1. The Myth of the Governmental Hand...
´´There is no disagreement that we need action by our government,a recovery plan that will help to jumpstart the economy´´
PRESIDENT-ELECT, BARACK OBAMA, JANUARY 9 , 2009
With all due respect Mr.President, that is not true....
Notwithstanding reports that all economists are now Keynesians andthat we all support a big increase in the burden of Government but I do not believe that more government spending is a way to improve economic performance.
More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope overexperience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
2. The pseudo-intellectual Keynesianism- Six Fundamental Errors of the Current Orthodoxy
The rate of interest.
Capital and its structure.
Malinvestments and money pumping.
3. The exit strategy for the policymakers(3T)
Timing: when should fiscal and monetary tightening begin?
Tactics: starting by cutting budget deficits or by raising interest
Τechnique: how will central banks go about the tightening monetary
Policy makers have to distinguish between relative and absolute price movements, while also linking broad price increases to money and credit expansion. They have to evaluate developments in key asset markets properly and quickly
4. Stimulus Packages and the new assumptions.
Let G = increase in government spending
1-á= value of a dollar of government spending (á measures the
inefficiency of government)
Let f equal the fraction of the output produced using "idle"
Let ë be the relative value of "idle" resources
Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending
So, when Will the Stimulus Add Value?
- The net gain is the value of the output produced less the costs of the inputs and the deadweight loss
- In terms of the previous notation we have:
Net Gain = (1-á)G -[(1-f)G + ëfG] -dG
Net gain = (f(1-ë) -á-d)G
A positive net gain requires that: f(1-ë) > á+d
Difference of opinion comes from different assumptions about f,e,a
With these parameters the stimulus package is likely to be a bad idea!
5.Questions for the policymakers
-If it is difficult to summon the political courage today, why will it be easier tomorrow?
-How the governemnets have to use their regulatory and supervisory
powers to deal with various types of prices inflation?
-How they should incorporate a view on asset prices into monetary
policy decision making?
-Is FED's or ECB's job to try and estimate the correct or fair value for asset prices!)
-Can they have predictions for a bubble in all asset markets at the