What Kind of Model Is Brian Riedl Using?

If one wants to be taken seriously in the world of policy analysis, one should at least use an internally consistent framework. This consideration, apparently, has not troubled Mr. Reidl.


To quote from The fatal flaw of Keynesian stimulus, in the Washington Times:

Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.



Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to conclude that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. In other words, these models are programmed to conclude that stimulus spending always creates jobs and growth, no matter how the economy actually performs.

Well, not quite. As I described in this post, there are a variety of ways in which multipliers are obtained. Oftentimes, the impacts are estimated either directly or indirectly, by estimating the marginal propensity to consume. The article continues:

But there is one problem with the government stimulus theory: No one asks where Congress got the money it spends.


Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.


It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.

Here, I think Mr. Riedl is invoking Ricardian Equivalence, despite the fact that there is no empirical evidence, to my knowledge, that validates pure Ricardian Equivalence (actually, Ricardian equivalence wouldn’t necessary hold for government spending on goods and services, anyway). Now, at this juncture, I thought that he might be invoking a real business cycle model, or an older, nonstochastic version of the RBC, namely a flex price Classical model. But then the next paragraph reads:

Some believe stimulus spending is the mechanism by which the Federal Reserve injects new dollars into the economy. Yet the Fed could run the printing press and then inject those dollars into the economy by buying existing bonds (with mostly inflationary results). It doesn’t need an expensive stimulus bill to conduct monetary policy.

Accepting that the Fed can stimulate via monetary policy then implies either (1) sticky prices so an expansionary monetary policy can affect the real interest rate, or (2) a financial accelerator model such that collateral constraints or some other financial rigidity holds. In the latter case, it seems prima facie that Ricardian Equivalance cannot hold.


Next, I was thrown for a loop, because Mr. Riedl seems to conflate real saving and the monetary multiplier. He argues that government deficits can only be financed by foreign saving, private saving and “idle saving”. This he describes thus:


Idle savings. The only government spending that truly increases current purchasing is the amount that would have otherwise sat idle in safes and mattresses. Those are the only dollars not already circulating through the economy as consumption, or through the financial markets as investment spending.


Idle savings are rare. People and businesses generally invest or bank their savings, where the financial markets transfer them to other spenders. Banks that receive savings either lend them out to a spender, or (when afraid to loan) invest them conservatively to earn some interest. They are not hoarding customer deposits in massive vaults (beyond the required cash reserves).

This is an odd conflation of saving, measured as a flow, and financial assets. But lets take the equation at face value, there is an incredibly counterfactual observation that there no reserves are behing held in excess of required cash reserves. According to the St. Louis Fed, excess reserves are now approximately $1 trillion dollars. Well, no need for facts to get in the way of a good polemic.


Mr. Riedl’s main point is:


All government stimulus spending requires first borrowing dollars that would have otherwise been applied elsewhere in the economy. The only exception is money borrowed from “idle savings,” which for reasons described above likely constitute a minuscule portion of the $814 billion stimulus.

As I’ve mentioned here and elsewhere, this is true in a full employment model. (I’m working off of textbook models; move to coordination models, or allow monopolistic power, and you have lots of other inefficiencies arising).


Mr. Riedl concludes:

Economic growth requires raising worker productivity to create more goods and services. Government stimulus spending represents a naive “magic wand” attempt to create purchasing power and wealth out of thin air.


No wonder the unemployment rate remains high.

Well, if we’re in a Classical world, then there is no involuntary unemployment. If we’re in a New Classical world, then whatever involuntary unemployment exists is not systematic. If there is involuntary unemployment, then there are resources that are not being utilized, and putting them to use naturally raises productivity (remember labor productivity is defined as output per man hour).


It pains me to say that Mr. Riedl is a graduate of the University of Wisconsin, in economics and political science.


Postscript: Here is Deutsch Bank’s assessment of the impact of the ARRA on the growth rate of GDP.

dbarra0.gif

Figure 1: Dobridge, Hooper, Slok, Sufian, “The growing risk of fiscal drag in the US,” Global Economic Perspectives, New York: Deutsche Bank, July 28, 2010.

Level impacts are depicted in this post. Here is CBO’s latest assessment.

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36 thoughts on “What Kind of Model Is Brian Riedl Using?

  1. Christian

    About a year ago I made a similar comment — I believe my point was that the demand for loans might be slack due to overcapacity and poor investment prospects — on an earlier argument by Mr. Riedl on his blog/site and his response suggested that he took the velocity of money to be a constant and seemed to be thinking through a strict Say’s Law/Ricardian Equivalence view of the economy.
    I think he completely rejects any Keynesian view of the world.

  2. apj

    Tip: as soon as anyone invokes Ricardian Equivalence, you know you’ve won the argument. It does sound kinda nice and important though….
    And to say that stimulus didn’t have an effect is to simply lie.
    Riedl: “Economic growth requires raising worker productivity to create more goods and services. ”
    What doesn’t he understand about private industry and aggregate demand? Everything it seems.

