Posted by: Tobias | January 16, 2009

Please stimulate my mind

Readers of my recent entry on the various stimulus packages that are being proposed all over the world probably know that my position can best be described as a skeptic. Not in the same sense as people that don’t believe in man-made global warming calling themselves global warming skeptics but in the sense that I have been far from impressed with the arguments and evidence on which people are trying to sell us on multi-billion stimulus packages (the 30 billion euro package that was just introduced in Germany almost seems like peanuts compared to what will soon be more than 1.5 trillion dollars worth of stimulus in the US, including the TARP funds which have long been diverted to things other than their original purpose) that future generations will take ages to repay.

That being said, I am also far from convinced by the opposite side, people like those quoted in today’s Chicago Tribune (via Greg Mankiw:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is “taught only for its fallacies.”

New York University economist Thomas Sargent agrees: “The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research.”

Nobel Laureate Gary Becker says any benefits will be modest at best.

I’m just struck by the definitiveness with which Cochrane and Sargent dismiss the stimulus. It may well be true that fiscal policy is only taught for its fallacies at UChicago these days, but this is certainly not so at other universities that I’m familiar with here in Europe and I would be very surprised if it were true for many of the Top20 schools in the US (MIT, Berkeley and Harvard come to mind). In fact, I would be surprised to find out this was true even at UChicago.

I would also be very interested in finding out just what it is “that we have learned in the last 60 years of macroeconomic research” that we are ignoring. Not that I don’t agree with Sargent that most of the discussions take place on a level that’s barely above what I can understand with a measly undergrad+ education economics (I don’t know whether this should flatter me or scare me shitless). But what useful innovations have taken place in macroeconomics that shed some light on how we should conduct fiscal policy in practice, I do not know and I’m comforted by the fact that it seems neither does Sargent’s NYU colleague Mario Rizzo.

Other opponents are hardly faring better. Eugene Fama, new to the blogosphere with his long-time colleague Kenneth French, posted a critique of the stimulus, seemingly deriving complete fiscal neutrality from an accounting identity alone, only to be smacked sideways by Brad DeLong for this mistake befitting an undergraduate.

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