Archive for the ‘John Cochrane’ Category

We Can’t Agree To Economic Cures Because Economists Can’t Agree

February 2, 2009

Economist Paul Krugman, the winner of the Nobel prize in economics, is embarassed by what he calls the weak arguements of other economists against the stimulus.

This small quote from his blog gives a nice review of schools of thought on this subject that have developed over the years:

There are certainly legitimate arguments against spending-based fiscal stimulus. You can worry about the burden of debt; you can argue that the government will spend money so badly that the jobs created are not worth having; and I’m sure there are other arguments worth taking seriously.

Yes indeed says, for one, John Cochrane, Professor of Economics at the University of Chicago Booth School of Business.

Cochrane and some 50 other economists have allied together to dispute Krugman and the Obama stimulus.

Dropping money from helicopters is “fiscal stimulus,” and that will surely goose demand before it quickly leads to inflation. Usually though, “stimulus” means by debt that the government plans to pay back, and is supposed to work without inflation. Does it? Many arguments reflect classic fallacies. 

The Obama economic team has not announced a clear schedule of future spending controls or tax increases that can pay off the new debt, and the Federal Reserve has already more than doubled the money supply and is widely announcing its intention to do much more.  (We don’t need to see higher tax rates, we need to see higher revenues or lower spending. A plan for higher rates can choke off growth implying lower revenues.)  On the other hand, they have not announced the opposite, a determined intention to inflate rather than pay off the debt, which would give the maximum inflationary demand punch.


In any case, let us hope this is not the plan. Just because a little demand goose followed by inflation is possible doesn’t mean it’s a good idea. The inflation that will result from a trillion dollars of money permanently dropped on the economy, and the real economic dislocation of such a major inflation, is frightful to contemplate.

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