The "tinkering" metaphor

     FDR was popular during the Great Depression partly due to his willingness to experiment with different solutions to the economic crisis.  He tried everything, as David Kennedy remarks...


What unit of plan or purpose, one might ask, was to be found in an administration that at various times tinkered with inflation and price controls, with deficit spending and budget-balancing, cartelization and trust-busing, the promotion of consumption and the intimidation of investment, farm-acreage reduction and land reclamation, public employment projects and forced removals from the labor pool?

—David M. Kennedy describing Franklin D. Roosevelt’s New Deal in Freedom From Fear

     The idea of using government to create different experimental interventions into the economy makes a lot of sense with certain metaphors of the economy.  If your metaphor for the economy is a gasoline engine, a broken economy is like a broken engine, and it makes sense to keep replacing different parts until the engine works again.
     Is a gasoline engine a good metaphor?  Yes, if you allow the possibility that replacing one working part with another part can cause damage elsewhere in the engine.  Like, spending money on a new alternator degrades from the performance of the fuel injection.  You would also have to assume that the engine, given time (and it may take a long time), will fix itself.  
     Any money the government spends must be taken from somewhere.  Even if the money is printed, money is essentially taken from the economy in the form of a devalued currency.  Consequently, you only replace the alternator if you have reasonable assurance the alternator was the problem, or if you believe the cost of replacing a working alternator in the form of a less efficient fuel injection is something you can live with.  Likewise, you do not want to risk the damage to the fuel injection unless you believe it will take the economy a long time to fix itself.
     This is why a better metaphor for a troubled economy is a sick person.  Chemotherapy might help a cancer patient, but will hurt the patient if the cancer diagnosis is wrong—just like a fiscal stimulus might be counter-productive if the problem is lack of confidence / spending, and just like a "quantitative easing" might be counter-productive if bank reserves are not the main problem.

Integrity in Macroeconomics

It takes a remarkable amount of integrity to make such an honest and humble statement about macroeconomics.

There are times when the economy works well and times when it doesn’t, and when it works well it’s easy to find a job and when it doesn’t work well it’s really hard to find a job, but we don’t really understand those differences.
—Russell Roberts in “Ramey on Stimulus and Multipliers,” EconTalk, October 24, 2011.

Galbraith on Keynes

“Never forget, dear boy, that academic distinction in economics is not to be had from giving a clear account of how the world works.  Keynes knew that; had he made his General Theory completely comprehensible, it would have been ignored.  Economists value most the colleague whom they most struggle to understand.”
—John Kenneth Galbraith in A Tenured Professor (1990), page 50.

Stimulus Perspectives

A number of Masonists and economists at the CATO Institute (both of which I read and listen to daily, with profound respect) has attacked the fiscal stimulus plan.  The rightly point out that many people think that the extra government spending is "new money" when it fact every dollar put into the economy as part of the stimulus package will be paid for by a dollar taken out of the economy through government borrowing (or if the government raised taxes to pay for the extra spending, taxes would rise by one dollar).

The Masonists and Cato folks make it sound like it is impossible for the stimulus to be a stimulus. If you take out one gallon of water from a bucket, and pour that water back into the bucket, nothing has changed. If you take a dollar out of the economy and then put it back in, nothing has changed.

It can change the economy though, as Hal Varian points out.  In an ideal world, the increased savings would be translated instantaneously into higher private investment (using banks as intermediaries).  However, in recessions, and especially the Great Depression, these savings tend to accumulate as cash and not used in any fashion by the economy.  This is akin to taking wealth out of an economy.  When the government induces people to buy government securities instead of accumulating cash, and using that money to provide public goods, the stimulus can work.

Not that I'm for the stimulus package. I don't think we need it.  The Bootleggers and Baptists effect will ensure most of it is a deadweight loss.  Besides, printing money is better, and Bernanke knows how to do that.  So let him.  

Let's be honest about the economics of the stimulus package though.  Economic theory does contend that it can have a positive effect, and in recessions, generally will.