Theories Abound

EconomicsArnold Kling:

From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.

Tyler Cowen:

In my view that is exactly correct.  It’s also why current gdp measures and projections aren’t picking up how well the stimulus is or isn’t working.  A higher monetary velocity, as induced by fiscal policy, will indeed boost nominal gdp, but we need to see how well these projects stick, or not, with time.

Matthew Yglesias:

Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill

Of the remainder, a very large portion consists of temporary expansions of social safety net programs to help take care of the most vulnerable. Again, the economic logic of this seems to me to withstand Cowen’s complaints—there’s no evidence that needed economic restructuring involves getting people who’ve lost their jobs to go without food or basic health care. And even if it didn’t, the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.

What we’re left with then, it seems to me, is a relatively narrow disagreement about a minority of ARRA funds. It’s useful to have an argument about that stuff. The “race to the top” education money, for example, strikes me as sound public policy that has relatively little to do with economic stimulus and was just smuggled into the bill because the White House likes the idea. And on down the list. But the policy as a whole is what it is.

Ryan Avent:

The “Recalculation” perspective, by the way, is that the economy has almost no cyclical unemployment — it’s all structural unemployment generated by the fact that many old production activities no longer make sense, and so the economy is sitting a bunch of people out of the workforce at the moment, while it strokes its chin, “recalculates,” and figures out where they ought to go next.

There are currently 15 or so million people out of work. The stimulus may have saved or created several hundred thousands jobs, or perhaps much more, but it is clear that it has not prevented many millions of workers from being unemployed. I don’t think that stimulus’ strongest supporters would advocate a package so ambitious that unemployment was scaled back to pre-recession levels.

So while stimulus means that several hundred thousands of workers who would be out of a job are not, and are spending, therefore supporting several hundred thousand more workers, it’s still the case that there are a lot of people out there cooling their heels. If one believes the recalculation story, then one has to think that those workers might soon be directed by the great TI-85 in the sky toward some new industry. In that case, when government stimulus is removed and workers entirely dependent on that spending are let go, the next growth industries will be up and running, ready to absorb new workers.

Matt Steinglass:

Matthew Yglesias thinks Tyler Cowen and Arnold Kling should be discussing what’s actually in ACES, rather than some hypothetical stimulus bill that was largely devoted to new government programs; in fact ACES is mostly about federal aid to states to keep their budgets from crashing due to the pro-cyclical nature of state tax revenues.

I find Kling’s post weird for a different reason: it treats the “recalculation” involved in shifting an economy from one basis to another during a recession (presuming recessions result from misallocations of economic resources and activity) as if it were a deterministic shift to some inevitable future state of the economy.


In the future, as the economy recovers, the United States might wind up being a center of engineering and design excellence for high-energy electric motors. Or it might not. A lot depends on what kinds of policies are adopted by the US government. That includes the spending policies adopted as part of the Obama administration’s stimulus. If the stimulus puts a lot of money into the development of green technology, and then those technologies are supported by the right kinds of regulatory frameworks and other decisions about infrastructure development, then they will create jobs that would not have been there otherwise. And when the government stops spending so much on seeding green technology companies, those companies will then be viable parts of the way the new American economy has turned out. This really is not so hard to figure out and doesn’t require the invention of a new theory of macroeconomics. Arnold Kling is trying to invent a reason not to understand something very simple and obvious.

Tyler Cowen responds to all and writes:

The bottom line is this: if you’re trying to use the recalculation idea to explain why the fiscal stimulus should be zero, that in my view will fail.  If you’re using the recalculation idea to explain why the stimulus has a lower rate of return than many people think, it hasn’t much been dented by the recent criticisms.  After all, if the problem were just insufficient AD, a solution would be ready at hand.  But it isn’t and it’s not just because Obama isn’t “tough enough” to propose a bigger stimulus.  It’s a genuinely difficult problem to solve.

Paul Krugman

UPDATE: Arnold Kling

Tyler Cowen

Megan McArdle

Ryan Avent

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Filed under Economics, Go Meta, The Crisis

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