The Technocrats We Will Always Have With Us

I found a bit of wishful thinking from the editors of the Wall Street Journal today, pronouncing the death of neo-Keynesianism. After the obligatory sideswipe at George W. Bush the editors continue:

President Obama’s tragic mistake was to blow out the U.S. federal balance sheet on spending that has produced little bang for the buck. The fantastical Keynesian notion (the “multiplier”) that $1 of spending produces $1.50 in growth was long ago demolished by Harvard’s Robert Barro, among others. That $1 in spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy. Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the “multiplier” has almost certainly been negative.

With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable. However, we also argued that permanent tax cuts aimed at marginal individual and corporate tax rates would have done far more to revive animal spirits, and in our view would have led to a far more robust recovery.

What the world has now reached instead is a Keynesian dead end. We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

In my view the underlying problem is that neither economics nor politics is a science like physics or engineering. Such and such an input will never produce a sustainable predictable output if only because you can’t regulate the inputs properly.

Both will remain crafts, like woodworking. Paying attention to the grain is important and the grain varies with every board.

However, since the thirst for power is infinite and eternal there will always be people promoting swift, easy, painless and bloodless solutions to every problem, bolstered by the very latest in research.

8 comments… add one
  • Andy Link

    Always the solution for “conservatives” is tax cuts. Keynesism isn’t the only thing that’s reached a dead end.

  • Sam Link

    Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the “multiplier” has almost certainly been negative.

    Given that the CBO says these things have the HIGHEST multipliers it’s a wonder you can call economics a “science” at all.

  • Oh, I think that economics is a science. I also think that anthropometrics is a science. It can be darned handy knowing what the likely relationship between your shoe size and your hat size is. That doesn’t mean that it should be the sole guideline for policy or that we should be willing to wager $1 trillion on it.

  • Sam Link

    I don’t know that there is any other science where the disagreements on basic things is so great as it is in economics. That economists can have such strong opinions – and that these opinions obviously influence their studies because that’s what determines their assumptions – makes me sceptical of any conclusions they come to.

  • steve Link

    Arnold Kling has floated the idea of writing a macro book on his site. I suggested that at least one chapter should be dedicated to the observation that economics has not been very useful as a predictive science. I certainly think that a big problem with economics is that it is so heavily influenced by people’s world view. The Barro study is a good example. It is an interesting study, but it was derived from WWII data. Who would think to apply data from a war economy, strict rationing and distorted demand, to a peacetime economy and think it completely meaningful?

    OTOH, you are totally wrong about it never being useful. We will have our Hari Seldon someday.

    Steve

  • Drew Link

    “The Barro study is a good example. It is an interesting study, but it was derived from WWII data. Who would think to apply data from a war economy, strict rationing and distorted demand, to a peacetime economy and think it completely meaningful?”

    Oh, I dunno, someone who understands that economies have so many uncontrolled (and uncontrollable) and difficult to measure variables that one might take a shot at measuring the variable of interest in its most robust setting? Its a routine concept in physics. A physicist friend of mine (I live near Fermi Lab) once cracked that studying partical physics is like throwing a watch against the wall as hard as you can and watching what comes flying out. I don’t know if that was an original crack, but its an appropriate analogy. The fact of the matter is that both atom smashers and Barro’s work have yielded important, if imperfect results.

    “I certainly think that a big problem with economics is that it is so heavily influenced by people’s world view.”

    Heh. Look in the mirror. BTW – stop cheating: “completely?” Your words.

  • Given that the CBO says these things have the HIGHEST multipliers it’s a wonder you can call economics a “science” at all.

    Since when did editorials constitute what determines economics, even bad economics? The editorial proves Dave’s point, but most commenters are too damned ignorant to realize it.

    Barro’s “refutation” of the Keynesian multiplier is based on some research he did back in the 1974 on government using debt to finance deficit spending. What Barro found was that under a specific set of assumptions such spending has no multiplier effect at all. The reason is that households will buy the bonds and hold them to exactly offset their future debt obligations. HOWEVER those assumptions are rather stringent. These assumptions are that households are infinitely lived (or at least nearly so in their beliefs), capital markets are perfect, the path of government expenditures is fixed.

    This approach has been criticized by Martin Feldstein and James M. Buchanan…not exactly leading lights on the Left side of politics.

    In other words, the WSJ is pushing its agenda much like polticians and other people with access to a wider audience push their agenda.

    Barro’s orginal article on this,

    Barro, Robert J. (1979). “On the Determination of the Public Debt”. Journal of Political Economy 87 (5): 940–971.

  • Oh and this one as well,

    Barro, Robert J. (1974). “Are Government Bonds Net Wealth?”. Journal of Political Economy 82 (6): 1095–1117.

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