David Kreps Takes On Obamanomics
Yesterday, Princeton economist Alan Blinder published a column in the Wall Street Journal. Blinder argued that we should extend unemployment benefits, which would stimulate consumption, but end the Bush tax cuts, which primarily promote investment. “There has to be something wrong with the argument,” I said to my friend David Kreps, formerly an associate dean at the business school at Stanford, over an afternoon cup of coffee. “But what? I can’t put my finger on it.”
David shook his head, a little impatient with me. He’s a distinguished microeconomic theorist; he won the John Bates Clark Medal in 1969 and this coming January will be named a Distinguished Fellow of the American Economic Association. After our conversation, I asked David to write up what he has said. Here’s what came back.
“I want to stipulate at the start that I’m not a macroeconomist. Any professional credentials I might have are for very different sorts of economics. I don’t understand macroeconomics or, perhaps more accurately, macroeconomists. But I know what I don’t understand in Blinder’s argument and what questions I’d want to ask him.
“For one thing, Blinder counterposes extension of unemployment benefits against extension of the Bush tax cuts, arguing that the former will have a greater stimulative effect than the latter. Maybe I’m not following the debate in Washington as closely as I should, but I didn’t think the Republicans were arguing that we shouldn’t extend unemployment so we’d be able to preserve the tax cuts. They say that they think it is a good idea to extend benefits (and I agree), but they are using the little political leverage they have in Congress to try to reduce discretionary spending elsewhere. Is Blinder ready to argue that it is wiser to preserve all the pork in present spending than to preserve the tax cuts? (I sure hope not.)
“Second, suppose I believe that the unemployed will spend more of a marginal dollar on consumption than will a rich guy. The rich guy isn’t going to put what he doesn’t spend under his mattress. It will get invested. I assume the objective is to create greater long-term employment. Assuming this is the objective, why is consumption spending better than investment? I gather that a Keynesian macroeconomist would say that consumption spending stimulates the economy faster than investment, and we need fast stimulation to get the economy moving. I’d like to see the evidence about that, taking into account the impact on the business climate -- especially the small business climate -- of this administration’s policies.
“But when looking at evidence, bear in mind Mark Twain quoting (incorrectly?) Disraeli about lies, damned lies, and statistics. I’m sure Blinder can cite good evidence in favor of his contentions. I’m sure proponents of keeping the tax cuts can cite good evidence in favor of their point of view. The question is, Which evidence -- which set of past circumstances -- is most appropriate for making a prediction about today’s environment? Believing as I do (and as the President says that he does) that business, especially small business, is the engine of economic growth and employment, and given the mood of the business community right now, at least as reported in the press, I guess I’d go real slow before taking more actions that scream, ‘I’m from the government and I’m here to help.’”
- Comment (3)
- · Quote
- · UnfollowFollow (1)
Comments :
May '10
Re: David Kreps Takes On Obamanomics
One policy encourages work; the other discourages work. Further discussion amounts to over thinking the matter, in my mind.
May '10
Re: David Kreps Takes On Obamanomics
If lower income people are consuming, they are far more likely to consume Chinese-made goods- not quite the same benefit as in Lord Keynes' day. We need Gulfstream factories to run and buildings to be built, not another shipload of containers into Long Beach. In 1934, England still had a few factories.
The sad reality of business growth and economic illiteracy continues apace. The best study of this addresses the "wealth effect" (I believe George Gilder has written on this). A healthy stock market and sensible cap gains taxes in essence enable those who have capital to free up greater shares of their holdings for "blue sky" high risk ventures. They hold their capital "safety stock" in solid diversified accounts, but set aside 20% or more (depending on the environment) "mad invest money", available for tossing into formal VC funds, or independently funding the kind of start-ups that have a 90% fail ratio (where the 10% success is MicroSoft, Amazon, Cisco, etc.).
When the central government sucks all the "mad invest money" out of the ether, how can one be surprised that no new jobs are created?
We develop new technologies here all the time, begging for investors.
May '10
Re: David Kreps Takes On Obamanomics
Duane, good point about stimulating the Chinese. Still, on this matter, I think maybe, just maybe, I'm blessed with an unfair advantage over you, Peter, and Mr. Kreps: My brain is smaller. I am not burdened with the ability to hyper-examine complex economic issues. Here, I am unable to appraise this situation beyond, "In a jobless recovery, do we want to subsidize employment, or unemployment?" This allows me to both reach the same policy consensus as the good guys, and sleep blissfully, without all those graphs and percentages and statistics that you all must have swimming around in your heads. :-)