Month: January 2009
It comes not from a professional economist but from Warren Buffet, here goes:
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.
I have a few hours there tomorrow, do you have any information about the place which can improve my life? I thank you in advance.
This exchange is a good micro-cosm of how the stimulus debate has proceeded. A highly respected anti-stimulus economist puts up some anti-stimulus evidence in a highly imperfect test (in Barro's defense, he did cover more than just WWII). The anti-stimulus economist is attacked by pro-stimulus economists. But the pro-stimulus proponents are focused on attack. They are not putting up comparable empirical evidence of their own for the efficacy of fiscal policy and there is a reason for that, namely that the evidence isn't really there.
I fully admit that I don't trust the oft-cited evidence that tax cuts are 4x better stimulus than government spending boosts; I think the result is a mirage from underspecified models. Overall we simply don't know how well the proposed stimulus will work — if at all (is aggregate demand always the relevant war?). It's a kind of Hail Mary pass, an enduring belief in aggregate demand macroeconomics at the theoretical level, even in light of broken banks, sectoral shifts, and nasty, failing expectations, all mixed in with hard to spend well, slow to come on line, monies. Yes it could work but our agnosticism should be strong rather than just perfunctory.
Writing polemics against market-oriented economists, no matter what the failings of such economists (and I am one of them, and I have failings), doesn't get us out of that box.
I'll say it again to the pro-stimulus forces: a stimulus is going to happen, so I'd love to be cheered up by your evidence. Put it on the table.
I also am confused by Krugman's view of the relevance of WWII. On his blog, at the end of a discussion of how the historical example of WWII doesn't much apply, he writes:
I can’t quite imagine the mindset that leads someone to forget all
this, and think that you can use World War II to estimate the
multiplier that might prevail in an underemployed, rationing-free
And he is upset at Barro for thinking that the WWII experience does apply. Fair enough, but a) the War didn't start at full employment, and b) is it possible that Barro received this impression from reading Krugman himself? In Rolling Stone last week Krugman wrote:
took the giant public works project known as World War II – a
project that finally silenced the penny pinchers – to bring
the Depression to an end.
The lesson from FDR's limited success on the employment front,
then, is that you have to be really bold in your job-creation
plans. Basically, businesses and consumers are cutting way back on
spending, leaving the economy with a huge shortfall in demand,
which will lead to a huge fall in employment – unless you
stop it. To stop it, however, you have to spend enough to fill the
hole left by the private sector's retrenchment.
If you read both Krugman passages closely, there is not actually a literal contradiction. But still, a fundamental decision has to be made on whether to run away from the WWII evidence or not. I say the WWII evidence does not apply and so I am closer to Krugman as he writes on his blog.
Either way you cut it, there aren't any boneheads in the room.
Here are a few key graphs from Time Magazine's cover story. Read them carefully.
..The slump is the longest, if not the deepest, since the Great
Depression. Traumatized by layoffs that have cost more than 1.2 million
jobs during the slump, U.S. consumers have fallen into their deepest
funk in years. "Never in my adult life have I heard more deep- seated
feelings of concern," says Howard Allen, retired chairman of Southern
California Edison. "Many, many business leaders share this lack of
confidence and recognize that we are in real economic trouble." Says
University of Michigan economist Paul McCracken: "This is more than
just a recession in the conventional sense. What has happened has put
the fear of God into people."
…U.S. consumers seem suddenly disillusioned with the American Dream of
rising prosperity even as capitalism and democracy have consigned the
Soviet Union to history's trash heap. "I'm worried if my kids can earn
a decent living and buy a house," says Tony Lentini, vice president of
public affairs for Mitchell Energy in Houston. "I wonder if this will
be the first generation that didn't do better than their parents.
There's a genuine feeling that the country has gotten way off track,
and neither political party has any answers. Americans don't see any
…The deeper tremors emanate from the kind of change that occurs only
once every few decades. America is going through a historic transition
from the heedless borrow-and-spend society of the 1980s to one that
stresses savings and investment.
Did the last line give it away? The article is describing the recession of 1991, an unusually mild recession that preceeded one of the biggest expansions in American history.
Thanks to Roger Congleton for the link.
You'll find the link here; I believe that Megan McArdle has a role in managing the site.
And who do I choose to link to but myself. Here is my guest post on bank nationalization. I could have stressed further that bank nationalization works best in small countries with a small number of banks. The more banks a country has, the greater the danger that nationalizing a few of them will make the rest much harder to recapitalize, thereby leading to a kind of contagious need for nationalization.
But enough of me (can any blogger say that with a straight face?). Here is a good post on the perils of Medicare reform.
You'll find them here. They are all excellent but I thought Kevin Murphy was the most to the point.
From Bloomberg radio, you may need to scroll down a bit.