  3. rjs

    the problem is that this “robbing peter to pay paul is the story being told by the media, 24/7:
    “Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.”

  4. CoRev

    Ricardian equivalence: “In its simplest terms: governments can raise money either through taxes or by issuing bonds. Since bonds are loans, they must eventually be repaidpresumably by raising taxes in the future. The choice is therefore “tax now or tax later.”

    “David Ricardo was the first to propose this possibility, though he was unconvinced of it.[2] Antonio De Viti De Marco elaborated on Ricardian equivalence starting in the 1890s.[3] Robert J. Barro took the question up independently in the 1970s, in an attempt to give the proposition a firm theoretical foundation.[4][5] The proposition remains controversial.[6][7][8]”
    From Wiki here: http://en.wikipedia.org/wiki/Ricardian_equivalence
    Menzie made this statement: “Here, I think Mr. Riedl is invoking Ricardian Equivalence, despite the fact that there is no empirical evidence, to my knowledge, that validates pure Ricardian Equivalence (actually, Ricardian equivalence wouldn’t necessary hold for government spending on goods and services, anyway).”
    So we know on which side of the Ricardian argument he stands.
    Menzie’s first argument some what confuses me. Reidl talks about the administration net job claims being estimated from models. While Menzie then goes off on a multipliers tangent by linking to one of his previous articles. I’m sure there is some overlap, but how much???
    Menzie, an observation. If you are going to refute a specific point, please address that point, but not by burying your counter-argument in a link. Searching you link found zero references to “jobs or employment.”

  5. CoRev

    Menzie, in your discussion of fiscal multipliers you showed the Deutsch Bank estimates of GDP growth of approximately 2.75%. While the total stimulus package was approximately 5-6% of the 2009 GDP with a current award of funds total of ~$200B. So simple math tells us that the ARRA impacts have increased GDP by ~$400B. A mutiplier of 2????
    But when we actually look at the classes of spending in the Deutsh Bank totals, many appear to be outside actual ARRA boundaries. My impression is that we may be hard pressed to get to a multiplier more than unity for the ARRA.
    My conclusions: 1) Multipliers, always an issue, may prove to be less than unity in the real world. 2) Multipliers translated to jobs is a meaningless comparison. 3) Slow implementation/roll out (as of 3/31/2010 less than 1/4) of ARRA funding has needlessly extended pain and suffering. 4) ARRA implementation and structure has been wrong (perhaps politically driven) from the beginning. 5) Reidl’s main points look to be supported by reality.

  6. kharris

    Funny, funny CoRev. Doesn’t understand the point Menzie makes, so he claims Menzie isn’t making his point right.
    The mechanism by which fiscal stimulus creates employment, in cases in which the stimulus is not paid out directly to workers hired for jobs mandated by the stimulus package, is to increase aggregate demand. ARRA does not, to a very large extend, mandate job creation, so to discover whether there is reason to think new new jobs were created through ARRA, we have to know if aggregate demand was increased. Multipliers are an estimate of the impact on aggregate demand of government fiscal actions.
    Now, this is the simplest, most basic stuff for undertstanding fiscal stimulus. CoRev either doesn’t understand it, or is pretending not to understand for some reason. CoRev then goes on to do some “simple math” to discover a multiplier of 2, then without evidence to claim that some of what went into the math falls outside of ARRA, so that the resulting 2 must be too high. Next, he argues from personal authority (“My impression is…”) that “we may be hard pressed to get to a multiplier more than unity for the ARRA.”
    My question is, if CoRev doesn’t understand the simplest stuff about how stimulus works, why should we listen to an argument from authority when CoRev is the authority on which CoRev relies? If he does understand how stimulus works, but pretends not to, we have another equally strong reason not to regard CoRev’s claim to authority. If CoRev doesn’t understand the link between jobs and multipliers, then he doesn’t understand enough for his opinion to have weight. If he does understand, but pretends not to, he is not honest enough for his opinion to have weight. Note that, in his list of “problems” with Menzie’s point, CoRev claims that “Multipliers translated to jobs is a meaningless comparison.” This is simply wrong.
    While I’m slicing through CoRev’s rhetoric, I’d point out that another of his “problems” with Menzie’s post is near meaningless. You see, it’s the trick of using “may” to make a point. Now, this actually IS a meaningless statement. For every “may” there is a “may not”. We really need to know how likely it is that multipliers are greater than 1 for CoRev’s “may” to mean anything.
    It is also pretty misleading to hold up a multiplier of 1 as a sort of magic threshold. We like large multipliers better than small ones, but from a policy point of view, a multiplier less than one during a period of low borrowing costs and wide output gaps is not really problematic. It’s easy to make “1″ seem important, but it really isn’t.
    CoRev has mostly just mouthed a number of well-rehearsed and already-refuted arguments. In a real, honest debate, you take on board the points that have already been established, and move on. That’s not what CoRev has done here.

