Policy is Policy, Economy is Economy, And (Sometimes) The Twain Shall Meet

Economist Arnold Kling gets skeptical about the extent to which monetary or fiscal policy can have predictable and expected effects on the macroeconomy:

The empirical basis for the belief that government can do something about output and employment is quite thin. If you really want to believe that, say, fiscal policy works, you can focus on those examples where it appeared to work (say, military spending in World War II and the Kennedy tax cut in the early 1960's) and try to explain away all the examples where it appeared to fail (which is pretty much every other time and place that it has been tried).

My father used to say that the First Iron Law of social science is, "Sometimes it's this way, and sometimes it's that way." My reading of the record on fiscal and monetary policy is that it follows the First Iron Law. Sometimes, we see economic improvement when fiscal expansions are attempted. Sometimes we don't. The same with monetary policy expansions. I think it is reasonable to read history as saying that economic outcomes are pretty much orthogonal to macroeconomic policy moves, which is a fancy way of saying that the economy does what it does without regard to fiscal and monetary policy.

The economy (that is, five billion people's decisions about what to do, choose, work at, save, invest, consume): shockingly, it's complicated stuff.

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  • Hugh Akston||

    Skeptics, bah!

    We've had the government tampering with the economy for more than two centuries now, and the sun has never once crashed into the earth. I call that results.

    I'll keep my tiger-repellent rock thankyouverymuch.

  • Guido||

    The inexactitudes of economics have never stopped zealots from building grandiose utopian ideologies on economic assumptions--marxists on the left and you market-worshiping libertarians on the rigt. The marxists are generally brighter and more interesting.

  • Smart Ass||

    Refresh my memory, how did that Marxism thing work out?

  • Max||

    It's had some ups--the Sacndinavian social democracies, for example--and some big downs. You pathetic libertoids have had neither because your version of utopia has never been put to the test. We have a very mixed economy with a huge public sector, in case you have noticed, twinky.

  • TallDave||

    Libertarians =/= anarchists. We aren't against roads.

    Most libertarians would happily accept the proportion of GDP allocated to government spending that is empirically best correlated to growth. Unfortunately, we last saw it about 40 years ago.

  • Mr Whipple||

    40 years ago? That's 1970. Try 50 years ago, guns and butter.

  • TallDave||

    Oh, and marxism was not so good to the Scandis -- at the time they adopted socialist-leaning policies, they were the richest countries in the world. Now they're poorer on average than most U.S. states.

    BTW, even so, "socialist" Sweden has a much more libertarian educational system than we do.

    http://en.wikipedia.org/wiki/Education_in_Sweden

    Swedish education is known for being a world leader in free-market education revolution

  • KPres||

    How about the entire US economic development pre-Fed, pre-New Deal, plus the mountain of empirical evidence which shows that GDP growth maximizes when government spending represents between 15 and 20% of GDP, as opposed the the 35% we have today and the 60%-70% that liberals want.

  • KPres||

    "the Sacndinavian social democracies, for example"

    1. That's not Marxism.
    2. Of the Scandanavian countries, only Norway does particularly well, and that because of all the oil, not the government. Kuwait does pretty well, too. Finland and Sweeden are run-in-the-mill European states.
    3. While they're tax heavy, they make up for it with lower tax rates on capital gains and business profit than the US. They also have fewer regulations on business than many other so-called "capitalist" countries.....
    http://www.doingbusiness.org/economyrankings/
    4. Give it some time...Sweden had the highest per-capita income growth in the world between 1870 and 1950, when their gov't spent less than 20% of GDP. After 1950 is when they started all their massive social engineering - and (predictably), they've tapered off.

  • Hugh Akston||

    C+ trolling. The spelling errors were a nice touch, but the comment could really be used on any number of threads.

  • tarran||

    I'll bet their intelligence and energy is also the reason why they have an unsurpassed body-count too.

  • tarran||

    BTW I love how libertarianism is now considered right wing, despite the fact that the right has always hated free markets and we were seated on the extreme left in the Paris assembly.

  • Max||

    Amazing. The tea party morons have given the right such a bad name that some on the right now want to be called leftists. See you at the next May day parade!

