I don’t know anything about Schiff, and I don’t accept that common-sense is always the best strategy. But the book sounds interesting. I’ll check it out. Thanks.
Here’s an interesting excerpt from the TVTropes page, Hard On Soft Science:
BrainGlutton: You might be interested in Hayek’s take on this. He basically says that economists rely on the measures that aren’t necessarily the most important from a causal standpoint, but the ones which are quantifiable, so that they can apply ‘scientific’ analysis to problems of the economy. But what happens if those measures aren’t the ones that really matter?
Of interest to all in this thread would be Hayek’s Nobel Prize Speech in which he summarizes his problems with the way economics is carried out and what he thinks the important factors are and why he couldn’t put numbers to them.
I’d never read this before today, surprisingly (to me). Anyway, it’s interesting:
Friedrich Hayek’s Speech on the Occasion of Winning the Nobel Prize in Economics
From the speech:
Of possible relevance is this thread I ran back in 2006: “Is economics an empirical or an “axiomatic-deductive” science?” Some of the responses were . . . astonishing. Especially Liberal’s.
I thought there were some pretty good comments in there. Of course, Liberal was as dogmatic as ever, but he made some decent points.
I followed your TVTropes link to some other sources, including this quote from Richard Feynman on psychology and psychiatry:
Well, as my friend the Witch Doctor says, “Oo, ee, oo ah ah, ting, tang, walla-walla bing-bang.” Seems irrefutable to me!
Let me address the issue directly before coming back to this analogy . Suppose there is an economy moving through different stages A,B,C:
A The economy is humming along in its normal state. There is no “malinvestment” and monetary policy is roughly neutral.
B. There is an artificial boom which stimulates investment and distorts the economy. It could be because of loose monetary policy, irrational exuberance in the financial markets, foreign capital inflows or whatever. Interest rates are below the natural rate and the production structure is distorted with an over-expansion of the interest-sensitive sector.
C. State B cannot last, the boom ends and many of these investments are revealed to be unsound. The Austrian belief is that if the government keeps its hands off, the bad investments will be liquidated and the economy returns appromimately to state A. Here is the problem: you cannot return to state A by doing nothing. Why this is the case is pretty much the essence the General Theory where Keynes analyzes at length the problems of a market economy in a recession.
Fundamentally it has to with the fragility of the financial sector and the centrality of confidence. The process of liquidating those bad investments is never clean and you get all sorts of vicious circles which create new and serious distortions. In the context of the current crisis, because the banks were so heavily leveraged, the bad investments threatened their solvency. Once banks became worried about the solvency of their counter-parties this froze up the inter-bank lending market which lies at the heart of the financial system. Market-to-market accounting also created a viscous circle where all banks were selling assets to repair their balance sheets, which led to further declines in asset prices which further damaged their balance sheets.
Eventually the crisis spreads to the entire economy. Business lending declines, investment declines, firms fire workers, workers become cautious and cut back on consumption which leads to further declines in business investment. The private sector can get stuck in a low-demand equilibrium potentially for years. Everyone is busy deleveraging and no one is spending. Businesses sit on mountains of cash and reluctant to invest and hire because of low consumer spending. Consumers are afraid of losing their jobs and cut back on consumption. That is pretty much the state the US economy is in today.
The important point is that even from a microeconomic, Hayekian perspective there is nothing beneficial about this state. It’s not getting you back closer to A but creating new and large distortions which damage the economy. There is nothing natural about a 9% unemployment rate; it wastes resources, reduces human capital and damages communities. There is no reason why liquidating the bad investments in B requires this.
The logical solution is for the government to stimulate the economy through monetary and fiscal policy. The goal of this is not to artificially prop up the bad investments in B but to correct the new and large distortions created in C by the recession itself. The expansionary policies get you closer to A than the Austrian policy prescription of basically doing nothing.
Or to get back to your ice sculpture analogy, the Austrians seem to believe that allowing the recession to unfold gets you back to the original sculpture but instead it only accelerates the melting. Expansionary policies stop the melting and leave you with a sculpture which is closer to the original
Austrians don’t want to get back to A). They want the economy to find the best path forward to new optimum conditions, whatever they may be. That means malinvestments have to correct, overproduction has to end, labor has to find its optimal use, etc. That new structure won’t be identical to the old one, because the underlying conditions of the economy are no longer the same.
