Tuesday, January 24, 2012

Cochrane: Just don't call it "stimulus"!


John Cochrane has a long blog post up, the first half of which is a general discussion of the idea of fiscal stimulus, and the second half of which is a rant about how mean Paul Krugman and Brad DeLong are. I'm going to talk about the first half.

Cochrane writes:
Let's be clear what the "fiscal stimulus" argument is and is not about. 
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course... 
The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare.  Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. (emphasis mine)

So Cochrane:

1. Is against austerity during recessions, and

2. Is in favor of increased public investment during recessions.

But countercyclical deficits and countercyclical public investment do not, in his terminology, represent "stimulus"; that term is reserved for the Old Keynesian hole-filling sort of spending. And what does Cochrane think about that sort of stimulus?
Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now... 
Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't...The facts are far from decisive...So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works. (emphasis mine)

And my response to this is:

!!! o_O !!!   <-- (this is an "emoticon" that indicates surprise)

If I told you that a famous economist thought that austerity is a bad idea in recessions, that recessions are a great time to boost debt-financed infrastructure investment, and that additional Keynesian stimulus spending was an "economically interesting proposition" about which the jury was still out, would you guess that the economist was John Cochrane? Before I read this post, I would not have. But hey, that's cool!

Actually, the parts of Cochrane's post that I quoted above almost perfectly sum up my views on stimulus. Although I'm convinced that recessions are caused by demand shocks, I don't really know enough to firmly believe that burying jars full of money would substantially boost aggregate demand. I don't know enough to accept or reject IS-LM or a New Keynesian model as my working model of the macroeconomy.

But right now, who cares? The fact is, we know we have a huge shortfall of infrastructure spending. Our existing roads and bridges - which clearly do NOT lead to "nowhere" - are falling apart. Even Obama's ARRA "stimulus" did very little to correct the problem. And instead of borrowing more money to fix our crumbling public goods, at a time when borrowing costs are historically low, conservatives are demanding that we tighten our belts and "starve the beast." We are not even close to addressing the question of whether to bury jars full of money.

I think the conservative push for austerity and reduced infrastructure spending is just nuts, and from what Cochrane has written above it seems he would probably agree. If we were to embark right now on a massive debt-financed program of road and bridge repair, that would not meet Cochrane's definition of "stimulus" (thought it would certainly be labeled "stimulus" in the press). It would consist entirely of policies for which Cochrane has expressed unqualified approval.

So why doesn't Cochrane stand up and loudly advocate a massive debt-financed program of road and bridge repair? Is it because the public might get the wrong idea, and start believing in "stimulus" of the hole-filling variety? Is it because infrastructure investment must be politically sacrificed in order to "starve the beast" and fight against creeping socialism? Is it just because Paul Krugman and Brad DeLong are mean mean meanies?

For crying out loud!

I may be wrong, but it seems to me that politics and/or personal feuds have contaminated the public debate over fiscal policy.


Update: Matt Yglesias says I want to "continue the argument" about stimulus. But actually, that's the opposite of what I want! What I want is for people to stop worrying about who is a meanie, and start trying to find as much common ground as they can. If a massive deficit-financed program of road and bridge repair is something that Paul Krugman and John Cochrane can agree on, then I think they should unite and push for that, and if that actually gets done, there will be plenty of time later to argue over whether "stimulus" in the strict sense is a good thing or a bad thing. But right now, it seems like there might be real common ground that is getting obscured by some of the rancor and politics.

53 comments:

  1. I think the key is this passage:
    "That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending."
    anyway he is still writing about it in the following post:
    http://johnhcochrane.blogspot.com/2012/01/new-keynesian-stimulus.html

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  2. Heaven forbid that politics should contaminate a debate about policy! How sordid! They'll be letting politicians run the country next.

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  3. "I think the conservative push for austerity and reduced infrastructure spending is just nuts." It isn't nuts if the basic goal is to weaken government so that it doesn't impede the rule of local bullies.

    "I may be wrong, but it seems to me that politics and/or personal feuds have contaminated the public debate over fiscal policy." You don't say?

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  4. "one can still argue that our government used the recession to radically increase permanent spending"

    If there was some basis for making that argument then Cochrane should give it his best shot and let the jury decide. I could argue that Ron Paul is obviously a space alien or that Newt Gingrich has a working moral compass but that does not mean that any thinking person would accept the argument.

