Tuesday, May 24, 2011

Another Reason for the US Government to Stimulate the Economy

I hadn't thought of this. But that's not surprising. I'm not an economist. But here is an argument from Brad DeLong that is new to me for another stimulus package for the US:
...here is still an overwhelming case for borrow-and-spend right now. Why? Because the thirty-year Treasury inflation-indexed security rate at 1.86% per year is lower than the expected long-run growth rate of the real economy right now of close to 3% per year.

This is a basic topic sometimes taught in intermediate undergraduate macroeconomics: the neoclassical optimizing growth "Golden Rule."

If the economy ever gets itself into a situation in which risk-adjusted long-run interest rates are lower than the risk-adjusted expected long-run growth rate of the economy, it is dynamically inefficient--and government should borrow and spend and keep borrowing and spending until at least it drives long-term interest rates up to and above the risk-adjusted expected long-run growth rate. (And the Keynesian multiplier and the shadows cast by recessions strengthen the case for spending.)

Yet I find none of the classical, semi-classical, new classical, or neoclassical economists who believe in optimizing growth models stepping forward and saying: "Because r < g right now, what we really need is more government spending and an expanded government debt."

It is very odd...
The basic argument for stimulus is that so long as private spending is missing from the economy, the government needs to step in and spend (stimulate!) in order to keep the economy from shrinking.

This argument is saying that even if the economy is growing, if the interest rate on money less than the long term growth rate of the country, the government should stimulate more growth. Why? My simple-minded way of looking at it is that you are leaving money on the table if interest rates are that low. You can use that money until the borrowing pushes interest rats up. Using that money buys you growth you wouldn't otherwise have. And foregoing that growth means you might so distort your economy that you end up building in a long term "structural" unemployment in your workforce, i.e. if you don't keep people employed their skills age, their determination to fight for a place at the economic table wanes, and they get kicked to the side and left behind as a permanent drag on the economy.

It is clear to me that the political right has so politicized the debate that academics fear for their careers and won't endanger them by taking issue with the idiocy that passes for "sound economics" among the political elite. This has happened before. When McCarthyism was rampant, many an idependent thinker in science laid low so that he wouldn't lose his job. They took the finest scientist of his generation, Robert Oppenheimer, and destroyed his career. They chased the innovative quantum physicst David Bohm out of the country. They ravaged the intellectual elite using red scare tactics. They've done the same now with the economists.

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