Saturday, 24 January 2009

Faculty panel: evalutating the Obama stimulus package

A panel discussion, at The University of Chicago, featuring Professors John Huizinga, Robert Lucas and Kevin Murphy. They evaluate and discuss the pros and cons of the Obama Stimulus Package. Watch video; View Huizinga pdf; View Murphy pdf;View Lucas pdf (panel presentation); View Lucas pdf (extended talk).

David Henderson comments on this video here and Arnold Kling comments here. Kling's summary is
Huizinga makes three points. First, we are hearing a lot of Keynesian macro being tossed around now, and it's not clear why. Second, so far this is not such a calamitous recession. The number of jobs lost is high, but relative to the size of the economy it's not out of line. (I would say that the media hype is greater for this recession. It's like the way that media magnify the horrors of war.) Some people forecast a long, deep recession, but it's a bit weird to base policy on a forecast of a long stagnation, when such forecasts are highly uncertain. The third point is that a fiscal deficit has costs as well as benefits. It will cut into national saving, which is not really a good thing long term.

Kevin Murphy points out that for fiscal stimulus to be cost-effective, the government has to make better use of resources. This is plausible when government uses unemployed resources, but it is implausible when government takes resources out of productive uses in the private sector. But if there is a 7 percent unemployment rate, then 93 percent of resources *are* being used, so the chances seem pretty high that a lot of the government spending is going to draw on resources that already are employed.
Henderson's comments are
Arnold covered Huizinga's highlights and so I have nothing to add other than that Huizinga laid it out beautifully and his overheads are worth showing to people. They show percentage job losses in various recessions to put this one in perspective. Huizinga, incidentally, was Yao Ming's agent.

The star presentation, though, was from baseball-cap-wearing Kevin Murphy. The clarity was superb. He laid out an equation that everyone could agree to so as to see if increases in government spending could have a good effect. The disagreements, he noted, would be on the various magnitudes and on one sign. Here's what Christie Romer must believe, here's what I believe, here's why Marty Feldstein is in trouble given his past work on deadweight loss from taxes, etc. Kevin made the point I made in my recent article about the destructiveness from cutting taxes without cutting marginal tax rates. Print out the equation and you can follow the numbers as you go along. Bottom line: if you share Kevin's view about the magnitudes, you will conclude that this Obama fiscal policy will be horrible. And you have to have a pretty extreme view of the magnitudes of the parameters to conclude that it will be on net good.

The final presentation was a sobering one from Bob Lucas, who made the Friedman-type points about the quantity equation and why the Fed must be the lender of last resort but we should avoid all the fiscal policy stuff.

The best contribution from the audience was from John Cochrane, who was a junior economist at the Council of Economic Advisers when I was a senior economist there. Cochrane pointed out that he had gone through the last 50 years of textbooks (on his web site, he says 40) and couldn't find any of them claiming that increases in government spending were a good way out of recessions. He pointed out that given that the problem is a lack of investment, having the government spend money that it borrows must crowd out some investment.
Tyler Cowen's comment is short but bang on
They are all excellent but I thought Kevin Murphy was the most to the point.
Watching the video is a hour well spent. Having a printout of the pdf files helps.

1 comment:

Anonymous said...

Obama’s stimulus plan should also envision changing regulations & economic policies to have short-term & long-term effects on unemployment, middle-class and the market stability. Strengthening the middle class and creating more job opportunities should be the primary objective of the package, rather than handing the blank check to the Wall Street and failed big corporations.