  • KPres||

    Liberals only know right and left. If you're not with us you must be against us. That's why they're so inconsistant and confused. Half of what they want doesn't follow from any political philosophy, it's just they know its the opposite of what Republicans are pushing for.

  • Max||

    Unlike us inconsistent liberals, you right-wing libertarian fantatics have learned your catechism and are always bon the lookout for infidels and heretics.

  • ||

    Labels are always simplistic. Originally left/right could have been more correctly labelled as conservatives vs progressives, with progressives being those who were against the status quo.
    Now it´s the reverse, left = supporting an ideology generally characterized as being socialist, and right = all those against it.
    So today being right wing = not being left wing, and includes ideologies that may or may not have anything in common but are not socialist.
    I personally am proud to consider myself right wing, meaning against the intellectual cesspool of the left.

    The right has always opposed free markets? I disagree but then we are again stuck with labels, what do you consider the right and when did they oppose capitalism?

  • tarran||

    The right wing varies between mercantilism - the economic system Adam Smith attacked when he wrote The Wealth of Nations to outright Fascism.

    The Republican party has been consistently mercantilist with occasional lurches to fascism (Herbert Hoover's administration, such as George Bush's repeated attempts to nationalize equity markets).

    The Democrats, on the other hand, did largely support free markets (ignoring the elephant that is their support for slavery) until the late 19th century, when they abandoned their principles and adopted socialism and of course were enthusiastic proponents of fascism in the 1930's.

    At this point, the Republicans and Democrats are supporting competing versions of fascism.

  • ||

    The right varies because it can most properly be defined as opposing the left, which is now the establishment. So different ideologies are packed together into what is considered the right. For example, the Tea Parties are an amalgam of ideologies opposed to big govt, whether it is because they are fiscally prudent, libertarian, or opposed to big govt because they disagree with the present govt´s policies.

    Fascists were socialist revolutionaries, who strayed from the socialist orthodoxy by embracing nationalism and thereby became bitter enemies of the communists. Which made them part of the right.

    It makes no sense to talk about parties because their political platforms change with the times, eg the Reps have consistently been the most liberal/libertarian of the 2 and originally more left wing than right wing by the definition of the time. Now they are right wing.

  • Coke Zero||

    Wait, are you telling me that what worked in one situation might not work in another?

    That might explain why telling that feminist joke didn't go over so well at the NOW rally...

  • tarran||

  • fyodor||

    Decisions about what to choose? :-)

    A little re-write of that last line would make it more copacetic, but I get your point!

  • Economics Barbie||

    Monetary policy is hard!

  • Economics Ken||

    That's not the only thing that's hard...

  • Frayed Knot||

    Orthogonal? Either Kling is exaggerating or he doesn't know the meaning of orthogonal. For example, I think it's safe to say that recent economic events are very much related to the Fed's policy of low interest rates.

    The results of various fiscal and monetary policy choices may not be what one expects, but it's silly to say that such policies have no effect.

  • ||

    Frayed, I think to one of Kling's bent, government actions can only have good effects. Therefor, if a government policy has no good effects, it has had no effect at all.

    Government policy having bad effects is just filtered right out of the worldview.

  • Corey S.||

    ?

    You think Kling thinks government actions can only have good effects?

  • ||

    I may be confusing him with one of the multitudes of other "economists" who seem to have that viewpoint. I'm still waiting for my coca tea to brew up, so I'm at a mental low point.

  • Frayed Knot||

    I'm not familiar enough with Kling's writings and opinions to agree or disagree with you, but I just thought that statement was asinine.

  • Corey S.||

    I was responding to R.C. Dean. I'd bet a large amount of money that Arnold Kling believes that many (if not all) government actions can have negative effects. He is a libertarian, after all.

    I take his point to mean (not that I agree with it) that monetary and fiscal policies don't have much of an effect on the economy, which is different from saying that all government actions have either a good or no effect on the economy. One example might be regime uncertainty.

  • hmm||

    I will patiently await the arrival of MNG and Tony.

  • ASVSBIBTTME*||

    *A Social Vision So Beautiful I Brings Tears To Ma's Eyes:

    http://apnews.myway.com/article/20100715/D9GVCNNO0.html

    North Korea’s health care system is in shambles with doctors sometimes performing amputations without anesthesia and working by candlelight in hospitals lacking essential medicine, heat and power, a human rights watchdog said Thursday.

