Peter Klein on some of the bone-headed logic behind enacting the stimulus plan:
Not to worry [about measuring "created or saved jobs"], says John Irons of the Economic Policy Institute. Indeed, the Obama Administration’s silly attempt to count “jobs saved” may actually underestimate the beneficial effects of stimulus, because “that construction worker [hired by stimulus funds] then goes out and spends money at a local diner, at a local McDonald’s or the local movie theater. That could very well mean an additional job.” Well, yes, but there’s the construction worker who wasn’t hired because investors, spooked by regime uncertainty, wouldn’t fund the construction project; the construction worker who won’t be hired tomorrow when taxes are hiked to pay for today’s stimulus; the construction workers who will sit idle at home when hyperinflation destroys the construction industry; and many other members of Bastiat’s “unseen” who would have spent money at diners and McDonald’s and movie theaters. But we never see those lost jobs, so — poof! — they don’t exist, and shouldn’t be counted against the free lunches wished into existence by Stimuluspalooza.
Some arguments defending the stimulus, such as Rob's fear of too much saving taking place, contain much more merit than what Irons is saying.
Relying on the broken window fallacy is just dumb.
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I agree that the broken window fallacy is called a fallacy for a reason, but I don't think the stimulus debate is that easily reduced.
ReplyDeleteThere is a multiplier effect, it's just a question of how big it is. Is the multiplier <1, and therefore not even worth the money we are taking from somewhere (taxes or future inflation), or is it >1? The multiplier is also constantly shifting so even if we could measure it acurately how would we know it's up to date?
A big piece of the puzzle are consumer expectations. If consumers can reasonably believe their income is stable they will be much more likely to spend, but if the average American is worried that they could lose their cashflow they will hoard income instead of propagating the circular flow of money.
Where the rubber really hits the road on this one, is whether the stimulus is inflicting damage on or decreasing damage to the American psyche, and I don't mean Wall street bankers and Chicago economists who factor in inflation expectations and believe in pigou effects. Does the construction worker in Nevada, the environmental consultant in New Jersey, or the lab technician in Maryland, believe that the job growth in their field will continue to provided them with income? I'm not sure how to measure this, but my gut (thanks Dubya), and the TIPs market, tell me that these people aren't worried about hyper inflation, they're just happy to have jobs.
It should also be noted that the broken window fallacy makes a similar assumption to the
ReplyDeleteSavings = Investment assumption. In reality, capital stock and inventories can grow and shrink which causes a lag between demand and supply. Just because the shopkeeper doesn't spend the money on the broken window doesn't mean he spent it on something else. In a bad economy he might bury it in a hole in his back yard if the window never broke.
So there is some merit to the parable of the broken window. High priority spending (laymen speak for inelastic goods/services) will be spent. Inelastic consumption cuts out important things like R&D, education, and strengthening our infrastructure... pretty much anything with a long view. That might be a good thing for Gov. to step in and spend on for the security of our future and the stability of our present. Markets are notoriously shortsighted.
Hmm, so given the assumptions of the Keynesian model plus a recession-like environment, you have the fallacy of the fallacy of the broken window. Well played, sir.
ReplyDeleteYou're right though, I should have acknowledged this. The shopkeeper will not necessarily consume or invest, he may well save. I think Bastiat created the story with consumption in mind as the only other option.
Questions: Are we demonizing saving too much? Are we overstating the threat of deflation (which does not necessarily mean by default we are understating the threat of inflation)? How much of a role, if any, do you think regime uncertainty has to play in all of this?
All things being equal, you would assume more investment with less uncertainty; more saving with more uncertainty. But how much uncertainty exists?
I certainly don't mean to demonize savings, especially when our economy is drowning in debt, but the variable to consider isn't the savings rate, but the debt ratios.
ReplyDeleteWhere firms and households are concerned, debt absolutely needs to be paid down. With shadow banking institutions leveraged on the level of 33:1 and households swamped with credit card debt and oversized mortgages, firms and households should be shifting from investment and consumption to savings, but Government is a whole other issue.
American debt has thrown defect hawks into a tizzy, but our debt to GDP levels are within a reasonable compared with other historical international and historical examples (http://krugman.blogs.nytimes.com/2009/11/19/invisible-bond-vigilantes/). The spender of last resort has good credit and should use it to buoy the economy while private spenders get their feet under them again.
As for deflation, I do believe the threat is far greater than inflation. Wages are notoriously sticky under inflationary pressures. There is an automatic check on prices rising (employers are reticent to pay more for the same amount of labor), but prices and wages can easily get caught in a downward spiral. Unless we believe pigou's wealth effect, I'd take inflation over deflation any day. To make matters worse monetary policy allows central banks to raise rates infinitely, but we can only cut to zero, which is where we find ourselves today.
I think the regime uncertainty story is played out. The day to day lives of most Americans is negligibly impacted by decisions made on the 10,000 foot level. Local issues play a much greater and more variable role. Uncertainty seems to me to be governed more by mob mentality and animal spirits than any probabilistic analysis of future regimes.
Fair points, all of them. A couple notes of contention, though.
ReplyDeleteI feel your reliance on animal spirits has been incomplete. Animal spirits are a constant in any market, boom or bust. Thus we need to decipher what variable changes the degree of animal spirits having impact. As I have noted before, I believe institutional incentives play the greatest role. I don't think markets fail so much as they are guided to optimal or less optimal outcomes, and this guiding is done by (primarily) institutional incentives. I think the housing crisis is an excellent example of this.
I disagree with you on regime uncertainty, but my thoughts aren't very organized on it as of now (need more coffee), so I'll just devote a post to it later.
Coffee is a a hell of a drug.
ReplyDeleteI agree that animal spirits need much greater study, but it's hard to sort all of the behavioral economics out without drinking the psychology kool-aid, and I'm not very confident in the field of psychology. I feel bad almost any time I reread a post in which I brought up animal spirits because it reads like such a cop-out... and it kind of is. It sounds like I'm saying, "blame it on the emotional human beings and thier fragile sensabilities."
100% agree about institutional incentives playing the greatest role. The vast majority of the time markets are the best solution and what we do or don't do to regulate them is the problem.
I'm interested to learn more about regime uncertainty. Political economy and public choice theory always struck me as either uninteresting or too poli sci, but I'm begining to think I made a mistake in over looking it.