Tyler Cowen starts the conversation which is good, because I wanted to go there.
I’ll have much more to say later but wanted to address a few quick things
Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources. Think of it as having to choose a rate of discount for evaluating expenditures. I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs.
This keys off a lot of things, including Rajan’s opening suggestion that the prevailing rate of interest was too low and was not providing the right incentives to save.
However, importantly, if the marginal rate of return exceeds the rate of interest there is no limit to how many dollars we can profitably spend. To paraphrase a former Princeton professor, the US government possesses a technology known as the printing press which allows it to produce dollars at essentially zero cost.
What costs us is the use of real resources. Yet, we have real resources sitting on the couch watching daytime talk shows. If we have profitable means of deploying them, then by all means we should. And, we should keep doing so until we run out.
Addendum: As I a side note, I do apologize for flipping out, though if it helps foster a key discussion then I am glad about that.
To explain – though not – justify myself I’ll note that after I finished reading the piece I literally did a search for the word “price.” It came up only twice, both in relation to oil. At that point I hit the roof.
Addendum II: I can’t go deeply into this right now, but just so as not leave the wrong impression, its not immediately clear to me why the long term investment model and the stimulus model are competing visions. My regular readers know that I have an natural affinity towards lower interest rates and tax cuts as stimulus, as they require little to no efforts at central planning. However, I am not utterly adverse to some central plan that Tyler might have in mind.
Modeled Behavior 
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Wednesday ~ May 9th, 2012 at 8:20 am
curtd59
Agreed, however, that kind of activity is a numeric artifact UNLESS we are printing and borrowing in order to increase productivity, defined as more profit per hour spent in effort. It is entirely possible to do the opposite. Russia was famous for producing iron this way.
However, the externalities caused by the borrowing and spending have extraordinary costs: the increased interference of the government.
That is why spending won’t get anywhere unless it’s matched by offsets that compensate for the losses caused by expansion of the state. (Even though you probably don’t see those involuntary transfers as losses.)
Spending isn’t the problem blocking the Keynesians. And arguing that it is, is disingenuous. The bureaucracy is the problem. Because the right will not budge if the bureaucracy isn’t contracted.
“Money is nothing next to freedom.”
Wednesday ~ May 9th, 2012 at 12:01 pm
J.V. Dubois
“However, the externalities caused by the borrowing and spending have extraordinary costs: the increased interference of the government.”
Actually the great depression showed us that large governments and rise of authoritarianism can be directly caused by inactivity of the government to smooth out business cycles. This is the reason why Keynes considered himself as one of the true defenders of capitalism. In eyes of many he saved western nations from the clutches of fascism and communism.
Wednesday ~ May 9th, 2012 at 12:26 pm
curtd59
Thats one of the great debates isn’t it? That no matter what we do it expands? But then that era was caused by the expansion of the state so the argument is circular. If that’s the case, then the question is how we create institutions that serve our needs but do not expand the state.
It isn’t hard if the left honestly wants to serve the common good rather than expand the state in pursuit of power. But I think those two goals are inseparable on the left, and are necessarily separate on the right.
Wednesday ~ May 9th, 2012 at 5:35 pm
J.V. Dubois
I think you read too much into that left-right story. For instance Scott Sumner considers himself a modern libertarian. I consider myself as leftist liberal. But that does not prevent me to agree with him on the matter of how to use markets to guide monetary policy so we prevent and solve demand side recessions.
As I see it, smoothing out the business cycle is neutral in left-right worldview. I have a hard time explaining to some right-wingers that even fiscal stimulus can consist purely from temporary tax cuts. So yes, you will get “government expansion” sometime in the future to pay off debts , but it is outweighed by “less government” now. And actually if demand side story is true, the future burden of taxation will be felt much less then the boon of lower current taxation. So from “right” point of view such fiscal stimulus should be at worst a wash and at best it will be positive.
The “fault line” is not between left vs right or small vs big government. It is about influential groups that feel threatened by some particular course of actions. For instance people holding their wealth in government bonds will oppose inflation to the last breath. They are guaranteed their nominal yields so it is only inflation that determines their real profits.
People who have capital structure made so that they expect profits in far future will oppose fiscal stimulus in form of taxes. Because they may individually not benefit from tax cuts now and they can be most affected by tax cuts later. This is the great tragedy of our depresion. This is why it is so hard to solve it. Young workers may object because they have low income now and they will have higher income in future. I hope you get the point.
Wednesday ~ May 9th, 2012 at 6:13 pm
curtd59
JVD
Now you’re changing the argument from one of ideological rhetoric necessary to pass policy to one of individual preferences. I mean that doesn’t follow. Humans still must reduce their differences to party affiliations.
RE: GROUPS
Well, that’s all well and good except that in practice, groups align behind ideological parties in order to gain enough support to pass legislation. They have to. We built the system this way.
