Noah Smith tells us that John Cochrane now writes:
Let's be clear what the "fiscal stimulus" argument is and is not about. It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons…. Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it…. The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5….
Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now…. Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't…. The facts are far from decisive…. So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works…
And I think of John Cochrane of the past, of three years ago, as reported by Oliver Staley and Michael McKee:
John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said…
I read John Cochrane today as constructively admitting that John Cochrane three years ago was a full-fledged bullshit artist.
I read John Cochrane today as constructively admitting that John Cochrane three yards ago was writing and saying things that simply were not true, and was doing so simply because he had not done his homework.
It's nice to see.
But what I would really like to see is something more. What I would really like to see would be an explicit admission: Something like: "I wrote a lot of bullshit three years ago because I had not done my homework. It made Christy Romer and Larry Summers and company's jobs more difficult. I'm sorry."
And, of course, for all of you gluttons for punishment there is more from Cochrane of three years ago:
If money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...
There has been no grand empirical reevaluation of fiscal stimulus either…. If you bleed with leaches when you have a cold, empirical work might say that the leaches cured you…. [E]mpirical work without a plausible mechanism is hard to believe…. The Administration's estimates for the effect of a stimulus plan cite no new evidence and no theory at all for their large multipliers…. If you've got magic, why not 2 trillion dollars [of stimulus]? Why not 10 trillion dollars? Why not 100 trillion, and we can all have private jets? If you don't believe that, why do you think it works for a trillion dollars? Their estimates of industry effects come from a blog post (p. 8)! Ok, they did their best in the day and a half or so they had in the rush to put the report together.… Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude…. Others say that we should have a fiscal stimulus to “give people confidence.”… Public prayer would work better and cost a lot less…. Fiscal stimulus can be great politics…. The beneficiaries of government largesse know who wrote them a check. The businesses and consumers who end up getting less credit, and the businesses that can’t sell them products, can only blame “the crisis,” and call up their congressmen to get their own stimulus. Roosevelt understood this, and his biggest stimulus came as political support was flagging…. [D]on't insist that we have to pass this monstrous [Recovery Act] bill in a day without thinking about it…
Well, [the Recovery Act] may have been politically effective, but the idea that it was going to raise output or increase employment, I don't think has panned out. So, I would give it a net zero on -- on those questions.... I mean, the stimulus, in the end, is taking money from one place and giving it to another place. And it's too easy to forget that you had to take money from somewhere in order to do any stimulating.... Like any time the government spends money, it has to come from somewhere. So, you get to see the jobs that the stimulus -- I don't want to say created, but the jobs supported by the stimulus. What you don't see is every dollar of stimulus had to come from somewhere.... [The government should] get out of the way. Now, let me say, even if there wasn't an alternative, that doesn't rescue the stimulus. If you have a heart attack and the doctor wants to cut your arm off, you can say, cutting the arm off isn't going to work, even if you don't know how to fix a heart attack.... The economy can recover very quickly from a credit crunch, left on its own, with stable, low-taxes, pro-growth policies in place. It doesn't need trillions of dollars of government spending to get it going again...
Noah Smith comments:
Noahpinion: Cochrane: Just don't call it "stimulus"!: [M]y response to [Cochrane] is:
!!! o_O !!! <-- (this is an "emoticon" that indicates surprise)
If I told you that a famous economist thought that austerity is a bad idea in recessions, that recessions are a great time to boost debt-financed infrastructure investment, and that additional Keynesian stimulus spending was an "economically interesting proposition" about which the jury was still out, would you guess that the economist was John Cochrane? Before I read this post, I would not have. But hey, that's cool!…
[W]e know we have a huge shortfall of infrastructure spending. Our existing roads and bridges - which clearly do NOT lead to "nowhere" - are falling apart. Even Obama's ARRA "stimulus" did very little to correct the problem. And instead of borrowing more money to fix our crumbling public goods, at a time when borrowing costs are historically low, conservatives are demanding that we tighten our belts and "starve the beast." We are not even close to addressing the question of whether to bury jars full of money.
