Why Is Stimulus Even Remotely Problematic for Recalculation?

by: Ryan Avent

I have to say, I was a little surprised to read Tyler’s take on my post addressing Arnold Kling’s “recalculation” theory of business cycles. He seems to suggest that the post is high in emotional content. I was not feeling particularly emotional when I wrote it. Rather, I was perplexed by what I thought was an idea that made no sense. I still think this. Tyler says that phrases I use, like “make no sense” or “is a little nuts,” indicate I haven’t thought hard about the issue. I find that a little odd (can I say this?). I don’t know why someone would try to divine my understanding of the question from phrases like that, rather than focusing on the content of the arguments that accompany them.

I feel as though Tyler deals with the points I actually make as superficially as he says I engage with Arnold’s. He seems to try and score rhetorical points by criticizing my summary of the recalculation theory as “full of strawmen.” It’s brief, but I don’t think it’s unfair.

And I don’t believe Tyler really got the criticism I was making. Arnold previously wrote this:

From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.

My question is this: why does the economy need the million or so workers kept out of unemployment by stimulus to be unemployed in order to recalculate? Why wouldn’t we want them to transition into different jobs at a later time, and why would that later time be pushed back by stimulus? Why is stimulus remotely problematic here?

It certainly seems to me that Arnold is arguing that it’s very important for recovery that every last worker who “should” be driven out of work by the recession actually lose their job and stay unemployed until some new private demand appears to bring them back into the workforce. Tyler says that not all of the recalculation can be done at once, and so some interventions are ok, but only bail-outs and automatic stabilizers, not other kinds of stimulus. Why? If we had a more generous social safety net and the automatic stabilizers played a greater counter-cyclical role, would that still mean that automatic stabilizers were ok, or would that be too much intervention? But what if the combined effect of all of those interventions got us down to 8% unemployment, where the new natural rate during recalculation is 7%?

Tyler writes:

On aid to the states, the recalculation problem applies very directly (Matt says it doesn’t but I don’t see where in his post he gives a reason for that view). You can think that some form of state-level aid is necessary, as I do, and still see the recalculation idea as explaining why a big state-level ouch is coming in about two years’ time. When (if?) the stimulus is not renewed, a painful sectoral reallocation will have to take place and right now we are only postponing that pain. By the way, it would be nice if state governments played along by having a coherent long-run fiscal plan but right now at least half of them are not doing this, thereby worsening the forthcoming ouch. Wait until you see what happens with state universities in two years’ time. Ouch, ouch, and triple ouch.

I don’t understand this at all. The recalculation includes state and local government employment? What does providing federal government aid to states now, when budgets are tight, have to do with the ability of the states to provide certain services two years down the road, when tax revenues have recovered much of their ground? In a world where state governments are typically constitutionally unable to borrow — to maintain a steady level of service provision by running deficits, which I believe would count as an automatic stabilizer — federal government aid is simply shifting the borrowing to the federal level, which makes a great deal of sense given the terms on which the federal government can borrow.

Tyler concludes:

The bottom line is this: if you’re trying to use the recalculation idea to explain why the fiscal stimulus should be zero, that in my view will fail. If you’re using the recalculation idea to explain why the stimulus has a lower rate of return than many people think, it hasn’t much been dented by the recent criticisms. After all, if the problem were just insufficient AD, a solution would be ready at hand. But it isn’t and it’s not just because Obama isn’t “tough enough” to propose a bigger stimulus. It’s a genuinely difficult problem to solve.

I might say that there’s a disconnect between the rhetorical content of the polemic Tyler wants to level and the information content in his post. Essentially, Tyler says that to the extent Arnold is saying that stimulus isn’t doing any good (and is actually doing some harm) and it certainly seems to me that this is what Arnold is saying, Arnold is wrong. Tyler then goes on to say that his views are right and others’ wrong, but I don’t think there’s much in the way of evidence offered to support his claims. I mean, many Keynesians continue to argue that a solution is at hand, and just because a sclerotic political system is unable to do much about it doesn’t mean that they’re not right. Unless we’re arguing that political sclerosis is somehow a manifestation of the recalculating process.

But I have learned something from this exchange — Tyler discounts arguments couched in emotional, or emotional-seeming, terms. That’s a shame. Sometimes people see and write most clearly when they allow themelves to be angry. It’s then that they feel no obligation to water down their argument with unnecessary caveats or efforts to protect interpersonal relationships. Maybe Tyler never has these inclinations, but I believe that most people do.