Selective extracting

In The Weekend Australian, Stephen Kirchner decries short-term macroeconomic management. He writes:

“When the government reduces national saving by running a budget deficit, the interest rate rises and investment falls. Because investment is important for long-run economic growth, government budget deficits reduce the economy’s growth rate,” So says Joshua Gans in his Principles of Macroeconomics text. Yet Gans was also one of the 21 economists who recently signed a letter defending the government’s deficit spending.

Shock horror. What does this mean?

Let’s start with the obvious: that on page 218 of my co-authored adaptation of Mankiw’s Principles of Macroeconomics, it says just that. It even has italics for emphasis of the middle bit. (Actually, it is repeated on page 220 — must have a word with the publisher about that!) The passage occurs in a Section looking at the ‘Real Economy in the Long Run’ and in a long-run model that says that we don’t want government deficits persisting in the long-run. By the way, the statement that I put my name to says just that: “Of course other things being equal it’s better for governments to be debt free.”

The debate is about whether we incur a short-run deficit and had Kirchner bothered to read the entire book rather than pick bits and pieces he might have happened upon the very last chapter of the book which lays out five debates in macroeconomic policy the fourth of which is regarding the desirability of government balancing its budget. There ensues a discussion about the term ‘fiscal conservative’ but even in the pro case, I guess we can’t help ourselves to point out:

… it is reasonable to allow a budget deficitduring a temporary downturn in economic activity. When the economy goes into a recession, tax revenue falls automatically, because the income tax and the payroll tax are levied on measures of income. If the government tried to balance its budget during a recession, it would have to raise taxes or cut spending at a time of high unemployment. Such a policy would tend to depress aggregate demand at precisely the time it needed to be stimulated and, therefore, would tend to increase the magnitude of economic fluctuations.

This is precisely what the statement is. The surprising thing is we only have 21 economists signing it. And that is before we get to the ‘con’ case which emphasises the Ricardian argument that it all doesn’t matter really.

The bottom line: beware ‘got ya’ selective extracting. They reveal a short attention span and unwillingness to deal with economic complexity.

8 thoughts on “Selective extracting”

  1. “They reveal a short attention span and unwillingness to deal with economic complexity.”
    Says the economics professor who thinks aggregate demand and GDP are a priori true concepts rather than statistical fallacies,  and refuses to address any criticism to the contrary.
    The truth is, you yourself have a very high time preference. You would rather confine yourself narrowly to journal articles and textbooks published in the past 15 years. Furthermore, you confine yourself primarily to economics within the neo-Keynesian framework. In this way, you ignore valid complexities raised by other schools of thought or from older time periods.
    The selective extracting you complain about is more than amply matched by your own selective reading of economic science. At least Greg Mankiw admits his ignorance. Welcome to the club of political economists who pretend to be objective! Perhaps you can tone down your indignation in future posts?


  2. The point of highlighting the very good discussion of these issues in Joshua’s textbook was precisely to show that the 21 economists were being selective and incomplete in their analysis by not acknowledging the many arguments against discretionary fiscal stimulus.


  3. Thanks Sukrit. You took the words out of my mouth.
    The debate is about whether we incur a short-run deficit……

    Seriously, what utter nonsense, professor. What complete and utter nonsense. The projected accumulated deficit is going to be $300 billion. How in god’s name could you even suggest it residual effect is short term.  Were you fully conscious when you write that?


  4. Joshua, I was wondering if you could clarify something about a possible contradiction in the above post. 
    The original 21 economist letter calls for additional discretionary fiscal policy and applauds the cash hand-outs. In contrast, the above quote from your textbook is referring to automatic stabilisers (not discretionary fiscal policy or cash hand-outs). Yet you follow that quote by saying “This is precisely what the statement [of 21 economists] is”. I’m not sure if that is true.


  5. John, there is no contradiction. The Statement did not advocate or endorse handouts and was merely about the notion of whether deficit spending is appropriate in a recession. It is and I challenge anyone to find a standard textbook that says otherwise. The Statement reflected the issue that long-term debt management and reduction is also important.
    My own view on the handouts in this regard is simple: they are more likely to be saved than spent but regardless, if people are concerned about having to give the money back in the future through higher taxes they can save their cheques to hedge that possibility. So unless one argues that people can’t be trusted to manage their own spending properly, there isn’t an issue here. I realise that some left-of-centre types do not agree with that and would rather keep that money in the hands of the government. I am more agnostic about it all.


  6. Professor:
    JH says:
    In contrast, the above quote from your textbook is referring to automatic stabilisers (not discretionary fiscal policy or cash hand-outs).
    I don’t understand how you recent response is referring to his question. Are you simply attacking a strawman here?



  7. From the original statement: <i>”Cash handouts of nearly two percent of GDP are being paid to middle and lower income Australians. There is no more effective way to stimulate the economy quickly. The success of this measure can be seen in the relative strength of Australian retail sales compared with almost any of our peers.”</i>
    Perhaps I am misunderstanding the intention of this passage, but it seems like an endorsement of activist fiscal policy. I think this is how it has been interpreted by others too.
    Allowing the automatic stabilisers to work seems uncontroversial. I’m don’t know of anybody arguing against that.


Comments are closed.