August 20, 2017

Weekend Weasel: Paul Krugman and the Summer Re-Runs

The following article is crossposted from a Friday Council Member post at The Glittering Eye

In reaction to yesterday’s reports of increasing unemployment, predictably Paul Krugman calls for another, bigger stimulus package:

O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?

I am an empiricist in these matters as I try to be in much else. One could reasonably argue, since only a minor proportion of the spending passed by the Congress has actually been spent, that the spending has not had a chance to have an effect on employment one way or another but I honestly don’t see how the lack of effect of the relatively small proportion of the whole actually spent constitutes an argument in favor of an additional spending bill. Quite the contrary I think it’s a powerful argument in favor of just letting the actions that have already been taken work their course.

I’ll take this opportunity to repeat the question I’ve been asking on this subject: does anyone have substantial empirical studies that support the idea of the effectiveness of spending as fiscal stimulus? The studies of which I’m aware indicate a multiplier of about .8, which is not particularly encouraging.

Additionally, does anyone have studies which support the idea that the n+1st dollar of spending has the same or greater multiplier effect that the nth does? We’ve been engaging in deficit-funded fiscal stimulus of the economy nearly continually over the period of the last fifty years. I think it’s at least possible that it’s running out of steam or has done so already.

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I have no predisposition to disbelieve Lord Keynes’s teachings—quite the opposite. When I took economics classes Keynes reigned. However, I do believe that theories proceed from data which proceed from facts rather than the other way around. What are the facts?

Well, at least Dr. Krugman has mollified his language in vilifying members of his own profession who disagree with him:

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. (Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.)

“Distinctly unhelpful” is a lot better than “traitors” as he called those who voted against Waxman-Markey, the bill that will implement a “cap and trade” system here hoping to reduce carbon emissions.