    Cochrane is being cute, defining stimulus to suit his argument so that he can say he is against "stimulus" - even though he knows that almost everyone else in the debate is using the word differently.

    I'm with you - safety net spending, money for roads, bridges (new Detroit-Windsor bridge for example), public buildings, research (lots of research), power grids, pipelines etc. would do a lot of good.

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  5. Noah: "Hey Mr. Cochrane, so does this mean you approve of further stimulus spending?"

    Cochrane: "Hoooom hum, let's not be hasty, little hobbit, let's not be hasty."

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  6. Anonymous3:02 PM

    Hey Noah, why'd you delete my post?

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  7. It seems to me that Cochrane is being dishonest. Dishonesty would understandably bother Krugman and DeLong especially with such severe real world (non academic) consequences.

    Cochrane:
    "But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates."

    In the link Krugman writes "Now, you could argue that Greece and Ireland had no choice about imposing austerity, or, at any rate, no choices other than defaulting on their debts and leaving the euro. But another lesson of 2011 was that America did and does have a choice; Washington may be obsessed with the deficit, but financial markets are, if anything, signaling that we should borrow more."

    Cochrane is lying about what Krugman wrote and is pretty blatant about it. How can you have a debate with someone who is so dishonest?

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  8. Anonymous3:08 PM

    The fact that Cochrane has to reach so far to redefine stimulus to exclude all spending he doesn't like, reducing it to an absurd intellectual argument when the actual public argument was about the very types he now claims to support, seems fundamentally dishonest.

    Anyone who has studied Keynes is taught that the 'burying money' example is an extreme and theoretical case, and that in all cases productive spending is to be preferred to burying money and digging it up. Keynes was countering the classical criticism which was that all hypothetically productive projects should be financed, but all actual projects under consideration were unproductive. The point of that argument was that the priority should be to get busy, and worry about the productivity later.

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  9. @first Anonymous:

    Which post? I haven't deleted any posts recently...

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  10. Anonymous4:09 PM

    @Noah Really? Wonder why it disappeared. Anyways, long post short, you misconstrued and misunderstood Cochrane's argument. In fact, it is a VERY common one. Michele Boldrin makes the same one in the debate between him and Brad Delong. To make it a little more intuitive, imagine you have two otherwise homogenous goods, but they have different prices. Why would you buy the more expensive one? Answer: you probably wouldn't. The sentiment is the same with Cochrane. If interest rates are low, and labor is cheap, then why not? Now, despite what you claimed, this is, in fact, austerity (in a certain sense of the word "austerity", and given that certain other things happen, i.e. less spending and less taxes either now or later, or possibly earlier). By buying infrastructure when it's cheap, as opposed to when it's expensive in good times, then you get the same amount of infrastructure for a much smaller price. This is to the benefit of tax-payers. We get more bang for the buck by getting the same thing for less money, and therefore government has to spend less, and get taxed less. Now to differentiate this from stimulus. Let's use Cochrane's example (strange how you stopped quoting the paragraph right before he says this. Qoute mining? Hmm.). Let's say that Chinese laborers would offer to build a road for half the amount that American laborers would. Why the hell not? The "stimulus" argument would more than likely spend the money on American laborers for "job creation" (although it is debatable whether it actually creates jobs, I think you can understand what I'm getting at.) Likewise, the "stimulus" argument would advocate ANYTHING that "creates" jobs. This includes digging up holes and filling them, which really provides no social value, but certainly pays people to do something.

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  11. Jeebus! Do I have to go read this, or can I just let sleeping dogs lie?

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  12. 'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.'

    'The question is,' said Alice, 'whether you can make words mean so many different things.'

    'The question is,' said Humpty Dumpty, 'which is to be master — that's all.'

    -Lewis Carroll, Alice in Wonderland

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  13. Anonymous4:50 PM

    you're making it seem like he did a 180... he's been writing about stimulus for years and this is totally consistent with his previous arguments.
    see: http://faculty.chicagobooth.edu/john.cochrane/research/papers/stimulus_rip.html
    this is what a lot of people don't understand -- stimulus isn't about building roads and infrastructure that's actually needed (taking "positive npv" projects). those should be done. it's about digging holes and filling them back in and saying this will be good for the economy. i don't think a lot of people ever read what he was saying closely, but it's not new...

