Assault of Thoughts - 6/5/10

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- I'm very excited about a new opportunity that's just come up for me. I was just asked by a former colleague of mine (Hal Salzman, now at Rutgers) to co-author a chapter of a forthcoming NBER volume with him. For those of you who aren't aware, the National Bureau of Economic Research (NBER) is an independents economics research organization that puts out a tremendous amount of working papers and maintains a large network of affiliated scholars. It's best known to the public as the organization that dates business cycles. The project I'm working on is funded by the Sloan Foundation and organized by Richard Freeman (Harvard) and the NBER's Science and Engineering Workforce Program. It will be about the engineering workforce. The chapter I'm working on will review the data on trends in the production of new engineers over the last several decades. To put it mildly, I'm stoked :)

- The Center for Budget and Policy Priorities has been sounding the alarm on state spending cuts here and here. This is a huge issue for me - people think we're doing fiscal stimulus right now, but that's only because they're looking at what's going on at the federal level. If you consider all of government, we're barely engaging in any stimulus at all. What frustrates me is that these CBPP posts insist that Washington needs to do more about it. In my mind, that's treating the symptom rather than the disease. Washington shouldn't do more - the states need to do more. My state, Virginia, has a great credit rating. It is completely irresponsible to cut school budgets right now when we're in a great position to borrow money. If we double-dip, the states will largely be to blame. But contrary to CBPP, effectively nationalizing their budgets is not the answer.

- Robert Reich discusses the prospect of a double-dip recession, something that I think is on everyone's mind after that last jobs report. I renew my query: how does the Austrian School explain double dip recessions? You can see my earlier post for a few of my thoughts on that.

- I still haven't gotten a chance to read this yet, but Jonathan at Economic Thought recently published a primer on Austrian economics at the Mises Institute. This has been a long time in the making, and is based on some lecture notes of his.

- Recently I remarked on a running debate between Mark Thoma, Tyler Cowen, and Scott Sumner on monetary vs. fiscal policy. There have been a few more posts, and Mark Thoma sums them all up nicely here.

Wilhelm Ropke and Broken Windows

From Crises and Cycles - an interesting passage that I came across yesterday. I think Bastiat would understand precisely what Ropke was saying. Modern fans of Bastiat might not.

"We are brought face to face with the intricate relationships of the innermost heart of our economic system when we remember that a political catastrophe like the Great War or a natural catastrophe like the Japanese earthquake of 1923, instead of retarding economic life, generally enlivens it, and thus tends to bring about not a crisis but a boom. Certainly catastrophes lead to an impoverishment of the economic system, but we must guard against confusing impoverishment with a crisis, all the more so as this confusion is an extremely common one. If we agree to understand by an economic crisis a temporary paralysis of the economic process which leads to a disturbance of the exchange apparatus with its consequences of over-production, surplus stocks, and insolvencies, we realize that it is characterized not by a scarcity but by a superfluity of goods, while the hall-mark of impoverishment is a deficiency of goods. This deficiency of goods generally spurs on the economic machine to make the highest number of revolutions it is capable, as was very markedly the case during the war. An economic crisis is therefore not an expression of shortage but of abundance or - to put it better - of what seems to us 'abundance' because of the temporary paralysis of the process of exchange and of the economic process in general. That it leads in the long run to an impoverishment of the economic system is self-evident, but this does not affect the question of the origin of crises, which is the question we are discussing here."

I'm a big fan of the broken window fallacy - I'm afraid that a lot of the people who talk about it most don't really understand it.

Speaking of German ordoliberals like Ropke, the Mises Institute recently came out with Ludwig Erhard's Prosperity through Competition.

