Marginal Revolution

A second stimulus?

That's today's topic in the blogosphere, starting with Bruce Bartlett, and then Paul Krugman (and here) and Megan McArdle.  The economy hasn't exactly gone well but a priori that could support either the view that the stimulus won't much help, or the view that we needed (and still need) a bigger stimulus.

I'll restate a few of my core points on this topic:

1. If we're not in a liquidity trap, monetary policy is a better way to stimulate aggregate demand.

2. If we are in a liquidity trap, the stimulative effects of fiscal policy will die out pretty quickly.

3. I have never defended "the Treasury view."'

4. The worst case scenario, which requires that you put your balance sheet in somewhat better order, remains relevant.  I am suspicious when I hear "efficient markets" defenses of current fiscal policy ("Interest rates remain manageable," etc.) from the same people who for years criticized those arguments as applied to banks or for that matter homes.

5. Some temporary, short-run stimulus was indeed called for, consisting mostly of aid to state and local governments.

6. The employment benefits of fiscal policy are mostly temporary and will require a "redo" in two years' time or so, unless we are willing to lose those jobs again or move to "permanent stimulus," which I do not recommend.  We are postponing required labor market adjustments, not solving the labor market problems.

7. There were better ways to spend most of that money.  The assumption was that the American public would be so happy with the stimulus that they would be clamoring for more and more government programs.  That does not appear to be the case.

One new point, based on recent history: We've just seen what special interest groups have done to legislation on health care reform and climate change and neither has even reached the Senate yet.  Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration.  What do you think round two of the stimulus would look like?

I'll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly.  American voters do not in fact have the patience for a lot of good ideas.

Assorted links

1. Australia markets in everything, naval edition.

2. Profile of Mark Thoma.

3. Via Kat, the new Dan Ariely chapters.

4. Short WSJ write-up of (part of) Create Your Own Economy.

5. Does job retraining work?

6. Which movies impress professional stuntmen?

7. The culture that is German

Where's Tom?

Today I found a two dollar bill in my wallet--must have been from something I bought on Saturday.

Robert McNamara passes away

He is best known for his dubious role in the Vietnam War and also, now, through the movie The Fog of War.  But McNamara also had a huge influence on the economics profession, most of all through his 13-year presidency at the World Bank.  He focused the Bank on poverty reduction, he brought Communist China into the Bank, he introduced the practice of five-year lending plans, he significantly increased the Bank's budget, he grew staff from 1600 to 5700, he favored sector-specific research, he raised money from OPEC, he strongly encouraged "scientific project evaluation," and he started a largely successful program to combat "river blindness"; the latter may have been his life's achievement.  The Bank as a large, modern technocracy -- for better or worse -- dates largely from his tenure.

He probably shaped the Bank more than did any other single person.  Here is one overview.  The Bank, of course, continues to be a major employer of economists and a major influence on the theory and practice of development economics.

Addendum: Kevin Drum offers some interesting thoughts.

Interview with *The Economist*

I was asked six questions (mostly about Create Your Own Economy, but not all), here is one of them:

FE: What has most surprised you about the current economic downturn?

Mr Cowen: That it happened with such severity.  As an economist I grew up reading and thinking about two formative events.  The first was the crash of the real estate bubble in the late 1980s, preceded by the stock market crash in 1987.  The second was the Third World debt crisis of the early and mid-1980s.  Both were bad, but for the United States neither were like the last two years.  I’ve never been a believer in any of the extreme forms of the efficient markets hypothesis, but those events made me overly complacent about how badly crashes and excess leverage can turn out.  In the early 1980s I expected widespread insolvency for major U.S. banks and when they muddled through I ended up overrating their ability to do the same again.

Should "Fairfax County" become a city?

Should Fairfax County become a proper city?  It has over a million people, many more than Washington, D.C.  The bottom line seems to be this:

The basis for the idea is largely tactical -- under state law, cities have more taxing power and greater control over roads than counties do -- and it led to more than a few snickers about the thrilling nightlife in downtown Fairfax (punch line: there isn't any).

Natasha could no longer say "We are from Washington":

If Fairfax does become a city, it would instantly become one of the largest in the nation, the size of San Antonio or San Jose.

It would also diverge dramatically from the stereotype of the gritty metropolis. Fairfax enjoys many of the benefits -- wealth and jobs -- and few of the detriments -- crime, troubled schools -- of a large urban center. With a median household income of $105,000, it is the wealthiest large county in the nation. Among large school systems, it boasts the highest test scores. And it has the lowest murder rate among the nation's 30 largest cities and counties.

One question is why this rather uncoordinated mix works so well.  Federal dollars, diversity of immigration, and diversity of planning strategies all can be cited.  The latter factor probably means we should not touch the status quo.  And by the way, almost all of our nightlife is Korean but it does exist.