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  14. I have had many conversations with economists who share this p.o.v.

    They say that at any and all times the government should spend on positive NPV projects, including macro externalities , to be a bit sloppy with terminology, in the NPV calculation, and that in current circumstances with low interest rates and lots of unemployed workers around, there are likely to be many such projects.

    But they view this as quite a different thing to special "stimulus" to create jobs and boost GDP. Rather it is merely applying the same rule to investment decisions that applies at all times.

    I can't say I grasp the distinction, my point is merely that some people genuinely hold what they feel is a consistent postion, that Krugman sees as incoherent.

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  15. Anonymous5:02 PM

    Interesting.

    So Cochrane's argument is not that Y will not rise in response to an increase in G, but that GDP does not accurately reflect production.

    I wonder how far he'd be willing to go down that road.

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  16. Cochrane's view doesn't seem too different from Greg Mankiw's. Basically, most of the arguments you hear for stimulus don't make sense in our best models, some of our best models do support ideas that might be called "stimulus", I'm uncertain about their merit, etc. But neither of them have generally framed it that way, because their audience is right-of-center, so it makes sense for them to frame their perspective as more completely rejecting the idea of stimulus. Similarly, Krugman, Delong, etc., seem to endorse arguments that they too, upon reflection, think are sloppy for stimulus, because their audience is left-of-center. It's terrible for the credibility of economics that such agreement is so deliberately hidden in order for particular economists to signal their loyalty to or affiliation with team left or team right.

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  17. An example, please?

    "Opinions of shape of earth differ" weblog commenting is a menace.

    Brad DeLong

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  18. Noah I'm with you as far as the poisoned discussion about stimulus.

    What I don't get is why you have been giving Sumner so much aid and comfort lately.

    Can't you see that he has done as much as anyone to poison any discussion of stimulus with his endless tortured arguments as to why the fiscal stimulus is "roughly" zero?

    http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumners-economic-canards.html

    http://diaryofarepublicanhater.blogspot.com/2012/01/krugman-needs-restraining-order-against.html

    Do you honestly think that his definition of savings as spending on capital goods ia anything but grossly misleading? Consumption is one thing savings is another, investment is expenditures not consumed. There are savings. Antyhing not saved is an expensiture. The two types of expenditures are consumption and investment.

    Yet you have written about three dozen comments defending him on this-assuming he hasn't forged your name.

    I for one don't believe he argues in good faith. The idea of NGDP targeting sounds decent to me I admit-better than the Taylor Rule by a long way I think-but what gives me pause is his main agenda is to convicne us that only monetary stimulus is valid.

    On the ohter hand lars Christensen over at Market MOnetarist takes it even further by claiming that fiscal stimulus basically is an illusion-we only think it exists. In truth there is only monetary stimulus. The idea of this is that whether the Fed prints money or the government-the treasury really-prints money that it spends on a bridge it's all the same anyway.

    I share with you a desire for an unpoisoned environment to discuss fiscal stimulus but I think that this will only happen over Sumner's dead body.

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  19. Germane

    I love the Humpty Dumpty quote ( I have used it myself ) and it is so appropriate to what Cochrane is doing in his piece. Welcome to the Rabbit Hole.

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  20. Anonymous5:31 PM

    Cochrane: Just don't call it "stimulus"!

    Basil Fawlty: Just don't mention the war -- I did once but I think I got away with it.

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  21. Anonymous5:51 PM

    What I want to know is does Cochrane still believes what he wrote a few years back:

    "We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”"

    His post acts as if he'll answer that when he says:

    "The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare."

    But then he spends so much time talking about hurricanes and WWII that he never does answer that question question.

    Maybe one can argue he made a point for the "not needed" case in "whether needed or not", but what the "needed" case? Can stimulus, in theory, ever raise output?

    I don't think he ever answers that question clearly.

    I think someone needs to clearly as him, "Yes or No, is there ANY situation in which an increase in government spending could increase GDP?"

