The debate with Bradford De Long

5 marzo 2009 michele boldrin

A few things I learned.

The trip to UC Davis was worth the money, the time and the effort. Organization was impeccable and the people at the Department were great. Plus it was nice to meet a number of friends and colleagues I had not seen for quite a while (my last seminar at UC Davis must have been in the early 1990s ...).

The debate was interesting, even if it were maybe less "lively" than one could have expected.

I learned a few things.

1) I no longer know how to debate in public, if I ever did. I guess I presumed I did, otherwise I would not have accepted the challenge, but looking at my performance I realize that I mumble way too much, make funny (nay: ridiculous) faces, eat my own words and the microphone while screaming into it, and, in particular, never look straight at the camera. Lesson: stop debating or learn how to do it.

2) I said lots of stupid things, or at least confused enough to sound stupid. My worst blunders: arguing over the quality of the CBO's calculations instead of just making clear that their actual estimates are in fact of the order of magnitude I claimed (spending 10% of the total during fiscal year 2009); not making clear that in Germany the depression ended earlier than in the US for reasons we may not like to imitate and that this applies to Italy as well, where the effect of the depression was very small; debating the content of Valerie Ramey's paper without having read it, thereby having to resort to a quick summary in the Hall and Woodward's blog, which did not help much, leading me (not their fault, mine) to confuse matters even more when, in fact, the issue was much simpler (see 4), below); not making clear that the data on public spending and relative performances of the G7 countries I showed were not mine but due to the kindness of David Andolfatto, whom I should thank ... there may be more, but these are enough!

3) I never made my position as clear as I should. I guess De Long had an easier job: he just believes that the stimulus will make a miracle, that we already are in the Great Depression of the XXI century and markets are not functioning (in fact, I wonder if he ever thought they do), that increasing public spending is un-ambiguously good and that, in any case, it always increases employment and reduce unemployment, not matter what. In retrospect I should have kept insisting that: (i) there is absolutely no empirical evidence this is the case, (ii) we are not in the Great Depression of the XXI century (yet) but we may end up in it if we keep believing that the most important thing to do is increasing public spending, (iii) the real source of troubles is elsewhere, not in the lack of demand but in the disruption of the financial system.

4) The statement promoted by the Cato Institute was right on the mark in stating that the fiscal package the Congress of US has just approved "is a triumph of hope over experience to believe that more government spending will help the U.S. today." My opponent did not have a single piece of data or of theory to support his claim that the "stimulus" package will be effective. The only piece of research he quoted, supporting the idea that there is a public spending multiplier larger than one (i.e. that if G goes up by a dollar Y increases by more than a dollar) is a paper (Ramey's, see above) that focuses mostly on military expenditure. The latter, because of its composition and, most important, because of the special circumstances in which it takes place (was mobilization, forced increase in labor force participation, activation of resources otherwise idle, and so on) cannot, just cannot, be used to assess the economic effects of expanding Medicare and Medicaid or financing state's expenditure these days. We, well the supporters of the "stimulus" package, just hope that the two things will turn out to be the same, but there is no reason to expect they will.

5) I now believe I understand what's going on a bit better than I did before. Hence, will the help of hindsight, I may find the time one of these days to write a longer and better piece explaining my current views. For the time being, here's the executive summary:

- The US households (and the US economy) are less rich and less productive than they thought they were. In particular, part of what we thought was "growth" was not, and the readjustment to a new path of sustained growth is not going to be short and painless. Different and better public expenditure may help, but certainly not the one contained in the package. More importantly, a number of structural reforms are needed, they have little to do with "spending more" and a lot to do with increasing competition in some key industries (financial and health care, first and foremost), technological innovation, and the labor productivity of the lower half of the American workforce.

- Partly as a consequence of the above and partly because of disfunctional internal mechanisms generating all kinds of wrong incentives, the core of the US financial sector is in shambles and not working. It needs major fixing, in fact something close to a drastic restructuring. This is long overdue, it should have started in 2000-2001; instead it is not yet starting even now. What's worse, policymakers seem to be trying the impossible to keep the actual system alive without major changes. A dramatic fight is taking place over who controls the American's (and the world's) financial power; while the fight continues, the financial system is paralized and the economy is being chocked off. This is borderline suicidal and may generate a true depression.

- Since September-October 2008 we are probably in a situation of "panic", panic that seems to get worse every day and to which I see no end in sight. This is not good, but that's the way it is: assets' valuations are reaching levels that make absolutely no sense. If the values of productive assets, in the USA and worldwide, keep decreasing at the same rate for a couple of more months we may hit a point of no return, after which all bets are off. Firms cannot possibly function when their market valuation drops, in a year, to 1/3 or 1/4 of its original value! Unfortunately, nobody seems to have any idea of HOW this panic can be stopped. But stop it we must. Which is what I meant to use the debate to argue for, but I clearly failed to.

