Friday, November 28, 2014

Macroeconomics at George Mason University

I realize that Tyler Cowen is not the only economist who teaches macroeconomics at GWU but I don’t know the other professors. I am worried about what the students are learning at GWU after reading two of Tyler’s recent blog posts. His comments about Keynesian economics struck me as almost asserting that we Keynesians believe that only fiscal policy matters – which of course no one has ever asserted. But Simon Wren-Lewis has already set this matter straight:
Let me single out three Keynesian propositions. 1) Aggregate demand matters, at least in the short term and in some circumstances (see 2) maybe longer. 2) There is such a thing as a liquidity trap, or equivalently the fact that there is a zero lower bound to nominal interest rates matters 3) At least some forms of fiscal policy changes will impact on aggregate demand, and therefore (given 1), on output and employment. Because the liquidity trap matters, when interest rates are at their zero lower bound we should use fiscal policy as a stimulus tool, and we should not embark on fiscal austerity unless we have no other choice. If propositions (1) and (2) strike you as self evidently correct, you might accuse me of drawing the lines in this debate in a biased way … This suggests (3) is at the heart of the dispute. However my reason for including (1) and (2) is that if you accept these two points, point (3) follows pretty automatically.
But it is this post that has me worried:
“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers.
Tyler is referring to a report from Xu Ce of the National Development and Reform Commission which is noted here. Maybe there is some waste but Xu Ce has assuredly overestimated it for reasons ably noted by Paul Krugman:
What the paper does is look at the ratio of capital added to economic growth — the so-called incremental capital output ratio. It finds that the ICOR has been lower in recent years than it was in the past, and attributes all of the shortfall to waste. But what if there were no waste at all? What if China were simply engaged in capital deepening? What would we expect to see in that case? The answer is, exactly what we do see. The ICOR data say nothing at all about waste.
Paul walks us through a standard presentation of the production function used in the typical Solow growth theory model. This is all very basic stuff. I would hope the graduate students at GWU are learning this when they take growth theory.

6 comments:

Myrtle Blackwood said...

Re: “Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers."

Paul Krugman:
...But what if there were no waste at all? What if China were simply engaged in capital deepening? What would we expect to see in that case? The answer is, exactly what we do see.

I haven't read Paul Krugman's article. But Mr Krugman's writing, as presented here, could be better expressed to provide much more clarity to the general reader. As for 'capital deepening' I sincerely hope that the 'hyperactive construction' in China (and elsewhere) is the type of capital needed for our resource-depleted and climate-changed future. It thoroughly annoys me to see the rise and rise of multi-storied apartments in urban centres when the countryside is de-peopled, heavily polluted and/or drained of nutrients. This can't be good!

Jammer812 said...

Myrtle,

You should always take the time to read an article before taking the time to criticize it. Also you might want to do so research before asserting that urban living harms the environment more than suburban, exurban, rural lifestyles.

Myrtle Blackwood said...

Point taken, Jammer. Although Krugman does make an incredible assertion that "wasteful spending is better than no spending." The full quote from Krugman is:

"Diminishing returns are not the same as waste...Now, I’m not claiming that there’s no waste in China; I’m sure there’s plenty. And at that point we need to get into the question of what would have happened to those resources otherwise; if they would have been unemployed, wasteful spending is better than no spending. But that’s all a different discussion..."

Where did I make the assertion that "urban living harms the environment more than suburban, exurban, rural lifestyles."??

Is it not self-evident that a life lived in a tiny cell of many in multi-storied concrete towers may not be the only example of "urban living" available to humanity. Lifestyles in rural areas can also be environmentally harmful.

My focus, rather, was on the form (and sustainability) of the 'capital deepening' taking place in China. A subject Mr Krugman dismisses with a throw away line "wasteful ...is better ..than [nothing]."

bakho said...

"Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills spraw..."

This describes Detroit, Flint and Gary. There are fewer people living in western Kansas today than there were 150 years ago. The US has plenty of rural "ghost towns". Ghost town is a sign of economic shift, not necessarily collapse.

Soccer Dad said...

Tyler has 15 numbered points
what I find odd in the many criticisms of his post, is that no one has bothered to systematically analyze them, eg TC point one, the Keynsians predicted disaster after seqeustration

Thomas L. Hutcheson said...

The ZLB for nominal short term interest rates is an important constrain on monetary policy that limits its instruments to sales and purchases of short term government bonds or the equivalent. Although in theory monetary authorities are not so limited, they do appear to act as if they are. When monetary policy is in this self limiting state, there is a practical role for fiscal policy to affect AD. Even if monetary authorities were hitting their inflation target (if not set too low) or their NGDP target (if not set too low) there would still be a role for deficit-financed investment in projects with positive net present values at the near zero borrowing rates and shadow prices that are less than market prices (unemployment). Unfortunately, we have had "fiscal policy" aimed at reducing AD that has contributed to a slower recovery.