{"id":2464,"date":"2013-12-12T10:40:15","date_gmt":"2013-12-12T05:10:15","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2464"},"modified":"2013-12-12T10:40:15","modified_gmt":"2013-12-12T05:10:15","slug":"most-stimulus-packages-have-been-far-too-small","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/12\/12\/most-stimulus-packages-have-been-far-too-small\/","title":{"rendered":"'Most stimulus packages have been far too small'"},"content":{"rendered":"

\"Tim_Harford_in_2012\"<\/a>
\nVivek Kaul<\/span><\/span>
\n
\nTim\u00a0Harford\u00a0is a senior columnist for the\u00a0<\/span><\/span>Financial Times<\/i><\/span><\/span>. His long-running column, \u201cThe Undercover Economist\u201d, reveals the economic ideas behind everyday experiences.\u00a0Tim\u2019s first book, \u201c<\/span><\/span>The Undercover Economist<\/i><\/span><\/span>\u201d has sold one million copies worldwide in almost 30 languages. He is also the author of \u201c<\/span><\/span>The Logic of Life<\/i><\/span><\/span>\u201c, \u201c<\/span><\/span>Dear Undercover Economist\u201d<\/i><\/span><\/span>, \u201c<\/span><\/span>Adapt<\/i><\/span><\/span>\u201d and most recently \u201c<\/span><\/span>The Undercover Economist Strikes Back.<\/i><\/span><\/span>\u201d In this free-wheeling interview to\u00a0<\/span><\/span>Forbes India,\u00a0<\/i><\/span><\/span>Tim\u00a0discusses the ideas he explores in his latest book\u00a0<\/span><\/span>The Undercover Economist Strikes Back,\u00a0<\/i><\/span><\/span>from why he feels that stimulus packages to revive the sagging economies in the Western world have been far too small to why money does buy happiness to why Henry Ford was the man who invented unemployment.
\n<\/span><\/span>One of the most interesting parts of your book is where you talk about the baby sitting recession. What is that all about?
\n<\/b><\/span><\/span>The babysitting recession was first discussed in an article published by Joan and Richard Sweeney in the 1970s, but it has been made famous by Paul Krugman. There was a babysitting co-op in Capitol Hill, Washington DC, that suffered a severe and lasting depression. Couples would keep track of who was babysitting for whom by exchanging babysitting tokens; however, there weren\u2019t enough tokens in the economy. Almost everybody wanted to babysit for other people, accumulating a few more tokens, as a reserve, before they spent any tokens themselves. But of course the arithmetic does not work:\u00a0<\/span><\/span>somebody\u00a0<\/i><\/span><\/span>has to go out or this no economy at all.
\n<\/span><\/span>So what drew you this example?
\n<\/b><\/span><\/span>A number of things are interesting about this example \u2013 notably that a total economic breakdown could be fixed by a simple policy tweak: printing more tokens. (Paul Krugman has more recently tended not to mention the end of the story: the co-op printed too many tokens and ended up suffering from a serious inflation problem. But that is more of an interesting sting in the tale than a refutation of the entire example.) In\u00a0<\/span><\/span>The Undercover Economist Strikes Back\u00a0<\/i><\/span><\/span>I use the babysitting recession as a nice simple example of a Keynesian recession; in a Keynesian recession there is some dysfunction in the way the economy works, a dysfunction that can be fixed by governments printing money or perhaps borrowing and spending money. Some commentators believe Keynesian recessions are logically impossible; this is nonsense and it is nice to have a simple counter-example.
\n<\/span><\/span>Another interesting part is about the prison camp recession. What is that all about?
\n<\/b><\/span><\/span>The prison-camp I talk about was in Germany during the Second World War. The economic activity in the camp \u2013 a bit of production, but mostly trading items sent to prisoners by the Red Cross \u2013 was analysed in a quite brilliant article by one of the prisoners, Robert Radford, who published his findings a few months after the war ended.
\n<\/span><\/span>And what did Radford find?
\n<\/b><\/span><\/span>The prison camp is almost the perfect counter-weight to the baby-sitting co-op. Trade in the prison camp worked amazingly well. There were well-understood prices and middlemen ensuring that prices in different parts of the camp tended to converge to similar levels. At one stage, coffee was worth more outside the camp in the cafes of Munich than it was inside the camp, that meant gains from trade, and coffee began to go \u201cover the wall\u201d \u2013 the prison camp had an export trade! Despite various attempts from the senior officers to regulate trade and particularly to fix prices at levels they regarded as fair, prices were flexible and refused to respect any social or ethical conceptions of the \u201cjust price\u201d. This was close to a perfect market. And yet\u2026 and yet the prisoners nearly starved to death.
\n<\/span><\/span>Oh, why was that?
