Personally, I do not believe this; that is, I remain unconvinced by the arguments people typically employ to support this belief. This does not mean that I believe that the contrary is true; it simply means that I remain agnostic.
But most people appear not to be agnostic on the matter; they appear to believe very strongly that fiscal stimulus works. Of course, there are some that believe very strongly that the opposite is true. I am not sure what accounts for their belief either, but I choose to ignore them. The burden of the proof surely rests with those that believe. If you want me to make a big earthly investment in relation to your belief in Jesus Christ, then it is up to you to convince me (it is not up to me to disprove the existence of God).
When I was an undergrad, I believed that fiscal stimulus worked. Why did I believe this? Because this was what I was told; and at that young age, I had no reason not to believe what my professor told me. Moreover, he could show me the "logic" of the argument by way of a simple theory (at that time, the IS-LM model). He could even point to WW2 as empirical evidence in support of the theory. This theory was further corroborated in my mind by the fact that policymakers, newspaper columnists, and many other economists said exactly the same thing. The "truth" of this matter was (and still remains) conventional wisdom.
I also used to believe that Lemming populations were prone to commit mass suicide by jumping off cliffs. Why did I believe this? Because this is what I was told; in particular, this is what Walt Disney told me in his Academy Award winning 1958 documentary White Wilderness. You can see the footage here. How's this for empirical evidence?
Naturally, almost everyone who has ever heard of the phenomenon actually believes it. The image of lemmings running off a cliff has become a popular metaphor for following a crowd in an unthinking manner; see figure above.It was only many years later that I discovered that this "fact" was a myth. Even worse, the "Norwegian" lemmings shot by Disney were imported from Hudson Bay to Calgary, where they did not jump off the cliff but were, in fact, launched off the cliff using a turntable.
I suppose that the point I am trying to make is that we are all to some extent "slaves of received wisdom." This is unavoidable. But it is not unavoidable that we should let this defect prevent us from questioning the conventional wisdom handed down to us by our predecessors (and repeated in rote-like fashion by true believers). I am wondering to what extent the widespread belief in fiscal stimulus is similar in any way to what many believe to be true of lemming populations?
As I mentioned in my earlier piece, many (certainly not all) people appear to believe in fiscal stimulus because they can see how it "works" at the microeconomic level. For example, here in my home province of British Columbia, we can measure quite directly the impact on gross employment stemming from the government's decision to build several state-of-the-art "fast ferries." The shipworkers benefited; as did a number of related trades. And the incomes earned by these people in this endeavor were no doubt spent in a manner that "stimulated" other economic activity.
But while the impact on gross employment is easy to measure, the impact on net employment is not. This particular fiscal stimulus program cost provincial taxpayers close to $500 million. This is 500 smackeroos that was no longer in the hands of the people who earned it. This loss of private sector purchasing power must have surely depressed the demand for all sorts of goods and services; and by implication, depressed the demand for labor in many sectors of the economy. Moreover, some of that income that would have been saved to ultimately finance other capital expenditures, now found its way to finance a fleet of fast ferries. In short, the aggregate impact of this policy--if measured correctly--is not likely to have been very large. (Unfortunately in this case, it did turn out to be large, but in the opposite direction; see fast ferry fiasco).
It would be more persuasive, in my view, if proponents of fiscal stimulus promoted their belief on the basis of its redistributive effects; not its aggregate effects. There may very well be a good reason to advocate fiscal stimulus with the view of supporting various sectors in dire need of help. But this is a very different argument than asserting that (almost) everyone will somehow benefit. This latter argument may even be true; but like I said, I have yet to be presented with convincing evidence.
The answer to your question is more likely to be found in the realm of psychology rather than economics. They believe it because they want to believe it. They believe it because they have always believed it. They believe it because they believe everybody else believes it.
ReplyDeleteI believe that there is a drive for fiscal stimulus because it is easy to comprehend.
ReplyDeleteYou can't sit down with just anyone and explain to them inflation targeting, NGDP forecasts, reserve penalties, and FOM purchases of assets...and then hope to be able to tie that into how monetary policy shapes aggregate demand (after you explain what that entails).
It's simply too counter-intuitive. As such, most people think that fiscal stimulus provided the greatest multiplier in producing AD effects in the 1930's...when it should be attributed to currency devaluation...as well, most people believe that the Bank of Japan wants inflation, when that is demonstratively untrue (although it is highly counter-intuitive to believe).
Fiscal stimulus has a number, and a target...and real micro-effects. Easy.
I think the way fiscal stimulus can work is as a way of smoothing the business cycle. In down times the government takes the risk that private companies are not willing to take by borrowing (not raising taxes) and putting that money into the economy. This way you make sure that you are taking money that otherwise will be sitting doing nothing because people are afraid to invest in anything that is not government bonds. But then (and this is the part that we always forget to pursue) when the economy is booming is the time to raise the taxes to pay for those loans, fund the social plans for the next downturn (I'm thinking mainly EI here) and to help avoid overspending and overinvesting.
ReplyDeleteI don't think economists and others, generally, think fiscal stimulus will result in a desirable increase in aggregate employment and output in all circumstances.
