James Hamilton on the Economy
A very good read, I highly recommend it. A couple of key points for me,
But where I may disagree with some of my colleagues is in their presumption that wage or price rigidities are the core frictions that are responsible for producing the present situation. I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise. More fundamentally, I have suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects, we’re not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of aggregate demand or stimulus package might be. In terms of the textbook Keynesian models that people play with, I’m suggesting that “potential” GDP growth for 2009:Q1– that growth rate which, if we try to exceed it by stimulating aggregate demand, we primarily just get more inflation– is in fact a negative number. I do not accept the proposition that there is a level of government spending– however large a number you choose to suggest– that will prevent the unemployment rate from rising above 8%. But I do believe that if the government borrows a sufficiently large amount, we will have to worry in a very concrete way about what will sustain the foreign demand for U.S. assets.
And unquestionably the number 1 priority for the federal government should be to restore a functioning financial sector. That in my mind should be done in a way that maximizes the return on any taxpayer funds invested.
But rushing through new government spending plans, just for the sake of spending? Count me off of that bandwagon.
His suggested policies are,
- Unrestricted block grants to states so that states don’t have to either cut spending, raise taxes or both.
- Spending on infrastructure.
I’d argue that the infrastructure spending is not really stimulus, unless Prof. Hamilton thinks the economy will be in a recession into 2010. Still it might be a reasonable investment irregardless and we should “have that discussion as a nation”. I think upgrading/improving parts of the infrastructure is probably worth while.
But nothing suggests we have to rush the legislation through and get the turds we have seen coming from both the Senate and the House.
On a side note, I like the idea of technological frictions. Well I don’t like them per se, but the idea that it is technological frictions that prevent markets from clearing vs. prices strikes me as a more…reasonable approach. I’ve always found the “menu cost” argument rather weak. Sure there are costs with changing the “menu”, but is it so large that you’d put it off for a significant length of time? But converting a factory that used to produce F150 pickup trucks to making something completely different and retraining the workers? Now that I can see as taking considerable time even is such a project is started right away. Anyhow, please go read the whole article. I think it makes a good case for some stimulus, but not what we’ve seen so far. What we’ve seen so far is crap for the most part.