If you try and let government ‘Help find A’ with fiscal stimulus, you’re likely to have a government trying to prop up industries that should die in a futile attempt to return to the past.
And you’re lumping monetary policy and fiscal stimulus together. They are very different beasts, even if their end goals are the same. Shifting monetary policy to make sure money supplies don’t collapse and a deflation kicks in is one thing - although it does bias some times of production over others it’s about as even-handed as you can get.
Fiscal policy specifically targets industries which are hurting the most. It has to, to avoid crowding out effects. It has to make use of underutilized resources. That means it’s propping up specific industries. Specifically, the ones which seem to have shed jobs and capital the most. Now, perhaps that loss of demand is because of a temporary constriction of demand, but maybe it’s also because they these industries represented the very malinvestments that caused the recession in the first place.
In this particular recession, attempting to prop up the housing industry with fiscal stimulus seems to me to simply be an attempt to avoid the inevitable. There’s no way the current level of housing construction can possibly be sustained without government intervention. There is clearly a major oversupply of houses. This is also a major source of the unemployment in the economy, so if you want to ‘fix’ unemployment in the short term, you’ll want to prop up housing. But all you’re doing in that case is propping up an industry with government money that can no longer exist without some form of subsidy. Better to let it collapse, free up the resources, clear the toxic assets, and let everything find a new equilibrium.
I don’t mean to be a semantic asshole, but I think the distinction is important: Real factors of production are what drive the economy, but a good monetary policy creates the underlying conditions where real factors can do their best work.
But to answer your question: Yes, given our current deflationary pressure, the manipulation of the quantity of money can absolutely help “fix” the economy. We couldn’t print dollars all the way to full employment, but more money is a tool that would lead us down the road to a swifter recovery.
I don’t get what you mean by “need”. There can be production and investment even in deflationary conditions. It will simply be suboptimal production and investment. It will be less production, and less investment, than in an economy with a better monetary policy.
As I said, to “best utilize” what we have, we need a better monetary policy.
I wouldn’t say it’s “more fundamental”. I would say, rather, that they are both fundamental. A modern economy simply does not work without some sort of money. There’s no way it could. And yet, the moment you start using money (as we have to do) we are inevitably left with all of the regular human biases that come with having nominal sticker-prices on top of all those real factors.
I mean, you are right about the importance of shifting preferences, but that’s not relevant to what I’m saying here. These shifting preferences are related to the available goods and services. In contrast, a general drop in prices is a shift in preference to holding money, rather than choosing between goods and services. The resulting deflation hides information about relative preferences between goods, services, labor, and capital in the real economy.
If the general price level were more predictable–that is, if we did not have deflation of all prices–then the relative price differences between different production inputs and outputs would become more apparent, and so it would be easier for producers to notice shifting preferences for real goods and services, as well as shifting prices for the input factors. I explained several examples of why this information is hidden by deflation in previous posts.
This is simply not correct. This is not what happens. Or more precisely, it takes many, many, many long and painful years for this process to play out, as I’ve already well demonstrated with my previous cite about Great Depression real wages. Real wages rose for three years straight. Nearly perfectly aligned with that was a commensurate drop in production.
It’s true that wages can drop in some industries, often those that are the most cyclically dependent. But those are the very industries where most workers will lose their jobs anyway, whether or not they take a pay cut that corresponds to the drop in the general price level. Since those industries suffer most, their workers would actually have to take proportionally larger wage cuts than the drop in price level, assuming the company doesn’t go bankrupt first. Meanwhile, wages don’t drop in other industries, typically those non-cyclical fields that are most skill dependent, where highly-trained workers refuse wage cuts, and firms acquiesce because of the prohibitively high costs of labor replacement. Those workers actually manage to receive the boon of higher real wages at the same time that the economy goes to hell. There’s no new balance here to be found. The economy does not reach a new equilibrium with lower real wages to offset the damage. Absolutely everything I’ve written about money has served to underscore that particular point.
