Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
Prompting Tyler Cowen to add:
Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?
It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?
If I read him correctly, Dani Rodrik is suggesting that Smoot-Hawley made the New Deal more effective. But of course, Smoot-Hawley was part of an ongoing round of trade contraction to which it both responded and contributed. If we tried the same trick again, we'd destroy the WTO, which would make global GDP shrink, not grow.
That it is stupid, does not mean that the government will not do it. But if Obama's team wants to raise tariffs in the name of enhancing the effectiveness of their stimulus package, I doubt they're going to be dissuaded by the possibility of possibly cutting an expensive side deal with every country in the developing world in order to get them to go along. Even if this were economically correct, it's politically tin-eared.
And how long would it be before the Chinese armada sailed from a devastated Tokyo Bay to try and sink our fleet at Pearl Harbor?
Penny wise pound foolish I'd say...
Another question: "Crude futures fell $2.35 to $41.32 a barrel in New York amid lingering worries about demand."
Did anyone see that comming? I know some big hedge funds made billions betting on the mortgage collapse - but did anyone back during the summer predict $40 a barrel oil by Christmas?
But I don't think you read Rodrik correctly, or at least fully. He continues by arguing that politicians and public will be unhappy with seeing expensive fiscal stimulus being spent on increasing imports from other countries. A possible solution:
The way out of this dilemma is to get the rest of the world to engage in fiscal expansion at the same time--so that the gift is returned. The good news here is that China is playing along and hopefully the Europeans will too (if they can convince Germans to get over their weird obsession with fiscal conservatism).
Yet developing countries, who don't have recourse to fiscal expansion, would still be a problem:
So unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism. Not a pleasant choice.
Two solutions suggest themselves. One is to enlarge global liquidity by creating new SDR allocations and handing them over to developing nations to increase their spending. The other is to institute a Tobin tax on foreign currency transactions and pass the proceeds on to the developing nations.
Rodrik's overall point, then, is that the U.S. being an open economy means that either the solution must be truly global, with some recourse to redistribution of wealth towards ppoor countries, or we could backslide into protectionism.
Sorry, the second-last paragraph in my post should also be italicized, indicating that they're quoting from Rodrik's post.
I don't think Dani Rodrik is actually advocating protectionism. What worries me is his reference to Obama and his advisers. Does this guy (at the Kennedy School of Government) know something we don't?
Leave it to Democratic "economists" to rail on about how we can't tax-cut ourselves out of a recession, and then try to tariff ourselves out of a recession.
At least the tax cuts are reciprocally sound, in that taxpayers aren't going to attack you for taking less of their money. A tariff war right now could go apocalyptic.
That does sound like a rather non-great idea, but I haven't heard anyone really connected to the new Obama administration suggesting it. Get back to me when they do.
"but did anyone back during the summer predict $40 a barrel oil by Christmas?"
I made a forward contract as a bar bet a few months ago with a buddy that's geared about 4:1, priced at $80 on Dec. 20th. Right now I stand to make $130 or so. But no, I didn't think it would fall as low as it did. I was expecting $60-65.
Don't misunderestimate the nostalgia Democrats feel for the depression. In some ways, it was their golden age.
A deniable trial balloon.
Daily Pundit Aug 6, 2008 - » SWAG
Well, let's hope that this Xavier Becerra for US trade representative rumor is false. He's a real protectionist.
Just to keep the historical record straight, it was Herbert Hoover who signed Smoot-Hawley, not FDR. In the 1928 campaign, Hoover promised farmers that he would "examine" the farm income issue, which meant enacting a tariff. By the time Congress acted, the Depression was underway and Smoot-Hawley became a Christmas tree. Apart from the historical record, if Obama is really choosing Xavier Becerra as trade rep, that's really bad news.
Rodrik has another post on this issue. The take home point, showing that he is quite aware of the "vicious cycle of protectionism" Megan emphasizes:
I am writing all this partly in response to Tyler Cowen's comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory. The experience with currency devaluations during the 1930s shows that the theory is in fact quite OK.
What the theory does not consider fully, which was rather my point, is that mercantilist policies--Keynesianism in one country--has adverse effects on others. My net exports can increase only at the expense of yours. Similarly, the worse thing about Smoot-Hawley was that it led to a vicious cycle of protectionism everywhere.
