Monday, March 21, 2011

DeLong Smackdown

Over at his blog, Professor DeLong completely destroys a fellow economists who made the following argument:

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington...

As DeLong notes:

Zingales's claim--that because the current crisis is a trust crisis that has left the economy short of safe high-quality liquid assets we cannot restore employment by having the government build roads and finance road construction by issuing trusted safe high-quality liquid assets--that claim is so incoherent as to reveal nothing more than a failure on Zingales's part to think any of the issues through for more than a weekend. Zingales is a smart guy. But he is also pig-ignorant about what economists have thought and said in the past. And because he is pig-ignorant, he has mentally disarmed himself.

DeLong next quotes a number of modern day economist who argued against the stimulus plan, saying such thought was backward thinking, out-of-date etc... This is a perfect example of really stupid smart people. First, consider that government spending is part of the GDP equation (C+I+(net exports)+G (GOVERNMENT SPENDING), indicating that a positive contribution from government spending would increase GDP and a negative contribution from government spending would decrease GDP. That's called simple math. Also consider that every government that has implemented austerity measures has seen slower growth. I've documented the data several times (see here and here). That's data -- as in what happens in the real world when certain things are tried. Hell, even Mish noted that austerity measures were slowing down economic growth after calling for those same measures. In short, these professors are so blinded by ideology that they can't see what actually happens in the real world when they do certain things.

Certain kinds of government expenditures are good and at certain times. For example, infrastructure spending is good as it creates the physical goods on which the economy grows. Ever wonder why the U.S economy grew strongly in the 1960s? Take a look back to the 1950s when the national highway system was proposed and started. The ability to move more goods and services from point a to point b increases the supply and demand of those goods for all parties involved. Again, this is not that complicated. However, it does involve reality, which seems to be lacking in a variety of economic departments across the country.