This is why a deflationary situation can create a self-reinforcing downward spiral. This might be the single most important insight in modern macroeconomics.
Sam Stone, with your latest post, I see now one very large and important place where my communication has been appallingly poor. More on that below.
I agree with a lot of this.
If you missed it, I suggest you go back up and read my last post to IdahoMauleMan in which I discuss one interesting market-based alternative to the present committee-based structure that central banks use now.
The economic environment we had when times were good was already a (mostly) vibrant, competitive, innovative machine. And that’s exactly what we value from the economy. Obviously, no one favors the misallocated resources in housing, a sort of forest rot if we continue the analogy, but you can’t attribute the total damage from the current downturn to those misallocations. The majority of the damage clearly comes from the after-effects which swamped other industries unrelated to housing. The “fire” didn’t just burn out the diseased section–it also rampaged through healthy, vibrant, green areas.
I know now that you don’t advocate ABCT, but just to get on the record, this is what offends me the most, by far. They attribute the whole thing to misallocation and recommend a “fire” (or in Schumpeter’s words, a “douche”, a cold shower), when the data is yelling, screaming at the top of its lungs, that the main problem is deflationary expectations that caused the fire to spread too far. Of course, von Mises and Schumpeter didn’t have the advantage of that data. They were intellectual pioneers, and their various bits of misinterpretation are understandable. But as for Rothbard… yeah, I’m not even going to go there. Not a nice place.
No, not regardless of the underlying economy. I’m referring only to a situation like the one we’re in, where prices are dropping.
That’s why I’ve focused so much on falling prices, and by direct extension, money. It’s just that I’ve been using M*V, instead of focusing just on M like Friedman did. Looking back on how macro has developed, I think that small difference might turn out to be Friedman’s single most tragic mistake.
And here is my great error in communication.
I haven’t been talking about Keynesian stimulus. Not at all. In order to stay within the spirit of the thread, I’ve been taking the most libertarian/Austrian approach that I can, while still being completely faithful to the data. That is to say, I’ve been on a full-tilt (New) Monetarist approach. I thought that was clear, but on review, I realize that I had never actually said that I was doing that. Following Sumner, I’ve switched out Friedman’s M and replaced it with steady growth in M*V. That’s what I’ve been arguing. You are absolutely right that Keynesian stimulus does not have the same certainty in its statistical aggregates. In other threads, I’ve argued Keynesianism fiercely, but I have always accepted that there are reasonable differences to be had about it (as long as people represent what Keynesian stimulus is correctly, which sometimes does not happen).
But no, as you think, Keynesian stimulus does not have the same statistical heft. That’s why we have this split in modern discourse: The vast majority of economists are Keynesian to one degree or another, because of the preponderance of the evidence, but the field does not speak with one voice here, not on what the best Keynesian track to take is. Some advocate tax cuts, others spending. Some advocate a big honking stimulus, and others urge us to keep future deficits in mind even as we stimulate. No certainty here, not statistically or anywhere else.
In contrast, the effectiveness of monetary policy is totally bleeding obvious. It is the rule of the day, constantly implemented, measured, tested. If the Fed would implement policy to achieve its own damn price level, the economy would improve. No question. No question at all. That they aren’t reaching their own fucking inflation target drives me batty. It makes me absolutely insane. There is simply no question about the damage of deflationary expectations.
Things would improve even more if the Fed temporarily increased its inflation target to make prices in the long-term stable. We want not only stable prices today, but also stable price expectations out to the horizon. From the evidence (some of which I’ve already posted), this is an overwhelmingly well-supported view. Everything checks to an amazingly high degree of confidence. But… (sigh) …most economists aren’t money-folks. Why? Because money was boring. Because of the Great Moderation, where things worked so well for so long that people sought greener pastures of research elsewhere. All of that macro knowledge was in the books, but it was lost in the minds of many economists. Krugman complains about this constantly, and he is right to do so, but he doesn’t get into one of the causes of the great forgetting, and that is: There was no reason to remember. Things were apparently sorted out. Money became the domain of central bankers, and everyone else forgot about it.
