In Which We Love Some But Not All Stimulus Spending Skeptics...
Arnold Kling feels lonely and unloved:
I'm feeling somewhat lonely these days. My understanding of macroeconomics is closer to that of Paul Krugman, Mark Thoma, and Brad DeLong than it is to that of Robert Barro, John Cochrane, or Eugene Fama. And yet I am a stimulus skeptic...
It's fine to be a stimulus skeptic! But stimulus skeptics need to be stimulus skeptics for reasons that are (a) theoretically coherent and (b) empirically relevant. To be a stimulus skeptic because you fear that the bill that emerges from congress will have a very low bang-for-buck, or fear that the long-run drag from amortizing the extra debt will cost us more than we gain from the short-run fiscal boost.
But it's not fine to be a stimulus skeptic for reasons that are empirically irrelevant or theoretically incoherent. Specifically, you cannot say:
"I am a stimulus skeptic because the savings-investment national income equation guarantees that fiscal policy cannot boost employment and production--not even if there are lots of unemployed resources in the economy." The savings-investment equation is an accounting identity: it has no implications whatsoever for whether fiscal policy is effective or ineffective. None.
"I am a stimulus skeptic because the money multiplier and the velocity of money are both fixed, so total nominal spending is a constant times the government-created outside money stock of currency and reserve deposits--except in the extraordinary case when banks or households are pathologically sitting on cash." But in normal times the money multiplier is definitely not a constant--it is interest elastic (see Milton Friedman and Anna J. Schwartz, Monetary History of the United States). And in normal times the velocity of money is not a constant either--it is also interest elastic (see Milton Friedman, ed., Studies in the Quantity Theory of Money).
The depressing thing is the number and credentials of the stimulus skeptics who are making arguments that are either theoretically incoherent or empirically irrelevant. The claim that the savings-investment identity prohibited fiscal policy from having any impact whatsoever was the infamous British "Treasury View" of the interwar period, and was dealt with and rejected then--when Milton Friedman writes about his framework for monetary analysis in the 1950s, 1960s, and 1970s, he rejects the theoretical argument that fiscal policy must be ineffective as strongly as Jim Tobin does. And he goes to great pains to emphasize that the claim that the velocity of money is constant in normal times is not true and is not part of his monetarism. And nobody has ever argued that the money multiplier is a constant. That fiscal policy can affect employment and output when the economy has substantial unemployed resources was--I thought--well-settled by the 1950s. Which is why it is depressing to see economists like Fama, Lucas, Cochrane, and Mankiw saying "no."
And the truly depressing thing is that smart people like Neil Sinhabababu look at this mishegas and, understandably, write:
EzraKlein Archive | The American Prospect: So I'm just Joe Philosophy Professor watching Krugman & DeLong vs. the Chicago Schoolmen about whether we need fiscal stimulus, with Nobel Prize winning economists* on either side. And I'm thinking: How many fields are there in which a big practical question pops up and the Nobel-level guys are on opposite sides yelling at each other?... [I]t isn't a question that should be sitting at the far cutting edge of research, like how many dimensions your string theory needs to have. The raison d'etre of the discipline is to deal with stuff like this.
I'm not saying that individual economists are sleeping on the job -- there are legitimate reasons why this is difficult stuff to do. We have a vanishingly small amount of historical data to work with, and economists can't go into the lab, start depressions in twenty Erlenmeyer flasks, and dump in different stimulus packages to see what works. But that in itself is a reason to be wary of math-heavy, evidence-light economic models and the pronouncements that they produce. (Big philosophers famously disagree about all sorts of stuff. But we have an excuse -- often when we all agree on something, it stops being an area of philosophy...)
I had thought that the questions of whether the "Treasury View" was correct, whether the money multiplier was a constant, and whether the velocity of money was constant in normal times had been settled and were no longer live parts of economics. But here we are...