    North Korea’s state health care system has been deteriorating for years amid the country’s economic difficulties. Many of its 24 million people reportedly face health problems related to chronic malnutrition, such as tuberculosis and anemia, Amnesty International said in a report on the state of the health care system.

    No, he protest, he wants a mixed economy! Mixed so the capitalist can stave off the natural outcome of socialism (starvation) from occurring!

    (Thanks to Bill Anderson for a brilliant turn of phrase I lifted.)

  • ||

    If you really want to believe that, say, fiscal policy works, you can focus on those examples where it appeared to work (say ... the Kennedy tax cut in the early 1960's) and try to explain away all the examples where it appeared to fail (which is pretty much every other time and place that it has been tried) ... I think it is reasonable to read history as saying that economic outcomes are pretty much orthogonal to macroeconomic policy moves, which is a fancy way of saying that the economy does what it does without regard to fiscal and monetary policy.

    Whiskey Tango Foxtrot?

    Logic fail. The Kennedy tax cuts didn't just appear to work, they fucking DID work. Getting rid of brain dead policies fucking up the economy, like marginal tax rates exceeding 90%, will work.

    Raising the minimum wage as we were heading into a recession, as Congress did, almost certainly made the unemployment rate higher than it otherwise was.

    Stupid, counterproductive policies will fuck things up. Getting rid of them will make things better.

  • ||

    Shorter rebuttal: there is a reason North Korea's economy is in the shitter, and South Korea's economy is thriving. Government policy matters.

  • KPres||

    If you want to get the difference between Capitalism and Socialism, a picture is worth a thousand words...

    http://4.bp.blogspot.com/_otfw...../korea.JPG

  • Max||

    Kim's green policies are working!

  • LeSigh||

    Astronomists are socialists?

  • TallDave||

    Key sentence in the article:

    "Extending unemployment benefits, stimulating road construction, or giving money to state governments to maintain high levels of compensation for public employees will not do anything that I can see to establish new patterns of trade and specialization. "

  • TallDave||

    I met Twain once. The rumors of his death were not exaggerated.

  • ||

    This morning on CNBC, Mark Haines (sp?) was giving some guy a hard time, and actually trotted out Tony's line about "Well Clinton RAISED taxes, and the economy BOOMED!"

    Yes, boys and girls, there is a direct, discrete causal relationship there. And when your tooth falls out, I'll come and put a quarter under your pillow.

  • alan||

    Not everything was hunky and dory in Clinton's America. The '93 luxury tax collapsed the yacht construction economy in Wilmington(NC). Took a once thriving movie industry with it as well.

  • Mr Whipple||

    The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

    - F A Hayek
    The Fatal Conceit

    Keynes vs Hayek

    John Maynard Keynes - 125 votes

    F.A. Hayek - 1990 votes

    From the Daily Kos (?)

  • cynical||

    1991.

  • Paul||

    The same with monetary policy expansions. I think it is reasonable to read history as saying that economic outcomes are pretty much orthogonal to macroeconomic policy moves, which is a fancy way of saying that the economy does what it does without regard to fiscal and monetary policy.

    The problem is, we know that's not true. I guarantee you could design a monetary policy that would ass rape the economy so hard it wouldn't recover until you had a bloody civil war.

    The question really applies to the fuzzy areas around the edges.

  • Paul||

    The economy (that is, five billion people's decisions about what to do, choose, work at, save, invest, consume): shockingly, it's complicated stuff.

    Which should always scare the American people when 535 guys living in a swamp think they can intelligently design a system that will fix what they perceive to be broken about those billions of decisions.

  • BlueBook||

    ...five billion people's decisions...

    Did you mean six billion people, or do the poorest billion not count?

  • LarryA||

    The poorist billion count. It's the government employees that cause the problems.

  • scarf||

    Oh, and marxism was not so good to the Scandis -- at the time they adopted socialist-leaning policies, they were the richest countries in the world. Now they're poorer on average than most U.S. states.

    BTW, even so, "socialist" Sweden has a much more libertarian educational system than we do.

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