Still, the general view seems to be slowly coming around. The Fed itself is starting to make noises about what’s happening. The great lumbering mass of committee-based group-think is starting to rumble. Consensus is building. Scott Sumner is on the bleeding edge of this change, even if he’s not personally driving it. (I am where I am because I’m enthusiastically riding his coat-tails, even though I often disagree with him on other topics.)
Make no mistake here: I want Keynes to be wrong, and (modified) Friedman to be right. Things would work out better for everyone.
I think that that clarification of my initial miscommunication answers most of the other questions you had. So to summarize my position: Money works. We’re certain about that. There should be no Austrian debate about it at all. Money would work in our present situation. We’re certain about that, too. No debate. In addition, money will almost definitely work even better if we raised the inflation target, in order to attain long-term price stability. We’re really really really really confident about that, based on the astonishingly provocative data that we have. At bare minimum, we need to get back up to 2% inflation. Bare minimum, not a question about it. But even better would be long-term M*V level targeting.
I think an Austrian criticism of Keynesian spending is reasonable. I don’t agree with it, but it’s reasonable nonetheless. There’s enough that we don’t know about the aggregate economy to justify differences of opinion on deficit spending during a recession.
Money is a different story. Money is where you can find all of the (fact-based) macro people nodding their heads in unison. Or at least doing so, when the wave of discussion finally reaches them. That’s why I’ve been emphasizing it here.
With the Monetarist nature of my contributions here now given its proper context, I’m pretty sure the only big topic that’s left is discussing bubbles. And you know what? Bubbles have always existed for the entire history of modern banking. The reason why governments got involved with regulating finance in the first place is because bankers have a tendency to be a short-sighted lot. With no coordinated monetary policy from the government at all, things went very wrong. Even with the best monetary policy, things will continue to go wrong. Yes, the wrong policy can make things worse. But the right policy won’t fix the problem of inherent human cognitive biases, that always makes us want to believe that this time is finally different.
Greenspan’s interest rates were too low, yes. But they were not much too low. They were just a smidge too low. If he’d taken more drastic action, he would’ve deflated the bubble, sure, but he also would’ve caused all sorts of other damage, the sort of damage I think you most often refer to. The key to this, for me, is twofold: improving and streamlining regulation to reduce the chances of financial crises (though we’ll never prevent all of them), and also, mitigating the damage afterward with a stable money supply–ideally meaning stable M*V growth–and keeping future expectations stable, especially in the aftermath of potentially deflationary financial crisis.
Of course, I also think right now that more Keynesian stimulus would work excellently in coordination with these other things. But I don’t know that for absolute certain. I have reason to believe so, but I don’t think that’s relevant to this thread. I’m not trying to argue people over to Keynesianism. Rather, I wanted my criticism to be about the bare minimum of macro theory that everyone has to accept, even the Austrians. That means talking money.
Your analytic framework is flawed by focusing on M*V.
But before I respond to your previous comments, let me ask you a few questions about your conception of fiat money.
Is fiat money an abstraction? Is modern fiat money like “points” in an economy? If fiat money is created and acts like “points”, is it similar to points in a basketball or football game? If it isn’t, please explain why it isn’t.
We can proceed from that if we have a common understanding (if any).
(This is not a subtext to reverting back to the gold standard. I don’t believe that will work. I know fiat money has useful benefits – even though it seems like it doesn’t because politicians screw it up. In any case, let’s just focus on what money actually is.)
Hellestal: Well, in that context we don’t really disagree. I certainly can’t find anything to disagree with in your last post. I’ve been pretty consistent in my support for monetary fixes for this recession since it started.
I’m just not sure what you can do with monetary policy at this point. Negative interest rates? More Quantitative Easing? I thought one of the problems with QE the last time was that the banks just sat on the money. Businesses are sitting on 2 trillion dollars in cash right now. How do you fix the money supply with more cash when the problem is velocity?
I’ve heard some economists say that negative interest rates would work, but I don’t really have an opinion on that. My understanding of theory isn’t good enough for me to really understand what would happen if negative interest rates were applied.