P.S. While Bradford and the whole "tax and spend" crowd is out there screaming that we absolutely need to do the spending now and worry about the financial sector later, things like this have been happening every day during the last year and a half. Paulson before and Moral-Hazard-is-not-a-problem Summers now (with the continuing support of Mr. Liquidity-is-like-Aspirin Bernanke) are donating hundreds of billions of taxpayers dollars (at the tune of almost 200 by now, only for AIG) to bankers and other assorted losers with good connections. The reason being, I am sure, that the poor unemployed bankers are bleeding and in desperate need of public money to make ends meet. Oh Yes!

 

24 commenti (espandi tutti)

Ecco quello che dice De Long sul suo sito

<em>Question from the Audience...<em>

Gerardo asks a question about last night's U.C. Davis debate on the stimulus:

Hoisted from Comments: Brad, any ideas as to why in last night's debate Mr. Boldrin avoided any reference to his work on opposition to the stimulus bill? It was an interesting "debate". It seems you only debated yourself, while Bodrin kept rambling on about other issues, important issues but not relevant to the topic of the debate. Why do you think, he couldn't just stake his position and declare what everyone in the room knew; "that he was curing a broken nose by placing a band-aid in the butt".

Here is a link to the Denver Post article he kept on trying to ran away from.... http://www.denverpost.com/business/ci_11755186

It was odd. There are six reasons people have given me for opposition to the stimulus package:

  1. (The main one) It can't work: it is theoretically impossible for stimulus packages to boost employment and production.
  2. It will work too well: we will wind up with an inflationary spiral as federal government demand runs into supply bottlenecks and sharply raises prices.
  3. It will work too well: it will cause a crash in the dollar and then we will find ourselves with a lot of inflation imported from abroad as the dollar prices of traded goods rise.
  4. It isn't needed: the economy will recovery quickly on its own, and the stimulus will give us an economy with too much government spending and too little investment.
  5. It would work if business confidence was not so shaky or if business confidence was already so shaky that there was next to no private investment, but we are in the bad middle--so the stimulus package will shake business confidence and cause a spike in interest rates and a collapse of investment that will offset the effect of more government spending.
  6. It won't work well enough: it will work somewhat but it will leave us burdened with the task of amortizing the debt taken on to fund it, and that is a bad trade.

Yet Michele Boldrin seemed at various points to disavow all six of those arguments, and to come up with a seventh:

I'm going to fight the stimulus and say that we shouldn't try to keep unemployment rising via fiscal stimulus because we cannot afford a big fight over fiscal stimulus--it will distract the political system from the real and necessary task: fixing the banking system.

Yes, we do need to fix the banking system. But whether we do or do not do a fiscal stimulus is unconnected with what we do to try to fix the banking system. So his argument seemed to me to be incoherent.

Quite strange: it's the first time that I hear, or read, about "excuses" from an accademic, especially to have not been clear, or compulsive, thanks Michael.

About your points, as above specified, I have nothing to say, except that there is no evidence that the "stimolous" shall work, but, on the other hand, there is no evidence that shall not. It's a question of faith, in "panic time", I think, it's the only thing that we can expect. In the while, I note, cars are still on the way, shops are still opened, people answers to telephone, the world has not stopped himself, just seems to adjust.

Nobody can fight with panic, is not an economic issue, it's only question of faith. Does it ?

About new rules for the financial sector, I agree with you 100%, and, I'm sure that you agree with me with this point: the new rules cannot be written with the same people that put us in this situation.

Your last point isn't  a discussion point: it's a nightmare. Have you any model for the nightmare ?

I think you're being too hard on yourself. The debate went pretty well, even within the confines DeLong wanted to put it. He wanted to make it only a discussion about the effects of the stimulus bill, and I believe your "band-aid on the butt" metaphor (ironically, after your dismissing the use of metaphors) is going to stick in the audience's mind for a while. 

Unless I missed it (I haven't listened to all the Q&A part) what deserved a reply was DeLong's repeated claim that "governement spending is as good as anyone else", in reference to specific times in history when people found it convenient to spend/invest in specific sectors and unemployment therefore went down. I thought the statement was completely bogus. 

On a side note, accepting your point that we should focus on the financial crisis, the compelling question is: why are we having these debate on the stimulus? Where are the microeconomists debating on how to restructure the financial sector? 

http://www.econjobrumors.com/topic.php?id=3087

I guess someone got your point:

Boldrin has the good point that this focus on the stimulus package diverts the focus on the more serious issue of the reform of the banking system, and that's why he opposes it.
He points out the case in Japan, where the government did quick fixes w/ plenty of stimulus packages for a decade fruitlessly, and then only when they decided to fix the root of the problem - the financial system - the economy went back to track.

