Costs and Risks of Central Bank Balance Sheet Expansion
Liveblogging World War II: December 16, 1942

Economists on the Ineffectiveness of Fiscal Policy; Sh@t Is All F@#^ Up and Bullsh@t Weblogging

Four years ago there were quite a number of economists of reputation and thought to be of note who stridently and aggressively argued that the increases in federal spending in the Recovery Act would not boost employment and production: consider Gary Becker of the University of Chicago, Casey Mulligan of the University of Chicago, David K. Levine of Washington University in St. Louis, John Cochrane of the University of Chicago, Robert Lucas of the University of Chicago, Edward Prescott of Arizona State University, Eugene Fama of the University of Chicago, Luigi Zingales of the University of Chicago, Michele Boldrin of Washington University in St. Louis, and a host of others.

What is sauce for the goose is sauce for the gander.

If extra federal spending and reduced tax collections in the Recovery Act could not boost production and employment, the reduced federal spending and increased tax collections from going over the fiscal cliff cannot reduce production and employment and does not risk sending the American economy into renewed recession.

Yet not a one--not a single one--of the economists who were so strident in their condemnations of the ineffectiveness of the Recovery Act is out there now saying that the fiscal cliff is not of concern. None of them. Zero. Nada. Shunya. Sifr.

And not a one of them--save for perhaps Richard Posner--has manned up to admit that back then they were bullsh@t artists, blathering without having done their homework.

And yet not a one of them is out there now reversing the polarity of their "analysis" of 2009, and arguing that going over the fiscal cliff will have no significant effect on production and employment.

Paul Krugman:

Heritage, Chicago, and the Fiscal Cliff: Menzie Chinn has some fun pointing out that if the doctrine Heritage was pushing to oppose fiscal stimulus were true — namely, that government borrowing always crowds out an equal amount of private spending — then the fiscal cliff could not be a problem. Hey, the government is going to borrow less, which will automatically and necessarily lead to an equal rise in private borrowing, so total demand can’t be affected, right?…

Menzie doesn’t mention… that the very same doctrine was propounded by distinguished economists at the University of Chicago — John Cochrane and Gene Fama made exactly the same argument that Brian Riedl was making at Heritage, while Robert Lucas fell into a somewhat different but equally misleading fallacy. So if you think the fiscal cliff matters, you also, whether you know it or not, believe that a whole school of macroeconomics responded to the greatest economic crisis since the Great Depression with ludicrous conceptual errors…. And I see no sign at all of a rethink, of an admission that perhaps the macroeconomic situation has developed not necessarily to the Chicago School’s advantage.

Paul Krugman:

A Note On The Ricardian Equivalence Argument Against Stimulus: There have been a lot of shockingly bad performances among macroeconomists in this crisis… the… most startling… is the way freshwater economists… don’t understand… Ricardian equivalence. Ricardian equivalence says that what determines consumption is the lifetime present value of after-tax income, and hence that, say, a temporary tax cut won’t stimulate spending, because people will figure that whatever they gain now will be offset by higher taxes later. It is a dubious doctrine even done right…. But even if you assume that the 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… when he said….

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….

How could anyone who thought about this for even a minute — let alone someone with an economics training — get this wrong? And yet as far as I can tell almost everyone on the freshwater side of this divide did get it wrong, and has yet to acknowledge the error.