Other than monetary theory, here’s where my Austrian leanings would take me: I think the problem is right now is that money can’t find investments because of uncertainty. Businesses aren’t investing in long term projects because they can’t plan. The recession is one cause, but another is that the current government has injected too many variables into the equation with all its regulatory plans.
Businesses have also lost confidence in the competence of the administration. The constant parade of stimuluses, regulations, new entitlements, and threats of more in the future are choking off investment. The threat of huge deficits makes future taxes and interest rates uncertain but probably negative for business.
Outside of the administration’s policies, the threat of a collapse of the Euro has also scared a lot of people. And if you’re a Keynesian, the risk of another recession because of the ‘new austerity’ everywhere but in the U.S. has to weigh heavily. In fact, the world environment seems to me to be somewhat of a worst-case scenario for American Keynesians, with Americans taking on the debt and distortionary effects of more fiscal stimulus, while the rest of the world takes measures that counteract the benefits. That seems to me for a formula for America to lose more of its competitive advantage.
Under those circumstances, I think a lot of money has simply been parked on the sidelines. And I think it’ll stay there until some stability is found in the business environment. Under those conditions, and considering that effective interest rates are near zero anyway, I’m now skeptical that monetary policy has a lot to offer. I thought that was also the Keynesian position - that fiscal stimulus was necessary because monetary policy was out of bullets.
I think the best way to get money moving again would be for governments to now focus on stability rather than growth. The Fed needs to clearly demonstrate a plan for stabilizing the money supply, including how it’s going to unwind all the QE wants velocity picks up. Governments should go easy on more regulation and more directed stimulus. If there has to be more fiscal stimulus, I’d like to see it applied more like Friedman’s helicopter drop than by giving the clowns in Washington another trillion dollars to divvy up among special interests.
If I’m right that the chief cause of the lack of investment right now is uncertainty, then I would expect the economy to improve right after the election, regardless of who wins. The election is another major point of uncertainty, because it now looks possible that Republicans could take back control of at least the House, and possibly the House and Senate. If they do, you can expect them to cause gridlock and even to unwind some of Obama’s program. Whether you agree with that or not, that means the election is a potentially huge inflection point in government policy, and that in itself adds uncertainty.
By the way, I part with Republicans and many others on the right because I don’t think tax cuts are a good answer at all right now. I think business is currently more worried more about fiscal stability and future interest rates than it is about taxes, and lowering taxes without compensatory spending cuts could easily make that worse.
I just had a very interesting conversation which illustrates exactly the kind of ‘structural destruction’ that fiscal stimulus can cause. This is a real-world case.
This morning I had a contractor come to our home to give us an estimate for fixing our heating system. Last year, the government created a ‘home renovation tax credit’ to stimulate the construction industry. This was a national program. It was heavily promoted, and a lot of people I know took advantage of it. It was considered a success because it stimulated a lot of construction activity.
However, the construction industry in Ontario was going through much tougher times than the construction industry here and we didn’t really need that stimulus. Nonetheless, we got it.
Anyway, I wasn’t even thinking about politics, but I asked the contractor when he could do the work. And he launched into a tirade that went something like this:
“Let me tell you something - if you had asked me last year, I would have said months. I might not have even given you a quote. We were turning away eight out of ten jobs because we couldn’t handle all the work. The result of that was that last year a whole bunch of inexperienced plumbers started their own businesses. We lost people who went into competition against us. But then the home renovation tax credit ended, and the orders stopped coming in. Now good businesses are going under because there’s too much competition. Most of the guys who started up last year have already lost their businesses. All that stupid tax credit did was push a bunch of work ahead, which swamped everybody. Now the credit is gone, and we’re hurting. And a lot of the calls I’m making this year are to fix the shoddy work done by the inexperienced plumbers last year. So I can do your work any time. Give me a week’s notice.” He also offered to cut his labor charges down to secure the deal.
I kid you not. This was an unprompted outburst by someone who had no idea of my politics. This is the kind of information that academic economists have no feel for. They don’t understand small business, by and large. Many of them have never worked anywhere but academia.
