Bruce Wilder on Andolfatto

Some time ago, I posed a question to those who were advocating "fiscal stimulus" in the form of increasing government spending as a weapon to combat a recession that typically follows a financial market panic. The question was: What evidence can you bring to bear that would persuade an agnostic that "fiscal stimulus" has "worked" in the past? ("Worked" in the sense of leading to a desirable increase in aggregate output and employment).

I have yet to receive what I consider to be a satisfactory answer to this question. I have, however, received a considerable number of responses that appear to be based on three basic principles hardwired into peoples' heads: [1] Econ 101 teaches us that increase in G leads to increase in Y; [2] Private markets are screwed up (and government agencies are not); and [3] Evidence that an increase in G leads to an increase in Y based on some wartime episodes.

In a nutshell, these people believe that: [1] leaves them with a firm theoretical foundation; that [2] legitimizes their belief in the principle of government intervention; and that [3] supports their view on the practical and desirable consequences of such intervention. In the language of climate alarmists, it is "obvious" that the "science is settled."

And what sort of response is in store for those who dare question [1]-[3]? Here is an example of Bruce Wilder comments on my earlier post. (Note: I have no idea who Bruce Wilder is, but I am pretty sure he cannot be an economist).

Libertarianism -- in all its mindless glory -- is often less a political philosophy than it is a personal conceit, a pose of intellectual superiority coupled with a demand that others assault one's own tower of skepticism, and, should one choose not to surrender, those assaulting will be found wanting. Much of what follows, in Andolfatto's posting, suggests that he can be as dense as a box of rocks. I just find him exasperating.

Now, I confess that I can be a rather slow learner. And maybe I am as dense as a box of rocks. But I am also being sincere in my question (and I have been known to change my mind in the past). Mr. Wilder's response to this question is basically this: How Dare You Ask Such a Question, You Mindless and Conceited Fool? I am reminded of the response by Brian's mother (Monty Python's Life of Brian) when she was asked whether she was a virgin or not.

Luckily, Andy Harless, a commenter plays the part of the voice of reason: "It seems to me that the burden of proof is on those who say that fiscal spending doesn't work. As you note, the visible evidence suggests that it works: the roads and bridges get built; there are many people looking for work, some of whom can presumably be employed to build those roads and bridges. If you want to argue about the general equilibrium effects, present a model in which those do erase the advantage of the stimulus, and someone else will present a model in which they don't. Then we can test the two empirically. Since, as your responders noted, there is econometric evidence which suggests that the government spending multiplier is greater than one, I'm guessing that the empirical analysis will tend to reject your model."

Ah, sweet reason. Somehow, I doubt that Harless will be judged to have penetrated the libertarian fortress of Andolfatto's conceit, at least by Andolfatto.

Actually, I thought that Andy Harless provided a thoughtful reply. I did, however, find his response wanting. According to Mr. Wilder, this should be construed as being attributable to the libertarian fortress of my conceit. This guy sounds like your common schoolyard bully (I suspect that he is more like the little Wizard of Oz).

My response to Andy Harless' reply is as follows:

[1] Yes, I did admit that there is ample evidence which suggests that fiscal stimulus "works" at the microeconomic or sectoral level. I even suggested that such a policy may desirable from the perspective of providing a form of social insurance to those who work in particularly hard hit sectors. But this is a far cry from saying that such a policy will work at the aggregate level. When the government makes an appropriation of funds from the private sector, this money is no longer available for private use. There has to be some crowding out. How much crowding out is an empirical question. So what is the evidence that a large fiscal stimulus will "work" in an economic crisis?

[2] Yes, there have been some econometric studies which purport to show that the multiplier on government spending is greater than one. But there are also econometric studies that suggest something closer to zero. In any case, no one is likely to be persuaded one way or the other by the results reported from running regressions on simple linear and reduced-form representations of historical data. People are much more likely to be persuaded by actual and dramatic historical episodes where such a policy can plausibly be interpreted as "working." Can you give me a few historical examples where this has been the case?

[3] What we do know from history is this. During the panics that afflicted the U.S. during the National Banking Era (1863-1913), recessions were typically short and severe; and the economy recovered without fiscal stimulus. This was also true during the Swedish financial crisis in the early 1990s. The only two dramatic examples I can think of where a recession prolonged into a depression involved massive fiscal stimulus; like the U.S. during the Great Depression, and Japan during its "Lost Decade." Is this the type of evidence that people have in mind in favor of fiscal stimulus?

Mr. Wilder: Please forgive me for remaining skeptical. I wish that what seems "obvious" to you might be made to seem obvious to me too. I ask that you persuade me, not by challenging my intellect or calling me names, but providing me with some evidence in support of your religion.