Paul Krugman links to a very nice piece by Oliver Staley and Michael McKee in which he (and a lot of other people) sing the praises of James Tobin. One of the benefits of being in an intellectual community that reaches into the past is that you can pick up the thinking of smart people who are now no longer with us when the issues they focused on come to the forefront again:
This age of Tobin - Paul Krugman Blog: Very nice piece about James Tobin’s influence from Bloomberg, with quotes from a lot of people including yours truly...
Alas, it also has:
bonus fallacies from John Cochrane...
The frustrating tiung about Cochrane is that he does not try to present a model or make an argument:
Bloomberg: John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago.
“It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.”
To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said...
If you tried to turn what Cochrane says into a model or an argument, it would go something like this:
The government can try to spur the economy by spending more money, but in order to do so it needs to sell bonds. When it sells Treasury bonds it will push down their price--push up the interest rate on Treasury bonds. That will push up the interest rate on other bonds that are close substitutes for Treasury bonds. Then businesses and households that were going to borrow to fund their own spending will take a look at the higher interest rates they must pay, and they will decide not to borrow and not to spend, and so the increase in government spending will be completely offset by a fall in private spending.
But if Cochrane were to present his model and argumeent for crowding out, it would invite a very natural counter: If only!! We should be so lucky!! If the passage of the fiscal stimulus plan raised interest rates and discouraged private-sector borrowing to fund investment spending--well, then the Federal Reserve could then swing into action and lower interest rates back to where they are now, and so spur the economy. A world in which expansionary fiscal policy was ineffective because it crowded out private investment would be a world in which standard monetary policy had traction. But the problem is that right now we fear we live in a world in which standard monetary policy does not have traction.
All this is, if not in Fisher and Wicksell, at least in Tobin and Patinkin--things that Olivier Blanchard at least made me read in graduate school in 1983... or was it 1984? I think that 1984 was after the 1960s, but I could be wrong.
If Cochrane were to present his model and argument for crowding out, it would sound--to me at least--pretty silly. It would carry the implication not just that government spending can't spur the economy, but that private spending by high-tech startups in the 1990s or by homebuilding compaanies in the 2000s did not spur the economy either--that it was simply chance that high-tech investment spending boomed in the late 1990s and the unemployment rate fell at the same time and that it was simply chance that home construction spending boomed in the mid 2000s and the unemployment rate fell at the same time.
And Cochrane's position had not to my knowledge been seriously advanced--certainly Milton Friedman did not advance the view that there was always 100% crowding-out of fiscal policy--since R.G. Hawtrey and the "Treasury View" of the 1920s.