The Economy is not a car, and fiscal stimulus is not a gas pedal

Great observations from Arnold Kling, promoting his new ebook, Specialization and Trade: A Re-introduction to Economics.

I don’t buy into everything Arnold writes, but I do agree that there are problems with the paradigm of macroeconomists treating the economy like a homogenous GDP factory driven by an engine that you rev up with more government spending.  Such an approach ignores specialization and patterns of trade which don’t necessarily respond significantly or rapidly to increases in government spending.  “Specialization is subtle, deep and highly dependent on context.”  There’s a lot more complexity and non-intuitive feedback loops in a modern economy compared to 1930 and it’s not clear how useful Keynesian stimulus is today.

Construction projects take too long to get started, and automated factories can ramp up production too easily (without hiring) to meet the increased demand from policies that stimulate consumer spending, weakening the link between increased spending and increased wages.  Real changes in the economy take years to unfold as new pattens of trade need to be identified and developed.  Another short term factor in the globalized world is how increased spending in one country may simply lead to higher purchases of imports (for the U.S. think consumer electronics, toys, clothes, etc.).  A big chunk of your own government stimulus spending therefore goes toward stimulating another country’s economy (e.g. China).

Arnold’s new book is a different take on macro economics, and it’s much more optimistic than this bit of Keynesianism criticism.  In fact, he argues the complexity and productivity that arise from specialization and patterns of trade are at the heart of why modern economies are so successful.

 

 

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