\n<\/b><\/span><\/span>Why they starved is not hard to understand. The parcels from the Red Cross began to dry up as the war progressed. Food and cigarettes both became scarce. In the last, desperate days, there were few goods and prices fluctuated wildly. Finally the US Army arrived and liberated the prisoners.
\n<\/span><\/span>But what does all this have to do with a modern economy?<\/b><\/span><\/span>
\nThe point is that there are two conceptions of what a recession really is. One conception is Keynesian, like the babysitting co-op: some internal malfunction that needs fixing. But another conception is Classical: that economies fluctuate not because of anything wrong within the economic system itself, but because of policy errors or external shocks. Of course the prison camp is an extreme example of a recession caused by an external shock, but modern economies are subject to technological changes, fluctuations in the price of basic commodities, and of course financial shocks from a banking crisis.
\n<\/span><\/span>Where do the baby sitting recession and the prison camp recession meet? What are the policy lessons one can draw from them?
\n<\/b><\/span><\/span>A Keynesian, baby-sitting co-op recession invites a role for government intervention \u2013 most famously through fiscal policy (cutting taxes or boosting spending) but also through monetary policy (cutting interest rates or even printing new money). A Classical, prison-camp recession invites a more fatalistic response: there\u2019s nothing the government can do to make things better, and plenty of things it can do to make things worse. The huge argument that has raged in many economies about fiscal stimulus versus austerity is really a debate about whether recent recessions have been mostly Keynesian, or mostly Classical. If Classical, then austerity is the right response: we\u2019re poorer and we need to get used to it. If Keynesian, then fiscal stimulus is the right response: we\u2019re only poorer if the government gives up and allows us to be!
\n<\/span><\/span>So are the recent recessions Keynesian or Classical?
\n<\/b><\/span><\/span>In a book you can give black-and-white examples and in life, nothing is black and white. But in my view the recent recessions have been at least partially Keynesian and governments \u2013 especially in the UK and US, where they had a choice \u2013 should have postponed austerity measures.
\n<\/span><\/span>The western world has been running stimulus programmes. Do they really work?
\n<\/b><\/span><\/span>It\u2019s interesting that this is your perception. I think most stimulus packages have been far too small \u2013 although the US has at least tried. The evidence on such things is always tricky because macroeconomists (unlike microeconomists) cannot run controlled trials. But we can try our best.
\n<\/span><\/span>Can you elaborate on that?
\n<\/b><\/span><\/span>The International Monetary Fund at first estimated a modest effect from fiscal stimulus \u2013 that is, government spending does make the economy larger in the short run, but only a bit. But the Fund later recanted and argued that in the recent recession, fiscal stimulus was far more effective than they\u2019d believed at first.
\nLet\u2019s assume this is correct (I think it is). How did the Fund make their original mistake? The problem was that they were looking at historical evidence on stimulus spending, and the historical evidence incorporated much milder recessions in which monetary policy was a good alternative to fiscal stimulus. Those mild recessions weren\u2019t a good guide to recent experience, alas.
\n<\/span><\/span>What is the best way to make a stimulus work?
\n<\/b><\/span><\/span>As for how to make stimulus work, I argue in my book that the best bet is advanced planning: governments should have a list of well-planned infrastructure projects, and should accelerate those plans in case of a downturn. That way, we carry out the investment we were intending to anyway, but at a time when it will have nice macroeconomic side-effects.
\n<\/span><\/span>Economists have been criticised for having too much faith in GDP growth. Even Simon Kuznets, the man who invented GDP never saw it as a measure of welfare. You write that \u201cthey rely on the popular misconception that much of what is wrong with the way the economy is organised is wrong because we collect GDP statistics, and that the way to fix our economic problems is to measure something else. I think that is a mistake\u201d. Why is that a mistake?
\n<\/b><\/span><\/span>Because it isn\u2019t the measuring of GDP that has caused the problems. We had economic growth \u2013 and inequality, environmental degradation and other problems \u2013 long before we could measure it. Of course there are thoughtful critics of GDP who suggest additional things we could measure, or ways to make GDP a better measure of economic activity. But the more radical critics seem to assume that our economy is organised the way it is because some sinister force is trying maximise GDP. And that\u2019s just crazy.
\n<\/span><\/span>A lot of recent thinking talks about happy economics (or what you call happynomics). Does money buy happiness?
\n<\/b><\/span><\/span>Money does buy happiness, it seems \u2013 or at least having more money, within a particular society, is correlated with being happier (or rather, with telling surveyors that you are more satisfied with your life). The big contested question in happynomics is whether that\u2019s also true across countries: so, is a richer country such as the US happier than a poorer country such as India?
\n<\/span><\/span>Is that the case?
