The best argument I’ve read *for* the stimulus

by on January 23, 2009 at 11:08 am in Economics | Permalink

It comes not from a professional economist but from Warren Buffet, here goes:

SG: But there is debate about whether there should be fiscal stimulus,
whether tax cuts work or not. There is all of this academic debate
among economists. What do you think? Is that the right way to go with
stimulus and tax cuts?

WB: The answer is nobody knows. The
economists don’t know. All you know is you throw everything at it and
whether it’s more effective if you’re fighting a fire to be
concentrating the water flow on this part or that part. You’re going to
use every weapon you have in fighting it. And people, they do not know
exactly what the effects are. Economists like to talk about it, but in
the end they’ve been very, very wrong and most of them in recent years
on this. We don’t know the perfect answers on it. What we do know is to
stand by and do nothing is a terrible mistake or to follow Hoover-like
policies would be a mistake and we don’t know how effective in the
short run we don’t know how effective this will be and how quickly
things will right themselves. We do know over time the American machine
works wonderfully and it will work wonderfully again.

Sadly, that's about as scientific as we've been able to get.

David H. Levey January 23, 2009 at 11:19 am

Tyler, Would be very interested in your reaction to the unconventional analysis of the crisis posted by Ricardo Caballero on VoxEU.org — and elaborated in several longer articles.

Bobby January 23, 2009 at 11:23 am

Somewhere, Warren’s dad is rolling over in his grave. I’m kind of surprised to see Buffet still peddling the old mantra that Hoover was a laissez-faire doctrinaire — particularly in light of all the recent scholarship on this topic.

Lord January 23, 2009 at 11:32 am

My proposal for stimulus is more IRS agents. With all these rich people running into housekeeper, nanny, and tax problems, they are surely sorely needed.

Andrew January 23, 2009 at 11:33 am

not much of an argument, but seems like the typical one being made.. “we don’t know what is going on” => spend a trillion dollars and increase government scope and power, but if we don’t, I’ll make a vague reference to Hoover and pretend like this is already the great depression. Oh and here are some vague, foundationless straight line graphs which i’ll call “analysis” to back up my argument. Don’t agree with me? then you’re a republican hack (re: Delong). The laughable thing is a fraction of this money could really help the developing world in a real way…

Gyan January 23, 2009 at 11:38 am

IANAE, but how does Buffet know that “to stand by and do nothing is a terrible mistake”? Sticking to the fire analogy, isn’t there a phenomenon of “fire paradox” recognized in suppressing large wildfires viz. disrupting the natural cycle and thus enabling greater number of fires, leading to the tactic of ‘wildfire land use’ and ‘controlled burns’ (as per Wikipedia). Of course, now we can argue on whether the current economy is akin to a wildfire or a house fire. Just curious.

Corey O January 23, 2009 at 11:43 am

WOW, such a pragmatist. Why doesn’t he just buy a house and move in with Greenspan? In the face of increasing government scope and hyperinflation (only thing pausing it right now is that other governments are lowering their rates drastically too), let’s just throw principles and ideas out the window and you know see whatever seems to work in the short run. Damn the consequences.

Lord January 23, 2009 at 11:51 am

Well, if anyone is to listened to it is someone that did foresee problems, not those that ignored this all along. Dr. Doom, Dean Baker, and Robert Schiller gets more credit for this than academicians and pundits that never saw anything coming. Reward judgment. Punish hackery.

f January 23, 2009 at 11:52 am

but what if stimulus isn’t analagous to a fire hose but rather a flame thrower?

Grant January 23, 2009 at 12:09 pm

That is some terrible and very un-economic reasoning. If Tyler believes this is the best pro-stimulus argument, he’s really ragging on pro-stimulus economists.

Like with anything else, the question is whether or not the benefits (in both the short and long-term) exceed the costs (again, in both the short and long-term). If they do, and if we can’t find anything else that will yield greater benefits, we go ahead with the stimulus. If they don’t, then we don’t do it. If we don’t know the costs and benefits, then wouldn’t we be better off using those resources on something more certain?

Walt January 23, 2009 at 12:11 pm

When, oh when, does a liberal not say that more spending is a solution? In goods times, we need more spending. In bad times, we need more spending. You would think that the burden of proof should be on those who want to take more money from other people. And, it has to be pointed out, spending more may actually makes things worse (costs exceeding the benefits).

K T Cat January 23, 2009 at 12:25 pm

“What we do know is to stand by and do nothing is a terrible mistake” – what kind of defense is that? We know nothing of the sort. We DO know that we have mammoth debt and unfunded liabilities. Blasting $1T into confetti might not be the answer.

E. Barandiaran January 23, 2009 at 12:33 pm

Tyler concludes “Sadly, that’s about as scientific as we’ve been able to get.” I have the impression that Tyler is increasingly confused about what is going on with the economy and with the debate on the economy. You don’t need Buffett’s bubbling to realize that there is nothing scientific about the views that macroeconomists have been discussing. Thus, after reading what Buffett’s answer, I prefer the conclusion: Sadly, that’s about as wise as we’ve been able to get.

Dave January 23, 2009 at 12:44 pm

Dammit, everyone’s already destroyed the argument. I was going to mention how stupid it would have sounded if WB just chose a different metaphor: a sick patient, for whom throwing every available therapy at every body part would cause certain death.

Charlie January 23, 2009 at 12:51 pm

“What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies”

Why does everyone assume he is saying doing nothing = hoover like policies? He clearly says “or.” I’m not saying I’m 100% certain he’s not equating them, but I am pretty sure he has Hawley-Smoot in mind (probably among other things).

