Gettin’ very blogospheric in here — I’m linking to bloggers writing about other bloggers. Who’d have thought ten years ago that the term “blog” would become respectable in an academic sense? Anyway.
Tyler Cowen writes about fiscal policy and multiple equlibria:
- From the comments: On downturns, fiscal policy, and multiple equlibria (Marginal Revolution)
One of the equilibria is a slow, steady decline from the top of a boom to more “realistic” supply/demand levels:
In this model there is still a useful role for fiscal policy. For one thing, fiscal policy can smooth that ride down the escalator, by spreading the losses out over time, at the cost of future debt of course. This may be needed if only to make the political economy of decline less bitter; see Spain and Greece. Nonetheless fiscal policy cannot make up for the output losses at will. We are not standing in an IS-LM diagram where the difference between “what we have” and “what we could have” is thwarted only by some supposed Austerians who won’t shift the proper curve and yet somehow have taken over some of the biggest spending social democratic, insider-leaning governments in world history. The IS-LM approach fits in nicely with the view that policy improvement is all about yakking about the obstructionists. Instead, policy is also about rebuilding trust, not just maintaining NGDP on a decent keel.
(Aside: Nick Rowe on NGDP targeting.)
Another is a shift to a new
boom steady state economy:
There is another possible role for fiscal policy, as there usually is in models of multiple equilibria. If you ran some super-duper fiscal policy, and invented the flying car, a cure for cancer, and other marvels, the market might suddenly latch its expectations on to a much more positive scenario. There could be a significant upward bounce to a much higher equilibrium of output and employment. In any case, the quality of fiscal policy matters, and Keynesian ditch digging probably doesn’t do much for inferences about institutional quality and for the selection of multiple equilibria. “Spend the money, anywhere” is in my view a deeply pernicious attitude, somewhat akin to thinking you can create a good NBA team, with a strong ethic for quality and work, by tanking for better draft picks at the end of every season. But no, the internal ethic matters and cannot be first destroyed and then recreated at will. Good teams don’t usually work that way, and neither do good fiscal policies.
I think most supporters of public spending tend to imagine this second equlibrium, justified by awesomesauce Cold War-era aerospace projects like the Avro Arrow and the Apollo programme. Unfortunately, what we actually get tends to be Keynesian ditch-digging at best.
If you want a big Keynesian multiplier:1. Focus on projects that hire less-skilled workers (remembering that “skilled” includes pipefitters, electricians and other specialties that mercifully don’t yet require a college degree).
2. Focus on projects that use workers from sectors with temporarily high unemployment rates.
3. Make some kind of effort to target parts of the country with high unemployment rates
It should have read,
If you are an entrepreneur who wants to set up a manufacturing operation during a recession:
(Emphasis from Kling’s post.)