I think the conservative push for austerity and reduced infrastructure spending is just nuts, and from what Cochrane has written above it seems he would probably agree. If we were to embark right now on a massive debt-financed program of road and bridge repair, that would not meet Cochrane's definition of "stimulus" (thought it would certainly be labeled "stimulus" in the press). It would consist entirely of policies for which Cochrane has expressed unqualified approval.
So why doesn't Cochrane stand up and loudly advocate a massive debt-financed program of road and bridge repair? Is it because the public might get the wrong idea, and start believing in "stimulus" of the hole-filling variety? Is it because infrastructure investment must be politically sacrificed in order to "starve the beast" and fight against creeping socialism? Is it just because Paul Krugman and Brad DeLong are mean mean meanies?
For crying out loud!…
Noah is more optimistic than I am.
I wish that I could say that I was confident that the bullshit has come to an end.
But as I read the stuff that John Cochrane is writing and saying right now, he still seems to oscillate between inconsistent and incompatible models. Sometimes Cochrane these days seems to still be working in the model of "if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment", the model of:
(1) MV = PY
with M being the money stock, P being the price level, Y being the level of real GDP, and V being the (technologicall-fixed, interest-inelastic) velocity of money, in which expansionary fiscal policy has no short-run effect on nominal spending or on real output, incomes, and employment. Sometimes these days Cochrane is clearly working in another model in which the key equation is something like the asset market equilibrium condition:
(2) (Y*/Y)(D/P) = (Tf - Gpf)/[(1+r)^t]
where Y* is the economy's potential GDP, D is the government's nominal outstanding debt, Tf is expected future real taxes, Gpf is expected future real government primary spending, r is the real interest rate on government debt, and t is the expected duration of the government's debt before it is not rolled over but extinguished.
In Cochrane's version of (2) [Tf - Gpf] is fixed by long-term fiscal expectations, and while r can be disturbed by financial crises but it is strongly and rapidly mean-reverting once the financial crisis is over.
In this second model, expansionary fiscal policy is extraordinarily powerful. Deficits that add to the government's debt D translate one-for-one into increases in nominal spending, and thus to increases in both real production and incomes and increases in inflation. Thus, Cochrane argues, it is very important to shrink the deficit massively right now before additions to the debt via expansionary fiscal policy have such powerful effects that they land us in an unwelcome inflationary boom.
How can Cochrane believe in both (1) and (2)?
And how does Cochrane decide when and how to switch back and forth between them?
The right answer, of course, is that this was what Hicks's (1937) IS-LM framework was all about. You note that in (1) the velocity of money is not technologically fixed but depends on the opportunity cost of holding money. You note that (2) with rapidly mean-reverting r and fixed [Tf - Gpf] may not be the asset-market equilibrium condition that you are looking for. And then you can have a nice New Keynesian (or Old Keynesian) discussion.
But that is not where Cochrane goes, even these days:
John Cochrane Monetary Economics PhD Reading List: I will be teaching the second half of this course, from May 3 to June 3 (Week 6-10)…. Please read these articles ahead of time!….
But then he says don't bother to read any of the "Keynesian" stuff:
Week 8: The Keynesian and New-Keynesian view, and its problems…. New Keynesian Models with Fiscal Price Determination. January 2011. These are just some slides that I'll cover. We need some references on the new-Keynesian model so you won't think I'm making this all up. These are not assigned ahead of time readings…. Woodford, Michael, Interest and Prices… p. 1-319…. Shorter, and available online: Robert King, 2000, "The New IS-LM Model: Language, Logic, and Limits" Federal Reserve Bank of Richmond Economic Quarterly 86, 45-103. Start by ignoring the "microfoundations," just learn to use the three equations. Then focus on the equilibrium vs. off equilibrium analysis. Then, finally, go back and read the "microfoundations"…