I have a question to readers - does anybody know of an Ordoliberal that thought highly of Keynesianism or even considered himself Keynesian? Generally speaking, the relationship between Ordoliberals and Keynesians was chilly. I'm guessing this is mostly due to the central European experience with inflation at the time that the Anglo-American world suffered under deflation, as well as a lack of acceptance of Keynesian theory itself (Keynesian policy does look awfully suspicious if you don't operate with a Keynesian theoretical framework). And yet, even in that piece above (which has nothing to do with Keynesianism), the potential common ground between Keynesianism and Ordoliberalism is crystal clear. Ropke practically announces an aggregate demand based theory of the business cycle, for God's sake! But was the gulf between the two schools ever explicitly bridged? Not that I'm aware of, but I'm curious if anyone else is.

More on BP

There has been some reporting lately on BP's violations of safety regulations. This is absolutely staggering:

"BP's safety violations far outstrip its fellow oil companies. According to the Center for Public Integrity, in the last three years, BP refineries in Ohio and Texas have accounted for 97 percent of the "egregious, willful" violations handed out by the Occupational Safety and Health Administration (OSHA).

The violations are determined when an employer demonstrated either an intentional disregard for the requirements of the [law], or showed plain indifference to employee safety and health."

OSHA statistics show BP ran up 760 "egregious, willful" safety violations, while Sunoco and Conoco-Phillips each had eight, Citgo had two and Exxon had one comparable citation."

I'm curious what Jonathan thinks of this. Citgo and Exxon have the same liability as BP, the same regulations and laws. It seems to me this has nothing to do with tort law or whatever else you want to finger, and everything to do with reckless, criminal disregard for basic safety. Tort law doesn't make these problems go away. You don't take murder and rape laws off the book and just let tort law sort it out. Why? Because compensation for crime doesn't decriminalize the act, nor does it provide a license to commit these acts so long as they're compensated.

I was thinking about the property rights issue more too. How can this really solve a spill in the Gulf? How would property rights be divided up? Would everyone in the world get their own little segment of the ocean? The point is we enjoy and utilize these resources in common. A public beach that everybody shares is qualitatively different from 3 square feet of beach assigned to each person. Commodifying the beach like that by assigning private property rights (1.) devalues it, and (2.) completely misses the point that we collectively enjoy the beach in its entirety - not a small section of it. We want certain things to be common property, and the seas are common property in this sense. We make rules so that we can all have the opportunity to extract resources from common property, sail on it, swim in it, etc. We make rules so that those activities can go on smoothly. How does giving BP property rights to the Gulf solve any of that? That's like saying "it's easy to solve the grafiti problem - just give property rights to the grafiti artists". It's nonsensical.

Assault of Thoughts - 6/3/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- It's not every week that you get two different references to Frank Knight's Risk, Uncertainty, and Profit (1921) in the popular press. Here, Lane Wallace discusses Knightian uncertainty and its relation to the way NASA deals with risk vs. how BP deals with risk. Here, Mark Thoma links to Peter Dizikes talking about uncertainty vs. risk and investment. Knight is a fascinating figure, and his book is a good reminder of how important the idea of uncertainty about the future was to economists in this period. It came out around the same time that Keynes wrote his Treatise on Probability, which covered similar issues of human uncertainty that would later be featured prominently in the General Theory.

- Yglesias reviews the vast chasm between journalists who write about politics and political scientists who write about politics. The point is well taken, and the chasm is even wider for economics. This is one reason why I think blogging is so important.

- Jonathan Catalán has a good post up on the gold standard and bubbles. The gold standard elicits some weird reactions from people. In researching my 1920-21 depression paper I had the opportunity to read a piece by Hayek from 1925 about American monetary policy in the 1920s, and Keynes's Tract on Monetary Reform. Hayek didn't gush about the gold standard and acknowledged it for what it was - a human institution. Keynes had his critiques and a flair for the dramatic (i.e. - "the gold standard is already a barbarous relic"), but he highlighted several positive elements of the gold standard and especially praised it's role historically. Somehow, in the late 20th century with the reality of the gold standard several decades removed, we've gone insane about it. For some people "barbarous relic" is all they associate with it. For others, it's the panacea that we've abandoned. Jonathan has one of the good, sober approaches to understanding what the gold standard was that approaches it on its own terms.

