The Most Important Macro Hour
By David Henderson
Ever since September, I’ve been wishing that Milton Friedman were still alive, not just because he was such a good, warm, friendly guy, but also because he would have brought a lot of clarity to the credit crisis, the bailout, and the proposed Obama fiscal policy. Well, today I watched three University of Chicago economists who, together, brought the kind of clarity Milton would have brought. Arnold has already blogged on this and mentioned the highlights but I want to add my recommendation and what I see as the high points.
I’m very impatient. I can speed read, but I can’t watch or listen faster than anyone else. Yet the hour I spent watching the U. of C. event was the best macro hour I’ve spent since September.
The three economists, as Arnold mentioned, were John Huizinga, Kevin Murphy, and Robert Lucas. You will get a lot more out of watching it if you go to this web site, download Huizinga’s and Murphy’s overheads, and print them out.
Arnold covered Huizinga’s highlights and so I have nothing to add other than that Huizinga laid it out beautifully and his overheads are worth showing to people. They show percentage job losses in various recessions to put this one in perspective. Huizinga, incidentally, was Yao Ming’s agent.
The star presentation, though, was from baseball-cap-wearing Kevin Murphy. The clarity was superb. He laid out an equation that everyone could agree to so as to see if increases in government spending could have a good effect. The disagreements, he noted, would be on the various magnitudes and on one sign. Here’s what Christie Romer must believe, here’s what I believe, here’s why Marty Feldstein is in trouble given his past work on deadweight loss from taxes, etc. Kevin made the point I made in my recent Forbes.com article about the destructiveness from cutting taxes without cutting marginal tax rates. Print out the equation and you can follow the numbers as you go along. Bottom line: if you share Kevin’s view about the magnitudes, you will conclude that this Obama fiscal policy will be horrible. And you have to have a pretty extreme view of the magnitudes of the parameters to conclude that it will be on net good.
The final presentation was a sobering one from Bob Lucas, who made the Friedman-type points about the quantity equation and why the Fed must be the lender of last resort but we should avoid all the fiscal policy stuff.
The best contribution from the audience was from John Cochrane, who was a junior economist at the Council of Economic Advisers when I was a senior economist there. Cochrane pointed out that he had gone through the last 50 years of textbooks (on his web site, he says 40) and couldn’t find any of them claiming that increases in government spending were a good way out of recessions. He pointed out that given that the problem is a lack of investment, having the government spend money that it borrows must crowd out some investment. But watch it yourself.