  7. kharris

    While we’re at it, CoRev has either offered up a bit of misdirection regarding Ricardian equivalence, or has shown once again that he doesn’t understand the issues.
    He highlights ‘The choice is therefore “tax now or tax later.”‘ as key in considering Ricardiann equivalence. What, one might ask, makes that important in considering the behavioral issues associated with Ricardian equivalence? If taxing later rather than now shifts spending forward, well, that’s what we were aiming at. The real point Ricardo made was that the public reasonably could be expected to save now to pay taxes later than are implied by government bonds issued now. The behavioral question has been addressed repeatedly through analysis of data, and there is no good evidence that Ricardo was right.
    So again, we need to ask – does CoRev not know enough to evaluate arguments that rely on Ricardo, or is he aware of the weakness of Ricardian claims, but pretending he is not? Either way, CoRev is not a reliable interlocutor in discussions of fiscal policy.

  8. RicardoZ

    Menzie wrote:
    Well, if we’re in a Classical world, then there is no involuntary unemployment. If we’re in a New Classical world, then whatever involuntary unemployment exists is not systematic. If there is involuntary unemployment, then there are resources that are not being utilized, and putting them to use naturally raises productivity (remember labor productivity is defined as output per man hour).
    If we are in a Keynesian world there is no unemployment, there is only a lack of sufficient money supply.
    $814 billion = 3.4 million jobs
    Why not $814 trillion = 3.4 billion jobs
    Obviously we have unemployment because the printing presses are just not working hard enough!

  9. Menzie Chinn

    CoRev: (first comment) Riedl himself links output to employment, so I think this step is not as mysterious as you believe.

    (second comment) You should really check your math, and recall the difference between growth rates and changes SAAR, and absolute levels of spending. It might be useful for you to review the math I laid out here: [1] [2] [3] [4].

  10. CoRev

    KH, makes this valid point: “Either way, CoRev is not a reliable interlocutor in discussions of fiscal policy.”
    Simply stating my own understanding of the issues seems to always antagonize folks like Mr Harris and 2slugs. Their reactions are almost always visceral and in Mr. Harris’s reactions most often personal.
    Anyway my first point to Menzie still stands. If you are going to counter Mr Reidl’s point re: jobs, at least cite a refuting article that uses the same or similar terms.
    Mr Harris, that may be why I am having trouble understanding Menzie’s response to Reidl on that issue.
    As to multipliers, Wiki has this to say: “In economics, the multiplier effect or spending multiplier is the idea that an initial amount of spending (usually by the government) leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending. In other words, an initial change in aggregate demand causes a change in aggregate output for the economy that is a multiple of the initial change.
    However, multiplier values less than one have been empirically measured, suggesting that certain types of government spending crowd out private investments and spending that would have otherwise happened.
    The existence of a multiplier effect was initially proposed by Richard Kahn in 1930 and published in 1931.[1] It is particularly associated with Keynesian economics. Some other schools of economic thought reject or downplay the importance of multiplier effects, particularly in terms of the long run. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.”
    I’m not sure why Mr Harris has taken offense at my first Wiki reference, but this new is interesting because of the Deutsch Bank chart. Doesn’t it confirm other schools of economic thought reject or downplay the importance of multiplier effects, particularly in terms of the long run.?
    BTW Mr Harris, these are all my opinions, if that helps in your next formulation. To make a real impact in the field, why not debate Reidl?
    For all the Keynesians, if Romer admits that the stimulus was inefficient, why so much denial of her view?

  11. Jeff

    Accepting that the Fed can stimulate via monetary policy then implies either (1) sticky prices so an expansionary monetary policy can affect the real interest rate, or (2) a financial accelerator model such that collateral constraints or some other financial rigidity holds.

    Really? When FDR raised the price of gold in 1933, industrial production boomed. How do you explain that? Saying that monetary policy can only work through one of two channels seems awfully presumptuous.

  12. Menzie Chinn

    Jeff: My apologies for being a little too abbreviated in discussion. See this post for a more comprehensive list; sticky prices seem to be required for a large number of the channels. After all, if prices are perfectly flexible, one can’t affect the real exchange rate using monetary policy. Please feel free to add if something is left out.

  13. Robert Hurley

    CoRev: Re KHarris’s post – If you make a mistake and someone points out the error, the attack is not personal even if it makes you look foolish. You seem to have an agenda that dictates your response. So it makes it difficult to have a fruitfull discussion.

