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I want to suggest that even many of the stimulus skeptics are hindered in their analysis by a much too aggregative way-of-thinking. The economic problem is a coordination problem because there is a structure of capital in society. Not all government induced stimulus spending is sustainable in the longer run. In other words, it is not all consistent with the true preferences of consumers, savers and investors. Just think about what will happen when the "temporary" stimulus stops or shifts to other projects. Will investors and capital goods producers be able to predict what will happen and where?

The particularly alarming thing is that if the government's principle of stimulus is to stimulate where markets have fallen most it runs the risk of reproducing the status-quo ante which is the cause of the status quo of our problems. The recession cannot be cured or prevented by restoring the misallocation of resources!

I'm currently on the last few chapters of "The Road To Serfdom" and happened to do an internet search on Hayek to find more information.

Question. Regarding the "Austrian Theory of the Business Cycle". Can someone direct me to a source so I can read more about an alternative to the "boom" and "bust" cycle characterized by a Central Bank and extended periods of low interest rates?

Paul Krugman argues that fiscal stimulus during a depression does not have a "crowding out" effect because of high unemployment and many under-utilized resources.

I like Bob Murphy's excellent rebuttal of this aggregate demand management in his article, Does "Depression Economics" Change the Rules?, found at Mises: http://mises.org/story/3290. Murphy nicely explains the macro side and then gives his rebuttal. Very civil.

Dr. Rizzo,

Well said. But isn't it possible that the stimulus will up the ante by hurting businesses and banks who, by following good solid financial practices, had no need for bailout money? Aren't they now essentially competing with government?

Why isn't Mises.org linked on the website? Seems kind of odd to me.

Matt, Slow your roll bro. As I'm typing this the QJAE link is right <---- there.

Thanks. :)

Rob,

Don't know if anyone has replied to your query. Go to Mises.org. They have a great deal of the Austrian writings, including Hayek.

Productive expenditure, Fiscal stimulus does stimulate, multiplier effect is 1, 2 or 5 and more/a bigger bang for your buck.

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It's a "stimulating" debate! Somebody also continues to write "make it bigger"!

Rizzo's argument proves to much. How will investors and capital owners ever be able to predict what will happen where?

Yes, roads and bridges will be produced rather than whatever it is that reflects "true" preferences. When the building binge is over, then resources will need to shift again.

Do you really think that nobody knows this?

To the degree that currently employed resources are shifted to produce the roads nd bridges, then what they were producing will not be produced. There will be a demand for substitute resources to maintain that production as well as higher prices. This will cause current buyers to shift into pruchasing other things. This raises the demand for those goods and so the demand for resources used to produce them. Of course, some of those resources may be currently employed, but some are not... and so on.

The sort of analysis that Rizzo has done either assumes that the current level of prices and wages is such that the real supply of money equals the real demand for money, and so that the shortages and surpluses of various things match, and so this is all about shifting resources about, producing the right capital goods, and so on..

Or else, the prices and incomes are not sufficiently low yet, but they should fall, and when the real money supply is large enough to motivate sufficient spending, that will be "good" because that will reflect true preferences.

Ignoring that issue, however, is must a nonstarter.

And that is why Austrians get ignored.

The new new Keynesians are worried about a differernt problem. They don't deny the problem described by Rizzo. But it is necessary to discuss the problem that are describing. The Pigou effect is enough. The paterns of expenditure that would result from the deflation better reflect long run consumer preferences than introducing new shifts in production (for roads.)

What I see, however, for the most part, is pattern of evasion of the issue.

On a related note... what is happening to the natural interest rate now? I can accept that the market interest rate was below the natural interest rate two years ago. But what happens to the natural interest rate during a period of readjustment?

Pete wrote:

===Especially, I might add as does Cowen, that the evidence while perhaps not as strong as one might like for the skeptics is non-existent for the pro-fiscal stimulus side.===

I know you are just trying to follow your own advice and be polite here, Pete, but look at what you're saying. You are agreeing that the pro-fiscal people have NO evidence on their side.

In other words, every time fiscal stimulus has been tried it has failed.

In addition, we skeptics have solid theoretical reasons for why that should be so.

I ask, then, how could our case be any stronger? Do you just mean, it would be nicer if we had 50 historical examples of when governments threw huge chunks of GDP at a stagnant economy and it didn't work, versus just a handful?

Rob wrote:

===Question. Regarding the "Austrian Theory of the Business Cycle". Can someone direct me to a source so I can read more about an alternative to the "boom" and "bust" cycle characterized by a Central Bank and extended periods of low interest rates?===

I'm not sure exactly what you're asking. Many Austrians say that the way to get rid of boom-bust cycle is to get rid of the central bank and return money and banking entirely to the market.

A digestible yet comprehensive explanation of this would probably be some of Rothbard's pamphlets, like _The Case Against the Fed_ or _What Has Government Done to Our Money?_

There are a ton of online books available at Mises.org here:

http://mises.org/literature.aspx?action=source&source=Online%20Books

I am suggesting Rothbard just because I am most familiar with his stuff and I know he is easy to read. Other people might suggest different writers who aren't so "in your face" in case you are new to this and Rothbard seems strident.

I fully agree that people should not be calling each other names on any side. However, the claim made here and repeated in many places (indeed, drawn here from Tyler Cowen) that evidence for the pro-fiscal stimulus side is "nonexistent" is simply wrong. Go look at Menzie Chinn on Econbrowser on Oct. 27 for "A Pocketful of Multipliers" or for something more formally academic, the paper by Blanchard and Perotti in the QJE in 2006. All of these find multipliers greater than one for government spending increases on average, with ranges from 1.3 to 1.8.

Of course there are caveats, very important ones. The Chinn piece is important (drawing from Mark Zandi actually) in that it reports quite different multipliers for different sorts of government spending (and also for different kinds of tax cuts). This is not surprising, and fits in with the Hayekian warnings here about mindless aggregation.

It is also pretty clear that these multipliers, even for specific fiscal policy actions, are likely to vary over time with the condition of the economy, with most observers arguing that they are likely to be higher when there is a lot of unemployment rather than full (or overfull) employment. Thus, many critics of fiscal stimulus have pointed to WW II when the multiplier appears to have been about 1, or possibly even less. However, a crude estimate for Korean War spending suggests something more like 1.4 or 1.5. Needless to say, now we are in a period of rapidly rising unemployment, so that one should expect at least somewhat non-negligible multipliers for some fiscal actions.

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