while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said.
Maybe Professor Cochrane is not aware that Dr. Tobin was including Keynesian economics in his graduate classes at Yale University. I’m sure other the macroeconomic classes in other graduate programs also spend considerable time explaining the contributions of Keynes, Tobin, et al. And we see that Professor Cochrane is still stuck on this discredited Treasury view. To claim that Keynesian economic represents a fairy tale that has been proven false shows how out of the loop Professor Cochrane happens to be.
Update: Brad DeLong wonders if Cochrane has an economic model to back up his argument for complete crowding-out. As Brad tries to fill in the blanks left by Cochrane, he realizes the following:
If Cochrane were to present his model and argument for crowding out, it would sound--to me at least--pretty silly. It would carry the implication not just that government spending can't spur the economy, but that private spending by high-tech startups in the 1990s or by homebuilding compaanies in the 2000s did not spur the economy either--that it was simply chance that high-tech investment spending boomed in the late 1990s and the unemployment rate fell at the same time and that it was simply chance that home construction spending boomed in the mid 2000s and the unemployment rate fell at the same time. And Cochrane's position had not to my knowledge been seriously advanced--certainly Milton Friedman did not advance the view that there was always 100% crowding-out of fiscal policy--since R.G. Hawtrey and the "Treasury View" of the 1920s.
Can you look at the stimulus bill, and claim that anybody who actually wrote or voted on it believes in Keynesian stimulus?
ReplyDelete1) Purchase of equities does not directly lead to any new investment. So that's stupid.
ReplyDelete2) For his argument to work, all spending must have exactly the same outcomes on productivity, growth, employment. Which is also stupid.
If he really believes all that, then he's too stupid to be an economist (which isn't the highest of bars to clear).
I am certain that people who pose as economists and claim "crowding out" while looking at an increasing unemployment rate are simply being paid to lie. The payment need not be direct. It can be some sort of funding for the "school" that promotes such an obvious inanity.
ReplyDeleteMoney is created on a keyboard at the Fed. Labor is REAL.