  14. kharris

    Ah, it seems CoRev is as unreliable in his views of others’ motives as he is in his views of economics. He wants my response to him to be seen driven by emotion, because that diverts attention away from the issue of his dishonesty.
    I will admit to as much of an emotional motive as anyone else has in posting here. One doesn’t spend energy and time on anything without some emotional motivation. The claim that I’m angry (or “angy” as CoRev recently claimed elsewhere – pattern developing?) is more than CoRev can know, but that has never stopped him before.
    As to the “analysis” CoRev offers here, it doesn’t wash. A multiplier less than one can suggest crowding out, among other explanations. Since we know that households and firms have increased their savings, and we know they have done so for reasons that have nothing to do with the cost of capital, the old stand-by “crowding out” argument so favored among opponents of government action doesn’t make sense. The mechanism through which crowding out is supposed to work is through the credit channel. Savings are high and rates are low – two conditions which belie crowding out.
    There is also a simple logical mistake in the claim that “certain types” of government spending crowd out private investment. Pretty much all federal borrowing is done through the same market, so the effect through the credit channel of any type of government spending is pretty much the same as the effect of other types.
    If CoRev meant to say that government actions compete with private actions, well some types of government spending could represent more competition in the market than others. But crowding out has nothing to do with multipliers. It has to do with the credit channel.
    It’s not a surprise to see this sort of mistake made in arguments against government action, since so much of what is said on the right against government action is not based in fact and doesn’t involve much logic. Mistaken claims like these do, however, suggest that CoRev is just parroting what he has read elsewhere – the sort of elsewhere that makes baseless arguments – rather than developing his own views.
    Finally, I find it interesting that CoRev wants to have a voice in economic discussions, but doesn’t want to have a debate. Let me answer he effort to duck out in this way -
    CoRev, sauce for the goose is sauce for the gander. Why should I treat you with kid gloves when you bring considerable rhetorical swagger with you where ever you go? You are willing to criticize the views of others, and employ awfully questionable tactics in doing so. Why should a belated claim that your assertions are “opinion” offer you protection?
    While I’m at it, if you are merely expressing opinion, then don’t assume an authoritative voice. Your chest-thumping routine is right out of “propaganda 101″. The more confidence you evince, the more the weak-minded among us will tend to lend credence to your statements. If you come in here with dishonest arguments, expect that I will point it out. Show up with honest comments, and you’ll get better treatment.

  15. kharris

    Oh, heck, while I’m at it, CoRev’s claim that his opinion should go unchallenged because it’s just opinion is simply another effort at having his own views stand without scrutiny. If the views he expresses were limited to views of personal taste, his “just an opinion” defense would make sense. He is not expressing mere personal taste in his opinion. Not “I like butter” or “I prefer workhouses to fiscal stimulus”. CoRev’s “opinion” comes in the form of “fiscal multipliers have nothing to do with jobs” and “fiscal multipliers under ARRA are less than 1″ and “fiscal multipliers less than 1 crowd out private investment”. These are not opinions in the same way “we should subsidize tractor pulls” is an opinion. These are statements about how the economy works. As I have shown, they are silly statements about how the economy works, but they are dressed up in language that suggests knowledge and understanding. That’s why I respond. Making assertions about public policy in a manner which carries a claim of truth is a pretense to expertise. An effort to sway the opinions of others through argumentation. A bad thing to do, if it happens that one is merely expressing a bias and dressing it up as informed analysis to sway the opinions of others.
    So, for those of you who are casual onlookers, not familiar with the history of this little tussle, here’s what’s going on. CoRev has a particular view of the world. When evidence is presented which contradicts his view of the world, he makes dishonest arguments against that evidence. I then point out the ways in which CoRev’s arguments are dishonest. He wiggle around a little bit in an effort to preserve his argument, then pretends that what I’m doing is illegitimate because I’m a big meany. If CoRev would make honest arguments, the discussion would take a very different form. As long as he keeps disrupting honest discussion with propaganda, I will keep saying that he is.

  16. CoRev

    Menzie, this was my point 1: “Menzie’s first argument some what confuses me. Reidl talks about the administration net job claims being estimated from models. While Menzie then goes off on a multipliers tangent by linking to one of his previous articles. I’m sure there is some overlap, but how much???
    Menzie, an observation. If you are going to refute a specific point, please address that point, but not by burying your counter-argument in a link. Searching you link found zero references to “jobs or employment.”
    Then to answer my point 1 you said: “CoRev: (first comment) Riedl himself links output to employment, so I think this step is not as mysterious as you believe.”
    Yes, I understood Reidl’s point, but not yours. Reidl specifically referenced “net jobs”, but you did not even use the term “jobs” in your linked argument even use the term. His is clear! Your response is off subject.
    Then your response to me used Reidl’s reference to jobs, again. That appears, without further clarification, to be circular logic which supports his point and not yours. At this point you seem to be losing an argument on logic and failure to provide a rebuttal. You told: “Jeff: My apologies for being a little too abbreviated in discussion.” Too abbreviated might also be true for this area of your response to Reidl’s article.
    RHurley, if you think I made a mistake, then point it out. Mr Harris did not. If you can find what Mr Harris was responding to (my mistake) in my comment please point it out.
    As for an agenda? Dunno. Agreeing with Reidl’s alternative analysis is an agenda? Maybe, but it probably represents the opinion of the majority of voters.
    For all the Keynesians, if Romer admits that the stimulus was inefficient, why so much denial of her view?

