reaction to the unconventional analysis of the crisis posted by Ricardo Caballero on VoxEU.org -- and elaborated in several longer articles.
Posted by: David H. Levey at Jan 23, 2009 11:19:28 AM
"What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake..."
But we don't even know that! I am increasingly convinced that the recession is like a head cold, and doing nothing and waiting it out (lots of rest and fluids?) may be the best possible option. I agree that Buffet's may well be the best case for the stimulus, which really says something about the case for the stimulus.
Posted by: Will Wilkinson at Jan 23, 2009 11:20:15 AM
Somewhere, Warren's dad is rolling over in his grave. I'm kind of surprised to see Buffet still peddling the old mantra that Hoover was a laissez-faire doctrinaire -- particularly in light of all the recent scholarship on this topic.
Posted by: Bobby at Jan 23, 2009 11:23:50 AM
Just a correction: it is Buffett---two f(s) and two t(s).
Posted by: Ted at Jan 23, 2009 11:30:31 AM
My proposal for stimulus is more IRS agents. With all these rich people running into housekeeper, nanny, and tax problems, they are surely sorely needed.
Posted by: Lord at Jan 23, 2009 11:32:20 AM
When will the myth that Hoover did nothing finally die? Hearing someone like Buffet repeat it is aggravating beyond description.
Posted by: Noah Yetter at Jan 23, 2009 11:32:44 AM
not much of an argument, but seems like the typical one being made.. "we don't know what is going on" => spend a trillion dollars and increase government scope and power, but if we don't, I'll make a vague reference to Hoover and pretend like this is already the great depression. Oh and here are some vague, foundationless straight line graphs which i'll call "analysis" to back up my argument. Don't agree with me? then you're a republican hack (re: Delong). The laughable thing is a fraction of this money could really help the developing world in a real way...
Posted by: Andrew at Jan 23, 2009 11:33:42 AM
Lane Kenworthy has a similar "do it because its wise" argument that I find compelling.
Posted by: pushmedia1 at Jan 23, 2009 11:37:40 AM
IANAE, but how does Buffet know that "to stand by and do nothing is a terrible mistake"? Sticking to the fire analogy, isn't there a phenomenon of "fire paradox" recognized in suppressing large wildfires viz. disrupting the natural cycle and thus enabling greater number of fires, leading to the tactic of 'wildfire land use' and 'controlled burns' (as per Wikipedia). Of course, now we can argue on whether the current economy is akin to a wildfire or a house fire. Just curious.
Posted by: Gyan at Jan 23, 2009 11:38:27 AM
Here is the problem with Buffet's analogy:
Right now the fire's raging, it's burning down a couple houses on the block. We are worried that sooner or later the whole block will burn down. So, in our panic we are reaching for anything we can find to douse the fire. Buffet advocates grabbing any liquid we can find and throwing it on the fire, except what if next to the bucket of water there is a bucket of gasoline. If we throw that on the fire not only have we not saved the neighborhood, we've guaranteed the fire will spread - maybe now the fire will spread to another neighborhood as well.
One does not need an economic understanding to see the error in Buffet's argument; panic is never a good answer. Buffet's commentary hit at two significant flaws in the current thinking: (1) Panic and (2) Hubris.
To accept the panic is a good reaction to the current crisis is to believe that things are so bad that anything we do will either have no impact or make things better. In other words, we can't make it any worse. To believe this shows a remarkable ignorance of history and relies far too heavily on those who claim the worse in order to reap the benefits that panic can reword.
In a recent New York Times magazine montage of interesting ideas, the magazine highlighted the work of Israeli academics who noted that in Soccer on a penalty kick, the goalie would dive one direction or the other almost all the time (~90%) despite the fact that empherical study indicated that the greatest chance to make the save occurs when the goalie stayed in the center of the net. The authors surmised that on a public stage the pressure to look like you were trying hard was so great that goalie would act, just to act, even if it hurt his chance to accomplish his goal. Public leaders could learn something from this. Adding to this is the fact that people in power are frequently to ambitious or arrogant to admit that the best solution may be to do nothing, work at the margins to mitigate the impacts of the problem, and wait for problem to right itself.
Posted by: Josh at Jan 23, 2009 11:43:22 AM
WOW, such a pragmatist. Why doesn't he just buy a house and move in with Greenspan? In the face of increasing government scope and hyperinflation (only thing pausing it right now is that other governments are lowering their rates drastically too), let's just throw principles and ideas out the window and you know see whatever seems to work in the short run. Damn the consequences.
Posted by: Corey O at Jan 23, 2009 11:43:41 AM
Tyler says this is the best argument he has read for the stimulus. He does not say it is a good argument. Thus, as with many of Tyler's posts, it is difficult to say what he is saying.
Posted by: John at Jan 23, 2009 11:50:52 AM
Well, if anyone is to listened to it is someone that did foresee problems, not those that ignored this all along. Dr. Doom, Dean Baker, and Robert Schiller gets more credit for this than academicians and pundits that never saw anything coming. Reward judgment. Punish hackery.
