Thursday, June 27, 2013

After reading the last post, tell me in the comments why I think everybody should email Learn Liberty and ask them take down this video from their website as a highly misleading explanation of the impact of fiscal policy

(Learn Liberty has lots of excellent economics videos, btw - I just don't think this one is one of them)


  1. Unfortunately, this is one of those "there isn't just one right answer" questions...

  2. There's alot that's wrong here. He takes the discredited Treasury view and recycles it. What might be true about a full employment economy isn't true in an economy with unemployed resources. In an economt=y with i=unemployed resources, "someone" isn't investing -- this frees the government to borrow funds,
    spend them, and create jobs without destroying jobs elsewhere. Sadly, the Treasury view is one of those undead Zombie ideas that won't die a blessed death.

    The data analysis is also misleading He tells a story where lack of correlation
    implies lack of causation. He doesn't reference any of the recent regression
    based research which has suggested multipliers of about 2 during the Great Recession.

    1. Two quick questions-

      First, how does one determine when an economy has "unemployed resources" compared inventory stocks or people that are in transition?

      Second, are you saying that correlation is not a necessary for causation? I thought that correlation was not sufficient, but was necessary.

    2. re: "I thought that correlation was not sufficient, but was necessary."

      Conditional correlation is certainly necessary, but not unconditional correlation. Causality is a real bitch. That's fine and we can claim agnosticism, but we certainly shouldn't go around acting like unconditional correlation is the same as causation.

    3. "Conditional correlation is certainly necessary, but not unconditional correlation" makes sense to me.

      I also agree that unconditional correlation is not the same as causation, but malcolm was talking about a lack of correlation. It seems to me that even though you can have (un)conditional correlation without causation, you cannot have causation without (un)correlation.

  3. OK I read your past posts and here's what I predict your position will be, Daniel:

    "By itself this video could be potentially misleading. However, any decent econ prof would use it to start a discussion with his students, explaining why that scatterplot isn't really the right way to think about fiscal policy. I still use this in the classroom myself, because after all there is a whole semester to clean up its bad intuitions."

    1. If you're going to be this relentless, Bob, you should at least be plausible.

      He actually drew a conclusion here, and it was abysmally wrong. You only get whatever conclusion out of the Keynesian cross that you get from the assumptions you bring to it.

      If someone said "the multiplier is five - the Keynesian cross says so - we must conclude this" they would be as wrong as he is.

  4. This guy is a professor? {sigh}

    For one thing, he conflates taxing, borrowing, and "printing" money. Then he claims that all three destroy jobs. (No graph for that claim, eh?) Taxing in one place and spending in another may in fact tend to "move" jobs in the sense that jobs will decrease where taxes are increased and increase where money is spent. You would think that he would have a good graph to illustrate that point. But, alas, he does not show it -- if one exists. He also should be able to show that jobs decrease where money is borrowed. No graph for that, either. He also should be able to show that jobs decrease where money is printed. Oops! ;)

    He did present a graph of the difference in gov't spending vs. the difference in GDP (instead of unemployment). Before he put up the graph my guess was that there would be little or no correlation. For one thing, he made no distinction between procyclical and countercyclical spending. That is a basic error. A policy of stimulus is one of countercyclical spending, to increase aggregate demand. For another, he left out the Great Depression and the early post-WWII era, a time when the Federal gov't embraced Keynesian policies. In particular, the Great Depression is relevant to the question of gov't policy today. This graph shows that he does not know what he is talking about, or that he is being deceptive.

  5. So, what's wrong with the video? I think it's a good summary.

  6. This graph could be improved by choosing 5 unemployment levels and using a different color for each.

    Of course, things like economic momentum and bounce still may cause too much noise to see an effect if it is there.

  7. This is pretty awful. Of course fiscal stimulus can work--if the monetary authority lets it. And does anyone think the level of federal spending is the only relevant variable here?

    If you ignore monetary policy, any output gap and put taxing, printing money and borrowing as always equivalently negative then it follows: but who thinks that is sensible analysis?


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