  17. Menzie Chinn

    CoRev: The second paragraph of Mr. Riedl’s article says “jobs and growth”. That is a paragraph I reproduced, if you had not been so inclined to click through to the original article.

  18. Nemesis

    The US private sector reached the “jubilee threshold” (the point at which the differential rate of growth of loans/debt to wages/production reaches an exponential order of magnitude and must thereafter grow at a faster-than-exponential rate) for debt and debt service in ’05-’07 (along with global peak oil production).
    Now it’s the federal gov’t’s turn to grow spending at twice the rate of trend private GDP to keep overall nominal GDP from contracting and consumer price deflation from occurring with debt/asset deflation.
    That gives us no more than 6-11 years at the current differential rates of growth of gov’t incremental deficit spending and private GDP before the public jubilee threshold is reached and net interest on the US public debt reaches and then exceeds 25% of total receipts, and the 40- to 50-year fiat debt-money Ponzi scheme is over.
    http://imperialeconomics.blogspot.com/2010/07/chinas-oil-consumption-and-imports.html
    [edited for length -- mdc]

  19. tj

    Why is it so difficult to accept that the stimulus saved some jobs?
    It’s no more difficult to accept that the stimulus saved X jobs than it is to accept that Y jobs are not being created because of the enormous amount of uncertainty that Obama policies and potential policies are creating.
    It’s as if hiring has become a last resort for private employers because they have absolutely no idea how much a new hire is ultimately going to cost. Financial market reform, health care reform and potential energy reform were expected. However, very few expected that portions of the new policies would (1) push the envelope of constitutionality, (2) increase the size of government by creating hundreds of new regulatory agencies, (3) create runaway government spending with the threat of ever higher taxes and (4) that the newly created agencies would be stuffed with uber left progressives who have a profoundly anti-business bias when crafting new policy.
    If you want a nice picture of why stimulating AD with a temporary stimulus does not work then take a look.
    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=ALTSALES&s1range=5yrs
    See the temporary effect of cash for clunkers on auto sales? That’s the same type of effect that characterizes any temporary stimulus. Just extend the idea to the impact of the Obama stimulus on GDP. Unfortunately, employment is not responding as rapidly as it might have if a different approach had been used.
    Instead of Obama’s AD stimulus, we should have used long lived tax credits for hiring and capital expenditure. If so, then the recovery would be much stronger and self sustaining.
    I would have been happy to trade a partial roll back of Bush tax cuts and leaving unemployment benefits capped at the pre-recession level. I am sure we could come up with a few other spending cuts. Obama should have made the economy the top priority and delayed health care.
    Remember, a tax credit for a job created produces a stream of future tax revenue, so it is more like a direct investment.
    The Obama AD stimulus does not have a direct impact on employment and it also has to contend with the mixed signals sent by the Obama administration’s anti-business bent.

  20. CoRev

    Menzie, I’m sorry, but you have completely lost any semblance of logic for me in your refutation. This is the entirety of the start of your article.
    ” To quote from The fatal flaw of Keynesian stimulus, in the Washington Times:
    (Reidl’s quote starts here)Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.

    Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to conclude that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. In other words, these models are programmed to conclude that stimulus spending always creates jobs and growth, no matter how the economy actually performs. (Reidl’s quote ends here)
    Well, not quite. As I described in this post, there are a variety of ways in which multipliers are obtained. Oftentimes, the impacts are estimated either directly or indirectly, by estimating the marginal propensity to consume.

    I have highlighted what I think were Reidl’s point(s) in the lifted quote. He may make a backhanded reference to multipliers, but it is not obvious. To me his point is about estimating jobs from stimulus spending. If you are not reacting to that, then please be more specific. Referring to a previous article of yours that does not use “jobs” in it does not refute his point.
    I’ve tried to make it quite clear to what I am referring. If you wanted to refer to specific material in his 2nd paragraph, then why not just highlight which phrases/sentences to which you are referring? And, then refute them with an article that goes to that point instead of some article that MAY IMPLY IT?

  21. Menzie Chinn

    CoRev: It might not be obvious to you, but it is obvious to everybody else. Unless you assume some incredibly odd production function, growth in GDP is linked to employment. To deny that means that you are being deliberately obtuse.

