It's good for the NY Times to give space to conservatives to present their views on economics to counterbalance Paul Krugman and the other liberals on its payroll. But surely they can do better than Mulligan.
Here Mulligan is misleading his readers. He would like you to believe that the economic theory that the Obama Administration relies on is based on a simple logical error, and that economic analysis tells us that there is no such thing as "stimulus" or the "multiplier". The truth, however, is that the economic theory behind the Obama Administration's stimulus proposals is completely conventional, and it is Mulligan who is making a simple logical error. To whit:
In describing the first flaw in the Obama Administration's reasoning, Mulligan says that when the government takes income from one person and gives it to another there is not necessarily a net increase in aggregate demand - the person receiving the transfer increases her spending while the person paying for the transfer reduces hers. Mulligan argues that this logic holds whether the government raises taxes or borrows to fund the transfer. But there's a huge difference. If the government borrows to finance the transfer, it is borrowing from people who desire to save rather than spend. So the person who pays for the transfer does not reduce spending, and the net effect is an increase in demand.
Let's illustrate this with a simple parable. Robert is a carrot farmer. He has a lot of carrots sitting in the ground but no one wants to buy them, so he does not hire anyone to dig them up. Sylvie normally works for Robert picking his carrots, but he has no work for her, so she has no income, so she does not wish to buy any carrots. If Robert had some income he would pay Sylvie to dig up the carrots and buy them himself, but alas no one is buying his carrots so he has no income either. Kofi is a hobo living on the edge of town with no money and therefore no ability to buy carrots. Aya is a wealthy retiree who has plenty of money but has had her fill of carrots and so does not want to buy carrots either. Instead she wants to bury her money in her back yard to be spent at some unspecified time in the future. The economy is in a depression: there are goods available to be purchased, but no one to purchase them.
Now Barack Obama appears in this community and says to Aya: let me borrow some of the money you wanted to bury in your yard. I promise I'll pay it back. Aya is indifferent between burying her money in the yard and giving it to Obama, so she says sure, what the heck. Obama takes her money and gives it to Kofi. Kofi now has income to spend on carrots, so he goes to Robert's store and asks for some carrots. Robert says sure, let me call Sylvie and get her to dig some up for you. Sylvie comes in and digs up the carrots. Kofi pays Robert the money, which he divvies up between Sylvie (in the form of wages) and himself (in the form of profits). Robert and Sylvie now have some money to spend, so they both show up to Robert's store and ask for carrots; Sylvie goes back out in the field and digs up some more, earning more income for her and Robert, which inspires them to want more carrots. At some point Sylvie's back is hurting from harvesting all those carrots, so she tells Robert she can't work any more. But people are still buying carrots, so Robert looks around and asks Kofi if he'd like a job. Kofi says sure, and starts harvesting carrots, earning income, spending it on carrots, and so on and so forth.
This is a very logical, conventional story. But of course any macroeconomist worth his salt, even if he's only taken one or two macroeconomics courses, will be able to poke holes in it. What if Aya is unwilling to lend her money to Obama unless he pays her a higher rate of interest than she can get by burying the money in the ground? What happens when Sylvie and Kofi are unwilling to dig more carrots unless they are paid higher wages? What if Robert, Sylvie, Kofi and Aya are worried about the future taxes they'll have to pay to repay the loan from Aya to Obama? All of these factors can reduce the magnitude of the increase in aggregate demand brought about by the transfers from Aya to Kofi. But a macroeconomist seeking to dismiss the effectiveness of the government's stimulus efforts needs to explain why these offsetting factors are likely to be large. (In fact, at a time when market interest rates are near zero and the unemployment rate is 8.3 percent, the offsetting effects are almost certainly very small.) But Mulligan doesn't do this. He makes an illicit assumption on square 1 (Aya transfers money to Obama that she would have spent rather than buried in her yard) and claims that the whole logical argument underlying the conventional story is therefore flawed. That's just plain bad macroeconomic thinking, beneath the standards one should expect from the New York Times.
