Saturday, November 16, 2013

"Bombshell Paper" - Another Macro Theory Farce

Sean McElwee writes in Salon recently that "if only Republicans knew some economics...."  He then goes on to reference a "bombshell paper" that justifies, academically, more government spending and higher deficits.  The paper he references is a 2012 paper by Larry Summer and Brad DeLong entitled "Fiscal Policy in a Depressed Economy."  This absurd piece of work purports to "show" that increasing deficits now reduces national debt later.

How does this paper "show" this remarkable (and nonsensical) result?  In a manner that has become more and typical of academic macroeconomic "research," Summers and DeLong simply assume the result that they want and then discuss it as if they have "proven" something.  It is the new "proof by assumption" method of doing economics that seems to have taken over academic economics. 

Summers and DeLong assume: 1) a huge multiplier of changes in government spending upon current GDP (when has that ever happened?); 2) a huge multiplier for changes in government spending on future GDP (when has that ever happened?); 3) no impact of higher debt on interest rates; 4) higher inflation to reduce the real value of debt without any increase at all in nominal rates (when has that ever happened?) 5) much higher tax revenues plus (?) lower government spending as GDP rises (when has that ever happened?).  If all this were true, guess what?, they are right.  But, all of these assumptions are precisely the issues that need to be proven, not assumed as Summers and DeLong have done.  Why not just assume that none of the above assumptions hold, then you have "shown" that Summers and DeLong are spouting nonsense.  Which they are.

McElwee cites this absurd paper in a vitriolic attack on Republicans as not knowing any economics.  If this is what McElwee thinks is economics, no wonder he thinks Obamacare is great policy.

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