Sunday, March 27, 2016

Sunday night wonkish macro - Stephen Williamson's bullshit


So I had thought we'd left the childish Norquist/Rand economics behind this semester - micro was teaching us Edgeworth boxes and macro was teaching us our first microfounded macro model, out of Williamson's Macroeconomics Fourth Canadian Edition.

But now I've been let down again.

Williamson's microfounded model blathers the same old shit that government spending has a fiscal multiplier of no more than one, and probably less than one.

But you'd expect that because his "government", G, is just another consumer. It taxes other consumers, then it buys stuff.

Gee, you think that if I take $500 from your pocket, and spend it on booze and smokes, that there will be any net boost to demand?

Unfortunately, I worked in engineering for 15 years, and for at least 10 of those I was justifying Ontario Ministry of Transportation spending on high-mast lighting systems by conducting cost-benefit analyses - the idea being that if the lighting brought about a reduced cost of accidents (based on the old guidelines that MTO incorporated into the HEIR system) that was greater than the cost of installation and 30 years of maintenance, the lighting should be installed.

That's not "consumption" in a Williamson model. That's "investment".

Government spending on education is also "investment" - the government is taking an uneducated manual labourer and giving them human capital to turn them into a worker with higher marginal product of labour. The initial cost is outweighed by subsequent payoff, both to the government (higher income tax receipts) and to the wider economy (higher productivity and consumption).

Sure, different government spendings have different fiscal multipliers: government buying $100B in military-grade toilets, then dumping them down a disused uranium mine, won't produce a net benefit to the economy. Handing $100B in subsidies to corn farmers in Iowa won't either.

You won't see neocon economists whine about any of that sort of spending, though.

But when it comes to spending on infrastructure and education, and any other addressing of collective action problems and generation of positive externalities, of fucking course there is a positive multiplier.

You won't see neocon economists admit to any of that, though, either.

Wonder why?

Is it just an honest blind spot caused by Williamson's need to present, in my textbook, an admittedly childish, overly simplistic, classical-based, "My First Microfoundation" model, for us undertards to colour in in crayon? Well, on the one hand no because on his blog, unlimited by his textbook's simplistic model, he blathers the same nonsense (in between his constant begging for a completely unearned title match against Krugman).

But on the other hand, the twit also commits the kind of simplistic mathematical fallacy that shows he could never pass the comps in graduate school:

"In basic Keynesian analysis, each dollar spent by the government increases GDP by more than one dollar. If we followed this idea to its logical conclusion, we would let the government grow infinitely large, which would make everyone infinitely wealthy." (p.371)

Um... no, because there's an upside limit to money supply, an upside limit to the potential size of an economy, an upside limit to possible production and consumption amounts, upside limits to the derivatives of all the above, and apparently an upside limit to Stephen Williamson's math comprehension at around the highschool grade 12 level. GDP in his fantasy example would only grow along a logistic/sigmoid function til it reached its upside limit.

We took logistic functions in first-year humanities calc, already.

So Williamson is either being wilfully obtuse or deliberately misleading.

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