Originally Posted by jimmac
... To just do nothing would make matters worse. He also said Obama would have to find a way to stimulate the economy in a similar fashion to the way WWII did at the end of the depression. But he did make it clear that tyo do nothing would make matters much worse.
However yes, yes I know everyone had his favorite economist. I favor this guy because I have an aquintance ( Husband of a friend ) at work that's an econ professor ( who was just awarded the Peter C. and Bonnie S. Kremer Chair of Economics so he must know something ) and he favors Krugman's views.
I have my favorite economists too, but I tend to trust the literature behind the person(s) more. Given that someone of Krugman's accomplishments (international trade, Nobel prize) can be stuck in the 1970's old Keynesian orthodoxy suggest that your aquintance may be equally benighted in this area.
Keysenaism took quite a few blows from Lucas and the real business cycle theorists in the late 70s. From that challenge arose the New Keynesians (such as Greg Mankiw) that have sought to embrace, but also answer, those criticisms. Fellows like Krugman are old Keynesians - the attractions of which are that it provides s way to manage policy, even as the New Keynesians show we really don't know what we are doing.
Sadly, only recently has anyone bothered to test any Keyneian theory against reality (something more commonly done by moniterists and microeconomists). And the results have not been encouraging.
A year ago I expressed my skepticism in another forum regarding the Obama/Democratic "plan" - I was skeptical of it's wisdom compared to other alternatives, and of the ability of Congress and Obama to implement it on a timely basis or sensible basis.
I pointed out that "In 1982 we went through a severe recession with 10.4% unemployment, without massive new programs. And it was only a few months ago that 200 economists signed a letter expressing their own skepticism of the lavish spending on the bailouts. So when Obama suddenly claims, in a fatherly and mildly imperious tone that every economist his team surveyed (with one exception) agrees with a huge spending program, it triggers suspicion - since when do all economists agree in macro-economics? (One gets the sense that this is another manifestation of the urbane elite's idea of 'consensus', an claim which intentionally confuses substantial majorities with universal truth)."
...in otherwords after looking at some model results I fully expected the 10% unemployment rate, and thought Obama would fail.
Among the nuggets of truth I found at the time:
1) Lucas (Chicago) noted that the strategy of first resort ought to be using more of the monetary tools - they are not depleted. For example, the government could buy (lend against) more private securities, pumping money directly into the system even if the banks are unwilling to lend. http://online.wsj.com/article/SB122999959052129273.html
2) Mankiw (Harvard) pointed out that contrary to untested Keynesian textbook theory, empirical economic studies show that the fiscal stimulus multiplier (massive government spending) runs from zero to (at best) modest. These multiplier estimates run from 1 to 1.40 (which means that a dollar in new government spending causes $1.00 to $1.40 in new growth.) http://gregmankiw.blogspot.com/2008/...-skeptics.html
3) However, contrary to textbook theory, empirical studies also showed that the tax cut multiplier is 3 (Christine Romer's own work) to 5 (NBER - National Bureau of Economic Research). Hence, tax cuts (especially payroll tax cuts) provide a lot more bang for the buck.
4) I discovered that unlike the monetarists and monetary theory, there is not
a large body of literature that tests fiscal Keynesian theory. And what literature there is often fails to confirm the textbook Keynesian models. Mankiw noted: "For example, ... (note) the conclusion of Andrew Mountford and Harald Uhlig
(a prominent econometrician now at the University of Chicago) in an empirical study called "What are the Effects of Fiscal Policy Shocks?". The conclusions are that while a surprise tax cut strongly stimulates growth, a non-surprise addition to government spending is very weak in stimulating the economy. Furthermore, government spending 'crowds out' private investments and does not stimulate new investments via increased interest rates.
6) Mankiw also noted that "an earlier, related paper by Olivier Blanchard and Roberto Perotti called "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output" reported similar anomalous results:"we find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is consistent with a neoclassical model with distortionary taxes, but more difficult to reconcile with Keynesian theory."
7) I noted that Bakus (Suny) pointed out that a fiscal stimulus would be based on political criteria (rather than cost-benefit), come to late, have a low multiplier (even Krugman's is a low 1.1), and only compound the CBO dire predictions on a looming budget crisis (which was made BEFORE the recession). http://gregmankiw.blogspot.com/2008/...-stimulus.html
These observations are even more relevant today. The "stimulus" did not deliver the promised benefits. Now suddenly Washington is fretting over the looming deficit.
Conclusion? They should have listened to the critics (and Christine Romer should have paid more attention to her own work).