Fun With Made Up Macro
- Posted by ryan on October 2nd, 2009 filed in Economics
We’re roundtabling at Free Exchange today, so here’s an economics post. Arnold Kling has been developing his own macro theory, which is a fun thing to do. He’s now applying his theory to stimulus, writing:
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 says he thinks this is “exactly correct.” I think it makes no sense at all. 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.
If one doesn’t accept that story, one is essentially saying that the process of recalculation requires precisely the number of people driven out of work by recession to be out of work for the period during which the recalculating is taking place. If government absorbs even a few hundred thousand workers, that will throw the whole process off, meaning that only when they’re returned to unemployment by the exit from stimulus can the recalculation proceed, generating, somewhere down the road, employment growth.
That set of beliefs would be, I think, a little nuts. It suggests that any interference in the labour market (and presumably this would include unemployment benefits at all levels) will disrupt the recalculatory process. And it suggests that workers will be more likely to find new employment sooner by spending the duration of the recession out of work, skills eroding, than staying busy at some job which wouldn’t exist without a little government help.
It makes no sense.
October 2nd, 2009 at 10:03 am
If I’m not mistaken, Paul Krugman at one point was proposing a stimulus large enough to fill the whole gap in GDP.
Taking Kling and Tyler out of the absolute, isn’t it likely the case that the readjustment of the economy to new circumstances goes more slowly due to government intervention?
A parable, the transportation infrastructure portion of the stimulus was road heavy and rail light, reflecting the government’s perpetuation of an obsolete paradigm.
Mind you, I think the government probably should be a larger part of the economy than it has been while we renew many things held in common like schools and transport, but I don’t think I disagree with Kling’s analysis except that I think there’s both (a) and (b) going on and some of each probably should be happening just now.
October 2nd, 2009 at 11:00 am
Yes. It makes no sense. The man obviously isn’t familiar with hysteresis.
October 2nd, 2009 at 11:47 am
Isn’t this just recycled real business cycle theory?
In any case, one look at the BLS Diffusion Index, which shows very wide job losses across inustries. (linked below via Claculated Risk) This ought give any structuralists some pause, there’s an enomorous amount of cyclical collateral damage out there.
Further, parts of the stimulus include things like unemployment benefits and supporting education funding. Is the Great Market Re-Calculator really such a delicate instrument that it’s internal DSGE will thrown a sputter unless families are left destitute and children’s educational opportunities are maximally diminished?
Other parts are investments in infrastructure. Does it not make sense to invest in public infrastructure prescisely when the opportunity cost is lowest? And side effects the largest? Or must the the Great Invisible Swami’s concentration be considered as an opportunity cost?
If there was evidence that the stimulus was preventing private households from deleveraging, that might be something of an argument, as that’s the recalculation that needs to happen.
http://www.calculatedriskblog.com/2009/10/unemployment-stress-tests-unemployed.html
October 2nd, 2009 at 12:15 pm
This recalculation thing sounds like a Pete Seeger sort of song:
It takes a worried man to sing a worried song,
It takes a worried man to sing a worried song,
It takes a worried man to sing a worried song,
I’m worried now, but I won’t be worried long.
October 2nd, 2009 at 12:18 pm
Plus Kling could save a lot of time and learn Post Keynesianism, since their Flow of Funds models predicted the crisis pretty accurately, unlike.
From Dirk Beezer at Vox:
“It is impossible to warn against a debt deflation recession in a model world where debt does not exist... If our routine forecasting models – CGE models, mostly – failed to foresee this, where do we look for alternatives?
In Bezemer (2009), I document the models that got it right. The important question for economists is – how did they do it? What is the underlying model?
While there is obviously a diversity of approaches, one important strand of thinking is an accounting of financial stocks (debt and wealth) and flows (of credit, interest, profit and wages), as well as explicit analysis of both the real economy and the financial sector (including property).
