Sunday, January 11, 2009

Are We All Keynesians Now?

Here is Gary Becker's Subtle Post offering some old school Chicago pushback against the fashionable young keynesians. Greg Mankiw also had a nice piece in the New York Times business section today. I must admit that Los Angeles is far from Washington DC. I'm not hearing any good gossip about what is really going on in elite Obama policy circles. If we could listen in as Obama's Economics Team debates the merits of different policies, what is the basis for how they "know" that a specific treatment (such as infrastructure investment or a tax cut for the lower middle-class) will be effective? What past recession experiences are relevant for today? Is the world that stationary?

The Obama Team doesn't have the time to run a field experiment to determine what works. In addition, it wants "general equilibrium impacts now! To my surprise, Paul Krugman has come out against cost/benefit analysis of public policy

"The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts."

So, how do we determine and debate what policies are "good" and how do we rank them?

So are academic economists "shovel ready" such that we are armed with free lunch policies that will jump start our economy, stop climate change and help to get the U.S ready for a 21st century long run economic competition with China?

I don't think so.

People tell me that they lack "confidence" , business lacks "confidence" --- nowhere in an economics textbook have I seen a "confidence" production function. At first glance, the fundamentals of the economy are pretty good. Our human capital stock is high. Our health capital stock is high.

How many people would trade their US passport for another nation's?

As all eyes turn to Washington waiting for the New President to help them, I do wonder what steps people would take now if they knew that no help was coming. Are we in a deep freeze as people and firms position themselves for the Keynesian $ that is about to flow? What fiscal stream of future taxes and inflation will be required to pay for this today?