Posted by: Lord at Jan 23, 2009 11:51:55 AM
"what if next to the bucket of water there is a bucket of gasoline."
From what I can tell, not even conservative economists like Barro are saying the multiplier is likely to be negative. Barro presents evidence that during a period of (more than) full employment, the multiplier on government spending might have been as low as 0.8.
The possibility that it is "only" 0.8 sounds better than 0, assuming the government spending isn't more than 80% wasteful. As Buffett suggests, similar arguments apply for most of the other "weapons" being proposed by reasonable people, from tax cuts to monetary policy.
Posted by: a student of economics at Jan 23, 2009 11:52:19 AM
but what if stimulus isn't analagous to a fire hose but rather a flame thrower?
Posted by: f at Jan 23, 2009 11:52:45 AM
How do we know that "to do nothing is a terrible mistake"? What does that statement even really mean? Is letting hopelessly insolvent financial institutions go bankrupt "doing nothing" and, therefore, a "terrible mistake"? Is it better to spend hundreds of billions of dollars of taxpayer money to prop them up?
A very successful investor from years ago had a sign on his desk that read "Don't just do something... sit there." Interesting advice for those that admit they have little idea what will work.
Posted by: Ken Hirsh at Jan 23, 2009 11:54:36 AM
That is some terrible and very un-economic reasoning. If Tyler believes this is the best pro-stimulus argument, he's really ragging on pro-stimulus economists.
Like with anything else, the question is whether or not the benefits (in both the short and long-term) exceed the costs (again, in both the short and long-term). If they do, and if we can't find anything else that will yield greater benefits, we go ahead with the stimulus. If they don't, then we don't do it. If we don't know the costs and benefits, then wouldn't we be better off using those resources on something more certain?
Posted by: Grant at Jan 23, 2009 12:09:30 PM
What we do know is to stand by and do nothing is a terrible mistake
We know this, do we? I think we know that Buffett, who has a great deal of wealth in the form of stocks, would benefit enormously if there were a transfer of wealth from taxpayers present and future into corporate hands. Of course we don't know the exact form of the stimulus, but to the extent that it involves propping up GM or providing additional revenue to other corporations (in the form of infrastructure projects or w/e) it will help Buffett's bottom line. Of course this doesn't mean his argument is invalid... but contra Tyler there is no 'argument' here, there is just a series of assertions.
Posted by: bbartlog at Jan 23, 2009 12:09:56 PM
When, oh when, does a liberal not say that more spending is a solution? In goods times, we need more spending. In bad times, we need more spending. You would think that the burden of proof should be on those who want to take more money from other people. And, it has to be pointed out, spending more may actually makes things worse (costs exceeding the benefits).
Posted by: Walt at Jan 23, 2009 12:11:01 PM
"We do know over time the American machine works wonderfully and it will work wonderfully again."
except for the fact that after having nationalized a few banks, raised taxes to pay for the excesses, maybe socialized medicine and having exploded public debt, the American machine will not work as wonderfully as before. And that's what the interventionists are missing.
Posted by: chicagoboyz at Jan 23, 2009 12:15:23 PM
"What we do know is to stand by and do nothing is a terrible mistake" - what kind of defense is that? We know nothing of the sort. We DO know that we have mammoth debt and unfunded liabilities. Blasting $1T into confetti might not be the answer.
Posted by: K T Cat at Jan 23, 2009 12:25:47 PM
>What we do know is to stand by and do
>nothing is a terrible mistake
There is no way we know that. Evidence please.
Posted by: rrgg at Jan 23, 2009 12:29:47 PM
Tyler concludes "Sadly, that's about as scientific as we've been able to get." I have the impression that Tyler is increasingly confused about what is going on with the economy and with the debate on the economy. You don't need Buffett's bubbling to realize that there is nothing scientific about the views that macroeconomists have been discussing. Thus, after reading what Buffett's answer, I prefer the conclusion: Sadly, that's about as wise as we've been able to get.
Posted by: E. Barandiaran at Jan 23, 2009 12:33:22 PM
What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves.
Sadly this is wrong, though. Hoover didn't do "nothing" he did quite a bit. In looking at what Hoover did he looks alot like...well like Obama and his promises. So we have Hoover pursuing activist/counter cyclical policies followed by Roosevelt. And what happened? The economy got deeper in the hole. Maybe the policies of Hoover and Roosevelt kept things from getting even worse...but I'm not entirely convinced.
Today...we had Bush enacting counter cyclical policies. Now it will be Obama. Will we go deeper in the hole? I don't know, but based on you latest post about AIG, Bernanke and Geithner...well lets just say I'm less than convinced by arguments like Buffets. Buffets argument is essentially based on fear. And letting that emotion ride rough shode over the decision making process.
Posted by: Steve Verdon at Jan 23, 2009 12:39:53 PM
Dammit, everyone's already destroyed the argument. I was going to mention how stupid it would have sounded if WB just chose a different metaphor: a sick patient, for whom throwing every available therapy at every body part would cause certain death.
Posted by: Dave at Jan 23, 2009 12:44:28 PM
