Tuesday, November 8, 2011

There's A Reason

...that FLG doesn't write about, say Norwegian folk music, and that's because he knows fuckall about it. FLG wishes Erik Kain would understand this same lesson when he writes about economics. Now, FLG knows The Ancient will be disappointed that FLG isn't aiming higher and is instead getting pissed about economic ignoramuses, but whatever. Anyway, Erik riffs off a post by Matt Yglesias, another fucking economic genius who thinks that mumbling Baumol's cost disease and Red Queen's Race makes him sound sophisticated, on Bastiat's "What Is Seen and What Is Not Seen."

Regular readers will know that FLG cites this essay from time to time, which is unsurprising given FLG's time horizons theory and this passage:
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Here's Erik:
[Matt] goes on:

The bulk of his early cases proceed by referring to a number of situations in which apparently wealth-creating activities are not in fact creating wealth because the money to finance them has to be taken away from somebody else. This, of course, is precisely why fiscal stimulus doesn’t consist of simultaneously increasing taxes and spending. Instead the idea of stimulative policies is to either borrow money or else actually increase the stock of money. This basically covers the points about broken windows, demobilized soldiers, and public works. And note that on public works, even Bastiat explicitly says that increasing public works spending during hard times is smart policy even if it merely shifts prosperity from the future to the present.

I agree with all of this. The entire point of stimulus spending and expanded monetary policy, as opposed to simply paying people to break and fix windows, is to use borrowed money and an increase in the supply of money to boost consumer spending, financial lending, and eventually hiring. I think Bastiat makes some important points about demobilization and I think here and in other works he makes a strong case against protectionism, but I see nothing in this essay or elsewhere that really lays the groundwork for a broad, anti-Keynesian approach to managing a recession.

To be clear, the basic issue in Bastiat is that we can stimulate economic activity by destroying wealth, but it doesn't make society better off. You destroy a window, wealth, and it leads to creates work for a glazier, economic stimulus, but owner of the window is worse off. And while the glazier is better off that comes at the expense of somebody else, a shoemaker.

Now, if you want to look at the specific cases that Bastiat makes and then say that doesn't disprove Keynesian stimulus, well, that's great. Bastiat was long dead before Keynes came around.

Matt and Erik are wrong to say that in the case of deficit financed stimulus the money doesn't have to be taken away from somebody else. Remember, there's not such thing as a free lunch. It does have to be taken away from somebody else, specifically it has to be taken away from taxpayers in the future.

So, there are two questions, given Bastiat's concerns about when the "immediate consequence is favorable, the later consequences are disastrous."

1) How would the deficit finance stimulus effect the economy today?

When making the case for the stimulus, Christina Romer and Jared Bernstein said the multiplier would be 1.57.

2) How would those future tax increases affect the economy in the future? David and Christina, the same Christina, said:
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

Now, FLG understands that in one case we are talking about dollars and the second percentage of GDP. So, if the stimulus results in increased growth over the intervening years, then the size of the dollars used as stimulus as a percentage of GDP, even in real terms, will easier to pay off. But when the multipliers are 1.57 versus -3, that's a big difference to overcome.

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