- The NEP-DGE blog has a new paper up demonstrating that the size of the multiplier you get is very closely tied to your assumptions about Ricardian equivalence.

- Mickey Edwards distinguishes between "limited government" and "small government". The Constitution mandates a government whose powers are limited, but the size of the government is a policy question to be decided by the people. I think it's a very good distinction to make.

- My 1920-21 paper is almost ready for submission! I heard back from a colleague of mine that was reviewing it. Unfortunately I think I need to cut it down dramatically, including some of the more interesting but more tangential sections. However, I should be able to spin off at least one of them into another short article some time in the future. Very exciting stuff! After all this background reading and realizing that there's so much more to talk about, I feel like I could write a book on the episode... perhaps some day I will. I always thought writing a book seemed like such a monumental task, but I can understand now how people do it. There's a point where you get so immersed that you can just keep writing, and writing, and writing.

Dispatches from Asia

Japan
William Galston discusses some recent points made by Krugman claiming that people who are comparing the U.S. to Greece oughta be comparing it to Japan instead. Galston cites work by Toshihiro Ihori, Masume Kawade, and Toru Nakazato arguing that fiscal policy did not improve the situation in Japan. I have a huge amount of skepticism for the evidence that Galston presents for much the same reason that I've outlined in a few recent posts. What is their counter-factual? On what basis do they claim that output wasn't improved? It's not clear and right now I don't have time to track it down. My guess is it's just some more sloppy post hoc ergo propter hoc analysis. Why do I guess that? Because if these guys figured out some way to get around the endogeneity problem while using a sample of a single recession, I think I probably would have heard something about it. Even the best of the best of this empirical work - Barro using defense spending, Romer using unexpected tax policy changes, etc. - ends up being unsatisfying. I can guarantee you nobody has decisively proven anything about Japan's fiscal policy. What's also striking is that growth rates are positive for most of the fiscal stimulus period covered by the data that Galston presents. A couple dip negative, but not that low. What we seem to see is that fiscal stimulus can bolster employment and output, but that it's not necessarily going to permanently pull an economy out of crisis. This isn't especially surprising to me. Japan went through a lost decade, not a Great Depression - and perhaps that's all we can hope for out of fiscal policy.

China
Matt Yglesias has been in China, and blogging about the nature of the Chinese economy. I haven't been following this closely, but I thought I'd pull together the links. He starts by talking about the Chinese economic model, suggesting that Chinese growth is less dependent on liberalization or on Japanese style industrial policy than a lot of people think. It's a pretty mundane post, but Scott Sumner and Tyler Cowen take it and make a big issue out of it. Sumner claims that since Ezra Klein calls China's economy a "miracle" he's thinking in binary terms: "free market or communist, successful or unsuccessful", and that a nation as poor as China shouldn't be called "miraculous". Sumner completely misses the point - what's miraculous is the growth rate, not the wealth of the Chinese. Scott's post reads like his recent critiques of what Krugman said about the 1980-2010 U.S. economy - when other bloggers don't provide sufficient things for him to disagree with, he imputes things to them (parenthetically noting that "His post is no worse than 1000 other similar posts; I’m not even sure he disagrees with me"). Yglesias responds here with this:

"I don’t intend anything I’ve said about China to be read as saying “China has a lot of state-owned enterprises and also rapid growth, therefore we should emulate that in America.” Or as saying “China has a lot of state-owned enterprises and also rapid growth, therefore we should conclude that state-owned enterprises are the reason China is growing quickly." I’m simply saying that I think most American discussions of China overrate the extent to which the Chinese economy has been liberalized."

You would think that would settle it. Of course not. Sumner responds here, but I've already lost interest.

The writers at the Economix blog should lose their Excel priveleges

... or at least learn the meaning of "post hoc ergo propter hoc".