Shame on your reading comprehension.

Yan Li January 23, 2009 at 12:53 pm

Taking into consideration of future payoffs, politicians are more likely to choose the “do something” option when the outcome is completely uncertain, i.e. when the probability distribution of good/bad outcomes is 50/50 regardless of the actions taken.

…………………………………………………..Politicians’ Action
…………………………………………….Did something……..Did nothing
………………………………………..________________________________
Good outcome (p=50%)……….High rewards……….Low-Medium rewards
Bad outcome (p=50%)…………Punishment……………….Punishment

Out of a scientific urge to sift out order from chaos, economists often argue the above four outcomes are not equi-probable. Of course, whether that is truth or illusion is utterly inconsequential because the outcome will be determined by the politician’s action. Like what T.S.Eliot said, what might have been is an abstraction, remaining a perpetual possibility only in a world of speculation.

Brian January 23, 2009 at 1:08 pm

“What we do know is to stand by and do nothing is a terrible mistake…”

He seems to use “we” rather freely. You first, Warren.

Superheater January 23, 2009 at 1:46 pm

sick patient, for whom throwing every available therapy at every body part would cause certain death.

Unfortunately, the medical analogy does not hold. Doctors are bound by “first, do know harm..”.

The word of the day is IATROGENIC.

Jack January 23, 2009 at 3:00 pm

But this is also a good argument *against* fiscal stimulus. If “We do know over time the American machine works wonderfully and it will work wonderfully again” then let’s not burden the future American economy with a whopper of a debt that’s the price of the stimulus.

Lord January 23, 2009 at 3:22 pm

Anyone that doubts that stimulus stimulates, I urge them to give their money to me. You bet I can stimulate with it, and enjoy doing so.

Mick January 23, 2009 at 4:31 pm

Hoover policies like freezing wages, cutting off foreign trade and doubling taxes?

Fact is that these clowns are not even mentioning the possibility that the stimulus will make it worse. No one wants to admit the crazy gold standard uncle is right (it took me a while to get over that factor), and the price for that will be unbelievable inflation and savings collapse in the long term.

And yes Keynesians, the long term ALWAYS happens.

jdo January 23, 2009 at 4:53 pm

It’s funny watching economists act like brats. I guess nerds are people too.

Steve Mac January 23, 2009 at 5:27 pm

When he said “Hoover-like” I don’t think he was referring to doing nothing.
He could have been referring to things like protectionism, etc… I don’t know
his usual stance on such issues.

Beth Hoteez January 23, 2009 at 9:58 pm

Every week thousands of folks head to Las Vegas to gamble (yes in the casinos) but more to trade show http://TradeShowsVegas.com looking to sell their products and services or buy or learn about retail or by Fashions at the Magic show and a dozen others next month http://FashionWeekVegas.com Commerical property across the US is cheap and companies for the first time in many years are welcoming the small start up business that has some money put away to operate.

Russell Nelson January 24, 2009 at 1:55 am

WB’s argument sucks, AND it’s superior to any argument a Keynesian has been able to come up with.

Doing “nothing” is exactly what a hockey goalie does when he’s positioned himself across the bulk of the net given the shot angles available to the stick-handler.

Unfortunately, doing “nothing” gets politicians no extra credit on their final exam. Politicians, like soccer goalies, have a bias towards action which causes them to fail more than inaction would.

mickslam January 24, 2009 at 9:26 am

We have a chance to run a real world experiment.

You have Keynesians saying the stimulus will work if it is large enough, you have neo-classical saying it will not.

We can finally disprove one or other of the theories. This alone is worth trillions.

Allison January 25, 2009 at 3:51 pm

why should buffett say nothing? he makes money by sowing more seeds of panic. buffet may or may not believe what he says, but he absolutely believes that saying it makes him more money than not saying it.

Rob January 25, 2009 at 5:28 pm

WB’s argument seems to be: “We need to do something, and the stimilus is something. Therefore, we need the stimilus.”

Steve Darden January 26, 2009 at 11:38 am

Seconding David H. Levey, I’m keen to hear Tyler’s take on Ricardo Caballero’s “comprehensive insurance” plan. Prof. Caballero is thinking outside the current policy box, having proposed a purpose-built weapon to kill off the Knightian uncertainty monster.

But how will the price discovery work? Who is covered? How do you politically sell a program that yet-again seems to reward Wall Street?

tom January 28, 2009 at 8:26 pm

“In a recent New York Times magazine montage of interesting ideas, the magazine highlighted the work of Israeli academics who noted that in Soccer on a penalty kick, the goalie would dive one direction or the other almost all the time (~90%) despite the fact that empherical study indicated that the greatest chance to make the save occurs when the goalie stayed in the center of the net. The authors surmised that on a public stage the pressure to look like you were trying hard was so great that goalie would act, just to act, even if it hurt his chance to accomplish his goal.”

Since the post has been pretty well dissected I’ll comment on this. The authors’ guess as to the reasoning of the goalie isn’t necessarily true (though it sounds good). Remember that the shot takers are people as well who can process information, then remember the information we have. The rate that goalies dive alter the best places to put your shot. If a goalie stands still 100% of the time he will only save badly mishit balls as the shooters adjust, you cannot simply assume that kickers actions are independent of goalies, in fact we must assume the opposite. Exactly what the optimal dive rates are is a problem beyond me, but I venture to guess that never diving would be among the worst options.

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