The visible hand in economics

Tyler Cowen and others: Lessons from the New Deal

Posted on: November 25, 2008

Excellent article by Tyler Cowen in the New York Times. (ht Economists View, Marginal Revolution).

Paul Walker at Anti-Dismal has also covered this issue heavily (here, here, here, here, here, and here).

Fundamentally, for New Zealand, there appears to be no reason for any change to fiscal policy to help deal with the slowdown – something we have discussed here.

Show me the actual “market failure” – then we can figure out how the government can improve outcomes. If there is no market failure, then government action to “stabilise” the economy will simply make matters worse.

Note: This is different to government actions to try and help cushion the impact of a sharp change in fundamental economic conditions. Although a change in the economic situation may change the optimal allocation of resources, a labour market that allows people to upskill and gives them firm institutions to rely on in the bad times will help to reduce the welfare cost associated with the change. This is subtly, but importantly, different from a simple “fiscal expansion”.

5 Responses to "Tyler Cowen and others: Lessons from the New Deal"

Way, way back as an undergrad doing macro in Australia, we had a guest lecture from Austin Holmes, special adviser to the Reserve Bank of Australia. This would have been in 1979 (yes, I am getting old!).

He said that he had made himself very unpopular with then Prime Minister Malcolm Fraser by advising the Government “don’t just do something, stand there”.

Politicians are under great pressure to “do something” about the current economic situation. New Government like in the US in here are very vulnerable to this.

Brad DeLong, in his darewell address to the US Treasury in 1995 put it very well:

“Keynes saw economics as a service profession–“rather like dentists,” was the phrase he used in his essay on “Economic Possibilities for Our Grandchildren”. If there is something wrong with your teeth, you go to a dentist, and he or she fixes things. If there is something wrong with your economy, you go to an economist, and he or she…

Well, the analogy does break down…

He or she at least explains why things are unlikely to get better and why steps to try to make them better will probably make them worse. Our specialty is telling unpleasant truths to powerful people who do not want to hear them. This is not called the Dismal Science for nothing.”

Economists must spend a lot of time at present telling unpleasant truths to powerful people who do not want to hear them. Among them: don’t fix things that aren’t broken; even if things are broken, be very sure that in trying to fix them, you don’t just make them worse; and above all: incentives matter. If you reward bad behaviour (like giving lots of other people’s money to people who are clearly pretty bad at running auto makers), then expect to see more of the rewarded behaviour.

Indeed, good comment George

[…] question, given that we are in a situation where governments around the world are looking to loosen fiscal policy. Tyler Cowen succinctly lists the four (five) ways that fiscal policy influences the economic […]

[…] have discussed fiscal policy before, and will discuss it again tomorrow. Now, I agree with chunks of this logic, but I feel that there […]

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