Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion–quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do–but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
That’s Dani Rodrik and do read the whole thing, if only to see where the title of this post comes from. I may be reading him incorrectly, but I believe he is claiming that a complete ban on imports would raise U.S. gdp by trillions.
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
Addendum: Rodrik responds: "I am writing all this partly in response to Tyler Cowen’s comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory." I would not use the word "any," but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong. I am well aware of the hypothesis that import substitution, during WWII, helped Mexico recover from the Great Depression and I do not attach it zero credence. But I still think, to quote myself, that: "this is the worst policy idea floated in recent memory." It is important not to let Rodrik change the terms of debate by ascribing the "any" position to me.
You’re probably right that Dani should add even stronger language to his post, but he makes it amply clear in my view that this is a terrible idea.
But you’re right to put some focus on the shortcomings of the theoretical apparatus. This is the time to do it, when economists haven’t sold their soul yet.
I don’t understand economics, but doesn’t the fact that we are actually importing money to finance the import of goods pose a serious problem for Rodrick’s theory?
Maybe I’m being too kind to Republican party economists, but I don’t think any reputable one claimed during the last decade or so that cutting taxes would lead to an increase in revenues greater than the amount taxes were cut by. There may have been a bunch of different reasons cited for tax cuts among such people, but I don’t think this was one of them.
That said, Rodik’s hypothesizing notwithstanding, I don’t think there’s a substantial number of economists in the Democratic party who believe the Keynesian multiplier is a cure-all. It seems like most are saying that since monetary policy seems impotent right now, fiscal policy in the form of increased spending is all that’s left before we drive off a cliff.
So was Smoot-Hawley good for FDR’s New Deal Keynesianism?
Yeah, no imports or a vast reductions of imports is a good idea. Just take a look at Cuba, it worked so well for them. Shouldn’t Cuba be rolling in the money?
“In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit.”
Shame on you Dani, a deficit can be a good thing or a bad thing. It is a bad thing if it is due to government spending or frivolous consumer spending. It is a good thing if it is due to direct foreign investment and savvy consumer spending. The latter is more common in the US.
what am i missing, isn’t this what happened with capital gains tax revenues after the rates were cut? are you comparing the expected revenue under the old rates against the revenue collected with the new rates? that’s not right, is it? you just compare old revenue to new, if it went up, you’re collecting more and, thus, didn’t lose anything. put another way, you can claim to know what expected revenue would have been if the old rates had still been in place, but you really don’t, that’s a different universe (that’s why it’s merely expected revenue).
Republican economists are just as whoresome as their lefty counterparts; they’re just quibbling about numbers.
if we eliminate imports then the prices of our goods will go up, thus the marginal propensity to consume will go down. If the marginal propensity to consume goes down then so does the multiplier. you can’t adjust one part of the multiplier without affecting the others.
I have a better idea. Set t=0, c=1 and m=0 to get infinite output!
I’d like to know what kind of “science” is Macroeconomics, when one can hold onto these theoretical models, arrive at ridiculous conclusions which one knows to be false, and yet continue to use the same models? What are the underlying clearly stated assumptions for the model to work? If you cant answer this question, this is not science, its pseudo science.
Academics love crises because it means people actually start listening to their wacky ideas and models.
Why are you enabling Rodrik?, he is obviously insane, the best thing to do is ignore him.
Microeconomists for lunch, eh?
We undervalue access to the US market and overvalue access to developing markets. It is like charging the same price to see the Rolling Stones in concert and some teenage garage band in concert.
shut the fuck up TC
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I would not use the word “any,” but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong.
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