  22. Anonymous

    CoRev Let’s begin with the Ricardian Equivalence Theorem (RET). Ricardo’s idea was that it didn’t make any difference whether a war was financed through higher taxes today or by issuing a bond with interest in perpetuity. Ricardo also dismissed it as nonsense. It was just a thought experiment. Barro rewickered the idea in a paper that asked whether government bonds were wealth. Even back when I was an undergraduate it seemed like a silly paper and it hasn’t improved with age. The strong version of RET is not taken seriously and doesn’t stand up to empirical analysis. It’s only real relevance today is that it opened the door for rational expectations models and Real Business Cycle theory. What Menzie was getting at was that Reidl appeared to be embracing RET and suggesting that a fiscal stimulus would be ineffective because rational actors would anticipate future taxes and exactly offset the stimulative effect by increasing their marginal propensity to save. That’s the relevant application of RET in modern econ, but it’s just as dumb as it was 200 years ago. Clear? [BTW...even Barro's own son (also an economist) said that his dad was off his rocker with his latest WSJ nonsense about unemployment insurance increasing the unemployment rate. Something seems to happen to the brains of aging UC economists...Prescott is another nutcase. I'm from Chicago so I hope it's nothing in the Lake Michigan water.]
    As to multipliers, you seem to think that their existence is contingent on Keynesian economics being true. That’s wrong. All you have to do is agree that GDP = C + I + G + NX and that consumption has an autonomous component and another component that is broken out between a marginal propensity to consume and a marginal propensity to save. If you agree with that, then the rest is just freshman calculus. The multiplier is simply the limit of the convergent series that you get when you differentiate the change in output with respect to the change in government spending (i.e., dY/dG). There’s really nothing to dispute with the theory. There’s plenty of disagreement about the empirical estimates of those multipliers. A lot depends on how you treat the response of imports to an increase in income, whether or not the MPC is fixed or if there might be some limited RET effect, etc. And then there’s the noisy data problem. One reason observed multipliers might be less than 1.00 is because the Fed consciously acts to sterilize the fiscal multiplier by increasing interest rates. Or in the case of WW2 the govt decides to ration goods. But none of that is relevant today because the Fed has kept the interest rate at zero. The Fed is cooperating with Treasury rather than acting to frustrate Treasury. Understand? A typical multiplier without Fed sterilization is around 1.4, which is what Romer used for spending. Note that Romer used a muliplier of slightly less than 1.00 for tax cuts.
    You referred to Reidl’s piece as “analysis.” It’s not. It’s just polemic. The theory he seems to be advancing is confused and wrong. Reidl’s piece serves the same purpose for Tea Party types as does the Discovery Institute for closet Creationists and the WUWT blog for global warming deniers. It doesn’t stand up to close analysis and actual math, but it provides a veneer of intellectual respectability for those who are looking for an excuse to oppose the stimulus.

  23. don

    If we don’t couple stimulus now with reductions in outlays in future, we will surely find ourselves unpleasantly near Nemesis’s end scenario. This may happen anyway if we don’t do something about the current account deficits. Nor is this simply a matter of the U.S. controlling its profligate ways – currency purchases by foreign central banks, coupled with capital controls, amounts to foreign lending being force-fed to the U.S., like one stuffs a goose to make liver pate.
    As for Ricardian equivalence, there are so many aspects, one hardly knows where to begin. Besides the oft-cited one of differences in marginal propensities to consume between the recipients of government largess and the taxpayers who end up paying for it (this requires a Keynesian demand-constrained economy to operate, otherwise the lower consumption is matched by higher investment), there is the more direct one pointed out by Krugman – namely, even if the principle holds exactly, the saving for future taxes will be spread out over time, whereas the spending can be done immediately.
    Repeats of the discreditied Treasury View are tiresome. Why is this one given the dignity of notice here?

  24. don

    Anonymous:
    “As to multipliers, you seem to think that their existence is contingent on Keynesian economics being true. That’s wrong.”
    No, that’s exactly right. You have to adopt a Keynesian demand-constrained economy for your multiplier algebra to hold. That is where the essence of the debate lies. You can’t get there merely by combining the consumption function and the national income accounting identities. The new macroeconomics is not quite that stupid.

  25. Nemesis

    How many here know that 40-50% of US “imports” are in fact from US supranational firms’ subsidiaries (and contract manufacturers) in China-Asia and elsewhere. When a politician or e-CON-omist talks about increasing US exports, by definition s/he is talking about ag products or US firms’ shipping components or high-value-add capital goods to their subsidiaries abroad; but they don’t know that’s what they mean.
    We have had since the 1970s-80s an Anglo-American neo-imperial/neo-colonial trade regime, not unlike that of Britain from the 1870s to WW I, and Spain during its peak imperial period.
    The US since peak domestic oil production in 1970 and a lower poeak in 1985 has deindustrialized, decapitalized, militarized, financialized, and feminized the economy and society to such an extent that we are well passed the point at which we can afford a self-sustaining goods-producing sector; instead, the so-called growth of the US economy since the 1970s-80s has been based on growth of digital fiat debt-money and its service and the increasing investment by US supranational firms abroad to produce a growing share of the goods we consume, including oil and distillates.
    If the US had to function on what we are capable of producing organically (or via “trade”), including fund our net deficit spending to sustain our imperial military and its 1,000 bases and facilities around the world, our economy would be about 50-60% its current size.
    Thus, in the context of Peak Oil, Boomer (“Doomer”) demographics (“Doomer-graphics”), falling net energy, and China’s rate of growth of oil consumption, private US economic growth is not only not possible, contraction is guaranteed.
    Instead of trying to use gov’t to promote debt-based growth via “stimulus”, we need a Marshall Plan II to adapt to the long-term structural effects of contraction of the post-Oil Age.