Yesterday I remarked on how bad it was for Ed Glaeser to even post a plot of change in the unemployment rate against stimulus spending, particularly when he doesn't want to get in the weeds of endogeneity problems. The whole point is that you stimulate economies that are weak and you don't stimulate economies that are strong. Simply plotting stimulus against unemployment tells you exactly nothing about the impact of fiscal policy, and because of endogeneity and the risk of confusing correlation with causation, you risk people underestimating the impact.

Now this morning on the same blog Casey Mulligan blogs on Ricardian equivalence (the theory that people cancel out public borrowing by saving more in anticipation of higher taxes in the future) by plotting private savings against public borrowing. Again, though, this confuses correlation with causation. The government is borrowing now precisely because we're in a paradox of thrift economy. I'm not saying Ricardian equivalence doesn't hold to a certain extent (I guess I'd call it "Ricardian inequivalence", though) - I'm just saying that governments borrow precisely when there is too much saving for a healthy macroeconomy.

Why do dumb blog posts like this get thrown up? I think it's because of how easy it is to download a few data points and make a supposedly informative graph in Excel. Hence my insistence that the writers at the Economix blog should lose their Excel priveleges. These are good economists. They would never make these inferences in journal articles. But when you're explaining it to a wider public, it's easy to plot a few points and do an informal interpretation, glossing over all the fallacies you employ to get to your conclusion.

The fact is, a positive relationship between public borrowing and private savings could potentially be evidence for two different things:

1. On the one hand, it could illustrate Ricardian equivalence, which if it held strictly would largely eviscerate the prospect that fiscal policy is all that helpful, or

2. It could illustrate the reality of the paradox of thrift and a predictable government response to the paradox of thrift.

Well that really helps, doesn't it? (No, it doesn't at all).

If you make a strong theoretical case with lots additional evidence and reasons for believing your case, then simple plots can be helpful illustrations. But if you ever see simple plots like this presented as evidence for anything in economics, ask yourself "in what sense could the causality be reversed". Think that through, consider those alternatives, and always be skeptical of anyone that tries to present a simple graphic as an open and shut case. And finally - keep straight what you know based on the data and what you think you know based on the theory, and what is a mix of both. I don't claim to know that fiscal policy works based on the data. That's a very hard case to make because of the empirical obstacles I mentioned in the previous post. You get yourself in a heap of trouble when you claim to have empirical support for things that you actually don't (or that you have only weak support for).

The Liquidity Trap - A Self-Taught Tutorial

In the comment section of a post from yesterday, Jonathan asks:

"I'm not sure, but in The General Theory Keynes doesn't refer to the liquidity trap in the sense of reaching a lower bound on interest rates. At least, I haven't come across it (maybe he does). I thought that this particular concept was developed in the 1950s, or at least after The General Theory?"

As I suggested, the liquidity trap plays a very minor role in the General Theory, although it is there. In his chapter on liquidity preference, Keynes writes:

"There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this even the monetary authority would have lost all effective control over the rate of interest. But whilst this limiting case might become practically important in the future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest."

My feeling is that J.R. Hicks's version of the liquidity trap as a horizontal portion of the money demand (and LM) curve at some positive interest rate is the most faithful representation of what Keynes was trying to say. At the same time, you can see where modern "zero lower bound" versions of the liquidity trap, like Krugman's, come from. In the 1990s, Krugman promoted the "zero lower bound" version of the liquidity trap because at that point everyone had forgotten about the concept (most of the time between Keynes and Krugman was dominated by higher interest rates). Krugman was reviving it to explain what was going on in Japan. Anyway, if you sanitize Keynesianism of all the concern with uncertainty about the future and liquidity preference, then the zero lower bound version makes perfect sense, because that's the point where cash and bonds become perfect substitutes. The only reason why the liquidity trap would take hold prior to a zero interest rate is if you have some sort of "uncertainty premium" or "liquidity premium" that you build in, which is essentially what Keynes did. I would argue that Keynesiansim never should have been so thoroughly cleansed of liquidity preference.

