links for 2009-09-15
Econ 115: September 15, 2009: Pre-World War I Democracy Lecture Powerpoints

The Chicago School's Intellectual Collapse Continued: Richard Posner Is Uranus...

When I was a child, one of my favorite stories was that of the discovery of the planet Neptune on September 23, 1846 by Johann Galle, Heinrich D'Arrest, and Urbain Le Verrier. The astronomers of the nineteenth century found an anomaly in the orbit of Uranus: it was not going where Newton's law of gravitation said that it ought to be going

I wasn't going to revisit this, but I finally had enough time to think about Menzie Chinn's and Justin Wolfers's very useful attempts to strike a blow in the long twilight struggle for rational economic analysis of the stimulus package, and it struck me that here Richard Posner really is Uranus.

Let me explain what I mean. Richard Posner writes, apropos of his comments on CEA Chair Christy Romer's DC Economics Club speech:

[Romer's] figure of $60 billion... is too high... the number for the second quarter is undoubtedly significantly lower. This makes the $40 billion in tax relief all the more important.... [N]ot all that $40 billion in tax relief is stimulus money; not all, and, at a guess, not most, put money in people's pockets before the second quarter ended [1]...

to which Menzie Chinn answers that Posner is wrong in his claim that $60 bilion was not spent by the end of the second quarter:

Econbrowser: I Am Even More Confused Now...: by Richard Posner's math.... There's a moving window on the, so I can't see the cumulative $60 billion figure for end-June, but I do recall it. Better yet, Donald Marron recalls it. No one else [besides Posner] has disputed the $60 billion figure....

And wrong in his claim that most of the $40 billion in tax reductions is not properly counted in the second quarter:

Mr. Posner has given up on accusing Dr. Romer of deliberately lying about the $40 billion figure, and has moved on to redefining those funds.... Specifically, he is saying that the $40 billion is partly decreased withholding, or shifting around of tax liabilities, and not entirely rebates. Mr. Posner does not provide any source for this assertion, and the language in Dr. Romer's speech (and footnote 4) seems to indicate otherwise...

Footnote 4 states that the tax reduction estimate comes from "internal calculations from the Department of Treasury through June 24, 2009." It is possible that the Office of the Fiscal Assistant Secretary of the Treasury has used accrual accounting rather than cash-flow accounting, but it is extremely unlikely: keeping accurate track of the government's cash on hand and liabilities is their principal business.

Had I been in Posner's place, I would not have dared assert without good, hard evidence that the Office of the Fiscal Assistant Secretary was using the wrong accounting method without good evidence that it was so: I would almost surely be wrong, and I would look--I would be--extremely stupid.

Had I been Posner's place, I would also not have dared assert without good, hard evidence that Romer's Summers's, Bernanke's, Orszag's, Elmendorf's, and a host of others' judgments that the Obama fiscal stimulus is somewhat effective reflect not their view of the world but rather their corruption. When you accuse people not of having looked at the issue too hastily or having started from the wrong assumptions or of having a different view of the evidence but rather of explicit corruption, you raise the stakes to a high level

And had I been in Posner's shoes, once it had become clear that I simply did not understand the arithmetic--had I gotten my principal calculation wrong by a factor of sixteen--I would have apologized and said that I regretted the error, rather than saying "Look! There's Halley's comet!" and resuming the attack from another direction. Ethical considerations aside, Posner ought to have recognized that continuing along the line he had chosen could only harm his credibility and reputation.

Now some of the deviation of Posner's motion from the normal laws of human behavior we understand. Posner is one of a relatively small but still distressingly large number partisan enough to have sought and continue to seek to go aggressively on the record as approving of Rehnquist, Scalia, Thomas, and company's prostitution of their high offices through their installation George W. Bush as president. Posner is a lawyer: lawyers are used to and see nothing ethically wrong with making strong assertions in the interest of whoever they take to be their clients about matters of which they are ignorant.

