Paul Krugman and Robert Barro have both responded to my column accusing them of putting politics first. Paul wonders what has happened to me.
Clive used to be a reasonable guy; in his mind he probably still is a reasonable guy. But he has misunderstood what it means to be reasonable. He now apparently believes that it means declaring, in all circumstances, that Democrats and Republicans are equally in the wrong, even if the Democrats are talking Econ 101 and the Republicans are being led by the crazy 36.
And it means hysterical attacks on yours truly for actually taking sides in this debate, with the ostensible basis for the denunciation being a wonkish blog post — it says so in the title — in which I acknowledge that there is a potential short-run argument for protectionism, while making it clear that I’m not in favor of acting on that argument. He doesn’t actually take on my argument; he just insists that the only reason I might possibly have said anything like this is partisan bias, as opposed to an attempt to be intellectually honest.
Speaking of which, Clive and others have, in my view, a fundamentally flawed view of how to defend free trade. They believe that you should scream “Heresy! Sacrilege!” at anyone who even suggests that the world is more complicated than the simple Ricardian model of comparative advantage. But, you know, the world actually is more complicated than that simple model, and I believe that one’s case for free trade should be robust enough to stand up to a bit of free thinking — not sustained by excommunicating anyone who questions orthodoxy, even hypothetically.
Was that piece really hysterical? I believe it is the first time I have ever been called that. One of Paul’s commenters accuses me of being Broderish, which is a criticism that makes more sense to me–but it cannot be possible, can it, to be both hysterical and Broderish? I do try to be reasonable, which I know can be infuriating, but as it happens I don’t think that “being reasonable means declaring, in all circumstances, that Democrats and Republicans are equally in the wrong”. Each side is usually somewhat wrong, I find, but the proportions do vary according to topic. I am very much in the Democratic camp on the stimulus, for instance. I think it is unreasonable, on the other hand, to regard everything Republicans say as definitionally wicked or stupid or both, which is the organising principle of everything Paul writes in the NYT.
As for defending free trade, I don’t recall ever shouting “Heresy! Sacrilege!” at anyone who “even suggests that the world is more complicated than in Econ 101″. Well, perhaps I have, but only as a joke, I promise. (Odd by the way that Paul thinks Econ 101 is all you need to talk about the stimulus intelligently, but far too simplistic when it comes to trade.) In fact I agree with Paul about free trade: in the real world, theoretical reservations aside, he is for it and so am I. The problem is that he can’t just say that, because most of the progressive Democrats who adore his writings do not want to hear it. He is too good an economist, and too honest a person, to advocate protectionism, so he does the next best thing. He equivocates.
I think Paul is disingenuous (there I go again, more hysterics) when he says that the blog-post in question makes it clear he is not in favour of acting on the short-run argument for protection. You be the judge. In my view, he says it is all very complicated. He kind of supports free trade in an ideal world–that would be an Econ 101 world–but there are circumstances, which happen to be very like today’s circumstances, in which protection could make sense. This “needs to be taken seriously”, and the case gets stronger if optimal macro co-ordination is not forthcoming (which it won’t be). Ask any Democratic congressman what Paul’s advice on “Buy American” is. The answer will not be, “Don’t do it.” It will be, “The most brilliant economist I know of thinks there’s a case.”
My exchange with Robert Barro was via email. With his permission, here it is:
I hope that all is well. It seems from your writing that I at least had the beneficial effect of neutralizing Krugman. I am not sure what you mean by “consensus.” You don’t think it’s pretty wild to have a multiplier of 1.5, so that government spending is not only free, it has negative costs? The only informative empirical work I know of (from Valerie Ramey and my own work) finds multipliers associated with defense spending that are positive but less than one. In Valerie’s work, this shows up as a negative effect from added government military purchases on private consumer spending. Multipliers for other forms of government spending are imprecisely determined but are not significantly different from zero. Actually, I hope that my current long-term empirical project will shed more light, including macro effects from changes in marginal tax rates.
You want me to ignore good economic theory and empirical analysis and pretend that a voodoo multiplier above one should be respected as a “consensus?”
Thank you for writing. It is good of you to take the trouble.
If we are to have Paul doing what he does in the NYT, it might be better to have you writing in a similarly gladiatorial way than not at all. But I do think it would be best of all if you, Paul, and other scholars of such distinction gave a little more thought to the harm that this unscholarly politicised jousting can do.
Rather than asking them to think, Paul gives comfort to the massed ranks of liberal economic illiterates–and you do the same for their conservative equivalents. In the middle, where there are open minds willing to be enlightened, the typical response is to switch off. I think that this is a shame. Needless to say, I am not arguing that you (or Paul) should be untrue to your own views when writing for a wider audience, only that you should not deny or dismiss the professional consensus, such as it is, out of hand, or advance your own views with deliberately exaggerated certainty.