So the implication is not that we throw the theory overboard, but that we foresee its global implications and apply the requisite remedy: a globally coordinated fiscal stimulus, which requires in turn that we provide the developing countries with the liquidity and fiscal resources needed to get on board.
Sorry, I should have learned by now that you must italicize each paragraph on this comment board.
Good for you, Bill. No shit. You were right.
>Did anyone see that comming? I know some big hedge funds made billions betting on the mortgage collapse - but did anyone back during the summer predict $40 a barrel oil by Christmas?
I sold my oil stocks when oil was at $120/bbl, I never thought it would get this low, and wouyld never have tried to figure out a way to make that much money over it.
My father became and stayed a Democrat because of the Republican Smoot-Hawley tariff. He was socially conservative and as the Dems degenerated into the trash they had become his holding point was that the Dems opposed the S-H tariff. It was enough to keep him a Dem to his dying day in spite of everything else.
I suppose we could tap his grave for some instant energy.
Aldous: Sorry, I should have learned by now that you must italicize each paragraph on this comment board.
Preview is your friend.
"Did anyone see that comming? I know some big hedge funds made billions betting on the mortgage collapse - but did anyone back during the summer predict $40 a barrel oil by Christmas?"
Not 40 but I predicted 60. I didn't count on the coming banking collapse. The "peak oil" end of the age of cheap oil stuff was nonsense. Any one who pays attention to the micro side of how oil supply and demand really works and the history of the commodity could tell the $140 was a bubble and that oil being a boom and bust commodity was about to bust.
1. Never overestimate the intelligence of politicians.
2. Conversely, never underestimate their ability to find merit in even the most horrible idea.
What neither seem to mention is that if the dollar has a fairly flexible exchange rate vs. our major trading partners (which it does) any expansionary fiscal package, whether it be via government spending or efforts to choke off imports via tariffs, isn't going to have nearly the desired impact on aggregate demand. Exchange rate adjustments are likely to insure that we import more or less the same amount in aggregate -- it might just be different stuff than it was before.
McArdle: Worst job numbers since 1974? Don't fret my chickadees! Let's shout down an idea no one is seriously proposing.
A reenactment of S-H would hardly be the dumbest thing they could do considering the staggeringly idiotic stimulus bill they're considering. We got into this mess by consuming more than we produced and financing it with debt. The solution is not to consume still more than we produce and yet, here we go.
Is it just me, or is the idea of cutting off imports, like, ridiculously, grotesquely stupid? In order for this to work, even assuming we had all the raw materials we needed in house, wouldn't we need about 100 million extra workers, all working at incredibly low wages, in order to make all the shoes, shirts, ipods, html pages and all the other wonderful things that other countries cheap labor make for us?
I mean, you do this, and the country would go insane - no more foreign cars, no more ipods or computers or toys. No more spare parts for, well, anything. Talk about catastrophe.
And if you do it slowly, it still doesn't solve the labor problem.
Bleah
Didn't we have a trade surplus when Hoover signed Smoot-Hawley? So we obviously had more to lose from a trade war. But that's not the case now, is it? Maybe there's something to be said for autarky. Worked for Germany in the 1930s, no?
Oh yeah, cause your northern neighbors are already excited about the possibility of an IOU from Arnold for all of the electricity California buys. Raw timber is cooked because of housing anyways, the oil sands are now uneconomical and the Auto Pact is a relic. Tariffs won't be noticed at all, NAFTA is a glorified napkin. Obama would have won Canada with over 70 percent of the vote.
jb - it would work if we all downscale our standard of living. No more having 10 MP3 players per person, 10 pairs of jeans, full-size auto instead of compact, etc... If we all banded together as a nation, we could put a huge tariffs and come out better morally as a nation. But too many of us are way too selfish and materialistic to accept it.
Bobbi:
Speaking as a Canadian Permanent Resident who finally escaped back to the U.S. in July, thank you for reminding me of how much I don't miss life there amidst the gibbering passive-agressives.
Crusader:
I have a better idea. I live in Maryland. I suggest we ban all trade flows from out-of-state in order to increase our prosperity. Some West Virginian was over here last weekend trying to sell me firewood! As if I can't cut down my own trees, or at least those in the park down the street.
