The Sorrow and the Pity (wonkish): Eugene Fama, completely not getting it. Proposition 2 is wrong, because savings is an endogenous variable, not a fixed quantity. This has become truly painful to watch.
Bailouts and Stimulus Plans - Addendum 1/28/09 - Fama/French Forum: Again, here is my argument in three sentences.
- Bailouts and stimulus plans must be financed.
- If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
- Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
It is scary that nobody has pointed out to Fama the implications of his argument. For one thing, it means that money printing cannot boost spending either--for a dollar bill is nothing if it is not a particular kind of "additional government debt." And private-sector decisions to boost spending on high-tech or houses cannot boost total spending either--because private investment spending must also be financed, and must also by Fama's logic crowd out other expenditures.