DeLong Smackdown Watch: Paul Krugman Edition
Paul says that I am not quite the stupidest man aliveTM, but in any case a fool:
Brad DeLong’s Foolishness: Brad looks at John Cochrane asserting that fiscal expansion does nothing but shift money around, and tries to figure out Cochrane’s model. It’s a hopeless quest. Ever since I got into this fight, I’ve been trying to explain that there isn’t any model there. Eugene Fama, at least, and perhaps Cochrane too, began this debate from a position of complete ignorance — not understanding at all the logic of Keynesian models (even for the purposes of debunking), and imagining that the savings-investment identity necessarily implies 100-percent crowding out. There was no deeper logic. And since then, what we’ve been witnessing is a simple matter of digging in, refusing to admit a mistake. I do not believe that Cochrane has, in his head or on the back of his envelope, a maximization-and-equilibrium model that justifies what he’s saying, or explains why, for example, Mike Woodford’s all i’s dotted and t’s crossed analysis is nonsense.
Matter are different when we’re talking about, say, John Taylor’s anti-stimulus arguments; there is a model there, so we have to discuss the assumptions of that model and whether they look plausible. (I say no, but at least we’re having a real discussion). But when it comes to Cochrane, or Brian Riedl, there’s no there there, and Brad is wasting his time looking for it.
Simple Analytics of the Government Expenditure Multiplier: This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models, through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates. However, it is important in such a case that neither the increased government purchases nor the increased taxes required to finance them be expected to persist beyond the period over which monetary policy is constrained by the zero lower bound.
Stan Collender on Brian Riedl:
I Hate To Pile On To Brian Riedl, But He Deserves It: I hate to pile on to Brian Riedl after both Brad DeLong and Matthew Yglesias do a pretty good job debunking his latest in National Review Online. But...
There's much in Brian's piece that requires criticism, but here's the graph that is the most offensive:
The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand.
Brian...The goal of economic stimulus is to create activity that wouldn't otherwise occur at that time. Your statement would have been correct if the economy had been operating at close to full employment and capacity. But it wasn't. Businesses weren't spending, consumers weren't spending, and monetary policy adjustments were not doing much to change that behavior...
A word about John Taylor. John Taylor could be right. I think he is right about Greece, for example--right now a Greek government program to boost the Greek government deficit would not be likely to boost output and employment in Greece because it would lead to an immediate spike in Greek interest rates and a fall in private investment. The problem with applying Taylor's argument to the U.S. and the ARRA is that the spike in interest rates simply did not happen.