ReplyDeleteThose, who advocate a fiscal stimulus in circumstances of high unemployment and aggregate demand depressed by a deflationary shock, are not asserting that a fiscal stimulus is desirable in every other circumstance. They are advocating fiscal stimulus in this particular circumstance, because, in this particular circumstance, the cost is much less than the nominal expense, and displacement effect is likely to be negligible.
When a monetary shock -- say a massive debt-deflation -- has suddenly reduced the circular flow, aggregate demand expressed in the flow of funds may no longer be enough to fully employ available resources: some people, literally, fall out of the money economy into unemployment.
Now, some people believe that prices can and will fall so that aggregate demand in the new circular flow of funds -- reduced by the sudden deflation -- is sufficient to fully employ available resources. Unemployed resources will bid down price, bidding their way back into the money economy. This is the classical view.
If one thinks the classical view is crap, then there are any number of ways to arrive at a well-founded belief that a fiscal stimulus is generally desirable, in a more or less Pareto optimal sort of way. The losses of output from involuntary unemployment are deadweight losses; the additional output gained from relieving involuntary unemployment are, in the limit, literally, costless. And, fiscal stimulus can be financed by, as the expression goes, "printing money".
With the economy near full-employment equilibrium and the price system functioning normally, of course, government expenditures are not costless. On the real side, the government must bid against competing uses for the products and resources it requires for its operations and projects. On the money side, the government must finance its spending with taxes, immediate or prospective (ricardian equivalence).
The case for fiscal stimulus rests on the belief that macroeconomic circumstances are such that the economy is not near, and is not headed in the near-term toward, a full-employment equilibrium, and that the price matrix is seriously out-of-whack. (One can argue the details of that out-of-whackness, whether it should be termed a liquidity trap or an expectations trap, or whatever -- it just seems like a digression to get into that here.)
Can you reframe your skepticism? Clarify whether you are skeptical about whether special circumstances:
1.) can obtain;
2.) do obtain, presently.
This comment has been removed by the author.
ReplyDeleteI agree it must be psychological in some sense - most (weak?,stupid?) people seem to need to believe in some power out there that takes care of them - mom, god, the government (!?!) and does the right thing. Also, with few exceptions, most people in the world rarely question authority (just like in your ISLM example from undergrad) - perhaps both evolutionary responses to improve survival. I think your lemmings analogy jumping off the cliff is right on and people like you and I who disbelieve or question are dragged together with them towards the cliff (still we should feel lucky since in the past we'd have been killed and not reproduced, hence the lemings win again).
ReplyDeleteIf Walt Disney had been Canadian, he would have been honoured with the Order of Canada for that documentary film on lemmings.
ReplyDeleteOne feature of fiscal stimulation during periods of "economic crisis" that must appeal to many folk, including economists, is the notion that increased expenditures exploit idle resources. Waste not, want not.The values embodied in that proverb are shared by many cultures, Judeo-Christian, North American aboriginal.
ReplyDeleteTake forest exploitation in British Columbia as an example. Economists would expect and hope for folks to seek to maximize the socio-economic value of the forests. Instead, BCers clamour for the quick exploitation of beetle-infected pine trees in order to avoid waste, sharply cut stumpage fees and subsidize new plant capacity. Although clearly individuals benefit, the public owners of these forests do not.
I still object to your contention that the burden of proof rests with those who believe. To pursue your analogy, the visible effects of a fiscal stimulus are analogous to a miracle. Once we have seen the miracle, something that appears to be the result of divine intervention, the burden is on the unbelievers to prove it was not.
ReplyDeleteI'm also a little puzzled by your apparent certainty about the direction of the net employment effects of the fast ferry program. As someone who wants to take an agnostic attitude and refuse to accept conventional conclusions without examination, and given the difficulties involved in measuring such effects, shouldn't you leave open the possibility that the net effect on employment was positive?
As for me, I'll tell you why I believe in the effectiveness of a fiscal stimulus (in these particular circumstances, as Bruce Wilder discusses above in more detail). I believe in it because, in the light of empirical evidence, anecdotal evidence, and my own intuition about how people and businesses behave, I find the gist of Keynes' argument convincing, and I find the counterarguments unconvincing. Under current conditions, with the risk-free interest rate at a zero floor, I just don't see any plausible way in which the indirect adverse effects of a stimulus on employment could be anywhere near as large as the direct (and indirect) positive effects.
I'm not saying I can necessarily make a case that will convince skeptics like you. My beliefs result in part from an intuitive synthesis of various available empirical evidence and analytical reasoning. Perhaps part of my intuition is merely the result of believing what I was first told. But it's not as if noone has tried to challenge the conventional view. Some of the greatest minds in economics have tried to challenge it; yet I and most policy-oriented economists find their challenges unconvincing.
Andy Harless, you raise a valid point. The fast ferry program probably did increase employment, at least short-term. The big knock against the program was the loss of social wealth for all British Columbians.
ReplyDeleteHowever, some BCers must be breathing a sigh of relief as they are likely quite content with Vancouver Island's relatively isolated location and would thus oppose faster ferries or a bridge link.
