Shhh…………….

by on February 3, 2009 at 2:12 pm in Education | Permalink

Robin Hanson writes:

In particular, the more public attention we give to the stimuli,
the less they might work.  We might make people realize that they need
to compensate via saving, and the more we scare folks into thinking we
need a huge stimuli, the more we might scare them away from normal
economic activity levels. So should we stop explaining macro-economics during this crisis, and stop saying how desperately we need a stimuli?

From now on…Markets in Everything!  All day, every day…

Pheo February 3, 2009 at 2:27 pm

Sorry, I can’t get beyond “a stimuli”.

IWantCookieNow February 3, 2009 at 2:28 pm
Bob Murphy February 3, 2009 at 2:37 pm

Tyler,

Every time I read this line from your tete-a-tete against Krugman I get stuck:

Let’s say government can spend $100 billion today or spend the present expected value of $100 billion, stretched out over time so it is a commitment in perpetuity. Both spending programs are financed by bonds

Specifically, I’m having trouble picturing what it means for the government to have a perpetual spending stream that they finance with bonds.

E.g. at 5% interest, a perpetual stream of $5 billion in government spending has a current PDV of $100 billion, right?

OK, so you want the government to commit right now to spending $5 billion a year, for the rest of time.

Now how do we finance that? I think you have in mind something like, “The government borrows $100 billion today, which it then invests at 5% interest, so it has $5 billion to spend year after year after year.”

But to borrow that initial $100 billion, the government has to make $5 billion interest payments in perpetuity. So are we counting the interest payment on the loan, as the $5 billion in extra government spending in perpetuity? I don’t think that does what you want it to, unless you originally borrowed the $100 billion from bridge and road owners.

I apologize in advance if I’m messing up what you are trying to say. I am just as confused on this as Krugman. :/

Tyler Cowen February 3, 2009 at 2:40 pm

Bob, you are describing the steady state, try doing the short run where $100 billion is borrowed and spent in the first year (and later years), and taxes rise in staggered fashion through time…taxes in year two do not have to be $100 billion, especially not if you are a Keynesian.

kebko February 3, 2009 at 2:50 pm

I’m about to utter an abomination, a statement so insane & without merit that to assume that anybody could think it is itself, heresy:

Our infrastructure is fine. All of our bridges aren’t a stiff breeze short of collapsing. Washington could largely get out of the infrastructure business for some time & we’d barely notice their absence.

OK. I’m clearly insane. Please tell the authorities to be gentle when they come to take me away.

brannigan February 3, 2009 at 3:36 pm

Precisely, also think of the non zero value of the Great Pyramids versus their spending costs…

spencer February 3, 2009 at 3:46 pm

kebko said this:

Our infrastructure is fine. All of our bridges aren’t a stiff breeze short of collapsing. Washington could largely get out of the infrastructure business for some time & we’d barely notice their absence.

Rephrase it some to this:

Our computer systems are fine. They are not all in danger of collapsing. Business could largely get out of the computer business for some time & we’d barely notice.

Is there any difference in these two statements?

brannigan February 3, 2009 at 4:04 pm

There is, because while computer systems are developed by and for private industry, roads are a public good paid for by taxation, not price.

If Washington got out of the road business some other jurisdiction would make roads, say local governments. This would fluctuate with political pressures for more roads and willingness of the taxpayers to fund them.

If computer businesses got out of making computers by definition there would be no more computer businesses, as any new competing enterprise would be a computer business.

There is thus a semantic difference, though broadly I think you missed his point that the roads are paved and bridge collapses almost never happen.

Sol February 3, 2009 at 4:51 pm

“the roads are paved”

Clearly you haven’t seen the roads in Michigan. With the exception of the stretch of interstate from the airport to downtown Detroit that was rebuilt for the Superbowl, most of our roads are in pretty bad condition. A result of harsh winters and limited local tax money for maintenance.

Lord February 3, 2009 at 6:16 pm

Ignorance may be bliss, but is it really the most desirable state and for how long?

brannigan February 3, 2009 at 6:56 pm

Sol,

Ever consider whether for profit toll roads would be better maintained?

Andrew February 4, 2009 at 4:32 am

A student, I think that is what Tyler is talking about when he refers to the “fetishization” of measured GDP. A rise in GDP will not get us out of this mess. A fall in GDP was not the problem.

There is almost no consideration of the value of the projects, only the price, and the extent to which they spur activity. The activity, i.e. aggregate demand, is completely separate from the ultimate value of the project. In most cases, the value of a project is how much customers want the result, not how much workers want the work. In this particular case, the value IS the cost!

Will people feel safe to spend and borrow when their laid-off neighbors get make-work employment from the government? Will banks feel safe to lend to people with temporary employment?

Cyrus February 4, 2009 at 7:01 am

Lastly, in a democracy, how can the government have a significantly different risk tolerance than the general public?

Even in a democracy, the government is only sort-of accountable.

Timothy February 4, 2009 at 9:21 am

This is pretty much on target. The stimulus will not work. It probably wouldn’t positively affect the market to begin with (as no government action does during recessions) but all the attention gives it about 0% chance of working.

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