August 2014

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Milton Friedman couldn't understand how so many people have come to believe that government spending stimulates economic activity with so little evidence. As Horwitz has demonstrated, Hoover engaged in "pump-priming" before the General Theory was written, and to no end.

The "evidence" is, of course, the predictions of models, which are believed over actual experience. The same can be said for monetary stimulus in the form of QEs.

Market participants understand each new QE round causes a sugar high in the stock market with no lasting economic benefit. That is precisely why Wall Street clamours for each new round: juice the S&P 500 against fading economic fundamentals.

Government spending as a way to stimulate the economy seems to have been very popular for centuries. Economists disagreed and remained very unpopular with the public. Keynes decided it was more important to be popular than right and a lot of economists followed.

The fire place near the seat of power if very warm and the crowd very friendly. Economists there get photo opps with famous and powerful people. Everyone speaks well of you, just as Hayek warned:

“The reason why I think that too deliberate striving for immediate usefulness is so likely to corrupt the intellectual integrity of the economist is that immediate usefulness depends almost entirely on influence, and influence is gained most easily by concessions to popular prejudice and adherence to existing political groups. I seriously believe that any such striving for popularity—at least till you have very definitely settled your own convictions, is fatal to the economist and that above anything he must have the courage to be unpopular…

“I think as economists we should at least always suspect ourselves if we find that we are on the popular side…”

“But the fact that, whatever may be true of the country as a whole, the ‘intelligentsia’ is predominantly left means that you are certain to have much greater influence, and therefore apparently chances to be useful, if you accept the sort of views which are generally regarded as ‘progressive’.”

Hayek “The Trend of Economic Thinking” pp 40-43

Whatever happened to the idea of diminishing marginal returns? Unless it no longer applies, economists should expect successive rounds of QE and federal stimuli to result in diminishing returns. Am I missing something?

2 points.

1) Kotlikoff's book is not all that great. His accounting has been repeatedly shown to be seriously wrong. See the numerous discussions by Bruce Webb and coberly at Angrybear, as well as from time to time, Dean Baker.

2) Gros's piece is less than the convincing slam dunk you portray it as, Pete. It does not note the budget balances of the three from the real starting point, their "equality" in 2007, which had much higher deficits for UK, US second, and EZ third, with its imperfectly followed fiscal targets of deficits not exceeding 3%, with much variation across the EZ. While Gros declares not much difference, in fact the US is ahead at the end and still rising, in contrast to both EZ and UK. Gros's argument really boils down to the UK, but again, it started out with the highest deficits. It stimmed, but has since gone austere. However, that has been associated with a return to recession, and that lowers its tax revenues, making its deficit look worse. Correcting for that leaves the US as the most stimulative and the best performing from 2007 to today, if not by much over the EZ.

And while we're piling on Peter's reading list, Bateman's "Scholarship in Deficit", in HOPE, is well worth reading along side the Buchanan citations. I was introduced to Buchanan early in my education - certainly before I read Keynes in the original. I've always enjoyed him and endorsed him, with the exception of almost everything he's put out on Keynes.

thank u for your nice post!

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