Good “Designers”, please come forward. The policymakers need you!

Mark Thoma “attacks” John Cochrane using John Taylor as “bait”:

John Cochrane cites the work of John Taylor in yet another rant about how complete crowing out, or at least near complete crowding out, renders government spending or tax policy multipliers small or non-existent.

And concludes:

Thus, the finding here is really about the institutional design of the stimulus. He is arguing that transfers to state and local governments can work, and work well. Just look at China. If the stimulus package is designed so that state and local governments cannot use the money to finance existing projects, i.e. substitute federal money for state money rather than increasing overall spending, then it will work just as well as it worked in China.

Thus, the lesson here isn’t that stimulus won’t work, not at all. The lesson is that the stimulus package must be better designed, e.g. so that state and local governments cannot substitute for other types of spending (though I should note, again, that I don’t think the empirical evidence is anywhere near as clear as Taylor implies). I think this is an important lesson. One of the biggest problems in our response to the Great Recession, something Paul Krugman has been highlighting recently, was the decline in state and local spending and employment. Getting the design of the stimulus right could have prevented that, and that rather than the more simplistic “stimulus doesn’t work” is the lesson that we need to take away from this experience.

A “good design” is always harder to get the more “intricate” the object to be “designed”. And “fiscal stimulus” is an “intricate object”. If you concentrate instead on monetary policy, the job is much “simpler”. All you have to do is find the “right” target, and “shoot for it”. And it won´t be a “new experience”. After all, it was mostly successful when applied, resulting in more than twenty years of a “Great Moderation”.

One thought on “Good “Designers”, please come forward. The policymakers need you!

  1. Pingback: Good "Designers", please come forward. Policymakers have urgent need for your services. « Economics Info

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