No, better yet since I live in Bethesda lets keep those nasty, predatory people from Rockville, Chevy Chase and, (the horror!) D.C. from selling things to us in Bethesda. For example, some shadowy character with a vaguely Brasilian surname delivers a fur-in sounding newspaper called The Financial Times to me every morning. Am sure I can find a few people in town to round up global news just as tidily and certainly for at least the same cost, probably less.
I feel morally cleansed just contemplating it. Now for that high colonic, the conceptual merits of which are approximately as well founded as your idea.
Yeah, I know. Sarcasm; lowest form of wit. It's late Friday. Cut me slack.
Better morally how? I don't understand... Is being poor morally superior to being rich? Does it have to do with some sort of puritanical masochism?
"Did anyone see that comming? I know some big hedge funds made billions betting on the mortgage collapse - but did anyone back during the summer predict $40 a barrel oil by Christmas?"
Yes, I did. I made my prediction on January 1, 2008. I also said the dollar would rise and the Euro would crater. The secret to my success: Common sense.
Nice call Bill. We might even be seeing that "economic tsunami" you predicted, albeit a couple years late (I'm still an optimist though; I think things will shortly take off again after a natural and overdue recession).
Heh, remember "peak oil?" I wonder what they're saying over at The Oil Drum now.
I remember looking into a standard college text in economics (Samuelson, maybe?). On the one hand, it refuted protectionism, with the standard comparative advantage argument. On the other hand, it taught the theory of the Keynesian multiplier, according to which it's advantageous to keep money at home, and prevent people from buying foreign goods instead. I had already learned real economics, so I saw the contradiction. (For real economics in elegant prose, read Henry George, m/y/ Megan's little chickadees.)
It seems that someone has been reading the wrong chapter of Fallacious Economics for College Freshmen, or whatever the book is called.
"If we all banded together as a nation, we could put a huge tariffs and come out better morally as a nation. But too many of us are way too selfish and materialistic to accept it."
jmo -
You missed the moral part of Crusader's call. Even though we would suffer and become poorer, dark-skinned people in other countries would suffer even more, because they're starting out with less and thus will be more affected by the resulting losses.
Crusader is pointing out that, even though we will hurt ourselves by protectionism, others will suffer much, much more, so we can feel good about ourselves, knowing how much we've screwed others.
Bill - I like your way of explaining things. Literally just yesterday I used the same idea to explain to my middle-schooler why Smoot-Hawley was bad (his homework was to write a letter to Hoover about his policies in the Great Depression). I went so far as proposing that our household should stop all trade with other households, instead growing our own food, making our own clothes, coming up with our own video games, etc. He got the point pretty quickly.
I heard that Obama is going to torture puppies and baby ducks.
Despite his references to mercantilism, the mature Keynes of the General Theory through to Bretton Woods and beyond did not favour "Keynesianism in one country". Instead, he wanted international coordination of Keynesian policies and an international economic architecture that enabled countries to pursue domestic policies with reduced exchange risks - and all this was to be combined with a high degree of freedom of trade. It would be a good idea to read Donald Markwell's detailed historical exposition of Keynes' thinking on this.
In "some ways" the Great Depression was the Dem's Golden Age? My God, it was *totally* their Golden Age, and at the same time the Gift That Kept on Giving, for over 50 years. I grew up in rural America. A rural America that worshipped at the altar of FDR 5 times a day, voted straight ticket Yellow Dog Democrat, and cussed Hoover and the GOP with every other waking breath.
Until Bill Clinton came along, that is.
You might like to introduce yourself to urban dictionary. Give that unfortunate headline a whirl.
Re: Did anyone see that comming? I know some big hedge funds made billions betting on the mortgage collapse - but did anyone back during the summer predict $40 a barrel oil by Christmas?"
I thought it fall to and fluctuate around $80, propped up a bit by a falling dollar as the Fed kept the monetary spigots wide open. I also didn't figure on the Sepetember banking FUBAR (did anyone?) or the deflationary hurricane that resulted from it.
Smoot-Shmoot...
Our industry today is a joke, robotics non-existent etc. I can assure you, gentlemen, we can reclaim industrial leadership if we want and NULLIFY any advantages of low wages in China. We can do it today, even!