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April Fools' Festival, Day II: John Cochrane


In which John Cochrane demonstrates that he understands freshman-level monetary economics less well than a duck understands advanced materials science:

John Cochrane (2009): Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?: "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. This form of ‘crowding out’ is just accounting, and doesn't rest on any perceptions or behavioral assumptions.

I count nine false statements in these 112 words by Cochrane--12.5 words on average before he says something simply wrong, and wrong at a first-year undergraduate economics level.

See if you can spot them all!

To get you started, here are the first two:

  1. "If the money is not to be printed, it has to come from somewhere..." False. The money can come from nowhere even without being printed. The money supply is explicitly defined to be not the monetary base. Rather, it is the monetary base times the banking system-determined money multiplier: the money to support a positive effect of expansionary fiscal policy can come from banking-sector inside-money creation.

  2. "The money... has to come from somewhere. If [it] borrows a dollar from you, that is a dollar that you do not spend..." False. Your spending does not have to be proportional to your initial period money holdings. Cochrane assumes that the velocity of money must be constant. It is not.

Have fun!