A blog of the NYU Colloquium on Market Institutions and Economic Processes
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by Mario Rizzo
In recent months "“ or has it been years? "“ Paul Krugman and Brad DeLong have been saying, in effect, "We told you so "“ the stimulus was not enough. Look at the sluggish economy and high unemployment rate."
They are arguing that the problem with the fiscal stimulus is that it was not enough. The idea was right but the quantity was wrong.
Let it pass that at ThinkMarkets it was predicted that this is what the stimulus advocates would say in the event that the economy did not improve as much as they wanted.
The basic problem with the quantitative claim is that it skirts some real problems in the analysis.
The reader should use the search function on this blog with the word "stimulus" to see what we have said as early as the beginning of 2009.
The essential argument is here from January 21, 2009:
This in a nutshell is also the problem with both fiscal stimulus and "forced lending." The stimulus is likely to stimulate lines of production that are not sustainable.
In some cases, it will restore depressed markets to their previous condition when that previous condition was an over expansion. In other cases, it will prop up certain sectors like "infrastructure" and whatever else the near-trillion dollars will be spent on. Assuming, as we are told, these expenditures are temporary, what happens when the resources shift out of these previously-favored areas? More importantly, will lenders and related businesses know when the stimulus will end or shift? If not, policy uncertainty will take the place of the current uncertainty, (In fact, the current uncertainty is to a certain extent derived from the policy uncertainty about the future.) In still other cases, banks will be cajoled into lending to borrowers whose industries are experiencing sectoral decline since they may be hurting the most. Furthermore, if banks are urged to operate contrary to their own risk assessments of borrowers, what standards will be substituted?
The stimulus advocates don't know the answers to these questions. They will simply try to get the housing market, other similar interest-sensitive markets and credit markets (plus the auto industry!) to such a point where general production and employment are considered non-recessionary. The standard, practically speaking, will be the status-quo ante. But the status-quo ante produced the status quo.
The root of the policy problem is that the "Keynesian" solution takes the simple aggregate demand model too seriously. It proceeds as though sectoral imbalances don't matter. In this view, the current situation is not a coordination problem but some kind of confidence problem that leads to a deficiency of demand in general. The theory is inadequate and thus so is the solution.
The stimulus should not have been expected to stimulate private spending. Most of the effect of stimulus is in the areas in which the government spends. Less than a third on private spending.
In addition, we predicted that Fed policy will not be helpful in equilibrating the housing market. Thanks to recent Fed policy the housing market has yet to reach its new equilibrium.
In sum: Obama stimulus won't work.
I was not unique in the Hayekian camp in making these claims. I urge other Hayekians to join in with their own "We told you so."
Obviously this is all in the new spirit of blogosphere self-promotion. In a previous age (not so long ago) I would have been less direct. Sigh. Share this: Share Email Facebook Print Digg
And this is what Krugman said you’d say too.
We can argue this till the cows come home. The assessment is no different now than it was in 2009. In late 2010/early 2011 the stimulus was set to recede in a big way, and they said in 2009 that in early 2011 we’ll start to see problems and we’ll start to see those against stimulus saying precisely what you’re saying here. This isn’t some sort of apologetics after the fact – they said we would run into trouble at this point.
None of the empirical or theoretical questions have changed. None of the problems with finding a counter-factual have changed. All of these “I told you so’s” on both sides are justified insofar as both sides DID tell each other this was going to happen a year and a half or two years ago. You said Krugman would say this and he said you would say this and he said HE would say this because he said it would peter out early on.
Unfortunately, none of this solves anything and none of this improves the terrible economy.
What I am saying is that we have our own reasons for predicting that the fiscal stimulus would not work. And these reasons, I should say, are more interesting (and I suggest more accurate) than the Parrot’s reasons: Aggregate demand failure. Yes, you are right this post doesn’t solve the problem of the current “recession” (NBER says it is over). Yes, you are right that it doesn’t “prove” my points. But then again: Krugman and DeLong are wonderful self-promoters. I think Hayekians should learn from them. Most of all, I enjoyed posting this!
Oh definitely.
And if nothing else – it sorts out the wheat from the chaff on both sides. Even among Hayekians, some made more notable predictions than others.
More interesting? I don’t know. A liquidity trap is pretty darned interesting dynamics. I think I’d take that over the pinacle of obviousness in pointing out the fact of relative government inefficiency or the inscruitible “everyone is scared of what Obama will do next”.
Out of curiosity – who is the Parrot?
The parrot is aggregate demand failure. It keeps being repeated over and over and over.
Larry Summers, ‘explaining’ that over confidence (you know, those animal spirits), caused all the troubles, now demands even more stimulus. When all your thinking is made up by a hammer, the rest of the world are just nails.
http://www.huffingtonpost.com/2011/06/12/larry-summers-calls-for-n_n_875678.html?ref=fb&src=sp
As Mario noted, we’ve all offered reasons for why we predicted that stimulus would be counter-productive. So there is a way to resolve issues through intellectual discussion. It is not just a matter of opinion.
Among other things, we analyzed how monetary stimulus — easy credit and very low interest rates –would produce new bubbles. The existence of such bubbles is now widely acknowledged. Even Chairman Bernanke has admitted there is too much risk of inflation for QE3.
Inflation is here and growth is sluggish. That is reminiscent of the stagflation of the 1970s. We also predicted that outcome. Keynesians never came to grips with stagflation, which is the reason for the triumph of monetarism.
As a former Fed colleague recently emailed me, the one sure outcome of the recent crisis will be a new economic paradigm. As happened in the 1930s and again in the 1970s.
OK, I’ll brag: The Daily Capitalist has been saying this from the get go. But, I’m rather Misean.
@ Jerry
Let us hope this new paradigm does involve capital controls to make national monetary policies more effective .
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