Bootleggers and Baptists Explain Stimulus Bias

Cafe Hayek

where orders emerge

by Russ Roberts on November 23, 2010

in Monetary Policy

John Taylor lays out the case for rules vs. discretion and in the process, does a superb job of summarizing his case for why doing less or even nothing would have been better than the activist government response over the last two and a half years.

One of the interesting questions Taylor raises in the paper is why what seemed to be a consensus in favor of rules changed so quickly into a consensus in favor of massive intervention.

Here is a nice summary of where the consensus used to be:

By the late 1990s there was about as much a consensus among economists as there ever was about an issue. In an assessment of fiscal policy in 1997, Eichenbaum (1997) concluded that "there is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible."?  In a paper in 2000, I concluded that  "in the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizers"?.It would be appropriate in the current circumstances for discretionary fiscal policy to be saved explicitly for longer term issues, requiring less frequent changes."?  And Feldstein (2002) wrote "There is now widespread agreement in the economics profession that deliberate "?countercyclical' discretionary policy has not contributed to economic stability and may have actually been destabilizing in the past."?

So why did things change so quickly? Taylor gives a number of possible answers including the possibility that the politics trumped the economic research that had made the case for rules rather than discretion. He also points out that there was research on the other side arguing for the benefits of discretion over rules.

There is truth in both of those arguments but I think it is useful to add some public choice as well with economists as rent seekersâ??if you want to be a player, you have to be willing to play. So those economists who argue for the virtues of intervention get a chance to play. Those who oppose intervention remove themselves from any chance of riding the government gravy train.

Itâ??s a bootlegger and baptist argumentâ??economists favored discretion and ad hoc intervention to save the economy knowing it is good for their own income and power. Thereâ??s also some groupthink involved. When everyone is touting the virtues of job creation via fiscal policy, you feel a little lonely suggesting itâ??s a sham. Finally, there is some risk aversion. Once you have some input into the policy process, better to do something than do nothing. Did Ben Bernanke really want to preside over the next real Great Depression while doing nothing? Better to do something, even if itâ??s flawed. The fact that you gain enormous power along the way would help any mortal man come to the view that doing something is better than doing nothing.

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Jwilliams4200

Also, if you do something, and it doesnâ??t work, you can always claim that things would have been worse if you had done nothing.

But if you do nothing, and things get bad, no one will believe you if you claim that nothing you could have done would have made things better.

JohnK

â??Never mistake motion for action.â? â??Ernest Hemingway

Anonymous

It seems to me wild accusations like that oughta have a little more evidence to them. This is as bad as reading Pingry claim that you espouse libertarianism not because you actually think libertarianism is right, but because the Koch brothers pay you to say itâ??s right.

Yes, the incentives all line up for that story, just like the incentives line up for your story about Bernanke.

But I donâ??t see a single drop of evidence for either â?? and Iâ??d never accuse you of what Pingry accuses you of. Iâ??m not sure why youâ??re doing the same with Bernanke.

Anonymous

I was also a little surprised by this: One of the interesting questions Taylor raises in the paper is why what seemed to be a consensus in favor of rules changed so quickly into a consensus in favor of massive intervention.. Itâ??s shocking that Taylor even makes a claim like this. But when Taylor talks about â??rulesâ? and â??discretionâ? you have to read between the lines more than usual. Whenever Taylor talks about â??rulesâ? in monetary policy, heâ??s usually talking about his rule. And whenever he talks about â??discretionâ? heâ??s often talking about rules that arenâ??t his rule â?? particularly a few prominent modifications of the Taylor rule.

The fact is, the intervention that was advocated was quite rule based. It was based on a modified Taylor rule that many were convinced was better than the old Taylor rule long before the crisis hit. Taylor gets regularly bent out of shape that itâ??s even called a â??modified Taylor ruleâ?, but that doesnâ??t change the fact that itâ??s still rule-based policy. To call it â??discretionaryâ? is disingenuous.

The same goes with the stimulus. The ones advocating a stimulus in the one and a half trillion range may have been right or they may have been wrong, but they werenâ??t really exercising â??discretionâ?. They were just implementing fiscal policy rules that have been around in one form or another (and improved along the way) for decades. What was â??discretionaryâ? was the fundamentally political decision in the Congress to cut that in half.

http://www.in.gov/iwm/2334.htm The Other Eric

Canâ??t we ask the Fed, and Congress for that matter, adopt a Hippocratic bent?

First do no harm.