    Yes or No. No muddling up the answer about whether or not it's worthwhile, no muddling up the answer with whether stimulus is needed or not. Simple YES or NO. Is there ANY situation, just one, where an increase in government spending can increase GDP?

    From the first quote I give, he seems to clearly state that the answer is NO. Not only that, one doesn't even have to use any theory. It's a simple matter of accounting.

    But surely he can't believe that. If he does, he better call up Greg Mankiw and tell him there's an error in his "Macroeconomics" textbook, because I happen to have it open to the page where it says otherwise.

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  22. Jeebus! Do I have to go read this, or can I just let sleeping dogs lie?

    YES! Yes you do! Muahahahahaha!!! (falls out of chair)

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  23. Basil Fawlty: Just don't mention the war -- I did once but I think I got away with it.

    LULZ

    Best comment of the year.

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  24. Anonymous6:46 PM

    The question is whether or not the very act of burying money and digging it back up should be counted toward G, and therefore Y, at all.

    Consider:
    The government gives you $100: not an increase in G.
    The government gives you $100 if you wave at the President: not an increase in G.
    The government pays you so that you will wave at the President: G goes up. Y goes up.

    Cochrane seems to argue that it is not real work because the acts themselves makes nobody better off, and so only knock-on effects count.

    I'm not entirely sure he's wrong on that, but it would require a pretty serious rethinking. Lots of economists have argued for a long time for a lot of reasons that GDP is not a good measure of the state of the economy.

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  25. "But right now, it seems like there might be real common ground…"

    I don't know Noah. If you're a hardcore libertarian who is expert in economics and really understands the implications of extreme libertarianism, not the fantasy, then you know you have to deceive to advance your ideology. The vast majority of the public would vehemently oppose it if they really understood its implications. Deception is the only way to move policy in your direction.

    Perhaps his strategy is to say, yes, I'm ok with some social insurance and high return public investment, but Obama's stimulus was just a bunch of ditch digging (and so will be any government spending, whether it's basic scientific and medical research or alternative energy), vote for Mitt, or Newt.

    Perhaps with all the blogosphere exposure and pressure, he was shamed into admitting these things, which should be obvious to any economist at a top school.

    It's not politically correct or very diplomatic to say these things, but they should be said, at least by someone whose position, or lack thereof, allows it. I encourage you, though, with your burgeoning influence, to try to stay reasonably diplomatic (while not shying much from clearly stating important truths). It is possible there could be some common ground here.

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  26. People, read Cochrane's old writing again. You don't even need to read the whole thing. Just the beginning, where DeLong says the important stuff is supposed to go.

    11/9/10. First few paragraphs. "Governments should run deficits in recessions, and pay off the resulting debt in good times .... The stimulus question is whether, beyond all this, the government should intentionally borrow and spend, or even give money away, on the belief that each dollar so borrowed and spent will raise output by $1.50, and therefore lower unemployment." link here

    1/27/09. First sentence. ""Fiscal stimulus” is the proposition that by borrowing money and spending it, the government can raise the overall state of the economy, raising output and lowering unemployment." He is talking about borrowing and spending. Period. He is *not* talking about borrowing and spending on useful stuff that markets do not provide. Never has been. link here



    I am continuously amazed how smart people can talk past each other so much.

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  27. So your answer is to completely ignore my direct question.

    I guess I should credit Scott with one thing. He answers all comments.

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  28. So your answer is to completely ignore my direct question.

    I guess I should credit Scott with one thing. He answers all comments.


    Scott has tenure. I don't even have a job yet. Feel free to email me (nquixote@umich.edu) if you have any burning questions!

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  29. Anonymous2:20 AM

    "Deception is the only way to move policy in your direction."

    True for libertarians as well as standard conservatives.

    Starve the beast has always been a fraud, built to eliminate social insurance programs that could never be done by asking the population.

    The strategy in the first is to convince the electorate that they are paying too much tax, to equate shirking with freedom and justice.

    Second is to sadly shake your head and proclaim that these popular programs are just not possible for a country as poor and indebted as ours.

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  30. Well I didn't have a job till last week but the job I have now is really crappy-$8 hr security job though higher than the mininum wage that Sumner hates.

    when you get a job it will be some cushy job as a professor.