This is how government intervention destroys wealth. The net result of the home income tax credit was to simply pull demand from the future into the present, distorting the market. People made bad decisions like leaving companies to start their own. Now that the credit is gone, the system most decidedly did not return to the state it was in before the credit. The credit mucked things up. Eventually the weak business will go under, the market will re-assert itself, and things will return to normal. But in the short term, the credit caused businesses to fail that otherwise wouldn’t have, and caused the industry to re-arrange labor and capital in ways that weren’t sustainable.
This is the climate that small business is living under. And here in Canada, we’ve been much more timid about such interventions. We didn’t have anywhere near as big a stimulus as you guys had, and we haven’t had nearly as many big programs and tax credits to ‘stimulate’ the economy.
In my opinion, this is why small business is not hiring. They don’t know what’s temporary and what’s permanent. They’re scared to make long-term decisions. They don’t know where the next shoe is going to drop.
Speaking of Canada - Obama wanted us to have a much bigger stimulus than we did. Our deficit is only about 2.5% of GDP, but we refused more deficit spending, despite our own Keynesian economists telling us that we needed more stimulus to prevent the recovery from collapsing.
Well, it’s good thing we didn’t do it, because our GDP is growing at 4.9% annually right now, and was at 6.1% in the last quarter. And our dollar is growing in strength rapidly against the U.S. dollar - so much so that I read this morning that the Bank of Canada is planning on a second round of interest rate increases. And one of the things they’re worried about is that our own consumer spending is growing faster than GDP growth. Our demand side came roaring back as soon as the initial crisis passed.
Had we done a huge stimulus of the sort Obama was telling us to do, it seems clear to me that it would have been a bad thing. It would have overheated the current economy, and added debt which would have depressed longer-term growth.
One thing that’s going to come out of this recession is data. There are countries taking wildly divergent paths to economic recovery. The U.S. went for a large Keynesian stimulus. Canada didn’t. Germany and other European countries are opting for austerity. By the time this is all over, I sure hope we have enough data for economists to go back to the drawing board and figure out what worked and what didn’t. And I have to say that from what I’m seeing right now, the case for the Keynesians isn’t looking all that good.
You have to, do you? Dragged reluctantly to a conclusion at odds with your assumptions, were you? Given the overwhelming evidence, you are willing to candidly admit that you were right all along?
Another sterling, content-free post from elucidator.
Federal Election October 2008
Parliament Prorogued December 2008
Parliament Reconvenes January 2009
Budget Presented January 2009
Budget Approved March 2009
Now note that the Conservatives were politically forced into a stimulus mode by public opinion (and possibly increasing fear of the rapid collapse of the global economy) so the HRTC would be effectively “born” around February 2009 – 17 months ago. I find it unlikely that sufficient numbers of home renovation “wild cat” businesses suddenly set up shop in the Alberta market solely due to the HRTC in numbers large enough to gut the established players.
Would it not be far more likely that the oil price ramp to $140 dollars in mid 2008 drove the proliferation with the subsequent stabilization at half that price has taken the steam out of the industry?
The Employment Alberta report shows that the construction industry employment figures were projected to fall from 205,000 in 2008 to 177,000 in 2010 growing back to 192,000 by 2013. So the die off was expected prior to the HRTC introduction. Though to be fair, I’m not sure how much of that is construction employment that could be linked to home renovations.
Oh, come now, you’re no better than any of the rest of us girls, your content free posts tend to be a lot longer. Just giving you a little tweak about your artful wording, if you can’t handle getting busted for it, don’t do it. Besides, its not really healthy to carry the weight of that much dignity around, you age quicker and your shoes wear out faster.
Well, according to the contractor I had over this morning, the difference between last year and this year has been dramatic, with a huge falloff in work after January 1. And the economy is doing better than it was last year, so you wouldn’t expect a demand drop like that unless it was created by the HRTC.
