Chicago professor John Cochrane – a closet Keynesian?

25 Jan, 2012 at 00:59 | Posted in Economics | Comments Off on Chicago professor John Cochrane – a closet Keynesian?

Three years ago Chicago professor John Cochrane said that the idea that spending can spur the economy was discredited decades ago:

‘It’s not part of what anybody has taught graduate students since the 1960s,’ Cochrane said. ‘They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.’

To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said.

But now it seems the Chicago professor has had second thoughts. On his blog, the other day, he writes:

Let’s be clear what the “fiscal stimulus” argument is and is not about.

It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn’t justify all deficits — one can still argue that our government used the recession to radically increase permanent spending. But disliking “stimulus” is not the same thing as calling for an annually balanced budget.

Nor is it about debt financing of “infrastructure” or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn’t justify all “infrastructure” roads and rails to nowhere, of course. A good test: If China offers to deliver an infrastructure project at half price, but no “jobs” will be “created,” do you still want it? If you say “yes, even more” than it’s infrastructure. If you say “no, we need to create jobs” then it’s stimulus. 

The “stimulus” proposition is that additional spending — whether needed or not — raises output and general welfare.  Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5.

And then some people say there is no progress in economics …

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