    Still I know your an ok guy I was just hoping for some reaction.

    I can email you if that's better, my question was pretty clear-that this conflict over stimulus has been really hyped by Sumner. Just check his posts from teh last month.

    Also I'll believe Cochrane would join you in calling for stimulus when I see it. I'm a little skeptical at this point.

    In any case thanks for the email.

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  31. Noah I have sent you an email. TK

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  32. The problem here is that the other guy doesn't think he's doing science. It's a category error on your part. He's fighting for Team R, and is well aware of that. The politics is a feature, not a bug.

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  33. He is talking about borrowing and spending. Period. He is *not* talking about borrowing and spending on useful stuff that markets do not provide.

    Actually, in the quotes you provide, Cochrane doesn't say "useful stuff". That's you. And as a rule the government funds projects for which demand is quite real.

    But as a general matter, as far as how wealth is created, borrowing and spending is... the way it is done.

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  34. According to the foolish knave John Cochrane, "This is not how real economists discuss things". So either Paul Krugman and Brad DeLong are not "real economists" or Cochrane is lying about how they discuss things.

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  35. [I wish I could fucking spell!]

    If economics were truly a science there would be no more disagreement on these points than than there is among physicists on the law of gravitation. We have way too many economists with far to little valuable work for them to do. So they play around forever instead, never arriving at consensus.

    Perhaps it is time to downsize the profession? Defund the universities? But that will never happen of course.

    Maybe a new insurgent set of colleges and universities starting from scratch, ones that give students better educations at more reasonable prices? (Remember how Edinburgh overtook Oxford and Cambridge back in the day?) There are plenty of billionaires out there who could found them.

    Economics will never reform itself from within. That would be against human nature.

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  36. Dear Noah (and others that think Cochranes recent blog post is big news):

    Cochrane wrote essentially the same things in late 2010. But then, of course, it was not on a blog but on his academic web-page:

    http://faculty.chicagobooth.edu/john.cochrane/research/papers/stimulus_rip.html

    Kind regards,
    Henrik Jensen
    hjeconomics.dk

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  37. You know, I never claimed that Cochrane's post was a turnaround, or that he had changed his position on anything.

    My point was to highlight that there is much common ground between Cochrane and those who call for increased debt-financed infrastructure spending in recessions.

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  38. @mattski Actually, in the quotes you provide, Cochrane doesn't say "useful stuff". That's you.

    That's my point. I put quotes around the things Cochrane wrote and not around the things I wrote.

    In everything Cochrane has written on this topic, stimulus describes NPV=0 projects. If it were an NPV>0 project, then it's not stimulus. It's a project that's worthwhile doing regardless of whether anyone thinks the macroeconomy needs stimulating.

    And as a rule the government funds projects for which demand is quite real.

    And this is one way people talk past each other in this debate. Some people start with the prior that the government spends money wisely and focus on the need to spend more now because idle resources can be put to work. Others start with the prior that governments tend to waste money and turn temporary spending into permanent spending, especially if given non-specific mandate to stimulate. These people focus on the point that it matters how the government spends money. All they hear the stimulus advocates saying is "spend". If they heard, "the government can borrow really cheaply right now and here are these important public goods projects that will not add permanently to the deficit", then they might be more receptive.

    But as a general matter, as far as how wealth is created, borrowing and spending is... the way it is done.

    Only if NPV>0.

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  39. there is much common ground between Cochrane and those who call for increased debt-financed infrastructure spending in recessions.

    I think the "common ground" is an illusion. Two points in particular: (1) The group who are calling for increased debt-financed infrastructure spending is probably a lot smaller than you think even though you and I are both in that group. The Republican party as a whole is not in that group.
    (2) You are assuming that Cochrane is acting in good faith. Cochrane is just trying to cover his own ass in a way so that he does not on the one hand alienate the economic illiterates driving the Republican party and on the other hand does not make himself a laughing stock in academic or informed circles. I suspect that his approach to NPV of infrastructure projects in practice would be so conservative that very few would qualify for debt financed construction by government.

    For me the no-brainer infrastructure project would be the proposed new bridge between Detroit and Windsor where the Canadians are offering to finance the American side of the bridge but it still cannot get past state politics.

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  40. Anonymous4:27 PM

    "Only if NPV>0."

