Friday, July 16, 2010

How to Think Like a Keynesian

Currently economists are debating whether the stimulus worked. The President's economists state that spending about $200B created about $400B in GDP net net. If the payoff is that high clearly we should spend more, way more. As Hayek said, ultimately, facts drive policy disagreements.

The empirical logic used, however, is often quite twisted. Here's Cato's Dan Mitchell with an analogy:
Next time I see my buddies, I’m going to claim that I enjoyed a week of debauchery with the Victoria’s Secret models. And if any of them are rude enough to point out that I’m lying, I’ll simply explain that I started with an assumption of spending -7 nights with the supermodels. And since I actually spent zero nights with them, that means a net of +7. Some of you may be wondering whether it makes sense to begin with an assumption of “-7 nights,” but I figure that’s okay since Keynesians begin with the assumption that you can increase your prosperity by transferring money from your left pocket to your right pocket.

8 comments:

jsalvati said...

I think perhaps the reason you find this ridiculous is that you assume they are talking about real GDP, not nominal GDP. While I have no doubt that many people (even economists who should know better) are talking about real GDP, the macro theory they reference is actually about nominal GDP. Aggregate demand is a nominal concept, even if 'Keynesian's' often forget this.
It's a lot more reasonable to claim that government spending increased GDP by a great deal than that it increased real GDP by a great deal. However, this is mostly irrelevant because the Central Bank can always manipulate nominal GDP how it sees fit, reversing or increasing fiscal stimulus. The Central Bank always moves last.

Again, I suggest Scott Sumner's blog.

Slavko said...

Polls of German economists - from Tyler Cowen Blog
http://www.marginalrevolution.com/marginalrevolution/page/4/

A very interesting poll from the German FT is here (in German). In addition to answering other questions, German economists speak to who are the important economists for the 21st century. The standings look like this:

1. Keynes: 92.4 percent
2. Paul Samuelson: 87.8 percent
3. Joseph Stiglitz: 86.0 percent
4. Milton Friedman: 84.6 percent
5. George Akerlof: 83.9 percent

(there were 1158 respondents.) Wisdom of crowds or Germans live on another planet?

Eric Falkenstein said...

Silly Germans. All the good ones left for America a long time ago ;)

Anonymous said...

"I think perhaps the reason you find this ridiculous is that you assume they are talking about real GDP, not nominal GDP. While I have no doubt that many people (even economists who should know better) are talking about real GDP, the macro theory they reference is actually about nominal GDP"

Wheyl: the macro theory they reference is about a world with 0 inflation rates so real==nominal.

Eric Falkenstein said...

Yeah, my ancestors came over around that time...As per Scott Sumners blog, discussions of "AD" I find rather pointless, like discussing aggregate wages, how inflation is caused by expectations, or worker alienation. I'm more of a Hayekian, who thinks of the structure of production is a vast interconnecting lattice of preferences, products and services. The general equilibrium effects are difficult to know, but I do know that morphing the model into the standard Hicks-Hansen-Samuelsonian framework generated a lot of publications, but it couldn't predict either via models predicting quarterly data, or which countries do better than others. So, I don't see it as a fruitful foundation for anything.

Drewfus said...

...Keynesians begin with the assumption that you can increase your prosperity by transferring money from your left pocket to your right pocket.

They also assume that the individual is a split brain patient, where the left brain (that controls the right hand), acts independently of the right brain (that controls the left hand). So if the left brain reaches across with right hand to move money from the left pocket to the right pocket, this will indeed make a difference, since the left brain is more spendthrift than the right.

Dave said...

Eric,

If you were asked by the President or Congress for your economic advice, what would you suggest? More of an Andrew Mellon approach?

Also, is the e-mail address in your CV still good? I sent you an e-mail there yesterday.

Anonymous said...

Were your emails kicked back? If not, have you considered the possibility he finds your offline comments insufficiently interesting or original to merit a reply?