Wednesday, October 17, 2012

Arrow v. Taylor Debate at Stanford

Aaron Sekhri provides a summary of a discussion at Stanford between Kenneth Arrow and John Taylor. I wish I had attended but based on this summary, Taylor is very confused about the role that fiscal policy plays during a recession even after Arrow stated the standard Keynesian position when the economy gets stuck in a liquidity trap:
He went on to discuss the disadvantages of what Obama opponents see as key fixes, namely, reductions in government spending. “Spending cuts are not productive,” he argued. “The real problem is the underutilization of resources. We can’t cut down what is really an investment in the future.” … Arrow then began a discussion of the need for government spending at a time when interest rates bottom out, as they did after the 2008 financial crisis. “The problem with monetary policy is that when the interest rate gets to zero, you hit a limit. That’s what happened in the Great Depression, and I’m probably the only one in the room who remembers that time,” joked the 91-year-old Arrow. Taylor argued in response that “temporary spending, such as the stimulus program, peter out very quickly and do not give you sustainable growth.”
Sustainable growth is what economists worry about in terms of full employment economies over the longer term. Does Dr. Taylor even get the basic premise that we have deviated from the long-term full employment path? Of course, Dr. Taylor has a simple solution to how we get back to full employment:
Comparing the federal government’s attitude towards change to the intransigence of the stubborn parent-teacher association at his child’s school, he asserted that the best route to economic wellbeing was to remove the incumbent administration and start anew.
In other words, make Mitt Romney President and everything will magically get better by itself. If you were not convinced by now that John Taylor has turned transformed himself from economist to political hack, this statement should make that case.


Saturos said...

I suspect what Taylor meant was "sustainable restoration of the utilization of resources" - i.e. it was a direct reply to Arrow's point.

Procyon Mukherjee said...

'Everything will get better by itself', is the apt representation of what the general perception hovers around; stimulus programs are transitory events, helping some economic activities, but did we not see a reversal every time the program was withdrawn?

Procyon Mukherjee