Nick Rowe on fiscal policy (and reply to Caplan)
By Scott Sumner
Keynesians often say that it’s “obvious” that more government spending will boost GDP. I love this reply by Nick Rowe:
The average reader of the New York Times probably thinks he knows about fiscal policy. “We know that Y=C+I+G+NX, so we can see that higher G increases Y. And monetary policy works because lower interest rates increase I, if we can cut interest rates. And Nick Rowe is just obfuscating, no doubt for political reasons, by ignoring that simple obvious mechanism.”
We also know that Y=C+S+T. And we can equally well “see” that higher taxes will increase Y. And higher interest rates, if it encourages more saving, will work too.
We also know that Y=gG, where G is goats sacrificed, and g is real output per goat sacrificed. That will work too.
Those are all just accounting identities; all three are equally true, and equally useless.
I see that I am getting increasingly far behind in my responses to Bryan Caplan, so let me make a few comments on immigration:
1. I’m not at all certain that open borders would make the average American worse off. I think the policy would have been desirable 100 years ago, and will probably be desirable 100 years from now. But right now I think it fairly likely that the average American would be made worse off by completely open borders, for three reasons; crowding, rapid cultural change, and (in some cases) labor market effects.
I’d rather explain this problem using Switzerland, as it will be easier to make my point. Switzerland has 8 million people living in a small mountainous country. The built up environment is very neat and tidy, and indeed often quite beautiful. It’s safe. I once accidentally left a wallet with lots of cash clearly visible on a ledge in a Geneva train station. When I came back later it was still there, with the cash. That doesn’t happen in lots of other countries. With open borders Switzerland might attract tens of millions of immigrants. It would no longer be a “land of the Swiss.” It would be much more crowded, much poorer, less well-educated, more crime-ridden, etc. Culturally it might become more like Kyrgyzstan, another small mountainous country. The Swiss greatly value the neat and orderly characteristics of their country. I find it quite plausible that they would feel worse off.
There are some counterarguments. Perhaps the Swiss would require all immigrants to first have a place to live. In other words, not allow immigrants to be homeless, living on the streets. Zoning rules could prevent shantytowns. Maybe they could make it work. A counterargument for the US is that it’s already quite diverse–we could handle the cultural change more easily. It’s much bigger. Many of the immigrants would move into places like California’s Inland Empire, where they would not be an obvious presence for affluent whites and Asians on the West Side of LA, or average Americans in cities in Iowa. In conclusion, the Swiss thought experiment makes me think that open immigration might be bad for domestic residents, but I am less certain that this applies to the US.
Of course there are also some difficult economic issues. Would it lead the US to cut back sharply on the welfare state? And if so, doesn’t that hurt the poor in America? What about the impact on the low-skilled labor market?
2. Then Bryan asks this question:
What’s noteworthy, rather, is that for once, Scott is vocally forgiving of non-utilitarians. Instead of ridiculing opponents of open borders for their cognitive illusions, Scott suggests that utilitarianism asks too much.
My question for Scott: Why is open borders the one issue where you seem to opt for moral leniency? (Perhaps this reflects a change of heart?)
First of all, I shouldn’t be “ridiculing” people for cognitive illusions. I should be criticizing them. In every single case, I have the exact same cognitive illusion; it’s just that I am also aware of alternative perspectives that I believe are more valid.
Bryan is asking why open borders is the one area where I don’t insist on the utilitarian position. This may well be a case where I suffer from cognitive illusion, as I discussed on the post he links to. I am generally tough on policymakers because I feel their gains for adopting the wrong policy are trivial compared to the social cost. Now I suppose one could argue that’s also true in the hypothetical Swiss case, the pain of a somewhat messier Switzerland is trivial compared to the gains to desperately poor migrants. But in the policy questions I look at the disproportion is an order of magnitude greater. A policymaker might hurt millions of people in exchange for a campaign contribution, or a slightly greater chance of winning an election. That’s morally unacceptable. Perhaps the aversion of average people to open borders is also morally unacceptable, but the case seems less outrageous.
And I refuse to accept deterministic political models based on self-interest that cannot account for the difference between Iraq and Denmark. I expect all politicians to behave at least as well as Danish politicians, i.e. to be at least as utilitarian.
I’d vote for open borders. Perhaps Bryan is right and I should expect more from average citizens. I’ll keep an open mind on the issue. The earlier post of mine that he links to is slightly more pro-immigration than this one, and also better.