A Bizarre Turn In The Stimulus Debate (Boring): Wow. Just wow. John Cochrane puts up a post that to all appearances amounts to a complete retreat from his previous denunciations of deficit spending in a recession. But he simultaneously denies having ever held the position everyone thought he held, and denounces me and Brad DeLong as big meanies. I’ll outsource the analysis to Noah Smith.
Just for reference, if you want to know what I was reacting to, here’s my original Dark Age post, and some further Cochrane quotation. Notice, by the way, the highly polite declaration that anyone who believed in stimulus was telling “fairy tales”; it goes with Lucas’s highly polite dismissal of Christy Romer’s stimulus analysis as “shlock economics.” I’m so glad to be lectured now on professional etiquette.
Anyway, see if you can reconcile all that with what Cochrane now claims he believed all along.
Paul on the Dark Age:
A Dark Age of macroeconomics (wonkish): Here’s Fama:
The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.
And here’s Cochrane:
First, 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.1 This is just accounting, and does not need a complex argument about “crowding out.”
Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.
There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.
What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.
And Paul on Robert Lucas's inability to… I guess "inability to discount" is the best way to describe it:
A Note On The Ricardian Equivalence Argument Against Stimulus (Slightly Wonkish): [E]ven if you assume that the [Ricardian Equivalence] doctrine is right, it does NOT imply that government spending on, say, infrastructure will be met by offsetting declines in private spending. In other words, Robert Lucas was betraying a complete misunderstanding of his own doctrine when he said this:
If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.
But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.
This remark was followed, by the way, by a smear against Christy Romer:
Christina Romer — here’s what I think happened. It’s her first day on the job and somebody says, you’ve got to come up with a solution to this — in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.
So she scrambled and came up with these multipliers and now they’re kind of — I don’t know. So I don’t think anyone really believes. These models have never been discussed or debated in a way that that say — Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics.
Maybe there is some multiplier out there that we could measure well but that’s not what that paper does. I think it’s a very naked rationalization for policies that were already, you know, decided on for other reasons.
I’ve tried to explain why Lucas and those with similar views are all wrong several times...