Tuesday, November 16, 2010

Rational Stimulus?

David Brooks is way out of his depth writing about the divide among economists on how to respond to the recent recession. He claims:
The economic approach embraced by the most prominent liberals over the past few years is mostly mechanical. The economy is treated like a big machine; the people in it like rational, utility maximizing cogs...

These models can be used to make highly specific projections. If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs. Everything is rigorous. Everything is science.
David Brooks doesn't, clearly, understand rationality. If $1 borrowed and spent by the government produces $1.50 in the economy, the government should borrow infinitely! This "regularity" is not reproduced in any rational-optimization model of which this economist is aware.

Moreover, within the discipline, those who believe in optimizing agents, intertemporal tradeoffs, and rationality typically are anti-stimulus. Those who are in favor of the stimulus and who have the ear of the Obama administration - Krugman, Stiglitz, Hall, etc - are typically more solicitous of 'heterodox' behavioral approaches. The Keynesian approach of the Obama administration is predicated on the famous concept of "Animal Spirits".

Brooks has it completely backwards: the administration and its 'technocrats' have relied on empirical regularities which lack theoretical underpinnings. What we need is exactly what November voters demanded: a return to rigor and reasonable intertemporal tradeoffs.

2 comments:

searchingforalethia said...

You have quite a bit here that could be over a non-economist's head. Could you provide an example of empirical regularity that lack theoretical underpinning.

I see the $1 for $1.5, but it seems like you have already dismissed that idea as being based on Keynesian ideas.

Chops said...

The main thing I meant to communicate is that Brooks is blaming the Obama administration for being too rigorous, when in fact they've lacked rigor.

The Keynesian framework, as those who love it freely admit, is not built on microeconomic foundations. Rather, it's constructed empirically, by observing how certain macro aggregates appear to be related, and concluding that those relationships are causal.