January 29, 2009

More On Economics

Filed under: Politics — Bob Gifford @ 11:24 pm

In my last post I glossed over some important fine points of economics. Admittedly, I was recounting what I had told my son, and I did not get into any of these details with him. But some of these nuances are very relevant to the current debate on the stimulus bill. Hence, lest anyone think I’m just painfully ignorant of some of the complexities of economics, I will address them here.

First is the value of monetary policy. Hard-core Keynesians believed they had the keys to the kingdom back in the 60s and 70s. We all learned beginning in the 80s that monetary policy is perhaps more important than fiscal policy to the successful management of the economy. The distressing fact, though, is that monetary policy has run out of juice in our current financial crisis. Interest rates are about as low as they can go, and we are still seeing a massive contraction. We need another dial to turn besides interest rates if we are to turn around the current economy. That’s why everyone has discovered Keynes all over again.

Secondly, as Megan McCardle points out:

Though you wouldn’t think it from the really quite shocking incivility emanating from the pro-stimulus side, the empirical evidence that this [fiscal stimulus] works in a large industrial economy like ours is basically nonexistent. The problem is, we have very, very few examples to test on: America during the Great Depression, and Japan in the 1990s. And neither America nor Japan managed to stimulate their way out of their troubles. You can argue–and many do–that this is because we, and they, didn’t stimulate enough. That may be true. But unless you can forward test your theory, it’s a just so story . . . as we just painfully found out about the “It was all the Fed’s fault” narrative of the 1930s banking collapse. There is no excuse for calling people who question your highly theoretical model fools and charlatans.

I am not nearly as dismissive of the empirical evidence for fiscal stimulus as McCardle is, but it’s been almost 30 years since I took macroeconomics in business school. I would much rather leave teasing apart the data on this to the professionals.

Speaking of professionals, President Obama has some pretty damn smart ones working for him. The consensus of economists both within and without his administration seems to be that we need a good Keynesian fiscal stimulus, putting forward the argument I make in my previous post. So I appreciate and respect the nay-sayers like McCardle, Mankiw and others, but for now I’m rooting for Obama and the Dems. We elected them to solve this mess, and they are on the hook. We gave the Repubs a shot, and they ran us into a ditch. Let’s hope the Dems can get us out of it. And if Keynesian stimulus is the tool they choose to do it with, God bless ’em.

2 Comments

  1. I quite like the pragmatic tone of your comments – in pleasing contrast to lots of the rhetoric from the economics blogs.

    I generally think the stimulus is worth trying – a story to illustrate why that is, is at http://www.knowingandmaking.com/2009/02/story-about-evidence.html

    Comment by Leigh Caldwell — February 19, 2009 @ 3:30 am

  2. I like the pragmatic tone of your comments – in pleasing contrast to lots of the rhetoric from the economics blogs.

    I generally think the stimulus is worth trying – a story to illustrate why that is, is at http://www.knowingandmaking.com/2009/02/story-about-evidence.html.

    Comment by Leigh Caldwell — February 19, 2009 @ 3:55 am

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