    Isn't that begging the question? If the NPV of taxes equals the NPV of spending, then the NPV is positive if and only if Y rises... i.e., if the multiplier is positive.

    So if the multiplier is positive, then NPV>0, and hence it is not stimulus. Therefore, stimulus cannot have a positive multiplier.

    But what if a project is NPV>0 when the economy "needs stimulating" but NPV<0 when the economy does not? It is no longer "worthwhile doing regardless"-- rather, it is "stimulus"

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  41. In everything Cochrane has written on this topic, stimulus describes NPV=0 projects. If it were an NPV>0 project, then it's not stimulus.

    So you're saying that Cochrane defines stimulus as ineffective spending. This sounds like semantics rather than economics.

    Going back to what you said earlier:

    He is talking about borrowing and spending. Period. He is *not* talking about borrowing and spending on useful stuff that markets do not provide.

    This is confusing. Isn't the latter a subset of the former? And doesn't putting idle resources to work raise overall output?

    It's important to remember that DeLong & Krugman are calling for deficit financed spending in a recession. It's also important to remember that borrowing money and spending it wisely is a critical step in wealth creation. If Cochrane came out against "borrowing and spending" per se then clearly he was painting with a too broad brush.

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  42. @mattski If Cochrane came out against "borrowing and spending" per se then clearly he was painting with a too broad brush.

    Suppose your daughter comes to you asking you to co-sign a loan because she intends to solve her financial problems by borrowing $100,000 and spending it. Would you approve? If your answer is that you will do so only if you can see how this loan will solve her financial problems, then you are taking Cochrane's position. If you think she'll blow through the money and be back for more next year because the money didn't address the core of her financial problems, then you are taking Cochrane's position. If your answer is an unconditional yes because you think her spending that money will enable an unemployed person to get a job and that person's income will somehow flow back to her with interest, then you are taking the pro-stimulus position.

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  43. Suppose your daughter comes to you asking you to co-sign a loan because she intends to solve her financial problems by borrowing $100,000 and spending it.

    I would say your analogy is inapplicable. The question is whether there is a source of revenue from which the loan--any loan--can be paid off.

    In the case of deficit spending during recession, is there a source of revenue from which the loan can be paid off? Why yes there is. It's called full employment, aka prosperous times and/or growth. That's when we pay off our debt.

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  44. Very interesting post, but I still miss an answer to the argument of Cochrane on the China-issue: if China would do the road&bridge-repair at half the cost American workers would do it: what would you choose? American workers => stimulus, Chinese workers => no stimulus.

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  45. Re: Noah said...: "You know, I never claimed that Cochrane's post was a turnaround, or that he had changed his position on anything."

    Beliefs that expansionary fiscal policy might be worth trying are no longer "fairy tales" that are "not part of what anybody has taught graduate students since the 1960s" and are "false".

    That is a pretty big turnaround. That is a pretty big change of position.

    Brad DeLong

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  46. @ Brad Beliefs that expansionary fiscal policy might be worth trying are no longer "fairy tales" that are "not part of what anybody has taught graduate students since the 1960s" and are "false".

    Show me where Cochrane called "expansionary fiscal policy" a fairy tale. He called "stimulus" a fairy tale because he doesn't think it is expansionary. It's disappointing how much people persist in talking past each other.

    Googling 'John Cochrane fairy tale' brings up lots of Krugman and DeLong posts and not much by Cochrane. Scrolling down, I found this link. An excerpt:

    "JH: I think it was Krugman that quoted you as calling Obama’s economic plan a “fairy tale.”

    JC: Let me be very strict about that, because I like Obama. He’s a very talented politician, which is what he’s supposed to be. What I called a “fairy tale” was Keynesian economics in general, and the proposition that last February, the key thing our government should do is borrow $800 billion and spend it, and that this would be the cure to our economic troubles."

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  47. Fred, stop being a bullshit artist.

    You say: "Show me where Cochrane called 'expansionary fiscal policy; a fairy tale. He called 'stimulus' a fairy tale because he doesn't think it is expansionary. It's disappointing how much people persist in talking past each other.

    Now Cochrane says that "stimulus" is not a fairy tale but rather: "Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work..."