  26. CoRev

    Thanks, folks for the discussion. I’m still not convinced that Menzie made his case against Reidl’s claim about the models and net jobs. It could be a jargon and semantics issue, since I haven’t taken Econ courses in several decades, but for me a refutation of “net jobs” by citing an article about multipliers is an apples to pears comparison.
    It’s political funny season, and passions are running high, but there is no excuse for KHarris’s responses. His personal attack approach is well known, and he has been admonished for it at AB. He usually makes a hit and run attack, disappearing for days. Recently, he has come back to continue his attacks. Yes, we do have a history, but so do many others.
    What I can carry away from today’s discussion is there is much passion and discussion re: RET and multipliers.

  27. don

    Looking at Krugman’s recent posts, the big fiscal stimulus of WWII seems to done more than simply offset the deficient AD caused by the debt overload prior to GD1 – it also fostered the dramatic rise in prices during the war years (70%) that wiped out a lot of the debt that burdened individual balance sheets. In this way, the problem wasn’t just kicked down the road – a lot of it was destroyed forever. That is an argument, it seems, that stimulus should be more than big enough to offset deficiencies in AD: It should actually be sufficient to create inflation.
    Hard to believe we would have anything like this short of a major war. Adds to pessimistic sentiments about our ability to engineer a like recovery from the current malaise.

  28. ppcm

    Interesting debate,as it is looking like the “quarrel of the moderns and the ancients” that shook up the French literature at the start of the 17th century, the Deutsch masters departing from classicism when introducing a new art of painting.
    The similar features of both, was a rejection of the imposed royal or religious authorities when it comes to model and frame, thoughts and representations.
    In essence Mr Riedl comments are going along these lines and are welcome as they question:
    Source of fundings ( domestic debts,foreign borrowings,fiscal deficits,savings) as a mean to produce a multiplier that remains to be correctly identified, quantitatively and qualitatively (jobs perenity versus census workers)
    The efficient use of public or private savings through governments expenditures.
    The efficient use of private savings through financial intermediation.
    A consumption function driven towards import of goods (the cash for clunkers drove more demand for foreign made cars than for those produced domestically)
    How are current accounts rebalanced should the focus be consumption only.
    Thoughts remain to be read on the following:
    The ability of academics to select a subject under focus and narrow it down to one single parameter when suiting their purposes (ISLM,Marshallian k,current account,BOP etc…) or discarding them for the same reason.
    The ability of governments to socialize their past misdeeds and to stand uncorrected
    The malfunctions of the institutional mainframes (they are numerous)
    Past Econbrowser posts regarding the ARRA multiplier effect ( Funds transfer to the states,private)

  29. Brian Quinn

    If he is following in the fine Austrian tradition, he doesn’t need a model because he maintains that measurement and modeling in economics is pointless so you should just resort to polemic. It’s all very convenient.

  30. Mark A. Sadowski

    I’ve had the priviledge of debating Brian from time to time. Here’s our most recent exchange (it reads from bottom to top, my apologies):
    “Brian’s response:
    crickets chirping
    MarkASadowski says:
    Brian,
    There are no “separate pots of money”. All reserves of private banks (required or excess) are held as FRB credit in FRB accounts. There is no way of determining which dollars are “new”.
    BrianRiedl says:
    No magic needed. They are completely separate pots of money. The “excess reserves” are new dollars sitting at the Federal Reserve. They were never collected as customer deposits, and thus they were never removed from the economy.
    MarkASadowski says:
    Brian,
    I take it you have the magical ability to determine which of those dollars are customer deposits and which are not, a pretty amazing skill given how fungible cash is.
    BrianRiedl says:
    Mark, you are wrong,
    The famous $1 trillion excess bank reserves are not customer savings that have been removed from the economy, but rather new dollars created by the Federal Reserve waiting to be injected into the economy.
    Furthermore, that’s not the money funding the stimulus, anyway (or it would have all been spent by now). The stimulus money is coming from dollar that were going to be spent elsewhere.
    Brian Riedl
    MarkASadowski says:
    Riedl wrote:
    “They are not hoarding customer deposits in massive vaults (beyond the required cash reserves).”
    Except that they are. Excess reserves currently stand at over $1,000,000,000,000 dollars. That’s cash, not bonds or other investments. Once again reality intrudes on conservative fantasies.”
    Gentlemen, I give you the magnificent Brian Riedl!

