Macroeconomics and Arguments

The best way to learn is by arguing with somebody.

Classes are boring, reading is passive, and videos are both of these things. But when you meet somebody who is well informed, thoughtful, respectful of your viewpoint but is willing to argue with you, well: Merry Christmas.

I’m well aware that social media leaves one with the impression that none of these things are true these days, but that is just our tendency to search out the bad, rather than the good.

When I teach courses in behavioral finance, for example, I often show a discussion between Richard Thaler and Eugene Fama:

That is not the point of today’s blogpost, but it is still a video worthy of your time, whether you’re interested in the topic or not. These two gentlemen (Nobel Prize winners both of them) hold diametrically opposite views when it comes to the efficiency of markets. But they spend a little over forty minutes here, engaged in perfectly civil conversation with each other, without once ceding an inch to the other’s viewpoint. The point isn’t the fact that we’re left without a clear understanding of who is right and who is wrong. The takeaway is that it is entirely possible to argue without turning the argument into a shouting match.

It is, as nine pm teaches us every night in India, a vanishing art.

Macroeconomics is a subject that lends itself to vigorous debate for a variety of reasons. One, and let us be clear about this, nobody has the slightest idea about what works and what doesn’t when it comes to macroeconomics. Yes, really.

Two, counterfactuals are impossible to come by, and so you can engage in endless games of but-have-you-considered.

Three, every macroeconomic crisis that I have had the opportunity to study as it has unfolded has led to all of what is listed below:

1. Some old theories have been vindicated
2. Some old theories have been falsified
3. All theories have been updated
4. We still don’t know quite what is going on

What’s worse is that the first two points depend almost entirely upon one’s point of view. And again, no, I am not making this up.

But I am not saying that this makes macroeconomics “bad”. This is precisely what makes it fascinating!

And the example du jour comes from two economists who love arguing with each other: Noah Smith and Tyler Cowen. The topic? President Biden’s proposed stimulus.

Blanchard’s argument that Biden’s bill is too large rests on the idea that this amount of spending will cause the economy to “overheat” — in other words, that inflation will rise. To prevent this, he suggests shrinking the size of the bill and financing more of it with taxes.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

This is a point made by Larry Summers as well, by the way. For a good summary, see this Vox article.

Noah Smith’s point, and it one worth considering, is that this recession isn’t like the others. We say that every time there is a recession, by the way, but Smith’s point this time around is that the spending shouldn’t really be thought of as a stimulus, it should be thought of as social insurance:

If you get a check during a pandemic, you’re not going to go out and spend it at restaurants and bars, because…well, there’s a pandemic. Instead, you’re more likely to stick it in the bank, pay down debt, or pay the back rent that you owe.
In a normal recession, this is exactly what we don’t want people to do. We want them to take their government checks and go out and spend them, to restart the virtuous cycle of economic activity! But in a pandemic, it’s fine.
It’s fine because what we’re trying to do with COVID relief isn’t actually pump-priming — it’s retroactive social insurance. Some people, through no fault of their own, took a big hit from a risk that only a few people were paying attention to. In order to relieve those people’s suffering, we are giving them money that they can use to pay rent and buy necessities, as well as money to pay down debts so they have a bit more financial security.

https://noahpinion.substack.com/p/covid-relief-isnt-stimulus-its-social

The rest of the post is worth reading, because it identifies potential flaws in the argument he is making, and provides reasoned counter arguments. So well is this done that you begin to side with him…

…until you read Professor Cowen:

Leave aside the political question of how aggressively to pursue an agenda of a larger, more activist government (and keep in mind that I am more libertarian than many of the participants in this debate). Take a Big Government as a given. History shows that consumption still ought not be the priority.
…
It’s not as if there aren’t obvious candidates for alternative investment: green energy, broadband and public-health infrastructure for the next pandemic, to name a few. Yes, I am familiar with the argument that spending the extra trillion or so now will make it possible to spend more trillions later, including on such policies. But whatever kind of complicated political story you might tell, the basic laws of economics have not been repealed. Increasing current expenditures does, in fact, involve foregone future opportunities.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

And his concluding paragraph is an excellent teacher at work, because he goes back to the Principles of Economics:

I say you can divide the commenters here into two groups.  Those who produce complicated arguments about why opportunity cost reasoning does not apply here, and those who stress the relevance of the opportunity cost of allocating another trillion dollars or two.  I believe that once you recognize that distinction, you know what to do with it next.

https://marginalrevolution.com/marginalrevolution/2021/02/investment-investment-investment-how-to-think-about-the-biden-stimulus-proposal.html

To which a pro-stimulus (or pro social insurance) person might say, “But people first!” Does that argument hold true? If this stimulus results in runaway inflation a couple of years down the line (students of the Indian economy might recall the years 2009-2013, so we’re not talking hypotheticals here), then was the stimulus in fact worth it? How do we balance this argument against the very real need to provide a stimulus today?

I am completely unsure about what the correct answer is – and that is my point in today’s post.

How can one not be fascinated by macroeconomics?