Progress in Economics Education Department: Yes, a Temporary Fiscal Expansion Would Be a Good Thing

David Andolfatto, February 2009:

MacroMania: A Stimulating Lesson from Japan?: Here we go again. Economic growth is slowing. Stock markets have plunged. Banks are failing. Perennial doomsayers are basking in a glow of perverted pleasure. A plethora of pundits are earnestly explaining the dire need for "stimulative" government spending measures to reverse the course of what will otherwise be a prolonged depression. In short, par for the course.

Well, perhaps not quite par. This time around, many governments appear to be taking seriously the notion that a massive government "electric shock therapy" is needed…. Is there any merit in the view that a massive government fiscal action can rescue the day? Apparently, there must be. Why would all these learned people be advocating a policy prescription that is not solidly backed by economic theory and the historical evidence?…

[T]here are several ways in which the patterns displayed in this data might be explained or interpreted. I am especially eager to learn how this evidence might be construed as supporting the notion that fiscal policy "works"…

David Andolfatto, March 2009:

MacroMania: Multiplier Mischief: The current debate over the size of the "government spending mulitiplier" is a perfect measure of the sway that conventional economic theorizing continues to grip the minds of people who should know better. At the center of the theorizing is the income-expenditure identity: Y = C + I + G…. The government spending multiplier is dY/dG. Now all economic historians have left to do is to try to estimate the size of dY/dG. They frequently "discover" that dY/dG > 1…. Conclusion: Obama's stimulus package is a good idea. There you have it. The only puzzle remaining is why it takes 4 full years of training to receive a PhD in macroeconomic theory; and why it should take a further 6 years to become a tenured professional by publishing papers examining what we all know to be the self-evident truth embedded in this "really useful ad hoc model."

Unfortunately, I am apparently one of few who have trouble absorbing this simple theory…

David Andolfatto, November 2011:

MacroMania: A bridge over the macroeconomic divide: As you may have gathered from my previous post, I am generally sympathetic to the idea of expanding the supply of U.S. treasury debt at this time (with a commitment to unwind in the future, if and when economic conditions improve). Of course, a big question is what to do with the funds acquired in this manner. I'm with Krugman that heck, we may as well use it to build physical capital (public infrastructure). Financing a corporate tax cut to stimulate domestic private capital spending might be a good idea too (not so politically popular though).

These provisional policy recommendations suggest themselves to me by way of a class of "new monetarist" models that I like to use to organize my thinking about things…

From my perspective, the depressing thing is the 31 months it takes to remember (some of) the lessons of Knut Wicksell's (1898) Interest and Prices--and the claim that the idea that expansionary fiscal policy is a way of raising the natural rate of interest is a "new monetarist" rather than an "old Stockholm school" theoretical point…