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.