The most detailed of these models, which has also been used to construct public projections and analyses, are “Flow of Funds” models of the US developed by Wynne Godley and associates at the Levy Economics Institute.”
http://www.voxeu.org/index.php?q=node/4035
October 2nd, 2009 at 1:23 pm
The “recalculation” theory is not new, nor did Arnold Kling invent it. It’s just Greg Mankiw’s “sticky information” theory, which is a variant on the typical neo-Keynesian “sticky-price” and “sticky-wage” theories.
October 4th, 2009 at 1:09 pm
Read a fucking book and end the imbecility.
Try Steven Horwitz, _Microfoundations and Macroeconomics_ and Roger Garrison, _Time and Money_.
And just for the record, in a secondary deflation/recession “recalculation” does not rule out fiscal or monetary meassures counter it — e.g. as explained by Hayek.
Don’t know what a secondary deflation is? Read a fucking book
and find out.
October 4th, 2009 at 9:19 pm
Kling isn’t inventing a new theory; he’s simply picking up the Austrian business cycle theory at the point where the bust sets in. (BTW Kling admitted early on the similarity between his “recalculation” and ABCT.)
Now the real puzzle is this: Tyler Cowen criticized ABCT as an explanation for the current recession, and yet now is praising Kling. Intriguing…
October 5th, 2009 at 10:08 am
Besides which, there is no reason that workers cannot be “pulled out” of temporary schemes into new growing industries. They don’t have to be pushed out of old ones first.
October 5th, 2009 at 10:17 am
I just don’t these lines of argument at all, because I don’t believe there is a single stable equilibrium to be found. The economy is always a dynamic economy. For instance there are always new workers available - they are called school leavers. There are always workers being pushed out of jobs, the main difference during in downturns is that they no longer find new jobs. So the opportunity for a new industry to grow is always there, but the growing demand a new industry won’t be there unless the wage bill is growing somewhere (either in the domestic economic or in a foreign economy). So I don’t believe new industries (unless the new industry is a cheaper alternative to an existing industry) can really start until the recovery is already underway. (I admit they may be helped in a post-recession environment by lower rents and starting wages). And what will start that?
October 5th, 2009 at 10:23 am
And surely a bit of employment search theory might suggest that if search is costly and funds to finance search are limited, placement rates will decline the longer the period of unemployment. Discouraged worker might in fact be a real and important phenomenon.
October 5th, 2009 at 3:19 pm
Browsing the Kling / Caplan blog will quickly impress upon you the fact that these guys are just not very bright. Anything I’ve ever read by one of them that’s not completely vacuous is invariably filled with glaring logical errors. This is why they spend their time writing dumb Freakonomics-inspired “Economics of X” posts and re-inventing discredited Austrian theories rather than publishing actual research.
October 5th, 2009 at 6:32 pm
greg-I agree, they seem pretty clueless.
October 5th, 2009 at 8:43 pm
Dear Ryan Avent
What Doug Said.
Congratulations on the link from Paul Krugman. However, you do demonstrate incomplete command of his writings when you write “I don’t think that stimulus’ strongest supporters would advocate a package so ambitious that unemployment was scaled back to pre-recession levels.”
In fact, Krugman advocated exactly that in this post http://tinyurl.com/8wqdnq
October 5th, 2009 at 11:59 pm
Robert, can you show me where, “exactly”, Krugman proposed bringing unemployment down to its lowest pre-recession level? By “full employment”, I think Krugman meant what most economists (fresh- or salt-water) now seem to mean by that term, i.e., NAIRU. That figure — whatever it should be now — is one that might fall short of “bubble-era employment” by a percentage point or two - or maybe even three. The current NAIRU debate has it ranging from the Fed’s 4.8-5% up to Phelps’ recent, not-implausible revision to 7%. In other words, “pre-recession levels” of unemployment might be too low a target in Krugman’s terms — he might have meant “in the neighborhood of 6%”, where the pre-recession low for unemployment was around 4.5%.