lesson in economics that even a simple minded right winger can understand

Discussion in 'Politics & Religion' started by Free Thinker, Aug 16, 2012.

  1. It's good for the NY Times to give space to conservatives to present their views on economics to counterbalance Paul Krugman and the other liberals on its payroll. But surely they can do better than Mulligan.

    Here Mulligan is misleading his readers. He would like you to believe that the economic theory that the Obama Administration relies on is based on a simple logical error, and that economic analysis tells us that there is no such thing as "stimulus" or the "multiplier". The truth, however, is that the economic theory behind the Obama Administration's stimulus proposals is completely conventional, and it is Mulligan who is making a simple logical error. To whit:

    In describing the first flaw in the Obama Administration's reasoning, Mulligan says that when the government takes income from one person and gives it to another there is not necessarily a net increase in aggregate demand - the person receiving the transfer increases her spending while the person paying for the transfer reduces hers. Mulligan argues that this logic holds whether the government raises taxes or borrows to fund the transfer. But there's a huge difference. If the government borrows to finance the transfer, it is borrowing from people who desire to save rather than spend. So the person who pays for the transfer does not reduce spending, and the net effect is an increase in demand.

    Let's illustrate this with a simple parable. Robert is a carrot farmer. He has a lot of carrots sitting in the ground but no one wants to buy them, so he does not hire anyone to dig them up. Sylvie normally works for Robert picking his carrots, but he has no work for her, so she has no income, so she does not wish to buy any carrots. If Robert had some income he would pay Sylvie to dig up the carrots and buy them himself, but alas no one is buying his carrots so he has no income either. Kofi is a hobo living on the edge of town with no money and therefore no ability to buy carrots. Aya is a wealthy retiree who has plenty of money but has had her fill of carrots and so does not want to buy carrots either. Instead she wants to bury her money in her back yard to be spent at some unspecified time in the future. The economy is in a depression: there are goods available to be purchased, but no one to purchase them.

    Now Barack Obama appears in this community and says to Aya: let me borrow some of the money you wanted to bury in your yard. I promise I'll pay it back. Aya is indifferent between burying her money in the yard and giving it to Obama, so she says sure, what the heck. Obama takes her money and gives it to Kofi. Kofi now has income to spend on carrots, so he goes to Robert's store and asks for some carrots. Robert says sure, let me call Sylvie and get her to dig some up for you. Sylvie comes in and digs up the carrots. Kofi pays Robert the money, which he divvies up between Sylvie (in the form of wages) and himself (in the form of profits). Robert and Sylvie now have some money to spend, so they both show up to Robert's store and ask for carrots; Sylvie goes back out in the field and digs up some more, earning more income for her and Robert, which inspires them to want more carrots. At some point Sylvie's back is hurting from harvesting all those carrots, so she tells Robert she can't work any more. But people are still buying carrots, so Robert looks around and asks Kofi if he'd like a job. Kofi says sure, and starts harvesting carrots, earning income, spending it on carrots, and so on and so forth.

    This is a very logical, conventional story. But of course any macroeconomist worth his salt, even if he's only taken one or two macroeconomics courses, will be able to poke holes in it. What if Aya is unwilling to lend her money to Obama unless he pays her a higher rate of interest than she can get by burying the money in the ground? What happens when Sylvie and Kofi are unwilling to dig more carrots unless they are paid higher wages? What if Robert, Sylvie, Kofi and Aya are worried about the future taxes they'll have to pay to repay the loan from Aya to Obama? All of these factors can reduce the magnitude of the increase in aggregate demand brought about by the transfers from Aya to Kofi. But a macroeconomist seeking to dismiss the effectiveness of the government's stimulus efforts needs to explain why these offsetting factors are likely to be large. (In fact, at a time when market interest rates are near zero and the unemployment rate is 8.3 percent, the offsetting effects are almost certainly very small.) But Mulligan doesn't do this. He makes an illicit assumption on square 1 (Aya transfers money to Obama that she would have spent rather than buried in her yard) and claims that the whole logical argument underlying the conventional story is therefore flawed. That's just plain bad macroeconomic thinking, beneath the standards one should expect from the New York Times.

