Stop Brad DeLong!

Geoffrey Manne —  27 January 2009

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?

Geoffrey Manne

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President & Founder, International Center for Law & Economics

7 responses to Stop Brad DeLong!

  1. 

    The Federal Reserve and IRS get the money. Beverly gets $500 and has to pay taxes on the income. She has to dig out more money from her pocket to make up for the taxes she paid, so she can pay the full $500 to Carol. After Carol receives her $500 back, she has to pay taxes on the same money that Beverly ALREADY paid taxes on.

    Alice received some of that $500 (because Carol paid some in taxes and had to dip into other cash to pay Alice) and Alice paid taxes on the same money that Carol and Beverly already paid to the IRS.

    Alice had to purchase lumber for the deck, unless she got it from FreeCycle, so that means Home Depot got some of the money, and had to pay taxes on it, too, unless they are big enough to have lobbyists getting tax cuts for them and they don’t have to pay taxes.

    Of course, Beverly could have borrowed more money from the mortgage lender than the $500 she owed, so she could buy the lumber.

    Beverly takes out a new mortgage and the bank says “Okay..we can loan you the money, because so-and-so deposited $55.56 in their savings account, and we can loan up to 9 times that amount to someone else, hoping you’ll pay us interest back…besides, when it all comes crashing down on us, (because you defaulted on your loan) we’ll just get a bailout package from Congress since we flunked basic math and realize that when we lend out more money than we have coming back, we go bankrupt.”

    Congress takes the same money that taxpayers have already paid taxes on, and sells our American assets to foreigners (such as our state parks, roads and landmarks)to raise money for the bailout packages because we are already trillions in debt.

    The bankers pocket the money and go to $12,000 a night hotels, buy jets, and get involved in the merger games.

    A Fortune 500 company’s parent corporation buys out shares of the bankrupt bank, (Lehman Bro.) giving them partial control of the Federal Reserve, using bailout money. Of course, while the executive of Lehman Bro was asking for bailout money, he had already pocketed $300 million…but Congress didn’t care.

    The Federal Reserve is controlled by 70% foreign families and corporations and 30% American corporations who are buying up companies, controlling Congress and the courts. Of course, the Federal Reserve is a for-profit entity that Carol, Beverly, Alice and Deborah probably thinks is run by the American government.

    The Federal Reserve controllers declare a recession and depression so Alice, Carol, Beverly and Deborah are afraid of the economy and vote for change. “Yes we can”

    Then, the new kid on the block, who makes more money than Alice, Carol, Beverly and Deborah, combined, will ever make, sets up change.gov for all the American people to learn how to be taken care of by the government from cradle to grave, while he spits on the Constitution.

    Foreigners put all that money into his campaign, but they can afford to do that because Americans buy gas and the money goes outside the country.

    Eventually, they won’t need the $500 from each other any more because the government can take care of them.

    The Federal Reserve wins.

  2. 

    Mr. Manne, keep fighting the good fight. Its all about the COSTS, COSTS, COSTS, associated with such fiscal policy. Its like shooting off your arm to get rid of a hang nail. Not to mention the precedent government sets through this type of spending; by necessity it will require greater spending with greater costs than any benefit (any tangible, sustainable benefit, that is), and so more spending will soon be required, on and on in a never-ending cycle. Why are so many forgetting that we live in the real world, with politicians who have an interest in spending money where it does the most political good, not where it has the most efficient and effective economic use (e.g. several million dollars for contraceptives).

  3. 

    Ah, someone has drunk the Kool-Aid. Maybe the problem is that my freshman economics course was at Chicago. I encourage you (and Brad) to read Cochrane’s essay, and to go past the first paragraph this time. Cochrane actually addresses precisely the point Brad thinks he must (he refers to people “pathologically sitting on their cash,”) and explains why even in such a situation fiscal policy is a bad idea. More important I’d say is DeLong’s “egregious error” of failing to consider the costs. Just a nod in the general direction–or at least an explanation why all this goodness is apparently free-would help. I’m with Cochrane–I see how this could work. But I see how it could fail. I’m guessing Brad is salivating so heavily over the prospect of so much government building that he is blind to the prospect of failure.

  4. 

    You really need to take a freshman economics course. The Cochrane assertions are egregious.

  5. 

    Actually, Krugman just repeats what DeLong said. He says, for example, that increasing government spending just increases GDP (and thus taxes and/or savings). It is, indeed, a wonder that France doesn’t have a higher GDP. Could it be because, eventually, France and the US and everyone else MUST PAY BACK THE MONEY USED FOR GOVERNMENT SPENDING????? Yes, after reducing investment (Krugman glosses over the fact that increasing G could also decrease I before or at the same time as increasing GDP), GDP may grow in the short run. Then what? On what planet is this not financed by inflation, debt or taxes? As I said in my earlier post on Kevin Murphy, it may be that the cost is worth it–after all the cost comes later, and increased GDP now might be worth decreased GDP later. But until the stimulus hawks take the costs remotely seriously, and until they are slightly more realistic about the relationship between G and GDP even in the short run (for example, rent seeking, public choice problems, inherent inefficiency, ignorance, etc. might limit the effectiveness of G in increasing GDP), they have not proved anything and they have not addressed the concerns raised by Cochrane and others. They have, however, done a great job demonstrating their childishness and intellectual poverty, which is nice.

  6. 

    Geoff:

    How delightful to find someone who dislikes Brad as much as I do!

    http://organizationsandmarkets.com/2009/01/13/the-delong-hall-of-honor/

  7. 

    Actually Delong is correct. Krugman provides a another explanation.

    http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/#more-1301