But I do not believe that those factors alone can account for Posner's peculiar orbit.

I have a guess as to what is going on. I think that the body that is playing Neptune to Posner's Uranus is Nobel Memorial Prize in Economic Science winner Robert Lucas. My guess is that Posner thinks his line of attack is OK because he is only following in the footsteps of Lucas, and Lucas is an economist and is supposed to know what he is talking about. For at the end of last March Lucas said of Christy Romer--and implicitly of Larry Summers, Ben Bernanke, Peter Orszag, Doug Elmendorf, Larry Meyer, Joel Prakken, Mark Zandi, Doug Holtz-Eakin, and all the other economists who believe that the evidence indicates that fiscal policy has a role to play in stabilization policy when short-term nominal safe interest rates are so low that Treasury bonds and bank reserves are nearly perfect substitutes--that they were simply corrupt:

The Moody's model that Christina Romer -- here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of -- I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons...

Note what Lucas does not say: He does not say that Christy Romer has a different reading of the empirical evidence than he has. He does not say that Christy Romer has a different assessment of policy risks than he has. He does not say that Christy Romer has a different tolerance of policy risks than he has. What he does say that she is providing a "very naked rationalization" for economic policies that Obama decided upon for completely non-technocratic political reasons. What he does say is complete garbage. Christy Romer does have a very different view--she would call her view an evidence-based view--of what fiscal policy does in conditions of extremely low interest rates than Robert Lucas does.

Unfortunately for all of our possibilities for rational discourse, Lucas is not a fringe figure.

Why Lucas chose to say this is unclear. On the theoretical side, the case for believing that expansionary fiscal policy can be at least somewhat effective is clear. Consider the monetarist framework of the quantity theory of money--Lucas believes that the "applicability of the quantity theory of money is not limited to currency reforms and magical thought experiments... [but it] applies, with remarkable success, to co-movements in money and prices generated in complicated, real-world circumstances. Indeed, how many specific economic theories can claim [such] empirical success...?" In the monetarist framework, the channels are straightforward. When the government increases its deficit it sells a lot of Treasury bonds, thus pushing down the price of such bonds and pushing up their interest rates. The quantity theory of money tells us that the velocity of money--the pace at which people spend their cash--depends on the opportunity cost of holding money balances. The opportunity cost of holding money balances is the short-term safe nominal interest rate. Boost the goverment deficit and you boost the supply of bonds, lower their price, raise the opportunity cost of holding money, raise the velocity of money, and so boost the flow of spending. The monetarist framework thus provides theoretical reasons for believing (a) that expansionary fiscal policy can be effective, and (b) that it would usually be easier and more straightforward to try to boost spending by simply raising the quantity of money. (And, indeed, it is only the fear that right now is a special circumstance in which normal monetary expansion loses its force that has led the Obama administration to resort to fiscal expansion.)

On the empirical side, the case for believing that expanding government purchases can boost the flow of spending is even stronger. The belief is, as Christy Romer says, best characterized not as the Keynesian view or the monetarist view but simply as the evidence-based view. Shocks to spending boost nominal demand: whenever any significant group decides to boost their spending nominal demand rises, whether that group is new businesses seeking to profit from technological progress in high-tech in the 1990s, construction companies tht find they can obtain cheap financing via derivatives in 2004, or the U.S. government in 2009. The government's money is as good as anyone's. And the correlation between the rise in output and the rise in government purchases in World War II under circumstances when fiscal policy would have been expected to be relatively ineffective has always served as the capstone to the empirical argument.

There's an argument to be made that given our long-term deficit problems the bang-for-buck from short-term government spending as a stabilization policy is too low for it to be worth doing. But there is no argument to be made that those designing and pushing for such policies are engaging in naked rationalizations for policies decided on for other reasons. No argument at all.

[1] UPDATE: And, indeed, U.S. Treasury staff report that Richard Posner's claim that the $40 billion number they gave Christy Romer is some sort of accrual number is simply false. It is a cash flow number.