Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Friday, November 6, 2009

Fiscal Multipliers in War and in Peace

It truly is breathtaking how certain some people are of what they know to be true about the way a macroeconomy operates. The Krugmans and DeLongs of this world really make it sound like everything we really need to know has been settled long ago. Yes, the science is "settled" (where have we heard this before?).

I recently came across this piece by Brad DeLong: A Guide for the Perplexed. Consider the following quote:
But when fiscal boost was tried on a large enough scale, it certainly did the job. And it is reasonable to infer (with all the caveats provided by the CBO) that what is true in the very large will be true in the merely large as well. Eugene Fama says that it is theoretically impossible for fiscal stimulus to boost output: World War II proves him wrong. Robert Barro says that the multiplier is zero: World War II proves him wrong. Benn Steil says that Jacques Rueff in 1947 conclusively proved that fiscal policy could not boost employment: World War II proves him wrong.

Implication: a WWII style fiscal stimulus will "do the job" in a peacetime recession. WWII "proves" it. does he know this? Why do I not feel as confident that this is the case? Am I truly that dense? (an invite to some rather rude comments, I'm sure!)

In any case, I decided to gather my thoughts on the subject and post them here for public review and criticism. The piece is a bit too long for a blog posting; so if you're interested, please click here. Looking forward to any comments.

Sunday, November 1, 2009

I Don't Mean to Nitpick, But...

You have no doubt read the news. The WSJ headline reads: Economy Snaps Long Slump, GDP's 3.5% Rise May Mark End of Recession; Recovery Weak, Reliant on Stimulus. See here. I reproduce their figure at the right.

Evidently, consumer spending "led" third-quarter growth (note the implicit use of the theory that consumer spending "drives" growth -- it is hard to get reporters to think outside the Econ 101 box). The 1% figure is, I think, rightly attributed in part to the "cash for clunkers" program.

My nitpick is the following observation. Almost all of these expenditure components (save exports) consists of spending on both domestically produced goods and imports. What fraction of this 1% is accounted for by spending on imported motor vehicles and parts?

It would be more informative, I think, if all these expenditure components had imports subtracted off individually; rather that summing them all up and then subtracting off total imports (the -2% figure in red).

Given the way the numbers are presented here, we have no idea to what extent the government subsidy stimulated domestic production (which is what goes into the calculation of GDP), as opposed to total expenditure. In short, did the "cash for clunkers" program simply encourage Americans to purchase foreign vehicles; and, if so, to what extent might one argue that this program encouraged the domestic production of vehicles (as opposed to foreign production)?