Someone agrees with your self-criticisms:

I like Brad point's better. Boldrini is just saying that we do not know what to do, so we should just do nothing. He did not mention the word unemployment in his opening statement.

But most people really care only about one thing:

There's a very hot Davis professor who makes a question to Boldrini.

And they keep mispelling my last name, as if I were from Ferrara or even further south of the Po river!

Disclaimer: I have not yet watched the video and was agnostic and uninterested about the topic (too much debate) before reading the seventh argument on the DeLong’s blog via Panunzi’s comment.

“My opponent did not have a single piece of data or of theory to support his claim that the "stimulus" package will be effective.”

It is not clear which qualities a “piece of research” should have to be convincing and able to support the suspicion that public spending multipliers might be positive. It is true instead that there are a variety of estimates out there. A nice survey of the empirical evidence is “Understanding  the effects of government Spending on Consuption” by Gali Lopez-Salido and Vallés, whose overview of the evidence tends to favour the predictions of the Keynesian model over those of the neoclassical one. Also the IMF World Economic Outlook of April 2004 chapter 2 presents an empirical survey that in synthesis says as follows “while there is a wide range of estimates of the size of this multiplier (0.1-1.6), partly reflecting a range of technical assumptions, typical results from both recent regression exercises and large macroeconomic models suggest that the impact of a fiscal expansion is significantly positive….larger for government spending increases than tax cuts; and it wears off over time”. The last 2008 WEO is much more diffuse on the topic but less optimistic, but still a good reading.

“The only piece of research he quoted, supporting the idea that there is a public spending multiplier larger than one … is a paper (Ramey's, see above) that focuses mostly on military expenditure. The latter …cannot, just cannot, be used to assess the economic effects of expanding Medicare and Medicaid or financing state's expenditure these days.”

Ramey and similar papers are not the only evidence out there, but it is the only methodology at the moment that responds to basically all criticisms of the endogeneity of fiscal policies which could undermine the estimates via VAR and alike. Moreover, if the effect on output and employment is positive with military expenditures (which is the least productive of all conceivable expenditures and, as a bonus, is not related to the economic cycle), than you can be sure that that is the lowest bound  of a multiplier. By the way, the Ramey’s paper is not so optimistic about the multiplier.

The seventh argument is like this (from Panunzi):

“I'm going to fight the stimulus … because we cannot afford a big fight over fiscal stimulus…it will distract the political system from the real and necessary task: fixing the banking system.”

That’s right.
My question: what if the fiscal stimulus works splendidly? The financial system is kept afloat, things become less pressing and everything is lost in the mist of time. Will they live happily ever after with a banking system still in a shambles? (and ineffective for years like in Japan). After all the fiscal stimulus may cover up rather than solving the issue.

Michele, I agree with Andrea; self-criticism is welcome but you shouldn't be too hard on yourself. In fact, I think that DeLong came across as extremely condescending, irritating and -- worse -- as a very poor economist. With defenders like him Obama does not need enemies...

P.P.S.

michele boldrin 7/3/2009 - 06:59

P.P.S. The only one "fact" Bradford De Long quoted during the debate is that there is no correlation between the areas where unemployment is growing the most and those where the housing bubble-bust was most pronounced. With the help of a kind colleague I am checking the data ... preliminary results suggest that the "fact" has the same degree of "factness" as virginitas in party (oops, partU) does. We are not done double-checking, though, so stay tuned ...

michele i thought your performance was not as bad as you think. I am relieved to see that there are economists willing to fight this semi-socialist stream.

If I may, I'd like to suggest three things that got overlooked but i think are extremely important; to be said every time one discusses the generational theft act.

1. it always comes down to "but shouldn't we build hospital and bridges, that have some social value, now that it is very cheap to do it?". well the answer is yes BUT THAT'S NOT WHAT THE SPENDULUS BILL IS DOING! only 5% (if i remember correctly) is infrastructure. the rest is money for nothing (as the dire straits would say). also said infrastructure expenditure is taking place too quickly to be really useful.

1.a also, as you pointed out, current crisis seems determined by a bubble in the construction sector. do we really want to keep people in that sector of the economy by financing bridges and useless school in milwakee or do we want to actually facilitate the transition of these people to other sectors of the economy?

2. the "tax cuts" of the spendulus. economists like cuts to marginal tax rates. they are good for efficiency and stuff. obama is de facto increasing marginal tax rates by sending people money checks (tax credits) that will be lost if they make more money, i.e. disincentivizing labor supply, specially for poor/lower middle class people. obama's tax cuts, seems to me, are the worst kind of tax cuts possible.