The subtitle is How Civilization Accelerated Human Evolution and the authors are Gregory Cochran and Henry Harpending. I do think that such topics should receive open debate but, as with Greg Clark's book, I'm not convinced. There is plenty on dog breeding, lactose intolerance, Genghis Khan and his children, the difficulties of settling the Andean Highlands, and just-so stories about medieval Ashkenazi Jews. What's missing is a sense of what the hypothesis does not explain, what its limitations are, and also what exactly is being claimed beyond the particular cited examples. The stories of "lots of recent change overall" and "current groups differ" are jammed together but of course they are very different. Epigenetics don't receive much attention, even critically, and the lower levels of Ashkenazi social achievement before 1800 are dismissed quickly. It's fine and indeed correct to claim they were oppressed but that opens up many doors to explain many other observed correlations. The authors report that we have Neanderthal genes even though this seems to fly in the face of recent discoveries and more importantly the evidence that such interbreeding (if it occurred) mattered is extremely speculative. Perhaps the authors are right but the reader is not given the tools to see why their understanding is a superior one.
Razib liked this book (see the first Amazon review) and I suppose it is a good introduction to this point of view, but overall I didn't come away feeling I obtained a superior understanding of the issues.
Robert Barro writes:
What do the data show about multipliers? Because it is not easy to
separate movements in government purchases from overall business
fluctuations, the best evidence comes from large changes in military
purchases that are driven by shifts in war and peace. A particularly
good experiment is the massive expansion of U.S. defense expenditures
during World War II. The usual Keynesian view is that the World War II
fiscal expansion provided the stimulus that finally got us out of the
Great Depression. Thus, I think that most macroeconomists would regard
this case as a fair one for seeing whether a large multiplier ever
I have estimated that World War II raised U.S. defense expenditures
by $540 billion (1996 dollars) per year at the peak in 1943-44,
amounting to 44% of real GDP. I also estimated that the war raised real
GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8
(430/540). The other way to put this is that the war lowered components
of GDP aside from military purchases. The main declines were in private
investment, nonmilitary parts of government purchases, and net exports
— personal consumer expenditure changed little. Wartime production
siphoned off resources from other economic uses — there was a
dampener, rather than a multiplier.
We can consider similarly three other U.S. wartime experiences —
World War I, the Korean War, and the Vietnam War — although the
magnitudes of the added defense expenditures were much smaller in
comparison to GDP. Combining the evidence with that of World War II
(which gets a lot of the weight because the added government spending
is so large in that case) yields an overall estimate of the multiplier
of 0.8 — the same value as before. (These estimates were published
last year in my book, "Macroeconomics, a Modern Approach.")
There are reasons to believe that the war-based multiplier of 0.8
substantially overstates the multiplier that applies to peacetime
government purchases. For one thing, people would expect the added
wartime outlays to be partly temporary (so that consumer demand would
not fall a lot). Second, the use of the military draft in wartime has a
direct, coercive effect on total employment. Finally, the U.S. economy
was already growing rapidly after 1933 (aside from the 1938 recession),
and it is probably unfair to ascribe all of the rapid GDP growth from
1941 to 1945 to the added military outlays. In any event, when I
attempted to estimate directly the multiplier associated with peacetime
government purchases, I got a number insignificantly different from
I'm a little confused by his definition of the multiplier (how does it relate to "crowding out"?; what he calls a multiplier of zero I would call a multiplier of one), but I think you get the point. By the way, I ran across this interesting short paper on fiscal policy and the fetishization of measured gdp, from Japan.
I thought of the economic crisis when I read this from Vladimir Kramnik (discussing his recent match with Anand, which he lost):
play well when you have good positions…
I am surprised that Bryan Caplan didn't already tell me this:
organ donors was put before the Singapore parliament this week and
while the health ministry is yet to decide on the upper limit for
reimbursement, it is expected to be at least S$50,000 (US$33,000).
Bruno Frey, David Savage, and Benno Torgler report:
paper explores the determinants of survival in a life-and-death
situation created by an external and unpredictable shock. We are
interested in seeing whether pro-social behaviour matters in such
extreme situations. We therefore focus on the sinking of the RMS
Titanic as a quasi-natural experiment to provide behavioural evidence
that is rare in such a controlled and life threatening event. The
empirical results support that social norms such as “women and children
first” survive in such an environment. We also observe that women of
reproductive age have a higher probability of surviving among women. On
the other hand, we observe that crew members used their information
advantage and their better access to resources (e.g. lifeboats) to
generate a higher probability of surviving. The paper also finds that
passenger class, fitness, group size, and cultural background matter.
You’ll find a more speculative treatment here:
British passengers on the Titanic died in disproportionate numbers
because they queued politely for lifeboats while Americans elbowed
their way on, an Australian researcher believes.
Savage, a behavioural economist at the Queensland University of
Technology, studied four 20th-century maritime disasters to determine
how people react in life and death situations. He concluded that, on
the whole, behaviour is influenced by altruism and social norms, rather
than a “survival of the fittest” mentality. However, on the Titanic he
noted Americans were 8.5 per cent more likely to survive than other
nationalities, while British passengers were 7 per cent less likely to
“The only things I can put that down to are: there
would have been very few Americans in steerage or third class; and the
British tend to be very polite and queue.” (The ship’s first-class
staterooms were closest to the lifeboat deck.)
Savage admits there is no direct evidence for his hypothesis concerning the Americans.