I also think it's important to think of the liquidity trap as more of a spectrum, or a gradually closing trap. Even if demand for money isn't perfectly elastic, if it becomes relatively elastic it makes monetary policy relatively less efficacious (note - in yesterday's post I said that money demand was "inelastic", when of course I meant "elastic" - that is now updated). Why not use fiscal policy to shift the IS curve until it reaches a point where monetary policy is more useful? When Scott Sumner scoffs at the prospect of a liquidity trap, responding "well why don't you print more money", my reaction is "why would you want to create monetary inflation - which gets harder and harder to do as you go along - when a much more effective and less distortionary option is available". I'm not terrified of inflation, but the Sumner position seems nonsensical to me, at least at a time like this. The general principle is that monetary policy becomes less useful at lower interest rates, not because of a zero lower bound (although that's a practical obstacle to a certain extent), but because of liquidity preference. Fiscal policy becomes less useful at higher interest rates where monetary policy can do the job without adding to the public debt or risking distortionary intervention. This is my view, although I'll caution that a lot of it is self-taught (and not under the tutelage of bloggers - while I respect Paul Krugman and Scott Sumner, you'll notice that this is one area where I depart from both of them).

The New School for Social Research has a good page on the practical challenges to the liquidity trap here. This is what is known as the "real balances debate". Basically, deflation causes real balances to go up which combats liquidity preference. So the "liquidity trap" is self-correcting. At some point, I know Krugman actually worked out the real balance effect and demonstrated that it is minor. People don't get windfalls on assets from deflation. While there is some real balance effect, it isn't enough to correct the liquidity trap. I'm both writing that from memory and trusting his math on it, of course. Generally speaking I think the real balance effect is real, but probably minor. We just don't have the deflationary swings that we used to. And of course even if you get out of a liquidity trap, it doesn't mean demand isn't still depressed. You don't need a liquidity trap for depressionary conditions in a Keynesian model - the liquidity trap just ties one hand behind your back while you're fighting that depression!

UPDATE: Xenophon shares this critique of the liquidity trap. That reminded me I had two pieces of literature I wanted to share. This is a critique by Scott Sumner in the Cato Journal (I haven't read this in its entirety yet), and this is a good review of the history of the idea in History of Political Economy (I have read this), and this is Krugman's paper on the liquidity trap and Japan.

Hayek on non-market derivations of subjective value

This morning, Don Boudreaux cites Hayek:

"Economic changes, in other words, usually affect only the fringe, the “margin,” of our needs. There are many things which are more important than anything which economic gains or losses are likely to affect, which for us stand high above the amenities and even above many of the necessities of life which are affected by the economic ups and downs. Compared to them, the ‘filthy lucre,’ the question whether we are economically somewhat worse or better off, seems of little importance."

This seems relevant to the point I was making about the fact that we do just fine allocating resources and deriving enjoyment without the price mechanism in all sorts of situations.

It reminds me also of something that John Adams wrote to Abigail in the midst of the Revolution:

"I must study politics and war, that our sons may have liberty to study mathematics and philosophy. Our sons ought to study mathematics and philosophy, geography, natural history and naval architecture, navigation, commerce and agriculture in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain."

Perhaps the reason why it reminds me of that isn't obvious. The point for me is that the price mechanism (just like the military and the state) is a way to derive happiness in only very specific circumstances. Some of the most enjoyable pursuits of our lives are pursued with non-market, non-coercive means.

More on Keynesian policy

Ed Glaeser has an interesting and accurate, albeit somewhat unsatisfying explanation of our knowledge of fiscal policy solutions.

He starts out with the most important point: we really don't have a lot of hard evidence for any question of fiscal policy in a recession (I would add that we perhaps have somewhat more empirical knowledge about monetary policy). The reasons he gives are good: not much data, things change over time, every recession is different, etc. etc.