I also think there is an unseen demand drop that can happen even from people who never took advantage of it. I know someone who agonized over doing a home reno last year - they weren’t quite ready for it, but they wanted to use the HRTC. In the end, they never pulled the trigger, so they wouldn’t show up in any statistics anywhere. But the psychology of ‘missing’ the credit and having to pay even more now could easily make them decide to put off the reno for a lot longer than they otherwise would have. Or, now that they know these programs come along once in a while they may hold out for the next one.
I don’t know that this is the case for sure, but it’s an example of the kind of local knowledge and psychological factors that can be affected by programs like this.
Getting back to elucidator for a moment:
Look, I’m willing to accept that a case could be made for a fiscal stimulus in some very particular circumstances. A strong risk of deflation coupled with a liquidity trap that prevents monetary policy from working might be one of them, and that was the justification for the initial stimulus. But I also think there are many situations in which a stimulus is counter-productive. For example, what if this is a ‘balance sheet’ recession, and people and businesses aren’t spending because the asset bubble collapse caused them to kick into savings mode to repair badly damaged balance sheets? In that case, demand stimulus isn’t going to work very well. You can give businesses money to stimulate jobs, but if those employees save their paychecks there isn’t going to be a multiplier, and you’re going to create things no one wants to buy or use.
In addition, it seems to me that in the real world stimuluses do not perform like perfect theory says the will because of:
- delays in implementing them.
- Inefficiencies caused by poor distribution of money caused by politicians
- A sort of Ricardian Equivalence, where stimulus results in the expectation of higher future taxes, which depresses demand
- Structural damage to the economy due to the stimulus, as Austrians suggest will happen
- Crowding out effects of both capital and resources as stimulus money makes its way into regions which have fewer unused resources.
How many economic models account for these facts? Are there Keynesian models which attempt to factor in poor allocation of funds because of political pressure? Are they quantifying crowding out effects at a micro level due to the inefficient allocation of stimulus money? Are they factoring time delays because of the lack of ‘shovel-ready’ projects? Are they considering the damage that could be done to well-functioning structures as well as the damage avoided through stimulus of under-performing sectors? Are they factoring in the possibility that demand is merely pulling from the immediate future, and when the stimulus runs out it could trigger a double dip?
I honestly don’t know exactly what modern Keynesians are feeding into their models. What I do know is that Christina Romer’s model was way off the mark, and it seems that every time there’s a new economic report in the U.S. it shows ‘unexpected’ drops in various aggregate measures, ‘surprising’ economists.
On the other hand, when I read the Canadian financial press, most of our ‘unexpected’ news is good news. Growth higher than forecast, more jobs created than forecast, dollar growing in strength at an unprecedented rate.
So far, I’m just saying that the track record in the U.S. is not looking so good, and it has followed a very Keynesian path to recovery. Maybe when everything shakes out it will become clear that things would have been much worse without the stimulus, or much better with a bigger stimulus. But I’m not seeing it so far. And post-analysis of specific programs like Cash for Clunkers or the Home Ownership Tax Credit is not looking promising either.
Don’t have time to get into this one and there isn’t anything I could say that hasn’t already been said better by Hellestal although I’d say for certain fiscal stimulus is good for the economy. On a quick read through the thread I’ve got to say Hellestal is the Strightdope board’s Emeritus Professor of Economics.
Seriously? The Alberta government projected in 2008 a contraction of 15% for 2009 that would not be recovered from even in 2013. That’s before the HRTC was introduced. Now you could say that the HRTC mitigated the rate of collapse, allowing people to exit the marketplace gracefully - since apparently small business is a bastion of economic common sense and would have reacted accordingly. Since your anecdote seems to speak against that, we’re at a bit of a loss.
Now the HRTC basically reduced renovation costs up to $10k by 15%, after that the return drops off. Your next argument is that people that considered renovating last year and chose not to, will chose not to again this year due to the difference in cost. But in 2009 (a worse economic year as you admit) the savings on $5k in windows would have been 15% of $4000 or $600. Now this year, when the economy is in much better shape, especially in Alberta that lack of $600 dollars in credit is preventing that renovation?
Or to move to a more extreme example a $25k renovation would have saved $1350 or 5.4%. That small amount is enough to drag the construction base to ruin? I think your contractor is misattributing the cause of the industry contraction.