\n<\/b><\/span><\/span>Early research from Richard Easterlin suggested that richer countries aren\u2019t happier \u2013 hence the phrase \u201cthe Easterlin Paradox\u201d: if money buys happiness for individuals but not for countries which are collections of individuals, what\u2019s going on? Two possible explanations: one is that what really counts is relative income. Indians compare themselves to other Indians; Americans compare themselves to other Americans. If Americans compared themselves to Indians they\u2019d feel rich and would be happier. But they don\u2019t, so they don\u2019t. An alternative explanation \u2013 favoured by economists Justin Wolfers and Betsey Stevenson \u2013 is that Easterlin is just wrong: at the time of his research, the data were of poor quality. Now we have better quality data and we see that money is correlated with happiness both across and within countries. It will be interesting to see this debate play out.
\n<\/span><\/span>Can economic growth carry on forever?<\/b><\/span><\/span>
\nIn principle, yes. Quite a few environmentalists and physicists have pointed out that the planet simply cannot support exponential growth \u2013 sooner or later (and, with exponential growth, sooner than we think) we will reach environmental limits.
\n<\/span><\/span>You don’t buy that?
\n<\/b><\/span><\/span>I regard myself as an environmentalist myself but I think this is just a simple conceptual error. Of course we cannot continue to use more resources or energy at an exponential rate. But economic growth is just growth in the market value of output. So it can continue forever \u2013 at least in principle. There are already signs that energy growth is being decoupled from economic growth: in countries such as the UK, the US, Germany and Japan, energy consumption per capita has been falling for a long time now. Population growth is also low or negative in many rich countries. I believe that we need to focus on practical environmental questions \u2013 for instance, how to reduce carbon dioxide emissions now \u2013 rather than these very abstract concerns about exponentiation.
\n<\/span><\/span>One of things that you write about India is that \u201cthere simply isn’t enough money in India yet for it to be unequal\u201d. What do you mean by that? Do you see it changing in the years to come?
\n<\/b><\/span><\/span>The World Bank economist Branko Milanovic has this idea of the \u201cinequality possibility frontier\u201d. Imagine an extremely poor subsistence society. Then imagine some class of plutocrats, who somehow confiscate wealth and spend it themselves. How much can they take? The answer is: not much if the society is to survive, because the poor cannot dip below the average income because the average income is barely enough to keep you alive. Now imagine a much richer society. This, in principle, could be far more unequal because the poor could still survive on a tiny fraction of the average income. Milanovic and co-authors were interested not only in how unequal a society is, but how unequal it is relative to how unequal it could possibly be. My point was that despite important gains over the past twenty years, India is still a very poor society. There\u2019s a limit to how unequal it can get until it gets richer \u2013 which should make us worry about the inequality we do see.
\n<\/span><\/span>Why was Henry Ford the man who invented unemployment?<\/b><\/span><\/span>
\nAh yes, this is one of my claims \u2013 and I should say that it\u2019s an exaggeration, of course. But here\u2019s the puzzle: Henry Ford of the Ford Motor Company raised wages at his factory to such a level that men were queuing round the block for jobs, being hosed down by police in a sub-zero Chicago January. Why have such high wages? Why not cut them and save money, given how much demand there was for jobs?
\nThe idea here is \u201cefficiency wages\u201d \u2013 that it can be efficient for an employer to pay well above the market rate because it gives him the pick of applicants, and a fiercely loyal group of workers who will do almost anything to keep their jobs. And of course, that describes many \u2013 perhaps most \u2013 jobs in the formal sector today. That means, in turn, that we\u2019ll always have unemployment, not because of some macroeconomic slump, but because individual profit-maximising companies prefer efficiency wages.
\n<\/span><\/span>You quote a lot of John Maynard Keynes all through the book. One of the things you quote in the last chapter is \u201cthe master economist must posses a rare combination of gifts…He must be a mathematician, historian, statesmen \u2013 in some degree….\u201d Do you see that in current day economists?
\n<\/b><\/span><\/span>Not enough. But that challenge is what makes economics such a marvellous subject to study. Everything is there in the subject, waiting to challenge us. Despite all the difficulties, economic remains a wonderfully important and rich topic to explore \u2013 and it\u2019s still a great time to be an economist.<\/span><\/span>
\nThe interview originally appeared in the Forbes India magazine dated December 13, 2013<\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul Tim\u00a0Harford\u00a0is a senior columnist for the\u00a0Financial Times. His long-running column, \u201cThe Undercover Economist\u201d, reveals the economic ideas behind everyday experiences.\u00a0Tim\u2019s first book, \u201cThe Undercover Economist\u201d has sold one million copies worldwide in almost 30 languages. He is also the author of \u201cThe Logic of Life\u201c, \u201cDear Undercover Economist\u201d, \u201cAdapt\u201d and most recently \u201cThe … <\/p>\n

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