RE: SMOOTHING
The argument on the right wing, and from the libertarians is that ‘smoothing’ simply expands and exacerbates busts and booms. (I agree with this proposition.) The counter argument is that slower growth places greater burden on the educational system and policy makers to make harder and better decisions, and under that model, booms and busts are smaller because credit does not mask the misallocation of capital as quickly. This line of reasoning suggets we should take the Danish model of direct redistribution rather than spending and consumer credit expansion.The only honest liberal that I know of is Karl Smith and he just argues that we have problems either way so it’s better to solve the problem we know now than the problem we don’t know of later. (WHich a conservative finds ridiculous.)
RE: PEOPLES INTERESTS
And while on a case by case basis, you might be right, in the aggregate, people that raise money and participate in policy discussions vote according to very simplistic principles that do not vary at all. It’s the people who determine the outcome of elections and they are the moderate and pragmatic minority middle. Everyone else is committed.
And the effect that you describe does not manifest itself in voting, but in money raising in support of their candidates, and candidates represent ideologies because large groups are required both for fundraising and to become elected. The evidence is that your argument is false, because people must aggregate a vast number of beliefs, wants, and needs into their votes.
NOTE ON COGNITIVE BIAS
(interestingly enough your example demonstrates a common liberal cognitive bias: extrapolating the personal to the mass by relying upon false consensus effect. Why liberals do this is incomprehensible to libertarians and conservatives. I can comprehend it but not comprehend why one would cling to it.)
Wednesday ~ May 9th, 2012 at 9:03 pm
Morgan Warstler
Sumner’s massive bet with me is about this exactly. He argues econ crisis = govt. growth.
I argue, since Nixon-Reagan, spending all the money, has shrink the govt. we just haven’t seen the full effect yet. Clinton met with Greenspan Jan 1993, and took he deal. He tossed Dem interests overboard, and bought himself 4 more years.
Obama REFUSED to be Clinton. And the Tea Party woke Sumner up to my argument.
If Obama loses, Sumner is wrong OUTRIGHT.
If Obama loses, I’m wrong. And if Obama loses, I will immediately adopt NGDPLT as my preferred conservative strategy.
But right now, I’m still betting that spending all the money. is UNBEATABLE by Dems.
Sumner argues humans don’t grow. I argue FDR only happened because our grandparents were 15-20 IQ point stupider than we are.
I think Main Street conservatives OWN the country with both $$$ and votes, and are now smart enough to stymie majority mob rule at every turn.
We’ll see in November.
Wednesday ~ May 9th, 2012 at 9:03 pm
Morgan Warstler
If Obama wins, I’m wrong.
Wednesday ~ May 9th, 2012 at 9:46 pm
curtd59
Morgan is right on the conservative strategy.
The conservative strategy has been to bankrupt the state. Spend it first in order to deny the left from spending it on what they prefer. It appears to be working. It was a conscious decision to adopt that strategy. At the time the bet was that we could spend it before SS went bankrupt.
I don’t know whether Morgan’s right about Obama winning or losing, but I do know that he’s right about the conservative strategy. I do think that every politician I have talked to at both the state and federal level believes that the population is done with tax increases. Period.
The contrarian argues that Europe will spend its way out (I don’t buy it) and that the USA will copy that solution. Personally I see Europe dividing gracefully and Germany allying with Russia, and the anglo-sphere having a family crisis. But that’s longer term. But the germans might commit suicide. I can’t tell.
Wednesday ~ May 9th, 2012 at 2:44 pm
Lord
The problem for the right isn’t the left, it’s themselves. They cannot decide whether they want less government or more government but just of their own preferences. You have those against debt and social spending and those against taxes but for military and medicare spending. Being against debt, spending, and taxes is non compromising because there is nothing to compromise with. The struggle is between which of these will dominate. In the last compromise debt won over spending and taxes, but in the next taxes will probably win over debt and spending, even while complaining about cuts in defense and medicare. They are playing rock, paper, scissors.
Wednesday ~ May 9th, 2012 at 6:18 pm
curtd59
Lord,
I think there is an argument in there but I can’t quite put it together.
If I could understand what you were observing I’m pretty sure I could explain the reasoning behind it. But the right is annoyingly consistent (Even when they’re wrong.)
Friday ~ May 11th, 2012 at 1:54 pm
Lord
The default farce produced a compromise to reduce debt and spending. The right now seeks to evade the military spending cuts they agreed to. The next battle will be to preserve the Bush tax cuts but to achieve this they will have to increase the debt as other options are unachievable (spending cuts) or more undesirable (other taxes) from their standpoint. Everyone wants to cut waste, fraud, and abuse, and everyone elses spending is waste, but there is no compromise in offering to cut everyone elses spending, only your own. The right have not been serious on cutting spending so are not serious on shrinking government, only in shifting it towards their ends.
