In economic downturns, most economic activity arguably has a positive externality; when A buys services from B, not only do A and B benefit but the downturn is reduced a bit as well. (In an upturn, extra activity arguably exasperates the boom-bust cycle.) This fact can justify subsidizing economic activity a bit more (or taxing it a bit less) during a downturn. But it turns out this isn't the main rationale for "economic stimuli" now being debated; those plans are largely based on the idea that people can be fooled because they are biased.
You are missing a key ingredient. The money supply. If people were rational there would be no boom bust cycles. The existance of some irrationality is part of the system. What the macroeconomists are saying is that our irrationality is somewhat predictable when it is aggregated and can be manipulated to increase prosperity. This isn't just an argument for stimulus its an argument for having a Fed which adjucsts interest rates. Why shouldn't we try to understand aggregate irrationality and use it to our benefit?
"why Robert Barro thinks you should discount Krugman"
But having read some Barro lately, and having seen Krugman's response, I have to say I am more persuaded by Krugman! I do think Krugman is winning the question honestly with his arguments. Overall my impression is that Paul Kedrosky actually has the most interesting and useful understanding of the situation.
"Is he the only one?"
Of course not. The person with the most amusing ideological view, hands down, is of course Wilkinson. That's because he's one of the most hilarious people I know.
But seriously, this question is too important to leave to ideology, which is why we're all here at OB. Whatever happens now could probably shape the planet for the next 7-10 years, as this is an international problem. The irony in this case is that truth-seeking will require most OB folks - the ones who could be the most helpful in forming views - to refrain from having an opinion. Sigh.
Eliezer, I know Krugman has written a lot about trade and protectionism. Contrary to (perhaps) popular belief, Krugman is a microeconomist and the work he won his prize for was micro. That's why Robert Barro thinks you should discount Krugman's recent writings compared to his own.
I understand Tyler has an ideological point of view on thisIs he the only one?
Oh, I wouldn't worry about the public understanding macroeconomics. Anyway, if it looks like they're beginning to, you just add more math. And what area of economics can't we add more math to? As I recall, Robert Frank showed that decision theory doesn't have to stop adding more math at the level of the individual actor. You can conceive decisions as competitions between multiple aspects of the actor's mind. If the public thinks they understand macroeconomics and that this understanding tells them that Keynesianism is false, we tell them that they have to look at it at the Quantum Level. If they do, we tell them that it involves Goedel's Theorem. We can play this game forever.
In that case, the bailout & stimulus would be an economic placebo. Tyler should back them wholeheartedly, as he has argued for greater use of the placebo effect elsewhere.
What if Keynesianism itself is a vast, organized lie, perpetrated by macroeconomists for the purpose of making us believe that the government can cause recoveries through debt-financed spending, when actually, there is no known way to cause a recovery - except by making people believe in one?
GDP is the sum total of all work done in a year (I think). So to increase it, you need policies that make people want to work harder. Giving them handouts will make them want to work less. Why work when someone is giving you money for sitting on your buttocks? I am sorry to avoid the big argument and concretize it down to the individual but I am not an economist.
"My frustration isn't so much the schoolyard silliness, but the demonstrated inability of prominent economists to talk to one another in the same language with words meaning the same thing and not freighted with a metric ton (or ten) of political baggage. . . .If nothing else, however, one benefit of the current depression is that whatever meager value macroeconomics was thought to have as a prescriptive discipline is thoroughly shot."
Eliezer: "Oh my gosh! What if the general public *suddenly starts understanding macroeconomics*? Trade barriers would collapse, the Department of Agriculture would be abolished, citizens would demand Condorcet voting -"
In the real world, judicious protectionism has helped national economies to develop, and unsustainable levels of debt were lately defended on the basis of economic theory. Despite Robin's occasional protestations that economists do actually know stuff, it seems clear that what professionals know about macroeconomics is seriously incomplete and overlaid by competing ideologies. So it is rather hard to see how laypeople could suddenly start "understanding macroeconomics" in a new and superior way.
Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn't that could be taxed too, to the level that the incentive vanishes.)
Undoubtedly, and then you get into the familiar avoidance/antiavoidance legal arms race i.e. basically the better-advised (i.e. roughly speaking the richer) you are the more likely you are to be able to do stuff economically equivalent to hoarding cash. Whether you mind this probably depends how much equality matters to you..
Silas, I intuit there can be behavioral economics differences in putting expiration dates on cash as opposed to debasing currency. But I'd need someone more economically literate and perhaps with more time than me to suss out and explain why that intuition may be solid or faulty. (Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn't that could be taxed too, to the level that the incentive vanishes.)
Hopefully_Anonymous: Also, has anyone considered expiration dates cash to prevent cash hoarding?
Yes, but debasing the currency quicky has basically the same effect. But it just makes people loan it out (buy bonds) which appreciate, in theory, as fast as the debasement. Expiration dates are just a less efficient way of accomplishing the same thing. Japan tried this all throughout its "Lost Decade", and never resulted in emergence from stagnation. Supposedly, Silvio Gesell had more success with a currency he and his followers started, which did have expiration dates. I'd have to look it up though. Anyone got a quick, no-BS summary of that experiment?
I believe that is what has been happening since '03, it's just that most buyers of bonds are too stupid to demand an interest rate that compensates for the debasement. Jerks.