Shipbuilding raises another popular myth, the economic benefits of military capital expenditures thanks to numerous civilian spillovers.
Presumably this myth persists because WW II is credited with ending the Great Depression, and people can point to specific innovations such as radar or the internet that originated in the world of national security.
David,
ReplyDeleteSo what role does the economics profession in academia and the incentives that academic economists face play in the on-going belief systems of the larger public?
Perhaps you would like to share some of the background behind the fast ferries fiasco..... I'm sure that your blog readers would be fascinated.
Bruce:
ReplyDeleteThanks for your post. I'd like to comment on your statement:
"When a monetary shock -- say a massive debt-deflation -- has suddenly reduced the circular flow, aggregate demand expressed in the flow of funds may no longer be enough to fully employ available resources: some people, literally, fall out of the money economy into unemployment."
I have no idea what this means. What was this "monetary shock"? How do you define "aggregate demand expressed in the flow of funds?" What is your theory of unemployment? And most important: what evidence can you bring to bear on the question of whether your theory/interpretation is the correct one?
Andy:
ReplyDeleteYou apparently still object that people like me would like to see "proof" (compelling evidence) that fiscal stimulus "works." Why? Is it because no compelling evidence can be shown to exist? If it does exist, then show me and persuade me. (Making vague references to empirical evidence, your own intuition, and what a lot of smart people believe is not enough to persuade me).
My comment on the fast ferry fiasco was directed at the aggregate impact that the policy had on provincial GDP (I'm not sure what impact it had on employment). This program cost the B.C. taxpayer $500 million. The ferries are now worth zero. Ironically, the expenditure would have likely been *measured" as a positive contribution to GDP. This is because of the strange way that government spending is recorded in the NIPA. We know, however, that the contribution to GDP was zero. And yet, people like you would apparently like to take the *measured* impact as "proof" that fiscal stimulus works.
David,
ReplyDeleteAndy raises a key point when he mentions the zero-lower bound on risk free interest. How do you arrive at the conclusion that a deficit financed increase in government spending crowds out private spending completely?
Wouldn't the fiscal expansion simply "soak up" the excess supply of savings?
Second, regarding the measurement of the ferry expenditures as output, the NIPA also records any decrease in consumption or investment spending that results from tax increases as a decrease in output.
It seems that you believe that tax-financed government spending completely crowds out private spending. I would ask whether you believe this is true when said spending is financed by a deficit and interest rates are pressed against the zero lower bound, implying that there is an excess supply of desired savings?
D-Wal:
ReplyDeleteI do not recall saying anywhere that I believe that a deficit-financed increase in government spending crowds out public spending completely.
I do, however, recall asking many times for people to provide us with compelling evidence in favor of fiscal stimulus. Not one single person has risen to the challenge; which I think is telling.
Re: the zero lower-bound on the nominal interest rate.
First, I do not know why a zero nominal interest rate (say, on short term U.S. Treasuries) should constitute evidence of an "excess supply" of saving. Perhaps you can explain.
Second, nominal interest rates (especially out in the yield curve) are not anywhere "close" to zero (at least, the last time I checked). So I am not even sure what the practical application of this thought-experiment is supposed to be.
I am also not sure about your explanation of NIPA practices. If a tax increase results in lower C and I, NIPA will record it (regardless of what caused it). My point was that the increase in G in this case would also be recorded when it should instead have been recorded as a transfer (and hence not counted as a part of GDP).
AV,無碼,a片免費看,自拍貼圖,伊莉,微風論壇,成人聊天室,成人電影,成人文學,成人貼圖區,成人網站,一葉情貼圖片區,色情漫畫,言情小說,情色論壇,臺灣情色網,色情影片,色情,成
ReplyDelete人影城,080視訊聊天室,a片,A漫,h漫,麗的色遊戲,同志色教館,AV女優,SEX,咆哮小老鼠,85cc免費影片,正妹牆,ut聊天室,豆豆聊天室,聊天室,情色小說,aio,成人,微風成人,做愛,成人貼圖,18成人,嘟嘟成人網,aio交友愛情館,情色文學,色情小說,色情網站,情色,A片下載,嘟嘟情人色網,成人影片,成人圖片,成人文章,成人小說,成人漫畫,視訊聊天室,性愛,a片,AV女優,聊天室,情色
That's actually really cool!AV,無碼,a片免費看,自拍貼圖,伊莉,微風論壇,成人聊天室,成人電影,成人文學,成人貼圖區,成人網站,一葉情貼圖片區,色情漫畫,言情小說,情色論壇,臺灣情色網,色情影片,色情,成人影城,080視訊聊天室,a片,A漫,h漫,麗的色遊戲,同志色教館,AV女優,SEX,咆哮小老鼠,85cc免費影片,正妹牆,ut聊天室,豆豆聊天室,聊天室,情色小說,aio,成人,微風成人,做愛,成人貼圖,18成人,嘟嘟成人網,aio交友愛情館,情色文學,色情小說,色情網站,情色,A片下載,嘟嘟情人色網,成人影片,成人圖片,成人文章,成人小說,成人漫畫,視訊聊天室,性愛,做愛,成人遊戲,免費成人影片,成人光碟
ReplyDelete