Oh, and the second flaw in Obama's logic? I think Mulligan is saying that Robert won't provide carrots to Kofi unless he gets a profit; but in my story he does earn a profit, and I don't see any reason he wouldn't make a profit. If Mulligan wants to say that in the current economic environment businesses won't sell to eager customers because their costs are too high he's welcome to do that, but it would be nice to substantiate that claim.
http://gecon.blogspot.com/2012/08/why-does-new-york-times-allow-casey.html#!/2012/08/why-does-new-york-times-allow-casey.html
Here Mulligan is misleading his readers. He would like you to believe that the economic theory that the Obama Administration relies on is based on a simple logical error, and that economic analysis tells us that there is no such thing as "stimulus" or the "multiplier". The truth, however, is that the economic theory behind the Obama Administration's stimulus proposals is completely conventional, and it is Mulligan who is making a simple logical error. To whit:
In describing the first flaw in the Obama Administration's reasoning, Mulligan says that when the government takes income from one person and gives it to another there is not necessarily a net increase in aggregate demand - the person receiving the transfer increases her spending while the person paying for the transfer reduces hers. Mulligan argues that this logic holds whether the government raises taxes or borrows to fund the transfer. But there's a huge difference. If the government borrows to finance the transfer, it is borrowing from people who desire to save rather than spend. So the person who pays for the transfer does not reduce spending, and the net effect is an increase in demand.
Let's illustrate this with a simple parable. Robert is a carrot farmer. He has a lot of carrots sitting in the ground but no one wants to buy them, so he does not hire anyone to dig them up. Sylvie normally works for Robert picking his carrots, but he has no work for her, so she has no income, so she does not wish to buy any carrots. If Robert had some income he would pay Sylvie to dig up the carrots and buy them himself, but alas no one is buying his carrots so he has no income either. Kofi is a hobo living on the edge of town with no money and therefore no ability to buy carrots. Aya is a wealthy retiree who has plenty of money but has had her fill of carrots and so does not want to buy carrots either. Instead she wants to bury her money in her back yard to be spent at some unspecified time in the future. The economy is in a depression: there are goods available to be purchased, but no one to purchase them.
Now Barack Obama appears in this community and says to Aya: let me borrow some of the money you wanted to bury in your yard. I promise I'll pay it back. Aya is indifferent between burying her money in the yard and giving it to Obama, so she says sure, what the heck. Obama takes her money and gives it to Kofi. Kofi now has income to spend on carrots, so he goes to Robert's store and asks for some carrots. Robert says sure, let me call Sylvie and get her to dig some up for you. Sylvie comes in and digs up the carrots. Kofi pays Robert the money, which he divvies up between Sylvie (in the form of wages) and himself (in the form of profits). Robert and Sylvie now have some money to spend, so they both show up to Robert's store and ask for carrots; Sylvie goes back out in the field and digs up some more, earning more income for her and Robert, which inspires them to want more carrots. At some point Sylvie's back is hurting from harvesting all those carrots, so she tells Robert she can't work any more. But people are still buying carrots, so Robert looks around and asks Kofi if he'd like a job. Kofi says sure, and starts harvesting carrots, earning income, spending it on carrots, and so on and so forth.
This is a very logical, conventional story. But of course any macroeconomist worth his salt, even if he's only taken one or two macroeconomics courses, will be able to poke holes in it. What if Aya is unwilling to lend her money to Obama unless he pays her a higher rate of interest than she can get by burying the money in the ground? What happens when Sylvie and Kofi are unwilling to dig more carrots unless they are paid higher wages? What if Robert, Sylvie, Kofi and Aya are worried about the future taxes they'll have to pay to repay the loan from Aya to Obama? All of these factors can reduce the magnitude of the increase in aggregate demand brought about by the transfers from Aya to Kofi. But a macroeconomist seeking to dismiss the effectiveness of the government's stimulus efforts needs to explain why these offsetting factors are likely to be large. (In fact, at a time when market interest rates are near zero and the unemployment rate is 8.3 percent, the offsetting effects are almost certainly very small.) But Mulligan doesn't do this. He makes an illicit assumption on square 1 (Aya transfers money to Obama that she would have spent rather than buried in her yard) and claims that the whole logical argument underlying the conventional story is therefore flawed. That's just plain bad macroeconomic thinking, beneath the standards one should expect from the New York Times.
Oh, and the second flaw in Obama's logic? I think Mulligan is saying that Robert won't provide carrots to Kofi unless he gets a profit; but in my story he does earn a profit, and I don't see any reason he wouldn't make a profit. If Mulligan wants to say that in the current economic environment businesses won't sell to eager customers because their costs are too high he's welcome to do that, but it would be nice to substantiate that claim.
http://gecon.blogspot.com/2012/08/why-does-new-york-times-allow-casey.html#!/2012/08/why-does-new-york-times-allow-casey.html