You are missing a key ingredient. The money supply. If people were rational there would be no boom bust cycles. The existance of some irrationality is part of the system. What the macroeconomists are saying is that our irrationality is somewhat predictable when it is aggregated and can be manipulated to increase prosperity. This isn't just an argument for stimulus its an argument for having a Fed which adjucsts interest rates. Why shouldn't we try to understand aggregate irrationality and use it to our benefit?
@TGGP
"why Robert Barro thinks you should discount Krugman"
But having read some Barro lately, and having seen Krugman's response, I have to say I am more persuaded by Krugman! I do think Krugman is winning the question honestly with his arguments. Overall my impression is that Paul Kedrosky actually has the most interesting and useful understanding of the situation.
"Is he the only one?"
Of course not. The person with the most amusing ideological view, hands down, is of course Wilkinson. That's because he's one of the most hilarious people I know.
But seriously, this question is too important to leave to ideology, which is why we're all here at OB. Whatever happens now could probably shape the planet for the next 7-10 years, as this is an international problem. The irony in this case is that truth-seeking will require most OB folks - the ones who could be the most helpful in forming views - to refrain from having an opinion. Sigh.
Eliezer, I know Krugman has written a lot about trade and protectionism. Contrary to (perhaps) popular belief, Krugman is a microeconomist and the work he won his prize for was micro. That's why Robert Barro thinks you should discount Krugman's recent writings compared to his own.
I understand Tyler has an ideological point of view on thisIs he the only one?
@Eliezer
Oh, I wouldn't worry about the public understanding macroeconomics. Anyway, if it looks like they're beginning to, you just add more math. And what area of economics can't we add more math to? As I recall, Robert Frank showed that decision theory doesn't have to stop adding more math at the level of the individual actor. You can conceive decisions as competitions between multiple aspects of the actor's mind. If the public thinks they understand macroeconomics and that this understanding tells them that Keynesianism is false, we tell them that they have to look at it at the Quantum Level. If they do, we tell them that it involves Goedel's Theorem. We can play this game forever.
@Eliezer
"except by making people believe in one"
In that case, the bailout & stimulus would be an economic placebo. Tyler should back them wholeheartedly, as he has argued for greater use of the placebo effect elsewhere.
What if Keynesianism itself is a vast, organized lie, perpetrated by macroeconomists for the purpose of making us believe that the government can cause recoveries through debt-financed spending, when actually, there is no known way to cause a recovery - except by making people believe in one?
GDP is the sum total of all work done in a year (I think). So to increase it, you need policies that make people want to work harder. Giving them handouts will make them want to work less. Why work when someone is giving you money for sitting on your buttocks? I am sorry to avoid the big argument and concretize it down to the individual but I am not an economist.
What Mitchell Porter and Kedrosky said about macroeconomics.
Another take on Tyler:
"My frustration isn't so much the schoolyard silliness, but the demonstrated inability of prominent economists to talk to one another in the same language with words meaning the same thing and not freighted with a metric ton (or ten) of political baggage. . . .If nothing else, however, one benefit of the current depression is that whatever meager value macroeconomics was thought to have as a prescriptive discipline is thoroughly shot."
-- the ever ironic Paul Kedrosky
Take the bailout money, then leave the country before the tax hits. Obviously.
Eliezer: "Oh my gosh! What if the general public *suddenly starts understanding macroeconomics*? Trade barriers would collapse, the Department of Agriculture would be abolished, citizens would demand Condorcet voting -"
In the real world, judicious protectionism has helped national economies to develop, and unsustainable levels of debt were lately defended on the basis of economic theory. Despite Robin's occasional protestations that economists do actually know stuff, it seems clear that what professionals know about macroeconomics is seriously incomplete and overlaid by competing ideologies. So it is rather hard to see how laypeople could suddenly start "understanding macroeconomics" in a new and superior way.
cash expiration dates seems worth exploring to me, too.
It's called inflation, and it used to be the mainstream prescription for dealing with economic crises, I'd say between 1940s and 1970s.
lol, trying to fool all the people all of the time, fail moar...
Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn't that could be taxed too, to the level that the incentive vanishes.)
Undoubtedly, and then you get into the familiar avoidance/antiavoidance legal arms race i.e. basically the better-advised (i.e. roughly speaking the richer) you are the more likely you are to be able to do stuff economically equivalent to hoarding cash. Whether you mind this probably depends how much equality matters to you..
Silas, I intuit there can be behavioral economics differences in putting expiration dates on cash as opposed to debasing currency. But I'd need someone more economically literate and perhaps with more time than me to suss out and explain why that intuition may be solid or faulty. (Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn't that could be taxed too, to the level that the incentive vanishes.)
Hopefully_Anonymous: Also, has anyone considered expiration dates cash to prevent cash hoarding?
Yes, but debasing the currency quicky has basically the same effect. But it just makes people loan it out (buy bonds) which appreciate, in theory, as fast as the debasement. Expiration dates are just a less efficient way of accomplishing the same thing. Japan tried this all throughout its "Lost Decade", and never resulted in emergence from stagnation. Supposedly, Silvio Gesell had more success with a currency he and his followers started, which did have expiration dates. I'd have to look it up though. Anyone got a quick, no-BS summary of that experiment?
I believe that is what has been happening since '03, it's just that most buyers of bonds are too stupid to demand an interest rate that compensates for the debasement. Jerks.