Flat-earth society opposes stimulus package
Wow, what a wild 7 months it has been. The recession did finally arrive with a vengeance, and rounds of bailouts have kicked up tons of fuss. Somehow controversy manages to continue, though to his credit Bernanke has truly turned out to be a "two-handed economist" with the ability to recognize the nature and magnitude of the threat.
Business Week publicized a meeting sponsored by the Cato Institute, showcasing the "long run equilibrium" perspective with Nobel laureate Ed Prescott as headline speaker. These folks are actually arguing that the stimulus plan is a mistake, will make no difference to output and will add significantly to inflation over the next few years. "All that is needed" they argue, is for wages and prices to fall far enough to capture people's spending, and then things will pick up again at the same "real" level of output that would have prevailed without the intervention.
I will try to avoid going apopleptic at the notion that they can get away with arguing that kind of drivel. Because Prescott can do well with a research paradigm that assumes that sort of thing to be true, and can solve technical problems within it that would be intractable in a more realistic setting, he gets to pocket fat fees for spouting the Cato line. But when I say, "do well" with this paradigm, I don't mean finding evidence that anyone believes to be persuasive. Rather I mean setting and solving problems that are technically interesting enough to sustain lots of Ph.D. dissertations and articles leading to tenure. In some ways the profession is as corrupt as the politicians.
The main problem, of course, is that much of the profession is still interested in fighting the last war, meaning the war against inflation that was so painfully won in the 80s. They haven't spent much time thinking about the possibility of a demand-constrained economy or about what needs to be done in that case. The fact that the obvious answers are Keynesian (the Keynesian approach arose from the last really seriously demand-constrained economy, namely the 30s) sounds to these people like going back to the over-confident Keynesian approach of the 60s and early 70s, when supply constraints were deliberately, consciously ignored. Fortunately Bernanke made a study of the Great Depression, and with an open mind rather than an ax to grind (or a paymaster to please).
In fact, there is no evidence that the "equilibrium" approach is of any value at all once a serious downward spiral begins. The talk of long run adjustment to the economy producing at capacity (sorry at "equilibrium" determined by capacity) is completely baseless, imposed by a certain symmetry in the models that do well in a supply-constrained economy and have therefore been at least competitive for professional backing. Chris Sims, 25 years ago when I was at Minnesota, said that he was not interested in any model that didn't have rational expectations, but also said that he had never seen any results from econometric modeling that didn't come out favoring the Keynesian view. That was after the St. Louis model (that falls apart even in the 80s) and I would venture to guess that his views haven't changed. On either point.
I cannot confidently predict that today's stimulus will add nothing to inflation in a few years. I can say with a high degree of confidence that 6 percent inflation would be much better than the situation if there was no stimulus. And in fact, the most likely inflation rate in the next 3 years will be below 2 percent all 3 years.
Just one other note. I think the press should be obligated, whenever they give time to any of the conservative crew as a way of being "even-handed", to ask them what they think about privatizing Social Security now, and to print their answers. They don't have to let themselves be spun by a bunch of hacks, or to pretend that they are allowing a fair hearing for a legitimate alternative point of view. It has no more empirical backing than creationism.
Business Week publicized a meeting sponsored by the Cato Institute, showcasing the "long run equilibrium" perspective with Nobel laureate Ed Prescott as headline speaker. These folks are actually arguing that the stimulus plan is a mistake, will make no difference to output and will add significantly to inflation over the next few years. "All that is needed" they argue, is for wages and prices to fall far enough to capture people's spending, and then things will pick up again at the same "real" level of output that would have prevailed without the intervention.
I will try to avoid going apopleptic at the notion that they can get away with arguing that kind of drivel. Because Prescott can do well with a research paradigm that assumes that sort of thing to be true, and can solve technical problems within it that would be intractable in a more realistic setting, he gets to pocket fat fees for spouting the Cato line. But when I say, "do well" with this paradigm, I don't mean finding evidence that anyone believes to be persuasive. Rather I mean setting and solving problems that are technically interesting enough to sustain lots of Ph.D. dissertations and articles leading to tenure. In some ways the profession is as corrupt as the politicians.
The main problem, of course, is that much of the profession is still interested in fighting the last war, meaning the war against inflation that was so painfully won in the 80s. They haven't spent much time thinking about the possibility of a demand-constrained economy or about what needs to be done in that case. The fact that the obvious answers are Keynesian (the Keynesian approach arose from the last really seriously demand-constrained economy, namely the 30s) sounds to these people like going back to the over-confident Keynesian approach of the 60s and early 70s, when supply constraints were deliberately, consciously ignored. Fortunately Bernanke made a study of the Great Depression, and with an open mind rather than an ax to grind (or a paymaster to please).
In fact, there is no evidence that the "equilibrium" approach is of any value at all once a serious downward spiral begins. The talk of long run adjustment to the economy producing at capacity (sorry at "equilibrium" determined by capacity) is completely baseless, imposed by a certain symmetry in the models that do well in a supply-constrained economy and have therefore been at least competitive for professional backing. Chris Sims, 25 years ago when I was at Minnesota, said that he was not interested in any model that didn't have rational expectations, but also said that he had never seen any results from econometric modeling that didn't come out favoring the Keynesian view. That was after the St. Louis model (that falls apart even in the 80s) and I would venture to guess that his views haven't changed. On either point.
I cannot confidently predict that today's stimulus will add nothing to inflation in a few years. I can say with a high degree of confidence that 6 percent inflation would be much better than the situation if there was no stimulus. And in fact, the most likely inflation rate in the next 3 years will be below 2 percent all 3 years.
Just one other note. I think the press should be obligated, whenever they give time to any of the conservative crew as a way of being "even-handed", to ask them what they think about privatizing Social Security now, and to print their answers. They don't have to let themselves be spun by a bunch of hacks, or to pretend that they are allowing a fair hearing for a legitimate alternative point of view. It has no more empirical backing than creationism.