I agree with Jeffrey Sachs

Greg Mankiw points us to this article by Sachs, excerpt:

President
Barack Obama’s economic team is now calling for an unprecedented
stimulus of large budget deficits and zero interest rates to counteract
the recession. These policies may work in the short term but they
threaten to produce still greater crises within a few years. Our
recovery will be faster if short-term policies are put within a
medium-term framework in which the budget credibly comes back to
balance and interest rates come back to moderate sustainable levels….

We need to avoid
reckless short-term swings in policy. Massive deficits and zero
interest rates might temporarily perk up spending but at the risk of a
collapsing currency, loss of confidence in the government and growing
anxieties about the government’s ability to pay its debts. That outcome
could frustrate rather than speed the recovery of private consumption
and investment. Deficit spending in a recession makes sense, but the
deficits should remain limited (less than 5 percent of GNP) and our
interest rates should be kept far enough above zero to avoid wild
future swings.

Comments

It's good to see that Jeffrey has become reasonable. Unfortunately Jeffrey's target --Larry Summers-- has moved in the opposite direction.

I agree with a lot of what Sachs says about analysis of past policy. What's different now though is that we've never experienced a bank solvency crisis of this magnitude except during the Great Depression, and that one only really began after the economy had already contracted by about 15%. This one is occurring very early and it has economic policy makers (like Bernanke) terrified. I sometimes wonder if they are overreacting and overestimating the severity of the crisis. But I understand the desire to undertake insurance against a worst case scenario. After all, who has confidence in macroeconomic models any more?

One of the benefits of this financial disaster has been to clearly demonstrate that economists don't know any more than anyone else which policies should be implemented to solve the problem.

Don't forget the Smoot-Hawley Tariff during Hoover's term, which ignited a trade war and destroyed export markets. Hoover was not a free market president and his record should stand as a warning for those seeking to actively manage the economy.

Re: the failure of macro: Is it possible that the best we could do would be to set up prediction markets for 5-year, 10-year, 20-year, etc. predictions of the economy's various vital signs (GDP, CPI, unemployment, etc.) and let those markets do our predictions for us?

Imagine trying to do an armchair prediction of the weather. It's hopeless! Too complicated. Should we trust any prediction by someone who isn't, say, working at an organization that routinely performs comprehensive, thorough computer simulations of the economy? Or even better, a mathematical aggregation of such predictions as in a prediction market.

Did any of you read the article? He argues that taxes are already too low. That is his main argument against the stimulus. I happen to agree that the tax cuts in the stimulus plan were idiotic, but somehow I doubt that the commentators on this blog view insufficient taxation as our major problem.

"Is it possible that the best we could do would be to set up prediction markets for 5-year, 10-year, 20-year, etc. predictions of the economy's various vital signs (GDP, CPI, unemployment, etc.) and let those markets do our predictions for us?"

"shouldn't we analyze the incentive of macroeconomists in giving us good advice"

This gives me an idea. Some corporations require top executives to buy stock in their companies. (At least Lou Gerstner instituted this when he ran IBM, I don't know how common it is). Now suppose we had prediction markets and universities required macroeconomic professors to invest part of their salaries in it. We might then see some real scientific progress in macroeconomics.

Markets in Everything!

Well, Sachs should have written this six months ago. Now is too late.

"I happen to agree that the tax cuts in the stimulus plan were idiotic."

Yeah and the remaining taxes are a beacon of equity and logic. I love it when
people complain about tax cuts, not realizing they are complaining about a broken window in
a delapidated building desperately needing formal condemnation.


Well, Sachs should have written this six months ago. Now is too late.

Sachs did not write this 6 mo ago.
As far as I know he never has warned about upcoming financial storm.

Why is he taken seriously?

Why econs virtually all of whom failed to see even 2 weeks into the future, point to other worthless econs and praise them?

A totally useless group that somehow convinced foolish elites that they know what they are talking about.

Nouriel Roubini should be appointed Treas Secretary and the rest of economists must be fired and retrained into taxi drivers. At least some value will be gotten from that worthless gang.

Braden, in NZ during the 1991 recession the NZ National Government drastically cut government spending. A large number of NZ economists signed a letter warning that this was a very foolish thing to do in a recession. This was followed by a rapid economic recovery and a sustained drop in the unemployment rate.

Now of course correlation does not prove causation. But I don't think that we can all agree your supposition. You don't merely need to say it, you should be providing some supporting evidence.

Sach's (and Cowen's) argument is that there are long and variable lags in monetary and fiscal policy.

And that argument is directly contradicted by historical data from, e.g., the Great Depression. FDR takes office and starts implementing policy: immediate sharp change. FDR backs off from New Deal in 1937: immediate sharp change. FDR reconsiders, restores previous programs: immediate sharp change.

There's abundant data that economic conditions track policy in near real time. Explaining it away requires an incredible and unwieldy amount of special pleading that only contributes to the reputation of economists as outside-motivated pseudoscientists with no intellectual integrity.

"We never found out what the Obama administration's number for the multiplier is."

The multipliers are documented here:

http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

"For the output effects of the recovery package, we started by averaging the multipliers for increases
in government spending and tax cuts from a leading private forecasting firm and the Federal
Reserve’s FRB/US model. The two sets of multipliers are similar and are broadly in line with other
estimates. "

I'm not sure I disagree with the multipliers, but I am more concerned about how financing the future cost of the current stimulus will influence the economy, which everyone seems to ignore.

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