The Ambrosini Critique

That is all.

PS – I’m a democrat, but this sounds like good economics not to mention good politics.

That is all.

This Lessig comment sounds like he’s wanting the fiscal stimulus because he’s bored by the old way of doing things:

If we’re lucky, we get the chance for this kind of transformation once a generation. It would be a scandal on the scale of the last 8 years to fritter it away.

New, hip things like broadband are cool. Let’s not fritter away the chance to force the whole economy to transition to these technologies.

Don’t get me wrong. I’m a total geek. I DO think broadband, smart grids, high speed railroad, online medical records, etc are cool. Its just not clear to me that these are efficiency improving technologies and even granted that, its not clear why these have to be public investments.

Larry Lessig and Will Ambrosini want these technologies therefore everyone else has to pay for them?

Now:


Then:


(source.)

Most criticism of the fiscal package have centered on its impotence: consumption smoothing agents will make it moot or it’s effects won’t be seen in time to make a difference. So we’ve all been talking about multipliers. There’s a possibility, though, that the stimulus actually does harm:

Stimulus plans that bailout the financial and auto sector will influence innovation and reallocation. Reallocation may particularly suffer if the stimulus plans lock in factors in low-productivity sectors and activities. Market signals suggest that labour and capital should be reallocated away from, for example, the Detroit Big Three and highly skilled labour should be reallocated away from the financial industry towards more innovative sectors. Halted reallocation will also mean halted innovation.

Not only are we saddling future generations with debt, but we may be making them poorer than they might otherwise have been. Economic efficiency is generated through sectoral reallocation and efficiency creates growth. Even small reductions in efficiency have huge effects in the long run. For example, suppose the fiscal stimulus solidifies the expectation that big firms are too big to fail. This will cause too many resources to be allocated to big, established firms where innovation isn’t as hectic. Even if this has a small growth effect — let’s say it reduces growth rates by 0.3% — it only takes a generation for this swamp out the size of the additional debt created by the stimulus package.

As we saw in the global warming debates, this point is almost impossible to get across. Future growth is particularly intangible for most people.

About Obama’s deficit spending plan, Posner says:

There is a legitimate concern that many of the projects undertaken by the federal government will yield costs in excess of benefits. But the concern is exaggerated, because it ignores the benefits that such projects confer on fighting the depression as distinct from simply improving the nation’s transportation system or reducing carbon emissions or buying military equipment to replace what has been lost in the Iraqi and Afghan wars.

Personally, I keep ignoring this criticism of the criticism of fiscal policy. I think this is because its right. Fiscal stimulus — or at least this fiscal stimulus — is all about expectations.

To take off from the Posner quote, this policy’s effect on expectations has two channels. It will directly support wages, by “creating or saving” jobs, thus discouraging precautionary savings. In light of my last post, policy won’t be implemented fast enough to have an impact through this direct channel. The second, indirect, channel is cheerleading.

As economic statistics get worse and the reporting of them gets more dire, fear rises and expectations get grimmer and grimmer. As Krugman points out, coordinated low expectations cause economic conditions to worsen. Now, because the unemployment rate and GDP are national statistics and headlines announce the state of the nation, people look to great national leaders to cheer them. Obama’s bold, optimistic speeches and policy announcements are the macroeconomic equivalent of “Go team!” at a football game.

The irony of this is plain. If nobody paid attention to national coverage of economic conditions, their low expectations wouldn’t be so correlated and we wouldn’t need great national leaders to cheer us on.

In any case, for that cheerleading to be credible it has to backed by an actual implementation of fiscal policy. It doesn’t matter if its direct effect happens too late and a dollar short.

Prof. Caplan makes an excellent point about standard spending multipliers:

It takes time and effort to figure out how to spend new money, you often need the approval of multiple levels of supervision to get started, etc. The standard Keynesian analysis essentially compares a conditional effect of government spending to an unconditional effect of tax cuts.

BTW, I checked with some finance people I know. It takes a long time to find good investments and to allocate a few billion dollars in funds. For example, a friend of my brother’s works in a successful PE firm with 20-25 fund managers. The firm runs a few billion dollar fund. My brother’s friend says it would take five years for his firm to invest $3B.

Assuming linear production functions, we’d need 50,000 fund managers to invest the $750B in time for it to matter. Investment production functions aren’t linear.

How many people will have meaningful input in determining the overall allocation of the billion [sic, trillion] stimulus? 10? 20? It won’t be more than 1000. These people–let’s say that in the end 500 technocrats will play a meaningful role in writing the bill–will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.

— Kling

And then this comment on that same post:

This argument by Kling is one of the most persuasive (and easily shared) that I’ve seen yet against the bailout. Most people don’t necessarily understand the complex relationship between demand and the economy, the effect of a “multiplier”, or any other bizarre macro effects. On the other hand, they CAN put themselves into the shoes of the techno-crat and see what an impossibility this would be. (Particularly for someone who doesn’t have a track record of success or accomplishment).

Its possible, though, that people putting themselves in the technocrat’s shoes will conclude the technocrat would actually be more able then them to allocate these resources. But that’s not the argument. The point is nobody is able to allocate such a large amount of resources in such a small amount of time.

I wonder what the turnover rate in large private equity funds is… I’d guess it takes 10 years for a billion dollar fund to completely divest itself and reinvest those funds.

Peter Levine:

If we are going to borrow a trillion dollars from our kids to spend now on economic recovery, the money had better be well spent. Avoiding waste and fraud is a political imperative; Obama’s reelection may depend on it. It also seems important economically. A big rationale for fiscal stimulus spending is to restore confidence. My guess is that people will feel confident if they believe a trillion dollars is being well deployed–less so, if they think it is being wasted.

Do we really think equlibria are this sensitive to such small expectational perturbations? Has anybody read Roger Farmer and understood it?

I have, but I didn’t.

PS – Prof. Levine has some good ideas for putting the budget online… read that post! Do it!

“But the stimulus checks haven’t been sent yet,” you say. “A stimulus package hasn’t even been passed yet,” you exclaim.

Right you are. But in expectation, my stimulus will be around $500. (90% chance a $750B deal will pass relatively soon and 75% captured by special interests leaves $500 each for the rest of “us”.)

“Alright smarty, but if you’re so ‘rational’ then why aren’t you saving all your expected stimulus in order to pay back the future taxes that will have to be raised to pay for all of this,” you respond.

Yes, given I’m forming expectations about the future, it looks a lot like I’m Ricardian. Maybe. If we’re allowed to stray from rational exceptions, though, its no holds barred. We can invent any psychology we want. Maybe my expectations are rational, i.e. expectational errors have mean zero, for cash in-flows but not for cash out-flows. Its easy to form expectations about in-flows — paychecks come in fixed intervals with some known probability— but the consumption side of my brain is next to unpredictable and so I don’t know the distribution from which my consumption draws originate.

Or maybe I expect to be poor in the future and I also expect a more progressive tax structure. Then its rational for me to spend other (future) people’s money.

Or more likely my future richer self really wants to give my poor-graduate-student self money to help smooth my consumption. He can’t do that because the right kind of long-term intertemporal consumption credit markets don’t exist. Fiscal stimulus just acts to complete the market.

“Right, so anyway, how do you like the phone.”

Thanks for asking. I’d have to say the iPhone is the best gadget I’ve played with in years. Its too early to tell but I’d say it may be the best gadget I’ve ever used.