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Words I wrote yesterday about fiscal policy
The argument for fiscal stimulus is simply that it will stop things from getting worse by preventing further collapses in aggregate demand. That may be true but fiscal stimulus won’t drive recovery. Recovery requires that zombie banks behave like real banks, that risk premia are properly priced, and that the economy undergoes its sectoral shifts toward whatever will replace construction and finance and debt-driven consumption. Fiscal policy won’t do much toward these ends and in fact a temporarily successful stimulus might hinder these long-run adjustments.
Here is a very good piece from Hal Varian on fiscal stimulus.
Posted by Tyler Cowen on January 7, 2009 at 06:09 AM in Economics | Permalink
Comments
Tyler,
Have look at http://www.levy.org/pubs/sa_dec_08.pdf . This is from Wynne Godley's Keynesian stable; the people who have had the most reliable medium term model of the US economy fro about the last 10 years. (Yes, they foresaw the crisis.)
They think a massive fiscal stimulus is necessary, but there is no way that a unilateral US stimulus can do enough.
Posted by: David Heigham at Jan 7, 2009 7:50:20 AM
10 years? Call me in 50.
Posted by: josh at Jan 7, 2009 11:35:22 AM
If stimulus is just life support, doesn't that make it another bubble, call it an "infrastructure bubble", albeit it without rising prices.
Other than the palliative effects of more people working and income support for the unemployed, isn't stimulus just buying time for banks, investors, firms and workers to shift their focus from the old dead sectors to whatever is to come?
Posted by: Larry at Jan 7, 2009 11:48:57 AM
"and that the economy undergoes its sectoral shifts toward whatever will replace construction and finance and debt-driven consumption."
Right. Hayek. Not Keynes.
This little bit of micro from Hayek's _The Pure Theory of Capital_ helps explain why over expansion during the boom/bubble in housing, finance, the building industries, etc. implies prices lower in these sectors than before the boom/bubble relative to other sectors:
"The decisive fact .. is that the effect on prices of these changes in quantities brought about by monetary influences will be in exactly the opposite direction from the direct effect on prices of these same monetary change. We may suppose, for instance, that, at the point where a net addition to the total money stream makes its first impact on the commodity markets, there will result an increase first of the prices and then the output of the commodities affected The effect of this increase in output will be that, as soon as the addition to the money stream cease, the prices of these commodities will fall relatively to the prices of all other commodities and will reach a lower level than prevailed before the monetary change."
Posted by: prestopundit at Jan 7, 2009 12:57:39 PM
"I predict future happiness for Americans if they
can prevent the government from wasting the labors of the
people under the pretense of taking care of them."
Thomas Jefferson
There is even a T-shirt!
Posted by: Andrew at Jan 7, 2009 2:08:59 PM
Is there a "no stimulus club" website like the Pigou Club?
Posted by: Mr. Econotarian at Jan 7, 2009 2:23:20 PM
One can agree entirely with Hal Varian's essay (and I think I do), but he leaves us hanging. Businesses are reluctant to invest. But we need to encourage investment. So how do we do that? Tricks like investment tax credits, which lower the (apparent) marginal cost of capital are less likely to be useful when businesses fear, with good reason, that they will have difficulty selling the products that the increased investment spending would allow them to produce.
The problem is to induce businesses to believe that consumption spending (or exports, or government purchases) will be enough higher in the future, when the increased productivity of increased current investment spending comes on line, to justify the increased current investment spending. Varian does no explain how we can accomplish that, and this alone makes a focus on increasing current investment spending something of a shot in the dark.
Posted by: Donald A. Coffin at Jan 7, 2009 3:00:30 PM
Does this sound like a poem to anyone else?
FISCAL POLICY
by Tyler Cowen
Recovery requires,
That zombie banks behave like real banks,
That risk premia are properly priced,
And that the economy undergoes its sectoral shifts-
Toward whatever will replace,
Construction and finance and debt-driven consumption.
Fiscal policy won’t do much toward these ends,
And in fact a temporarily successful stimulus,
might hinder these long-run adjustments.
Posted by: Carrie at Jan 8, 2009 9:38:10 AM
I've gotten fed up enough with the media claims that professional economists support stimulus to start a web list of skeptics at
http://rasmusen1.blogspot.com/2009/01/economists-opposing-massive-fiscal.html
If you know of names I should add (with links) please let me know.
Posted by: Eric Rasmusen at Jan 10, 2009 10:36:54 PM
