[Chinn] ignores the fact that Heritage Foundation economists, like most academic macroeconomists, have put away the old Keynesian model in favor of modern alternatives.
I thought it useful to see some of this advanced analysis in action at Heritage. From Heritage Foundation’s Ron Utt — admittedly a long time ago (2008!):
In the real world, the additional federal borrowing or taxing needed to provide this additional $1 billion means that $1 billion less is spent or invested elsewhere and that the jobs and products previously employed by that $1 billion thus disappear. Regardless of how the federal government raised the additional $1 billion, it would shift resources from one part of the economy to another, in this case to road building. The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven…
This sounds at worst a lot like S ≡ I [or (T-G) + S ≡ I ] to me, and at best the Classical model I outlined in my post. Certainly doesn’t sound like an intertemporal model.
The critique continues:
…Chinn apparently believes that all marginal private spending is for (frivolous) consumption, not for investment. In Chinn’s equations and graphs, where are the changes in investment? Nowhere. By assumption, Chinn’s Keynesian model keeps investment spending constant and capital stock constant in both the short and long run.
When the government borrows a trillion dollars on global financial markets for a stimulus package, does Chinn believe that zero dollars of that is diverted from investment? When the government raises taxes on dividends to 43 percent from 15 percent, does Chinn believe that has zero impact on investment?
Apparently, I = I(Y,i), ∂I/∂i < 0, which is pretty much required in a downward sloping aggregate demand curve (see notes here), means I’m holding investment constant? This comment indicates an inability to understand an undergraduate level textbook model, which is somewhat disquieting.
As a concluding remark, I thank Dr. Furth for highlighting intertemporal dynamics. But one must approach intertemporal considerations with some sophistication. Simple models (with no rigidities) can lead to misleading inferences. I much prefer approaches such as incorporated in this paper. For the edification of Dr. Furth, these types of intertemporal models fall under the New Keynesian rubric.