Kevin Murphy is Right

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Megan McArdle points us to this fascinating panel at the U of Chicago devoted to evaluating Obama’s stimulus plan. Kevin Murphy’s remarks  (between 17:20 and 31:37 in the video) wonderfully elucidate the terms of the debate, and helps me better grasp exactly why the stimulus is sure to be a bust. If you agree with Murphy, as I do, that the efficiency of government spending is generally low, that the value of activating currently idle resources is low (the “multiplier”), and that the deadweight loss from the future tax increases required to finance the stimulus spending is high, then the whole thing looks like a pretty sure loser.

5 thoughts on “Kevin Murphy is Right”

  1. And from listening to and reading several nonkeynesians who do not subscribe to the unquestioned and total importance of aggregate demand, I've found a lot of sense in the idea that “capital” is not simply “k” as keynesians would like it to be. To them, capital is capital is capital. This is simply not true.

    The term “play dough” or “clay” has been used to describe the flawed way in which keynesians view capital….as if it's all the same and can be simply remolded to suit any generic need. Some capital is idle right now because of gross misallocation in form of too many resources going into housing. Priming the pump doesn't solve this and it also totally avoids why this all happened…as if it doesn't matter or is too messy to spend time on.

  3. Murphy's model is really good, since, as you say, it's useful in defining the terms of the debate and forcing people to make their assumptions explicit.

    On the other hand, Murphy implies that making government “inefficiency” (alpha) go negative is a lot harder than it really is. “Inefficiency” isn't really a good term, though, since alpha is just a statement about the value of government spending. If government spending is quite valuable, then more spending can be a good idea, even if it has no multiplier effects.

    As Mark Thoma writes, “Tax cuts won't build schools, or any other public good,” and that's what it is really all about. Infrastructure, schools, welfare programs, and the like, are all considered by most stimulus advocates to be more valuable than private spending. If you are not a libertarian, it's easy to assume that alpha is negative.