3. delong said something like 1/3 of the bill is "tax cuts", 1/3 is money to states, and only 1/3 is spending. which means that 2/3 of it is spending (some of it will take place at state level but so what?). but the way delong puts it is much nicer for his point.

current crisis seems determined by a bubble in the construction sector

This statement is, at least partially, misleading. What lies behind the current crisis is overlending. Existing buildings have been financed as new ones, and even more. Collateral lending has been used for other businesses as well (private equity leveraged buy outs, leveraged hedge funds, etc.). It's not necessarily associated to expected cash flows to refund the loans, that is the paramount issue. Collateral lending has pushed up the price of certain assets up to a bubble level. When the new lending flows have dried the price of assets has started to decline, the collateral has vanished and the loans have turned into toxic assets. Collateral lending in relevant size has the power to inflate asset prices. Collateral apparently looks safe but it is only temporarily. At the first stages it is the additional lending which support asset prices and collateral value. At the end it looks like a Ponzi scheme where the new loans backed the old ones. The difference is that the value of collateral cannot go to zero. Actually it can go down enough to spread painful bankruptcies and to block lending to the overall economy, as it is now. 

Mi avevano detto. La cosa divertente è che De Long ripete lì gli stessi argomenti che ha usato con me a UCDavis! Quasi parola per parola ...

Be', e' confortante almeno che nell'opinion poll i "No" stanno vincendo 63% a 27%...

Brad De Long mi ricorda alcuni professori di economia da me avuti negli anni '80 del secolo scorso che ci propinavano teorie tratte da quaderni di appunti ingialliti degli anni '60.

Oggi Bradford De Long scrive sul Sole 24 Ore e invita a studiare la storia.

RR

So' messi male in Confindustria: ora pubblicano pezzi dalla "to do urgently list" di De Long?

E chiamameli stupidi, in Confidustria!

Adesso chiamano il grande economista che possa giustificare stimoli e massaggi per la grande industria  italiana...ovvero trasferimento di risorse per le imprese (tipo sussidi Fiat?)...adesso hanno anche la grande copertura intellettuale dell'accademico (parafrasando la frase di quel tale, a proposito degli indiani d'America, per la Confindustria e la politica sembrerebbe che il loro motto sia "l'unico accademico buono è quello che mi da ragione"); strano vero? In Confindustria sembravano avere un atteggiamento di grande sufficienza nei confronti di chi è accademico...ricordate le reazioni per le posizioni su Alitalia espresse su questo blog?.

 

Mi pare che sia ospite in Italia Delong, o no?

A Brad De Long consiglierei la lettura di Gilles Saint - Paul

http://www.voxeu.org/index.php?q=node/3996

"Capire il funzionamento dell'economia nel suo insieme è estremamente difficile. E' ingenuo credere che se solo gli economisti avessero una mente più aperta, se facessero buone letture e fossero in sintonia con altre discipline, sarebbero capaci di sviluppare una comprensione operativa di come funziona la macroeconomia. L'economia è un sistema estremamente complesso: comprenderlo appieno è oggi al di là delle nostre capacità intellettuali, personali e collettive". 

De Long

giovanni federico 11/10/2009 - 23:19

Da storico economico, plaudo all'intervento di De Long. Non so se la storia economica possa essere utile a prevedere le crisi, ma una maggiore apertura degli economisti aumenterebbe le possibilità occupazionali per i miei  allievi :-)

Più seriamente, l'intervento di Saint-Paul mi sembra debole. A cosa servono i macroeconomisti se non a prevedere l'andamento dell'economia e gli effetti delle politiche economiche sull'andamento dell'economia?

Più seriamente, l'intervento di Saint-Paul mi sembra debole. A cosa servono i macroeconomisti se non a prevedere l'andamento dell'economia e gli effetti delle politiche economiche sull'andamento dell'economia?

Più seriamente, l'intervento di Giovanni Federico mi sembra invece convincente. A cosa servono gli storici (o gli storici economici) se non a prevedere l'andamento della storia (o della storia economica) e gli effetti delle politiche (delle politiche economiche) sull'andamento della storia (storia economica)?

Per cui domando: Giovanni, chi sarà il prossimo primo ministro italiano? Fra cinque anni, il PIL per capita italiano sarà maggiore o minore del greco? Secondo te, la pace fra israeliani e palestinesi si farà o no? ... Ne ho altre, ma per oggi bastano queste. Puoi anche mandarmi le risposte in privato, grazie.

Fra cinque anni, il PIL per capita italiano sarà maggiore o minore del greco?

Mah, forse intendevi dire se fra 5 anni il Pil per capita ITA sara' ancora maggiore di quello della Repubblica Ceca:

Nota: fonte dati Fondo Monetario Internazionale

 

No perche' questa stima del Fondo fino al 2014 si basa su un tasso di crescita italiano che converge verso il 2%.

:_{ 

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