Wednesday ~ May 9th, 2012 at 8:21 am
curtd59
(You really ought to update this wp theme.)
Wednesday ~ May 9th, 2012 at 10:02 am
Morgan Warstler
Karl drops Fiscal Stimulus, drops Monetary Stimulus and endorses my Guaranteed Income plan!
Another convert:
“Yet, we have real resources sitting on the couch watching daytime talk shows. If we have profitable means of deploying them, then by all means we should. And, we should keep doing so until we run out.”
It doesn’t get much simpler than that.
Because ONLY my method is 100% PROFITABLE. Fiscal is not profitable. QE is not profitable.
But AUCTIONING excess resources to profit seekers at whatever price the market will bear is always profitable.
Wednesday ~ May 9th, 2012 at 10:21 am
Gepap
In what universe isn’t a “guaranteed income” plan not a vast form of both fiscal sitmulus (who else but the government can guarantee an income, anyway?) and a transfer of income? (unless you plan to fund such an income through inflation of the money supply?). And I say this as someone who has no problem at all with a guarenteed income plan, depending on implementation.
Wednesday ~ May 9th, 2012 at 11:29 am
Morgan Warstler
The only way you’ll get a GI is if it is done my way:
http://modeledbehavior.com/2012/04/20/the-ebay-job-auction-and-guaranteed-minimum-income-program/
The costs of the program are paid for… it absorbs all forms of AID, even the disabled are working from home.
The cost savings on local and state public employees actually makes it profitable.
Wednesday ~ May 9th, 2012 at 10:18 am
Gepap
Please do bug out Karl – people need to start bugging out about the epistemological closure that supposedly rational individuals have chosen to undertake in the name of ideological purity.
Having a truly logical discussion on anything, particularly policy, is impossible if individuals place certain actions out of bounds simply because they don’t like the impications of them.
Wednesday ~ May 9th, 2012 at 11:23 am
Morgan Warstler
Are you unfamiliar with hegemony?
You think the folks who own things don’t get extra votes?
You get that the US Constitution, the entire founding structure of our country, and the foundations of the Fed were not set up tabula rasa right?
Preferences are BUILT IN.
You have what going for you? The “oh by the way” second part of the dual mandate?
—–
Look, I’m not concerned with right or wrong here… this isn’t an ideology thing for me like it is you….
I just want you RECOGNIZE and ADMIT that your optimal gameplay is a policy that is acceptable to the hegemony.
It is not a bipolar game, you vs. conservatives.
It is tri-polar. A power = Main Street conservatives (the 80-99%) B power = 1%. C power = you
You won’t get your favored preference, but your optimal play to offer up policy that causes A to fight with B.
Even in Monetary policy.
Wednesday ~ May 9th, 2012 at 11:09 am
Ritwik
“If we have profitable means of deploying them”. That’s the entire catch. You cannot visualize a world where we don’t have a profitable way of deploying these willing but unlucky resources. But what are those profitable means? Why should the aim of policy be to make more opportunities profitable with lower rates and tax cuts? If we want people to feel good about having a job, why not job-sharing Stevenson-Wolfers style? Why do we need to stimulate production and demand? Wasn’t the social security net designed precisely for misfortunes of this kind? What about the existing wealth – why shouldn’t that be used to absorb some of the misfortune?
Wednesday ~ May 9th, 2012 at 11:51 am
J.V. Dubois
“Why do we need to stimulate production and demand?” – so far I thought that this was not being discussed. Economy studies production and consumption of goods and services. It leaves out the normative “why”. It is given that people like to consume things and that it is better to have higher production (and consumption) rather then lower or no production/consumption.
Wednesday ~ May 9th, 2012 at 1:02 pm
Ritwik
Sure, the implicit argument here is not one of being happy with lesser, but simply that further stimulation only creates the next boom and bust. And that aggregate disutility may be better mitigated through some public finance decisions that do not involve stimulating aggregate demand. It’s just not very clear to me why nominal income growth, here and now, is the best way to manage material ‘non-normative’ (assuming that there is such a thing) utility.
Also, my point on wealth and social safety nets was precisely that they are supposed to decouple production and consumption. My shirts won’t start fading any faster if I lost my job tomorrow, and my car (if I had one) would run just as smooth. Nor would I not have food to eat. I’m guessing the same holds true for the overwhelming majority of people in advanced economies. The US & Europe are not Rosie-the-riveter economies anymore. They are Sarah-the-Coca Cola area sales manager-economies. Rosie the riveter has a number of benefits to fall back on. Sarah still has the same car and house as yesterday. The magnitude of human suffering is not comparable – the case for allowing capital and labour misalignments to correct themselves is quite strong so long as the most unfortunate are well supported.