But he bypasses one of the most important factors: the endogeneity of fiscal stimulus. We stimulate the economy when it is weak, which means that any simple examination of the data is going to bias impact estimates downwards. Glaeser doesn't mention this, which is perhaps understandable - you don't necessarily want to drone on about endogeneity in a forum like the New York Times. But even if he doesn't mention that, he proceeds to plot change in the unemployment rate against stimulus dollars, by state, as if there is no endogeneity problem at all! Which means he fails to mention one of the most important problems with empirical work on fiscal policy, and then proceeds to do empirical work that deliberately flaunts this concern!

There's another issue I have with this post - like lot's of people today, Glaeser completely ignores the fact that we live in a federal republic. He writes:

"There is no equivalent consensus about fighting unemployment and economic downturn. For decades, the economics profession had been moving away from Keynes, but when the recession hit, no one had much of a viable alternative to Keynesian countercyclical spending. We’ve had a $787 billion recovery act — a great burst of Keynesian activity — and unemployment remains at 9.9 percent."

No observer that is both objective and well informed can claim that we've seen a "great burst of Keynesian activity". Perhaps we've seen this at the federal level, but it has largely been canceled out by spending cuts at the state and local level leaving no real "burst of Keynesian activity" to speak of. I forget what the GDP figures looked like in mid-2009. Perhaps we had a "spurt" of Keynesian activity as the bulk of the stimulus was pushed out, but it was nothing to write home about. Americans today blissfully ignore their states and counties. In normal times, that's a shame because these governments that are the closest to the people often provide the most innovative solutions to public problems. In downturns, it's a shame because the one thing states can't seem to do right is macroeconomic policy. We look to the federal government only, and ignorantly assume that there's been a "burst of Keynesian activity" when there hasn't been.

Some Posts on Keynesian Political Economy

Tyler Cowen give his take on fiscal and monetary policy, and if readers of F&OST can make heads or tails of it, feel free to explain it to me. He starts by quoting Matt Yglesias as presenting a standard Keynesian position... so... bad start (while Yglesias's point isn't all that bad, citing him for this sort of thing is a big no-no in my book). What bothered me most is that he didn't even really seem to understand or make the Keynesian case for fiscal stimulus before declaring that he was skeptical. He cited two points: (1.) intertemporal substitution that was possible (ie - smoothing the business cycle), and (2.) uncertainty about the future. Both are fine and consistent justifications for fiscal policy, but he doesn't even address fundamental Keynesian understandings of the determination of full-employment when he talks about fiscal policy.

Brad DeLong seems to note this two when he writes that Cowen's "inner Keynes is missing". DeLong focuses on the uncertainty point first and shows (somewhat stylistically) that it doesn't fully explain the general glut situation that we're dealing with. He then goes on to the question of business cycle smoothing and is incredulous at Cowen's equivocation:

It's not just that a greater amount of government investment meets the benefit-cost test when the government can borrow at 1.83% in inflation-proof bonds for thirty years, a whole bunch of tax postponements do as well. And so do a whole bunch of expanded social welfare programs. And so do a whole bunch of government issues of debt which are then invested in risky private ventures. So I don't see how Tyler then gets to:

"But even if that fiscal policy is a good idea..."

Where does the "but even" come from? I see no "but even" earlier in the market: the cost of borrowing for the government has fallen--the market value today of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea.

I'd agree with DeLong's assessment of Cowen (not to mention his assessment of government borrowing) on this count. Cowen seems to fall back on the "well smart people in government aren't pushing fiscal policy right now so there must be a good reason not to push fiscal policy right now and how dare economists like DeLong second-guess that" argument. He offers no good reason why he or anyone else is fine with monetary policy but not fiscal policy. In fact you rarely hear this trade-off ever made. Scott Sumner constantly asserts the same thing, and does a great job explaining why he supports monetary policy but a terrible job (1.) addressing the critics of reliance on any more monetary policy, and (2.) explaining why fiscal policy wouldn't work.

