Sharpening my knife
He gives a reason why planned stimulus can affect outcomes now (hint: expectations), thus giving an economic argument for Brad Delong’s seemingly puzzling call for more extremely laggy fiscal policy. He then proceeds to give a reason why, given Fed behavior, said fiscal policy is contractionary(!).
A must read.
We have an incomprehensible, to most, outside-in view of the world. David Friedman says something correct but incomprehensible:
Climate aside, we do not live in a static world—consider the changes that have occurred over the past century. The shifts we can expect to occur due to technological progress alone, even without allowing for political and demograpic shifts, are much larger than the shifts required to deal with climate change on the scale I am discussing.
A few months back I was debating a petroleum engineer about peak oil. It occurred to me that if petroleum engineers didn’t get excited about hard problems in energy production, maybe those hard problems wouldn’t get solved. This, I think, is the problem with the assumption of exogenous technology and this is the problem with economists giving policy advice.
The American economy appears to be nearing the end of contraction. That’s good news, particularly when one considers that only about 10% of the funds authorised in this year’s stimulus bill has been spent; the plan is only beginning to ramp up and outlays will peak in 2010. We should expect that injection to provide the economy with a nice boost at a critical time.
On the other hand, state budget policies are sharply contractionary at this point. Despite allocations of federal aid to states, services are being cut, state employees are being laid off, and taxes are being raised in order to balance the budgets of local governments constitutionally unable to run deficits. It’s not at all clear that the federal stimulus will entirely compensate for state-level fiscal tightening, which means that American fiscal policy could, on net, be contractionary.
Easy money is doing its part, of course, but the bottom line is that the fiscal boost many are expecting may not actually materialise. This will end up causing a lot of human suffering, and it may make for a long and shallow recovery—or worse, a tipping back into contraction.
Nobody thinks that it’s time to go back in the water yet. And we do need a bigger stimulus.
I can’t find the economics here. The economy is “nearing the end of contraction”, people are suffering now and fiscal policy is contractionary now. So… we need stimulus (from the current package and a new bigger one) next year and beyond?
I know what’s going on here. Delong, an uber-smart guy, has done analysis showing how this makes sense. The problem, like “beat the market” investment strategies, is if he tells people his analysis, that’ll make it unworkable.
Professor, honestly, I won’t tell anyone if you let me in on the secret!
Krugman likes Prof. Clark’s stuff.
