by Mario Rizzo
From Tyler Cowen at Marginal Revolution:
Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts. That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.).
I’ve never seen a stimulus proponent deny this point about real shocks but I don’t see them emphasizing it either. It should be the starting point for any analysis of fiscal policy but so far it is being swept under the proverbial rug.
I think that Tyler Cowen is right on this issue. What follows is my congruent take on the issue, without implicating him in the details. Or implicating me in the details of his own view.
One does not have to be an adherent to the orthodox Austrian Business Cycle Theory (assuming that is what F.A. Hayek’s Prices and Production and Profits, Interest and Investment embody) to accept the view that the advocates of stimulus are operating at an excessive and misleading level of aggregation. In fact, my own views on the current mess are fairly eclectic when looked at from the point of view of Hayek’s theory. I do believe, however, that (1) some causes of the current downturn are to be found in the misdirection of resources due to a long period of exceptionally cheap credit; (2) that rectifying this misdirection is an important part of a long-run cure.
Now it is possible to hold that #1 is true but #2 is not due to the predominance of feedback effects. It is also possible to hold that the recession has nothing to do with the misdirection of resources but that certain exogenous sectoral shifts are happening simultaneously. In either case, I do not think that trying to maintain an unsustainable allocation of resources can permit a real recovery.
The current financial and economic problems appear at two levels: first is the aggregative level that is most visible – an increase in the demand to hold money, rising unemployment, difficulties in obtaining credit even when one’s credit history is fairly good, declining value of real estate assets, etc.; second, we see particular sectors suffering – the domestic automotive industry, the construction trades, retailers, etc. If stimulus were neutral with respect to the sectoral issues, that is, if it would not prevent necessary reallocations of resources, then it would be much less objectionable.
But instead stimulus will not be neutral. Consider the form that the new anti-recessionary tools have taken: infusion of capital into particular financial firms and now particular industries like autos and housing, and even forms of consumer credit are being encouraged. Given the exigencies of our political system it will almost certainly be the case that areas that are “hurting” will get the stimulus. This, unfortunately, is the perverse operative principle of resource allocation in a stimulus world.