A panel of Chicago economists convened to discuss their views on the stimulus package recently, and video of the event is now available online. All the speakers had something interesting to say (including Nobel Laureate Robert Lucas being surprisingly sympathetic to government intervention).
Of particular interest, in my opinion, is Kevin Murphy‘s discussion, which comes in the middle of the video. (If you don’t have the patience for watching video, you can just look at Murphy’s PowerPoints.) It is vintage Kevin Murphy. He says that he can’t remember much from his macroeconomics courses, so he starts over from scratch and creates a perfect framework for thinking about how one should evaluate the case for stimulus.
What he comes up with seems totally obvious once he presents it, and yet I have never seen anyone discuss the issue in a manner even remotely similar to this. That is the mark of true genius.
I have only one thing to add to the panel’s discussion. Throughout the video, you will see that the speakers operate under the assumption that the economists who are advocating stimulus are doing so based on an economic analysis. For instance, Murphy says things like “Christina Romer [the head of the Council of Economic Advisers] must believe that the deadweight loss of taxation is very small.”
A very plausible alternative hypothesis is that the justifications being put forth for the stimulus package — even if those doing the justifying are economists — are based on politics, not economics.
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I’m going to tend to go along with the opinion that U of C economists place theory higher than politics on the value chain. And if the usual monetarist rah-rah of the Chicago school is supporting fiscal intervention, I’m going to take that into account when forming my own opinions. http://is.gd/ifpk
Politics will trump Economics for the stimulus, unfortunately.
I see no skimming or kickbacks involved in equation…
Steve has one thing to add: “A very plausible alternative hypothesis is that the justifications being put forth for the stimulus package… are based on politics, not economics.”
Interesting choice of words. Does that mean he doesn’t think it plausible that the justifications for *attacking* the stimulus package are based on politics, not economics?
Do you know how many Harberger triangles it takes to fill an Okun gap?
Did any of these geniuses figure out that massive borrowing to finance top-heavy tax-cuts was a bad idea?
How about appointing foxes to guard hen houses? Or were they cheerleaders for “financial innovation”?
Did any of them realize that loose monetary policy with a near-zero savings rate and a housing bubble might spell trouble a couple years down the road?
A lot of skeptics are probably right about the stimulus bill. If only their newly rediscovered skepticism had shown up 8 years ago. It would have done a lot more good then. There is a moral hazard to taking economists seriously if they didn’t speak up while the damage was being done.
When they discuss government spending displacing private spending, why don’t they consider the risk/return characteristics of the spending?
For instance, if private investors are investing their money in low-risk/low-return assets and the government is willing and able to invest in high-risk/high-return assets then the substitution is good (and vice-versa).
Kevin Murphy says that if his equation indicates doing the government spending now why wouldn’t it always indicate that – i.e. he’s claiming that the parameters in his equation don’t change over time, but these particular characteristics of private investment (risk/return) are undeniably changed this year versus last year.
A few reactions to the PowerPoint slides: I like the simple model, but I disagree with some of the assumptions – some economic and some not.
The assumption that the government will be less efficient because it is trying to spend the money quickly may actually be backwards. If the money goes out as block grants, it may be less likely to have all of the interference that oversight often causes. What I am seeing is that local governments are planning to use the stimulus money to make up for shortfalls in existing budgets, not to do anything new. That could be less efficient, but, considering how lean local governments are at this point, I expect that the money will go straight to paying teachers and police, etc. As for the deadweight loss from taxation as 0.8, I am just curious (as a non-professional economist) where that analysis is published?
On a political side, we need a mental shift in this country that is more important than an economic one. People need to start thinking that things will be okay, otherwise we are stuck in a bad cycle and many individual decisions are being made irrationally. That is the real key to the stimulus.