Anonymous

Itâ??s a little different, because these are only guesses for why opinion has shifted in the field. Research with opposing conclusions was cited along with some of the other possibilities. What also makes it different from the Koch Bros. funding fallacy is that in the paper, Taylor goes over the reasons why he believes rules are better than discretion. It then asks a question for why the shift happened. Itâ??s not about pointing out a possible source of the opinion swing and then using that source to discredit the swing. The swing was, according to Taylor, so drastic and so quick that it should have required more than just a few pieces of research to take place.

Anonymous

But it is discretionary, because itâ??s being used at the whim of the Federal Reserve Board. Rules-based policy should be in play more frequently and far less severely for a given time period, shouldnâ??t it?

Anonymous

Instead, the Fed has a hypocritic bentâ?¦

http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/11/18/bloomberg1376-LC3XBX1A74E901-3VUQLQ8CLH35B7L9RNV7JMQ0C5.DTL

Anonymous

Well see my comment below about why I think Taylorâ??s claim that the swing did occur is a little odd to begin with. You need to read that initial claim a little more critically. I think there is a lot thatâ??s wrong about Taylorâ??s accusations, but that wasnâ??t my real point in this comment. Here Iâ??m more concerned that Russ is suggesting that the prospect of â??enormous powerâ? played a role in motivating Bernanke. It could have played a role â?? itâ??s a plausible ex post story â?? but I donâ??t see why anyone would suggest such a thing unless they had more reason to think it than just that â??itâ??s plausible and the incentives are thereâ?.

Anonymous

I donâ??t see what frequency has to do with it. Presumably, action in accordance with rules should change as frequently or infrequently as the relevant conditions change.

Iâ??ve only glossed the paper, but I doubt Taylor has concerns about the Board implementing these policies or the frequency with which they implement it. Heâ??s made this argument many, many, many times before. What he doesnâ??t like is the fact that from the 2000s to today they abandoned his version of the Taylor rule. OK â?? I suppose thatâ??s unfortunate from his perspective but thatâ??s not the same thing as saying policy is â??discretionaryâ?.

Anonymous

Fear, plain and simple. Once Lehman fell, widespread fear gripped the market, the country, and Washington. The interventionist hand was forced, by fear, to act.

I remember watching the news, feeling very unsettled. I donâ??t think Washington had a choice, really. Not saying it was rightâ?¦

Anonymous

Maybe this is semantics, but you seem to be treating discretion as just â??rules that have evolved over time.â? The problem with this is that the way they evolve is necessarily political, and thus decisions are made not solely due to economic indicators, but also to the whims of politicians and politically motivated board members.

So should there really be a dichotomy between rules and discretion when one considers that rules will evolve in accordance with the political landscape?

Anonymous

Iâ??m not trying to make that point, so let me clarify. â??Discretionaryâ? seems to me to be â??not based on any pre-determined rules at allâ?. Taylor is complaining about Fed action that followed pre-determined rules they just werenâ??t his prefered pre-determined rules. If Russ has a curfew of 10 o clock for his kids and Don has a curfew of 9 o clock for his kids, Don canâ??t legitimately accuse Russ of being â??discretionaryâ? in his parenting. Heâ??s simply using a different rule.

Now, as you say, politics always creeps in to a certain extent. But I donâ??t think Taylor really demonstrates that this is any more true after the period when the old Taylor rule was adhered to than before. Indeed â?? Greenspan was famous for being a more discretionary Fed chair. It was Bernanke that was known to be big on targeting and policy rules. It turns out Greenspan more or less followed a Taylor rule, and over time Greenspan and Bernanke adopted a modified Taylor rule. But generally speaking the whole period Taylor covers has been rule-based. Itâ??s just that the end of the period hasnâ??t been a rule that Taylor likes.

Anonymous

There are fiscal policy rules as well of a sortâ?¦ obviously politics creeps in much more substantially when it comes to fiscal policy.

Anonymous

Yet, we always do.

Anonymous

I like that. Now, the problem is defining â??harmâ?. Iâ??m pretty sure that Nancy Pelosi and I differ on the definition.

Anonymous

Dude â??I donâ??t think Washington had a choice, . . â?

Come on, DUDE, stop speaking their language: Cities donâ??t choose, people choose.

The confusion created by reification is important, dangerous, and profound.

Dr. T

The economists who ignored (or twisted) evidence and publicly supported discretionary interventions to â??fixâ? the economy are similar to the climatologists who ignored or slanted evidence and publicly supported massive cuts in fuel use to â??prevent catastropheâ? from anthropogenic global warming. Both groups put their own interests ahead of truth and ahead of whatâ??s best for society. They have the same moral character as deceitful politicians such as Al Gore.

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