Incomprehensible Analyses of Macroeconomic Effects

A tweet:

I am fine with govt. helping people pay bills. But the idea that the spending will actually increase GDP is the Keynesian argument that I find very misguided.

So, here it is useful to have a model discipline one’s arguments (textbook I’m using this semester, here, includes Classical as well as New Keynesian models). Fiscal stimulus, particularly some that have proposed, involves transfers (SNAP, unemployment insurance payments). Helping people pay bills presumably makes aggregate demand higher (by virtue of enabling greater consumption) than it otherwise would be. If there is slack in the economy (which is likely if lots of people can’t pay their bills), then higher aggregate demand will lead to higher output.

If higher demand results in higher production, that means that income necessarily is higher than it otherwise would be, and likely disposable income. That would then mean consumption should be higher; but that would mean higher aggregate demand, and hence higher output, and higher income, leading to a repeat cycle – albeit at a lower rate.

In other words, we have the Keynesian multiplier process. In the presence of slack in the economy, output will rise. Of course, assume that output falls entirely because of reduced production capacity (not a single person reduces consumption because they aren’t being paid), then increased transfers won’t do anything.

How likely is that condition?

The capacity for some people to engage in internally inconsistent reasoning and writing is breathtaking.

More on multiplier estimates here.



11 thoughts on “Incomprehensible Analyses of Macroeconomic Effects

  1. 2slugbaits

    Okay, ‘fess up. Was Brian Riedl one of your students when he was an undergrad at UW-Madison? C’mon now…be honest.

  2. Kien

    Hi I agree that fiscal stimulus increases GDP especially when aggregate demand is lower than normal.

    But I suspect that the sceptical tweeter uses “GDP” to mean the long-term potential of the economy, not to aggregate activity. Words that specialists in the field use don’t necessarily have the same meaning to a lay audience.

    That said, I very much appreciate reading your blogs and learning from them.

    1. 2slugbaits

      That’s an awfully generous interpretation, but if that were the case, then Brian Riedl would be arguing with a straw man. Aside from hysteresis effects to combat secular stagnation, no one is arguing that fiscal stimulus increases long run potential GDP. Fiscal stimulus is relevant when talking about the downside of the business cycle, just as fiscal contraction is relevant when we’re on the upside of the business cycle. I think most economists, and I hope most laymen, understand the difference between business cycle macro and growth accounting macro. Check that. Maybe most laymen don’t know the difference. And since Riedl has more than proven that he isn’t an economist, perhaps on second thought you might have a point. It could well be that Riedl is hopelessly confused and thinks that Keynesian economists are talking about fiscal stimulus being a tool to increase potential GDP.

      1. pgl

        “I think most economists, and I hope most laymen, understand the difference between business cycle macro and growth accounting macro.”

        You are right about Riedl not understanding this critical difference but note neither does Lawrence Kudlow. And he is Trump’s chief economic adviser.

    2. macroduck

      Riedl is not a specialist in economics. He is a polemicist. It is therefore more likely that he is choosing his language to persuade people who would not be persuaded by evidence than that he is using a non-standard, specialist meaning of GDP.

      Even if Riedl meant to say that potential GDP would not be higher than otherwise in response to fiscal expansion, he would be ignoring a great deal of what has been learned from the past couple of recessions. Hysteresis cannot be said to be proven to be factor in potential GDP, but it certainly has a place in the debate. Riedl personally claiming that any idea in economics is misguided should be given less credence than anything your dentist may have to say. He has always, for his entire professional career, been paid to uphold rightwing economic claims.

      1. pgl

        “Riedl is not a specialist in economics. He is a polemicist.”

        A nice way of saying he is a right wing hack!

  3. pgl

    Gotta love this reply on the Twitter:

    “its also super counterproductive to tell people “stay at home social distancing” but also “go spend money”

    The dude who wrote this has learned about Twitter but he has never heard of Riedl has some really dumb followers!

  4. pgl

    I wonder what Menzie thinks of what Greg Mankiw wrote:

    A recession is likely and perhaps optimal (not in the sense of desirable but in the sense of the best we can do under the circumstances).

    Mitigating the health crisis is the first priority. Give Dr. Fauci anything he asks for.

    Fiscal policymakers should focus not on aggregate demand but on social insurance. Financial planners tell people to have six months of living expenses in an emergency fund. Sadly, many people do not. Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start. A payroll tax cut makes little sense in this circumstance, because it does nothing for those who can’t work.

    There are times to worry about the growing government debt. This is not one of them.

  5. Steven Kopits

    “I am fine with govt. helping people pay bills. But the idea that the spending will actually increase GDP is the Keynesian argument that I find very misguided.”

    I agree with this sentiment as I understand it. During crisis like this pandemic, we swap our customary objective function — GDP maximization — for another one, in this case, the protection of the public and the business community during a transient downturn.

    If we wanted to stimulate the economy, we could simply re-open the restaurants. Obviously, we don’t want to do that under the circumstances. The use of the phrase ‘stimulus’ is thus misplaced at present. We should be talking about bridge financing for individuals and companies. We are attempting to minimize transient damage, not maximize gains. The White House would therefore be better served to use a phrase like ‘a bridging package’ rather than ‘a stimulus package’.

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