Matt Nolan

On the issue of crowding out

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Eugene Fama has written a much maligned post on stimulus packages. As a medium-long term view there is really nothing wrong with it, but the large swath of criticisms that have appeared focus on the fact that the author appears to be implying that there is no short-term stabilisation possible from expansionary fiscal policy – namely, government investment is completely crowded out.

Given that everyone else is talking about it, I thought I would add my relatively inconsequential two cents 😉 . This is from an email I sent along to CPW.

http://gregmankiw.blogspot.com/2009/01/fama-on-fiscal-stimulus.html

I’m really with Greg Mankiw.

I think that the criticism that Brad Delong laid out – that inventory is counted as investment but is over-valued – is really a second order issue. The main issue with this is that the mix of credit rationing and a flight to quality does support the idea that there is not complete crowding out – contrary to what Fama implicitly assumes. This in turn implies that government spending can smooth the economic cycle.

How does this hold with the S=I identity? I would say that:

  • Given the existence of “low risk” government investment this (an increase in government investment) would lead to an increase in savings to match the increase in investment – people are more willing to loan to government than business after all,
  • Given the presumption of unemployed resources (and credit constraints) there is scope for an exogenous positive shock to invest (which government investment is) to lead to an increase in equilibrium savings and investment – given that the use of unemployed resources creates value which could not be picked up by the private sector because of credit constraints/catatonic fear.

Even if I thought that the US was at potential (which I don’t – I just think the output gap could be overestimated) the whole attitude to risk and credit rationing surely implies that complete crowding out does not hold – sure S=I always holds, but not complete crowding out.

I realise I’m not adding anything to the debate. However, this blog is a good place for me to store things the way I see them at a given point in time, and thats just what I’m doing damn it 😀

If anyone thinks I’m talking crack, feel free to tell me in the comments 😉

Note: In case it isn’t clear the first mechanism reduces consumption, so no instantaneous stimulus even in the face of no crowding out! However, it does allow for a “reallocation” from consumption to investment, if the price signal was screwy for some reason this could be optimal.

The second leads to an indeterminate change in consumption (given the first mechanism – the income effect in of itself will increase consumption), but a net stimulus.

These are important factors to note when we ask “is an increase in government investment increasing output” and furthermore “is an increase in GI increasing welfare” – which is the ultimate goal.

Note2:  There is also the case where public investment is more productive than private investment.  I don’t think this case is as unlikely as people say – given that the government may have easier access to some resources than the private sector (and given the possibility of increasing returns to scale, especially in a small place like New Zealand).

Matt Nolan

Handling an asymmetric information problem

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Over at the Free exchange blog there is an interesting piece on actions in the current crisis – namely whether to follow the “free market” route or the “inteventionist” route.

My hefty use of speech marks in the above sentence stems from the belief that there aren’t really two distinct schools of thought telling us what to do – there is a single framework of events that forms its descriptive and prescriptive powers from value judgments. These value judgments are thereby the true differences.

This quote sums it up for me:

The problem is that we’ve reached a point of market failure and uncertainty. It’s impossible to tell who the weak banks are.

The difference between the two prescriptions stems from how significant the implied market failure is – not a difference describing what the market failure is.
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Matt Nolan

No money? No problem!

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Or so says a recent spam email:

No Money? No Problem!

You’re entitled to government funding and can claim it here

Government money is readily available for many reasons including:
# Business setup / expansion
# Real estate purchase and renovation
# Rent payment assistance
# Bills
# Education
# Equipment
# And Much Much More!

All you have to do is know where and how to ask!

Get our complimentary information kit here

Now, just before I celebrate my “free money” I find that if I go to the hyperlink I end up with this.  “Sorry, we cannot service your country”.  I guess NZ isn’t as interested in taxing everyone to give me extra buyer power – a pity really 😉

jamesz

Wilful ignorance or intellectual vanity

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There’s been a request for a post on wilful ignorance. How much should we aim to learn about the world, and when should we stop inquiring? Should we read up about the latest violence in Gaza or should we shut it out and concentrate on what we’re doing? In particular, what trade-offs do we face between learning and doing? For every moment we spend reading about tragedies we could be doing something to mitigate or avert it.

To begin we need to ask what we really want to achieve from learning about current events. Do we want to help others in need? Do we want to impress our friends with our learned discussion? Do we simply value accrual of knowledge? All of these are no doubt a part of our decision, yet in each case we face trade-offs. If we want to help people then looking around for people to help reduces the time we can spend actually helping them. If we wish to impress then reading the news reduces the time spent on highbrow discourse. In the final case, there is a trade-off between the depth and breadth of knowledge one can amass. Read more

Matt Nolan

This is why exports from Asia are falling in a hole …

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Calculated Risk illustrates growth in US retail sales over the past 15 odd years:

retaildec2008

Source: Calculated Risk.

Now we know that exports from Japan are plummeting. We suspect exports from China are falling. This decline in spending in the world’s largest economy would be the reason why. Very interesting …

Update: Don’t forget about trade, ick!

Matt Nolan

Broken windows and thrown towels: The issue of stimulus

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Over at Economists View, Mark Thoma points out and, in my opinion, rightly criticises a piece from the Cato institute on fiscal stimulus.

Now the Cato piece seems to equate a fiscal stimulus strictly with the “broken window fallacy“.  I do not completely agree with this.  As Thoma points out government investment should be counter-cyclical, as by investing this way they get to build public goods (which will not be provided in sufficient quantities by the market) cheaply!

However, some fiscal stimulus does fit into the broken window frame – however it does so in two different ways.  First we have the case where the windows are broken and then we are wondering what to do with policy.  Then we have the case where the government could break windows.  Lets discuss.

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