Few people in my small sphere of the world are taken as seriously as Brad DeLong, while still being as much of an ass as he is. The latest stems from his juvenile criticism of this masterful analysis of the stimulus situation by John Cochrane. Brad’s juvenile criticism is here. The thing is, it sounds so plausible (if childish in its name-calling and patronizing tone). But Brad’s fundamental error–and it is a huge one–was succinctly pointed out by one of his commenters with a single sentence:
Isn’t the “end of story” in the first scenario rather arbitrary?
OK–You need a bit more background. Cochrane makes the claim that borrowing (or taxing or inflating) to pay for stimulus doesn’t create wealth, it only redistributes it (Sounds familiar). DeLong claims that this disregards the concept of velocity of money, and says this (in his un-charmingly petulant way):
Let us take this slowly.
Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.
Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.
In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.
In a second scenario Beverly says to Alice: “I have a house. Why don’t you build a deck–I will pay you $500 after the work is done. Here is the contract.” Alice takes the contract and goes to Carol. She shows the contract to Carol and says: “See. I will be good for the debt. Cook me meals so I will have the strength to build the deck–here’s another contract in which I promise to pay you $500 within 90 days if you cook for me.” Carol agrees.
Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.
Alice then asks Beverly for payment. Beverly says: “Wait a minute.” She goes to Carol and says: “Here is the the $500 cash I owe you.” Beverly pays the money to Carol. Beverly then says: “But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?” Carol says: “Sure.” Beverly files an amended deed showing Carol’s mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.
The net result? (a) Alice who would otherwise have been idle has been employed–has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed–has traded her labor for a secured lien on Beverly’s house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.
Alice has more income and consumption expenditure than if she hadn’t taken Beverly’s job offer. Carol has more income and saving than if she hadn’t cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.
A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.
John Cochrane would say that this is impossible. John Cochrane would say:
[I]f money is not going to be printed, it has to come from somewhere. If Beverly borrows a dollar from Carol, that is a dollar that Carol does not spend, or does not lend to Deborah to spend on new investment. Every dollar of increased Beverly spending must correspond to one less dollar of Carol or Deborah spending. Alice’s job created by Beverly spending is offset by a job lost from the decline in Carol or Deborah spending. We can build decks instead of fountains, but Beverly stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”…
John Cochrane is wrong.
But actually it is Brad DeLong who is wrong. As the commenter pointed out–what happens after the money is paid in Brad’s first scenario? Does Carol stuff it under a mattress? Or does she invest it, spend it on something (say, a new deck) or lend it (put it in the bank)? Unless Brad can exaplin why the order of events matters to his analysis, his analysis is worthless and wrong. It is not a criticism of Cochrane but a childish attempt to demean someone with whom he disagrees–pretty much Brad’s M.O. In fact, over the long or medium run, Cochrane is precisely corect–and Brad’s second scenario is equivalent to his first. The question is whether we gain anything by forcibly re-ordering the events and injecting government inefficiency and rent seeking into the mix. Brad doesn’t bother to see this, because it doesn’t further his aims–instead he essentially picks arbitrary facts and an arbitrary cut off point, completely disregarding the essential elements of the analysis that are not in plain view.
What I like best about this fundamental move of Brad’s is that it typifies the hubris with which Brad and his political allies operate: They frequently don’t see (or at least acknowledge) the unseen, they don’t account for the unintended consequences and they believe alpha = 0!!!!!!! Why does anyone take Brad DeLong seriously anymore?