Yes, I do think there is a broad consensus on fiscal policy–one that you, I don’t need to say, have helped shape. It is that fiscal policy can deliver a stimulus under certain circumstances, albeit not as powerfully or reliably as was widely believed pre-Barro. The consensus has absorbed your contribution by advocating counter-cyclical fiscal stimulus more cautiously than before, and with much closer attention to the implications for public debt and financing. Of course you would go further–and everybody who cares about this subject will pay close attention to your ongoing research. You may very well push the consensus further yet. But, for the moment, you can press for greater caution in attempting fiscal stimulus, or even argue against it altogether, without saying that advocates of stimulus under present circumstances–including economists like Paul or Larry or Christina Romer, whom I know you respect–are dealing in voodoo economics.
By the way, is it helpful to say that a multiplier of 1 implies that government spending is free? The implication would be that even a multiplier of 0.5 (which you seem willing to contemplate) would buy you real resources at half-price. Obviously public spending eventually has to be paid for, in full, one way or another–which is true regardless of the multiplier. It is quite another thing to say that a multiplier of more than zero commits you to the view that we can have a free lunch. That is a debating point, something to please one’s allies and annoy one’s opponents–not an aid to understanding.
Perhaps all I am saying is that economists of the stature of you and Paul and Larry and so on should address each other in your pop writings with something like the same courtesy and intellectual seriousness you would use in an academic setting, rather than pushing custard pies into each other’s faces. That just looks bad–and I find it hard to believe that you or Paul value the approbation of the idiots on either side who are delighted by it.
Sorry, but I do not believe you are getting the economic substance right. A multiplier of 1 means that, from a social perspective, the added government purchases really are free–they are provided by the utilization of idle resources. This point holds even if the spending is deficit financed so that the public debt rises, although there can be deadweight losses in the future from financing the larger debt. In the same sense, if the multiplier is greater than 1, say 1.5, the free public goods really do come with the bonus of free private consumption or investment. I think this view is the one actually held by Summers, C. Romer, etc., and I really do think it’s voodoo macroeconomics. I think you do not regard it as voodoo because you find it familiar and comfortable.
If, as you say, the multiplier is positive but less than 1–say 0.5–the public goods cost only 50 cents on the dollar. This is correct, but I think, in practice, the only evidence for positive multipliers comes from responses to (temporary) military outlays during wars (such as in the U.S., where the wars have not involved a lot of physical destruction or loss of life). In these cases, the added outlay did require a lot of added work beyond reduced unemployment, notably by women, so this extra effort has to be included in the social cost. For non-defense outlays, the best empirical estimate I have at this point is a multiplier of 0 (though not precisely determined). This is the standard cost-benefit case where the benefit of an extra unit of public spending has to justify the added cost one-to-one. This multiplier of 0 should not be regarded as a pole, but rather as a central point. In the medium run, the multiplier is likely to be negative, reflecting the adverse effect of larger government on economic growth.
By the way, although WWII raised U.S. real GDP a lot, this response is not typical for the OECD. If fact, WWII is the biggest economic disaster of the 20th century, out-stripping the Great Depression. This is, of course, because many countries suffered greatly from physical destruction and loss of life (the U.K. not nearly as much as many countries on the European continent).
As to Krugman, my response would likely have been more moderate if he had not referred to my ideas as bone-headed. But I promise to behave better in the future.
Yes, I take your point, of course. From a social welfare point of view–ignoring distributional issues as they affect taxpayers v bondholders, this generation v later generations, residents v foreigners–then the cost of a fiscal stimulus that puts idle resources to work is confined to the deadweight losses of financing the debt. It feels strange for me to be reminding Robert Barro that those losses and distributional issues might be a big deal, and that one should be cautious on those grounds (among others) about advocating immoderate fiscal activism–but I just did, so there you are.
I would never presume to quarrel with you (or Paul) on the economics. That would be absurd. I am quarrelling with you about your journalism. Your view that counter-cyclical fiscal policy cannot–even in present circumstances–put idle resources to work may for all I know be true. I resolve to keep an open mind about it. But I am sure that for the moment the larger part of the economics profession disagrees with you. And I am sure that in challenging that consensus by calling it voodoo economics you are doing the discipline no favours.
Did Paul call you bone-headed? That was a bone-headed thing for him to say. But you see my point. What are non-economists to make of this exchange of insults and exaggerated certainties? Can you blame them for hearing only the political message they want to hear, and tuning out the rest?
Oh yes, the bone-headed remark is what started things.
One thing I think you need to be clear on is the distinction between Ricardian equivalence and Keynesian multipliers. The first bears, for example, on how a deficit-finance tax cut affects aggregate demand. The Ricardian view is no effect, and the “standard” view is that the effect is positive but less than one. The multiplier has to do with how a change in aggregate demand affects output. It is possible to have a large multiplier even with Ricardian equivalence, and it is possible to have a small multiplier even without Ricardian equivalence.
Thanks, Robert, especially for that last clarification. I have to admit that I haven’t been giving much thought to the scenario in which a deficit-financed stimulus has no effect (under Ricardian equivalence) on aggregate demand and yet still has a big multiplier. I will have to think about that one…