Sunday, December 28, 2008

Krugman Assumes One Must Act

Krugman writes:
the opponents of a strong stimulus plan don’t really have an alternative to offer.

Here's an alternative: nothing. Like when a nervous mom takes her precious 12-month old to the doctor because he has a cold, the best thing the doctor can do is nothing. Maybe a placebo. So too for the economy.
They don’t even have a really coherent critique; as Brad DeLong points out, if you believe that a surge in private spending would raise employment — and even the critics agree on that — it’s very hard to explain why a surge of public spending wouldn’t have the same effect.

The difference between an increase in private investment spending, and government spending, is like the difference between pushing an old lady down and pushing her out of the way of a runaway train. private investment is the result of millions of individuals making decisions based on their wealth and profit expectation; the other is simply someone spending other people's money to help other people get jobs.

In a complex system, injecting more of an endogenous quantity that is correlated with something good invariably causes feedback effects, most bad, because complex systems tend to be optimized, and so the 'total derivative' in futzing with some input is usually negative (though the first partial often highly positive). This is why we do not suggest one take serotonin supplements, even though higher levels of serotonin are correlated with success and high status. Testosterone is known to have many positive qualities for men, but the best ways to generate a higher level of testosterone is to exercise regularly, including weight training, avoid insulin spikes, get your body fat low, and get good sleep. A bad way would be to inject it into you bloodstream. This is because the latter invites your body to decrease the amount it makes, and the net effect is usually negative.

Similarly, taking money away from some people for make-work projects creates jobs, but these are taking away money spent on something else, so the net is often negative. Further, unlike natural demand, the incentives of the workers are not necessarily so good for 'natural' jobs we would like them to eventually get.

It's funny how many economists do not really believe in the Invisible Hand, except for trivial applications.


OnlineBrokerReview said...

Good analogies and I agree. Doing nothing is not an option for "experts" because saying so would make them useless. I mean, what would economists do all day if their advice would be to do nothing? Look for a new career, most likely.

J said...

The problem is that there are periods when the public is afraid to spend its money and terrified of getting indebted, like the during the recent Japanese recession. In these government forced spending to get thing moving may be indicated.

Regarding government spending on public works (or weapons & war) vs private consumption, I for one am against frivolity.

Anonymous said...

krugman is an ego-maniacal sham. the reason ppl hate liberals in this country. i see zero value in any of his scribbles. his getting the million bucks and not being capable of grasping basic economic concepts tells a lot about the state society is in. using fancy arguments like 'morality play' doesn't make it any more correct.

Plamen said...

Hear, hear! It's before-coffee o'clock here, so I'll just copy-paste my thoughts on this from a few hours ago:

I was tempted to call this drivel, but, on second thought, it is not. It is a sinister attempt to shift the burden of proof on one's opponents, and that almost reduces me to unbridled profanity, but I am trying to behave. A decent analogy I can think of would go something like this: someone holds a group of people hostage and justifies killing the guy in the wheelchair by pointing out that he asked everyone to pick someone else, and nobody did. No, Krugman, you bleeping idiot, I cannot offer you an alternative in your sick parallel universe, where my money is yours. In this one, here's an alternative: put down the bleeping spending gun, and begin to sort the bodies from the last few blasts.

J said...

During deflation, everybody is holding his money as tomorrow everything will be cheaper. The government can (must) incentivate spending - generally by moderate inflation. Inflation is vital.

Anonymous said...

I'm surprised a Ph.d. in presents such an unbalanced analysis before stating his opinion.

The problem right now is that any fiscal stimulas to consumer or investment incentives for business won't have their usual effect because everyone is scared ... so consumers are trying to save and businesses are afraid to invest.

Some can strongly agree with your opinion on government spending being wasteful, but when an economic stimulas is needed with consumer and business confidence this low ... the other alternatives (first stimulas package) didn't or won't work.