    Oh, and the second flaw in Obama's logic? I think Mulligan is saying that Robert won't provide carrots to Kofi unless he gets a profit; but in my story he does earn a profit, and I don't see any reason he wouldn't make a profit. If Mulligan wants to say that in the current economic environment businesses won't sell to eager customers because their costs are too high he's welcome to do that, but it would be nice to substantiate that claim.

  2. Lucrum


    Not so free thinker continues his mental masturbation.
  3. twohit.....

    <iframe width="560" height="315" src="http://www.youtube.com/embed/ZX8-5hU1cr8" frameborder="0" allowfullscreen></iframe>
  4. Brass


    Excellent post, FT. However, judging by the first response to your post, the lesson may be straightforward enough for the somewhat simple-minded, but not nearly enough so for a simp. As unfortunate as it may be, perhaps some simps would better internalize lessons with the use of sticks rather than with carrots.
  5. The Chicago school doesn't believe in multipliers.

    Since Paul Ryan hangs out with Asness and Cochrane, maybe listening to him can tell us more about economics in Chicago: Paul Ryan’s imaginary expertise:

    ....That’s not even his worst proposal for monetary policy. That distinction goes to his call to raise interest rates to cure the recession — because “there’s a lot of capital parked out there, and we need to coax it out into the markets.”

    This shows a serious misunderstanding of what’s holding the economy back. If interest rates are increased, the higher return on financial assets will cause more people to provide funds to financial markets — but the supply of funds isn’t the problem.

    As the vast amount of “parked capital” highlights, there’s already ample supply. The obvious problem is insufficient demand , and Ryan’s policy of raising interest rates makes it more expensive for firms to invest and more expensive for consumers to buy durable goods like cars and houses. The result would be a further decline in demand, a fall in output and employment and even more money than before just sitting there, doing nothing to create jobs.


    I know I've said this before but it's becoming more and more like some sort of rule or law: "Right wingers always say that government is bad or inefficiently run, and when elected, they do a damn good job at proving it."
  6. lol, good title:

    Paul Ryan’s imaginary expertise
    The supposed economic policy wonk lacks basic understanding

    Read more: http://www.nydailynews.com/opinion/paul-ryan-imaginary-expertise-article-1.1137112#ixzz23j1yLgY8
  7. Well, we have a little problem here. What happens when Aya doesn't want to loan her money to Obama at all, for any rate of return? Aya thinks her money is better invested someplace else. Aya perfers investing in rice. No loans means Obama must collect higher taxes to fund his carrot stimulas plan. Taxes aren't loans means no return for the taxpayer, so nobody likes the idea of funding the carrot venture. Add to the fact that there aren't any carrots to begin with because it's all smoke and mirrors, and people really don't like the higher taxes for the non-existing carrots. Obama could tell the carrot farmer to start growing rice, but the carrot farmer can't grow rice at a competative rate. So we keep taxing to grow the non-exisiting carrots just to keep the system alive another day. The people are smart enough to know we live in a rice world now days, but the carrot famers are used to the carrot welfare plan the government has been giving them all these years. The carrot farmers donate money to the government carrot welfare program cause they know a good deal when they see one. That's where were at.
  8. as indicated by the price of money the government has to pay there are dozens of Ayas eager to lend money to obama. next.
  9. If that's the case then why aren't the carrot famers hiring? Why do we need to raise taxes if there are dozens of Aya's eager to loan? The carrot farmers might hate Obama, but they like making money more. They'd grow carrots if there was any money in carrots, regardless of the politics.
  10. geeze. i though sure the lesson was simple enough so that anybody could understand.
    no business will hire workers until he sees the need based on demand. his taxes have nothing to do with it. stimulate demand and business are forced to hire. simple economics.
    #10     Aug 16, 2012