Brad DeLong tutors me on fiscal stimulus

Brad DeLong, responding to my post on The uncertainty of stimulus, offers A Guide for the Perplexed Justin Fox on Fiscal Policy. His basic point is that World War II proved beyond a reasonable doubt that fiscal stimulus can work:

Demand expansion–deliberate attempts by governments to put the unemployed back to work by deficit spending and loose-money low interest rate policies–was successful in the 1930s and 1940s. It put the unemployed back to work. It did not contain within itself the seeds of a renewed Great Depression. It did not explode into hyperinflation. The coming of “stablization policy” enlarged the policy steps that could be undertaken without forcing a definitive break with the market-capitalist order, and without forcing a choice between Hitler’s way and Stalin’s.

I agree with all that. And I think the people who argue that FDR somehow prolonged the Great Depression are twisting history. Actually, they’re ignoring history. The depression ended in 1933, FDR’s first year in office. The subsequent recovery was maddeningly slow in many ways, there was a deep recession in 1938, and unemployment stayed high. I’m willing to buy that dirigiste New Deal policies played a role in slowing the recovery, but it’s awfully hard to make the case that deficit spending was to blame. What’s more, the U.S. economy did go from shrinking (which it had been doing since 1929) to growing again in 1933, and it kept growing for most of the rest of the decade before positively exploding during the war.

I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It’s basically just, We ran gigantic budget deficits during World War II and the economy got better. That’s the kind of argument I would make, not the kind of argument I’d expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It’s just all so seat-of-the-pants. But it’s better to be approximately right than precisely wrong, I guess.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

pneogy

“And I think the people who argue that FDR somehow prolonged the Great Depression are twisting history. Actually, they’re ignoring history.”
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Thank you.
plukasiak

well, I learned one thing today. The meaning of the word “dirigiste”, which I don’t think I’ve ever seen before.
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from http://www.thefreedictionary.com/dirigiste
Directed by a central authority; as, a dirigiste economy; with respect to economics, opposed to free-market.
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thanx, Justin!
tegwar

First off, I’m not sure modern economics is always that ‘rigorous’ – mathematical yes, but the data and fit between the equations and reality aren’t always that robust (or put another way, some models ‘work’ with randomly created data). Which, I think, brings us to the less quantified / formal discussions of stimulus effects – there just aren’t enough data points to formalize and test a strong model about these special times. Delong made a nice argument a few months ago about Good models being built upon strong observations of reality which get crystallized into simpler forms. For low frequency events like Depressions, the lessons of history can be understood, but not yet catalyzed into ‘rigorous forms.’
sosc122

I think the fact that Keynes has been out of style for so long (since the monetarists/Chicago school guys killed it in the 70′s), really, the last academic work on Keynesian fiscal policy was way back when after WWII. My humble guess is that the surge in formal mathematics left Keynes on the side of the road, and the recent conversion of the entire economists profession back is just a sign of how little these formal equations correlate with reality.
plukasiak

I think the fact that Keynes has been out of style for so long (since the monetarists/Chicago school guys killed it in the 70′s), really, the last academic work on Keynesian fiscal policy was way back when after WWII. My humble guess is that the surge in formal mathematics left Keynes on the side of the road, and the recent conversion of the entire economists profession back is just a sign of how little these formal equations correlate with reality.
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I’d have to concur — the enormous changes in information technology (both in terms of speed, and how much information can be handled efficienty) makes most economic theory obsolete — and this is especially true when it comes to market theories. In essence, much (most?) of the effort to manipulate the economy are immediately absorbed by the markets, rather than “working their way through the economy” in the ways proposed by either Keynes or the Chicago School.
sosc122

Just to add one point:

I also find it incredible the way that economic theory is used to calculate expected returns in the marcro economy. For example, Christina Rhomher writes a report on the stimulus, makes a couple of assumptions and viola a “1.5″ multiplier.

Yet, it seems the economy is much more chaotic, why the housing bubble? what grand theory explains the internal harmony of that? Isn’t this as much a psychological/sociological problem as an economic one? I wonder if the Republicans had joined with the Democrats and then there was this huge push in bipartisan support and the nation reacted with amazement etc etc. Wouldn’t we be in a much better situation instead of a cynical public that thinks Pelosi is just pushing pork around?