  31. 2slugbaits

    don “No, that’s exactly right. You have to adopt a Keynesian demand-constrained economy for your multiplier algebra to hold. That is where the essence of the debate lies.”
    You’re either misunderstanding my point or you’re wrong…not quite sure which. Multipliers are not a theory, they are an mathematical result given the basic accounting identity and given a marginal propensity to consume. If you think I’m wrong, then you should be able to demonstrate that dY/dG does not lead to a convergent series. Like I said, it’s not a theory, it’s a result.
    Now I would agree that there are plenty of folks with PhD’s in economics who are trying to peddle some nonsense that there’s no such thing as fiscal multipliers. I’m not talking about folks who argue that the effect is small; that’s an empirical question. But an economist who denies that there are fiscal multipliers is not acting like an economist. Newton was a great physicist, but he was also a superstitious crackpot who wasted a lot of his brainpower on alchemy and magic. We excuse his indiscretions by remembering that it was only his physics that’s worth remembering. Just because Newton was a scientist doesn’t mean that he always acted like a scientist. Similarly, just because someone is an economist doesn’t mean that every breath coming from his or her mouth is sensible economics. A lot of the nonsense is coming from economists who made their name in finance rather than macroeconomics. Well, finance models are not macro models. And have you noticed how the only “economists” who take RET seriously tend to be in finance? Finance models tend to be static models because of the speed of finance, and as the economic historian Mark Blaug once said, “[RET] is only another instance of the vice of neoclassical economics: the hasty application of static theorems to the real world.” How true.
    There is a school of economics that tries to deny there is such a thing as an aggregate demand curve, which is strange because postulating demand and supply curves is the hallmark of economic thinking. Economics without both curves is like taking the Danish Prince out of Hamlet…you’re just left with a bunch of cameo appearances by Rosencranz & Guildenstern. They want to do economics with just a supply curve. You see this with RBC types and the oddball Austrian. But I don’t think anyone takes seriously the Austrian mumbo jumbo of “roundaboutness” and “concertina” effects. People are attracted to Austrian economics because of its political message, not because of its economics.

  32. don

    2slugbaits -
    So “Anonymous” was you? O.K.
    My point was just that the “multiplier” you referred to is too mechanistic and appeared to ignore supply. I agree, of course, that defined as dY/dG, the multiplier will always be something, as long as you allow zero and even negative amounts to be included among potential results. With the same marginal propensity to consume, the actual multiplier can take a range of values, depending on the economic circumstances.
    For example, you will agree, I presume, that increased government spending will not result in any increase in real GDP if we are at full capacity. (That happened during WWII and is why we needed rationing.) In fact, the real “multiplier” can easily be negative (the shifts from private to government consumption can result in a poorer allocation of resources).
    If you expect output to increase by the full amount implied by the simple Keynesian multiplier algebra in (old) introductory textbooks, then you are assuming income is entirely demand determined with no supply constraint – what I referred to as a Keynesian demand-constrained economy. That was my only point. I agree that the economy can be demand constrained, and is surely such right now, so I don’t subscribe to the notion that the multiplier is always zero. But even people like Kevin Hasset are on record agreeing with this point.

  33. 2slugbaits

    don “But even people like Kevin Hasset are on record agreeing with this point.”
    Except that CoRev doesn’t even agree with that much. In the past he’s argued that the whole idea of multipliers is junk. His complaint isn’t that estimates of the multiplier from folks like Romer or Zandi or Macroeconomic Advisors or the CBO are too high. CoRev isn’t saying that he thinks the multiplier should be 1.38 instead of 1.40. His complaint is that the entire notion of multipliers is just something in a bag of math tricks made up by clever pointyheaded liberal academic economists in order to justify left-wing big government policies. CoRev subscribes to Tea Party “knownothing” economics. Tea Party economics is entirely intuition based and multipliers are counter-intuitive…especially so if you think of economic activity as a zero sum game, which is the way Tea Party types view the world. And I think that’s the audience that folks like Reidl (and noted economist Glenn Beck) are appealing to. As I said before, the purpose of op-ed pieces like Riedl’s is not to advance the debate, it’s to provide some kind of illusion of intellectual respectability for people who want to oppose a stimulus plan even though they don’t quite understand the economic arguments. C’mon…who else reads the Washington Times?!!! It’s a version of the old Krugman line “Shape of the Earth: Views Differ”. The Reidl op-ed provides cover so that Tea Partiers can say “You’ve got one study, I’ve got another.” Same thing with intelligent design. Same thing with global warming.

  34. CoRev

    2slugs, I see you just couldn’t play nice for more than a day.
    You are clueless re: my economic views, while seemingly carrying on a discussion with don? What’s that all about? I’ve noticed a trend of Lib commenters being angrily abusive to conservatives recently. Disappointment in the “O” administration? Insecurity in your own views with the current economic evidence? Reaction to recent polling? Just guessing, no need to answer.
    Have a good day. The weather’s too pretty to cross keyboards with you.

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