Reader Spikers opines on some economic issues we've discussed. On trade:
I agree that using trade policy for diplomatic reasons can be an effective and beneficial tool for advancing American interests overseas and promoting stability of foreign governments. Too some extent, this has been done successfully (CAFTRA for example). I should have been more clear—much of our trade policy is driven by domestic partisan politics — republicans try to protect certain industries from foreign competition while democrats tend to protect labor from foreign competition. For example, the Doha negotiations essentially died in large part because of 1) our refusal to reduce or eliminate agricultural subsidies, and 2) our demand that developing countries accept our IP laws and develop enforcement agencies to this end.
Another key reason Doha collapsed is the standoff between the US and the EU. The agricultural lobby is powerful in both places. Good points. But politicians fan the flames of bad trade policy, and we should hold them accountable (but not, of course, Obama, who is beyond reproach). On the recent Fama article I recommended:
In On the stimulus..., RD quoted a post from the Fama blog and highly recommended it. But Fama's post has been heavily criticized. Because I am strapped for time today, I don't have time to explain all of the criticism. But here are some links: HERE , HERE, and HERE. Economist's View removed Fama's blog from its links because of the egregious errors in the Fama post. From what I gather, RD is a skeptic of Keynesian economics — perhaps the Fama post simply caught his eye because it agreed with his world view. But citing to, and highly recommending, a post which is seriously flawed diminishes PP's credibility.
1. Fama's post has indeed been criticized - but not by everyone. I do regret recommending his blog - that was the first I had heard of it. He was criticized for some of his theoretical assumptions. However, the quote I included has not been criticized. "To survive, private entities must invest in projects that generate more wealth than they cost. Public investments face no such survival threat." This mismatching of incentives is what leads people like me to be skeptical of government's ability to make economically efficient business decisions. If you need an example, you can consider Fannie and Freddie, which grew hopelessly inefficient due to protection from markets - protection which was provided by people willing to accept lobbyist money (including Obama, who was happy to accept over $100,000 despite his claims of being free from special interests). Those of us who still reserve the right to think for ourselves (instead of letting Obama do it for us) will remember that Mr. Deregulation himself, Bush, pushed for legislation which would make the GSEs more accountable, but was rejected. Since government decisions are so often based on politics and made by lawyers with little economic training, I think my concern is valid.
2. I am indeed skeptical of Keynesian economics. As you doubtless are aware, Keynesianism proper - the old Keynesian consensus - has been under heavy criticism since the 1970s due to its inability to provide solid theoretical foundations or empirical validity. The New Keynesians, which include people like Mankiw, have had to discard some of the more dogmatic and unfounded elements of Keynesianism, and a much more sensible consensus has emerged (one with which I agree). The synthesis of real business cycle theory with what's left of Keynesianism, and the development of dynamic stochastic GE models, are major breakthroughs which the general public knows nothing about. Among the general, non-economically trained public, pop Keynesianism has become popular lately for the simple reason that people are tired of Republican economic policy. The timing of circumstances which propelled Messiah Obama to the White House has also given people false impressions of an economic discipline in disarray. But don't be fooled by the blog posts of the Krugman crowd - traditional Keynesianism is not in near as good of shape as pop culture would have it. Regardless of mistakes by Fama, the idea that there is some sort of broad consensus around the Obama stimulus plan is preposterous. When people like John Taylor and Greg Mankiw - people with much more political credibility than hyper-partisan columnists who no longer publish like Krugman - are concerned, it is clear that there is no definitive answer yet. Being naturally distrustful of a system which rewards pandering lawyers at the expense of people with real economic training, I am indeed skeptical of the government's ability to spend money efficiently. To even believe in pop Keynesianism you have to believe that government has the tools to implement good policies in a timely manner. With Obama's record of supporting things like the corn ethanol debacle and accepting money from Fannie and Freddie (for which he was never held accountable), I think I can be excused for my doubt in his ability to turn wine into water.
I have not yet had the heart-changing experience of converting to the Obama religion and joining the ranks of those who refuse to question his infinite wisdom. For now, I retain my Christian belief system. While still waiting for an Obama conversion story, I agree that some fiscal stimulus is needed - but it's clear that we haven't yet exhausted monetary policy options, and the Obama administration still hasn't made a convincing case that his plan will address the root causes of the problem. I am agnostic about the stimulus, hoping that Obama will provide a better explanation for why his particular plan is our best option.
The argument for full fiscal response is based on the assumption that government can make correct investment decisions efficiently. I have yet to see any evidence that government has that ability - even with His Hopeness at the helm.