    That's very different from calling it a "fairy tale" that is "false".

    There are enough bullshit artists in the world as it is. You don't have to add to their number. You can choose to act like a responsible human being.

    Yours,

    Brad DeLong

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  48. @Brad

    What about the definition of Cochrane of stimulus?

    He gives a good example of a depressed economy with high unemployment (low wage cost) and low bowering cost for government. At this point, the NPV of infrastructure projects will be better, so more projects will qualify.

    So, is this stimulus? Yes, a lot of economists would say. It depends, says Cochrane: if you would prefer an American firm to do the projects although it's twice as expensive as a Chinese, than it is stimulus. If you would pick the Chinese firm, it is no stimulus.

    For me this is an important, but subtle distinction Cochrane makes. So far, I have not found yet any comments discussing this subtle difference.

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  49. Brad, nice one.

    Now ask yourself which is more likely.

    1. John Cochrane is "constructively admitting that John Cochrane three years ago was a full-fledged bullshit artist," but just forgot to tell us he was doing a complete about face.

    2. John Cochrane use the word "stimulus" sloppily in this sentence. His opinion has not changed. I just didn't get his point the first time. My interpretation was biased by what I thought he was saying. I'm glad he is now blogging so that he will write often enough to clear up such misconceptions.

    The fact that you choose 1 makes your blog entertaining. I think 2 would be more constructive.

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  50. To use words so "sloppily" that what you wind up saying is that an idea is a false fairy tale when what you really mean is rather that it is an interesting proposition--that is the very essence of being a bullshit artist...

    I believe my work here is done

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  51. You can say bullshit artist all you want and maybe you are right but still a good rebuttal of the preference to a chinese firm offering an infrastructure job 2 times cheaper as an american firm would be nice. Your job is not done yet, I believe. Thanks!

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  52. Anonymous1:29 AM

    Andreas, I'll give this a try. As I understand your/Cochrane's proposition, it is that it is stimulus if we would choose the domestically-assembled infrastructure project over the Chinese-assembled one. Or it is a question, would we choose?

    1) Given the NPV construct, I question the mathematical proposition that BOTH projects were NPV negative or zero before the event that lowered borrowing costs and both are magically NPV positive - by which I mean, it's hard to imagine a typical infrastructure project (high up-front cost, long payback period) where both are magically moved into positive territory. I'll grant it's possible, but note that there is something wrong with this fanciful representation of government fiscal policy if NPV positives were not being funded before the event (and if that's true, why is this tool for considering fiscal policy interesting or useful?).

    2) Another qualifier: hard to imagine any infrastructure project that does not employ any domestic workers. Heck, a significant part of the value chain of Chinese-manufactured tchotchkes at Wallmart is captured domestically. But let's assume we'll adjust for that, or, if you prefer, that the Chinese are just going to drop-install that new bridge in Minnesota from a satellite.

    3) Likewise, I'm going to assume that either a) forex rates adjust automatically to nullify the effect on jobs net/net, as markets are efficient) or b) they do not adjust for some reason, market failure or government intervention, such as the foreign provider of infrastructure policy pegs their currency. In the case of a), it should be obvious that we should make no distinction between the foreign jobs and domestic jobs, as the markets will adjust swiftly. In the case of b), perhaps I would have some additional reason to prefer domestic jobs - but that would require separate analysis.

    4) But the argument in the main: I assume that I may use the difference in current expenditure immediately for spending, and that there won't be insane pogroms/intellectual jihads against me and my ilk for spending the savings. I choose to use the savings from the Chinese-manufactured bridge to finance the next project on my infrastructure list (preferably a renewable energy project), and if I don't have any more of those that will not be provided by the Chinese, to hire unemployed people to plant the White House garden with free-range quinoa while humming the Internationale. The quinoa shall be fed to the homeless whether they like it or not.

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  53. For crying out loud!

    I may be wrong, but it seems to me that politics and/or personal feuds have contaminated the public debate over fiscal policy.

    Noah.

    You seem to be a super nice guy and I love the way you try. The sad reality is that personal agendas and feuds have more than contaminated the public debate.

    Look at how Obama was cut to pieces by the pesonal ambitions of Max Bacchus and other Demo Senators on stimulus, etc.

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