Posted by: Dirk | January 12, 2009

The US Stimulus proposal: January 2009

Christina Romer and Jared Bernstein have published the official American Recovery and Reinvestment Plan estimates. This has been commented on already by Paul Krugman at the NY Times here and here, criticising that the plan is not enough and also not a long-run prjoect. What would be needed, according to almost everybody, are good investment projects that are available soon. Ugo Pagano takes a position that I have not heard of before:

Some “old theories” (which were academic pariahs until a couple of months ago) offer the main intellectual framework for anti-crisis policies. Re-considering past theories and policies is certainly a very useful re-starting point. However, policy suggestions should not ignore how much the economy has changed since the thirties. …

Instead of being used to nationalize inefficiently the assets of firms producing private goods, Keynesian policies could be used to decrease the monopolization of knowledge and to transfer efficiently knowledge from the private to the public sphere. The WTO, which has made intellectual private property more convenient, should be balanced by the institution of a strong WRO (World Research Organization) which helps to make intellectual public property feasible whenever it can better foster development.

This seems like an interesting proposal to me. More comments come from Gregory Mankiw, also at the NY Times. However, I find his exposition a bit superficial. Let me give you some examples:

  1. What has to be done today is not what modern textbooks say. This is because Keynesians and Keynes are not the same. Keynes General Theory applies only when monetary policy fails, which is the case now. As a textbook author, Mankiw surely does not like this point.
  2. How much bang for the buck? Mankiw says tax cuts beat government spending on average in the past. But what we have here is not an ‘average’ economy. People are loaded with debt and relatively likely to spend tax savings to decrease their debt.
  3. His depiction of Keynesian theory is wrong. One guy digs a hole in the others yard, then the favor is returned. That’s just not it. One guy digs a hole, spends the money to buy something useful from his neighbor, who in turn spends the receipts on something else – that’s more like it.

Economists in general have depicted the economics of Keynes in a wrong way, and now there is a big confusion. Axel Leijonhufvud and others have warned for a long time, but their goods ideas were left out of mainstream economics books (by Mankiw, among others). Since academic discussions were discouraged in the past after the discipline settled for an unconvincing truce, it is difficult to have them now.

The last comment I want to mention is that of Joe Stiglitz. I agree with most of what he says. His criticism of the international economic order could be more precise. But with the space he got I don’t blame him. What I don’t like is the old US consumer of last resort view:

For a long time, the US has played an important role in keeping the global economy going. America’s profligacy – the fact that the world’s richest country could not live within its means – was often criticised. But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.

Well, the US consumers were only able to not save because the US received big capital inflows from net exporting countries like China, Germany, Japan and others. Now that they won’t get any more foreign money (because we all know now that they wasted it on houses they cannot afford and the Iraq war), the countries can spend it on their own and increase demand at home. This will, by the way, also lead to rising US exports. In the last and I believe most important point, however, I agree with him that the international economic order has to be fixed. I believe his idea of reviving the Bancor plan of Keynes is a good starting point for discussion:

Third, a global reserve system is needed. It makes little sense for the world’s poorest countries to lend money to the richest at low interest rates. The system is unstable. The dollar reserve system is fraying, but is likely to be replaced with a dollar/euro or dollar/euro/yen system that is even more unstable. Annual emissions of a global reserve currency (what Keynes called Bancor, the IMF calls SDRs) could help fuel global aggregate demand and be used to promote development and address the problems of global warming.

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Responses

  1. […] I have just read an article called Voodoo Multipliers by Barro. After recently finding that Gregory Mankiw does not understand Keynes, this is the latest case of macroeconomic […]


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