All this is simply to say that from the perspective of government policy, public finance initiatives to get the tax code, redistribution, regulations and incentives right are probably more important from a utility perspective than trying to get businesses and households to spend more. At current levels of income and wealth for advanced economies.
Of course this is all tangential. If one accepts that business cycle stabilization is indeed as important as everyone thinks it is, then the disequilibrium Keynesian demand side story is probably closer to the truth.
Wednesday ~ May 9th, 2012 at 2:39 pm
Greg Ransom
You’re an economist. You should understand that the word “resources” in your first sentence were is meaningless unless the “if we” part of the second sentence is replaces with “we do”. But that is just the rub, isn’t it?
Economists, comically, don’t think economically.
That is the central pathology of modern macroeconomic “science”
You wrote,
“we have real resources sitting on the couch watching daytime talk shows. If we have profitable means of deploying them”
Wednesday ~ May 9th, 2012 at 6:21 pm
curtd59
Thanks for taking that one on Greg.
He uses the term allegorically and therefore it’s silly. Especially because he’s pretty consistent in attacking the same approach by others.
Wednesday ~ May 9th, 2012 at 11:59 pm
Karl Smith
I think I get your point but I am not sure if it is correct.
Suppose that there were no profitable means of employing a former construction worker and therefore he was sitting on the couch.
He would not fail to be a real resource he would simply not have marginal product in excess of his reservation wage.
My point of course in the sentence was of course to connect the idea that human beings are the constraint not dollar bills.
Thursday ~ May 10th, 2012 at 2:13 pm
Morgan Warstler
My god Karl, with my GI plan, the construction worker is OUT FIXING UP HOMES. He is not marginalized onto a couch.
WHY are you are daft about this?
If you CARE SO MUCH, why are you not taking it seriously?
What is it that bothers you about the actual workable solution?
We don’t need to print dollar bills to employ 30M people, and find a new price level.
[Karl Here]
Morgan, not sure exactly what’s gotten under your skin but to be clear I was replying to Greg. In the future I might but @s or edit directly into comments to make it more clear.
Friday ~ May 11th, 2012 at 10:08 pm
Morgan Warstler
good lord. tell ya what Karl, how about I pay you to answer my actual arguments?
Wednesday ~ May 9th, 2012 at 4:21 pm
Lord
I agree the notion this is about a discount rate is simplistic. It is not about a rate, but about an entire sequence of rates, and entire future of rates. It is not about the present vs the future, but the present and the future. Acceptance of permanent bust to avoid a boom is as ridiculous as acceptance of a boom to bust or the acceptance of a bust to boom. If there is a choice, it is between accepting it as the weather or acting in hopes of mitigating it. If we are powerless, our actions are irrelevant.
Thursday ~ May 10th, 2012 at 2:04 pm
Becky Hargrove
Meanwhile, the unused resource sitting on the couch knows full well that ‘opposing’ forces plan to sit down soon in their closed room, at their table, to settle on their devil’s bargain with one another to divide a shrinking pie, and forget that the marginalized ever asked to be let into the room to help everyone recreate wealth and a bigger pie. The marginalized did not wish this extremely unsettling outcome on any of you, THEY WANTED TO HELP YOU. When it becomes about power and glory, the marginalized can go to hell as far as the people in power care. Unfortunately, precious resources and knowledge also ultimately go down the rat hole, with the devil’s bargain. When people rationalize that the marginalized do not matter in this except for token moral crumbs, civilizations are lost in the process. No one wants a poor person on their side. But the poor who become a little smarter, a little more knowledgable and able to contribute, IS THE DEFINITION OF GREATER WEALTH AND POSSIBILITY IN THE WORLD. No plane can continue to fly without the wind beneath its wings of a structured and functional lower class.
Saturday ~ May 12th, 2012 at 2:02 am
curtd59
@Becky,
RE: “No plane can continue to fly without the wind beneath its wings of a structured and functional lower class.”
Not that I want an unproductive lower class. I argue for just the opposite. But I’m pretty sure that your statement isn’t true. Presently, and in recent, and in distant history, the lower classes have been little more than a drag on society. The most difficult problem in human history is suppressing the fertility of the lower classes – a problem which was solved in the northern latitudes by weather and the agrarian cycle. The contemporary problem is getting as much of the lower class into the lower middle and middle class is possible. That can be accomplished by indoctrinating them into norms, giving them education, and letting them serve one another. But the world would get along find without them. That’s the whole point. We struggle to find something to do with them. We fight in politics over what to do with them and for them. So why do we subsidize their birth rates instead of the opposite? Sounds horrible given our current ethic but it’s a serious question.
I don’t actually like this line of reasoning but it’s just what we end up with.
Friday ~ May 18th, 2012 at 2:41 pm
My take on Rajan’s “True Lessons of the Financial Crisis” « azmytheconomics
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