Let's All Calm Down - Do We Really Need Stimulus?
Saturday January 19, 2008
Recently Arnold Kling stated:
I believe our profession has succumbed to the urge that we continually decry in others - the urge or the need to do something. If a politician looks at a problem such as rising costs of living and states that they must solve the problem through a policy such as rent controls, us economists go into the media, haughtily laugh at the ignorance of politicians and state that any cure is likely to be far worse than the disease.
But when real GDP growth starts to slow, we hear from economists on all sides about the need to do something - tax cuts, rebate checks, drastic cuts in interest rates.
It is a shame Al Scaduto recently passed away - this would make an excellent They'll Do It Every Time strip.
Updated to Add: I just discovered Alex Tabarrok said roughly the same thing well before I said it. Here is Alex's take:
Actually, if someone had come along in 1970 and said, "All of macroeconomics is wrong," they would have been more right than the typical macroeconomist at the time.Now I wasn't around in 1970 (as Justin Fox has pointed out), but it certainly feels like we have gone back to early 70's macro. I was delighted to see that the Wall Street Journal takes the same view in We're All Keynesians Now:
So famously declared Richard Nixon back in 1971, in what we thought was a different economic era. But after yesterday, we're not sure what decade we're in. With Federal Reserve Chairman Ben Bernanke and President Bush both endorsing temporary tax cuts and more federal spending as "fiscal stimulus," an inflation-adjusted version of Jimmy Carter's $50 rebate can't be far behind...Am I the only economist out there who wonders why we're all getting so worked up because the U.S. might go into a small recession? Is it really worth putting an end to price stability because we might have a couple quarters where real GDP growth is -0.2%? Listening to some economists talk, you would think we're about to enter The Great Depression.
Instead, Mr. Bernanke embraced the explicit Keynesian notion that the government should write checks to "low and moderate income people," who will spend it quickly and thus lift consumer demand. In the academic literature, this is called having a higher "marginal propensity to consume" than the more affluent, who tend to save more...
And speaking of the 1970s, what markets may really fear is that we are entering another period of "stagflation," slower growth with rising prices, and without political or economic leaders who understand what to do about it.
I believe our profession has succumbed to the urge that we continually decry in others - the urge or the need to do something. If a politician looks at a problem such as rising costs of living and states that they must solve the problem through a policy such as rent controls, us economists go into the media, haughtily laugh at the ignorance of politicians and state that any cure is likely to be far worse than the disease.
But when real GDP growth starts to slow, we hear from economists on all sides about the need to do something - tax cuts, rebate checks, drastic cuts in interest rates.
It is a shame Al Scaduto recently passed away - this would make an excellent They'll Do It Every Time strip.
Updated to Add: I just discovered Alex Tabarrok said roughly the same thing well before I said it. Here is Alex's take:
Fourth, in their desperation to "do something" politicians will often do something foolish. If a spending increase or tax cut isn't worthwhile on its own merits then it's highly unlikely to be worthwhile once we add in the benefits of "stimulus." Thus, it's one thing to argue for extending unemployment benefits as a matter of welfare it's quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment! (The implicit view of Larry Summers.)
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Blog of lammertdecayfractals
19 January 2008 Quantum Decay Fractals and the US Great Second Fractal Terminal Nonlinearity
Posted at 2008-01-19 Money growth and asset valuation in the US macroeconomy have reached their saturation limits in a well-defined heretofore described simple mathematical quantum fractal growth pattern. As assets depreciate, debt undergoes default, and recessionary job loss - as all three of these elements- synergistically feed one another, there will be a relatively short time interval of great nonlinearity in asset devaluation. In the larger picture of historical US macroeconomics dating to near the year of its constitution, this nonlinear devolution will be timed between 2X and 2.5X of America’s Great Second Fractal beginning in 1858. This 2X-2.5X time window is quite large: approximately 35 years. When the devolution occurs, no one will mistake it for anything but the Great US Second Fractal terminal nonlinear collapse. Do the next 10-12 trading days represent the time period of this Great Second Fractal’s terminal 2X-2.5X nonlinearity? Time will very shortly tell. As of 19 January 2007 at 13,305.08 and at a 14 month low, the Wilshire - whose minutely, daily, weekly, monthly and yearly valuation spreads have been perfectly ordered since October 2002 in evolving growth and decay quantum fractals and exactly represent the quantitative data points for the directly correlative evolving growing and contracting US money supply and macroeconomy - the Wilshire - now rests 2.6 trillion dollars below its predicted daily interday high on 11 October 2007. From the blogsite ‘LAMMERT’ a Wilshire decay model dating from 16 August 2007 has been identified. The daily data points are shared among growth and decay models with an averaged 20/50/50 day y/2.5y/2.5y decay model shared with a 17-18/44/34-35/27 day x/2.5x/2x/1.5-1.6x growth and decay 4 phase fractal series. 26 December 2007, the final lower high for the Wilshire was day 34 (2x)of the third fractal. 18 January was day 40 of a 20/50/40 of 50 day averaged y/2.5y/2.5y decay fractal and day 17 of a 17-18/44/34/17 of 27 day growth and decay fractal series. Both are caricatures of the ideal four phase and three phase fractals but with a mutual shared terminal day. The US macroeconomic saturation growth period and corresponding saturation growth curve for the Wilshire have validated the empirically derived simple laws of Lammert quantum fractal progression and have likely delivered all the evidence and data points that the system will yield for many years. Now the focus is on the decay process and a similar validation of necessary, optimal, and ideal quantum fractal contraction of the macroeconomy as represented by Wilshire valuation quantum decay.
To get back to the article and away from the fractals, the reason why many Americans are beginning to get nearvous and panicy about the approaching recession is that they have no means of determining whether it will develop into a full blown depression.
That means that a lot of businesses will fail and a lot of people will starve. It bothers me too because as an engineer whose claim to economics is based on a mechanical (deterministic) model of the system, on the more professional scale of macroeconomic forecasting there is no certancy of how diffult the time ahead will be. Also I guess, because of the US balance of payments problem and the loss of value of the Dollars that are in the reserves of foreign countries, there is a degree of guilty feeling that perhaps the US public should be punished for the way it has allowed government to undermine the standing of this national currency.