Then Cowen gets even more unintelligible when he starts imputing rationalizations to Keynesians:

"Reading the Keynesian bloggers, one gets the feeling that it is only an inexplicable weakness, cowardice, stupidity, whatever, that stops policies to drive a more robust recovery. The Keynesians have no good theory of why their advice isn't being followed, except perhaps that the Democrats are struck with some kind of "Republican stupidity" virus. (This is also an awkward point for Sumner, who seems to suggest that Bernanke has forgotten his earlier writings on monetary economics.) The thing is, that same virus seems to be sweeping the world, including a lot of parties on the Left... In general you should be suspicious of explanations which take the form of "if only the good people would all band together and get tough."

Excuse me? In what universe does the government's choice of what to do or not do have anything to do with the validity of an argument about fiscal policy, monetary policy, or anything else? Some Keynesian bloggers may put out their "if only..." hopes, but that says nothing about the validity of their argument. And many don't put out these hopes - many understand why it's so hard to get governments to implement these policies. As Mark Thoma highlights, a lot of it is politics, plain and simple. No need to appeal to "stupidity".

While I wouldn't appeal to stupidity first (I would appeal to the incentives that politicians face), relative ignorance of economics is pretty clear on Capitol Hill too. Obama understands more than most do, but he regularly appeals to his own brand of populism when he addresses the economy. Democrats who appeal to fiscal policy rarely go any farther than Cowen's own point about intertemporal substitution (ie - they don't understand the fundamental justification). And need I say more than "have you ever heard Ron Paul explain monetary policy or Dennis Kucinich explain capital markets?". Ignorance is not what I would initially appeal to because Congress realizes that there are better informed people out there than them, they call these people as witnesses and get them to help write bills, and they rely on them to a certain extent. But we shouldn't ever be afraid to say that the government operates under a certain degree of ignorance.

And speaking of Keynesian policy, Jonathan Catalan smacks down Robert Murphy on his opportunistic economic history, and cites yours truly (although I can't help but expect Murphy to read this and think "who the hell is this Daniel Kuehn?". Jonathan brings up the point of the liquidity trap:

"However, with no liquidity trap in the Depression of 1920–21, one cannot make the argument that that recession proves Keynesian fiscal policy wrong. Strictly speaking, Keynesians argue for strong fiscal policy only during liquidity traps, or where there is a lack of private investment. This was clearly not the case during the early 1920s, and so in the broadest sense Keynesians have not necessarily been proved wrong."

I would modify this point somewhat. "Liquidity traps" actually play a very minor role in the General Theory. When Keynes first mentions them, it is very speculative and he wonders whether a liquidity trap is even possible - but he holds out the possibility when he is discussing liquidity preference. Even through to the concluding notes, Keynes emphasizes the role of the interest rate in recovery - so he's not relying at all on the liquidity trap as a reason for switching from monetary to fiscal policy (the way it's treated today by guys like Krugman). J.R. Hicks (who himself was inspired by Mises and Hayek, in addition to Keynes) is responsible for fleshing out the liquidity trap in a more formal way, and giving it the attention that Keynes never did. Here's my take - Keynesian theory jutsifies fiscal stimulus in situations where there is a shortfall in aggregate demand below a full employment level of output. This demand shortfall can be either due to a lack of private investment, as Jonathan says (that's how it usually starts), or due to a lack of consumption. Monetary policy can help in these cases as well. However, when you're in a liquidity trap monetary policy turns into pushing on a string. Money demand is elastic, and monetary policy becomes considerably less useful. The U.S. has only been in a liquidity trap in the 1930s and today (we brushed up against one in 2001). It's not a common occurence, but when it does occur it just means that you have one less tool in the toolbox. When downturns are caused by supply shocks, bubble liquidations (like 1920-21), etc, and there is no depression of aggregate demand, there is no justification for fiscal policy. Monetary policy can help lance the bubble and ensure that money supply doesn't fall too low in the panic resulting from the popped bubble (a la Benjamin Strong or Paul Volcker). That's my view of things, at least.