ACCUMULATING PERIPHERALS


Arnold Kling's recalculation non-dilemma by mattsteinglass
October 2, 2009, 3:40 pm
Filed under: Economics

Matthew Yglesias thinks Tyler Cowen and Arnold Kling should be discussing what’s actually in ACES, rather than some hypothetical stimulus bill that was largely devoted to new government programs; in fact ACES is mostly about federal aid to states to keep their budgets from crashing due to the pro-cyclical nature of state tax revenues.

I find Kling’s post weird for a different reason: it treats the “recalculation” involved in shifting an economy from one basis to another during a recession (presuming recessions result from misallocations of economic resources and activity) as if it were a deterministic shift to some inevitable future state of the economy. Check this out:

The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed.

After the oil shocks in 1973, the American energy sector could have made a massive shift to nuclear power generation. That’s what France did. But instead, for economic and political reasons, we didn’t. That outcome wasn’t inevitable. There were reasons why it happened the way it did, but it wasn’t an inevitable outcome. It was the product of historical actions. If things had gone differently, there would be a lot more jobs in the American nuclear power industry than there are today. Similarly, the American automobile manufacturing industry is facing terminal decline, but it’s not being replaced by Chinese companies; it’s being replaced by German and Japanese ones. Meanwhile, the American aircraft manufacturing industry is still doing very well. And none of these things are inevitable outcomes of deterministic genetic or geographical or cultural facts. They’re things that happened because of actions that were taken by powerful people and organizations, including government, subject to certain constraints and trends, and to the rules of economics.

In the future, as the economy recovers, the United States might wind up being a center of engineering and design excellence for high-energy electric motors. Or it might not. A lot depends on what kinds of policies are adopted by the US government. That includes the spending policies adopted as part of the Obama administration’s stimulus. If the stimulus puts a lot of money into the development of green technology, and then those technologies are supported by the right kinds of regulatory frameworks and other decisions about infrastructure development, then they will create jobs that would not have been there otherwise. And when the government stops spending so much on seeding green technology companies, those companies will then be viable parts of the way the new American economy has turned out. This really is not so hard to figure out and doesn’t require the invention of a new theory of macroeconomics. Arnold Kling is trying to invent a reason not to understand something very simple and obvious.

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[…] Matt Steinglass: Matthew Yglesias thinks Tyler Cowen and Arnold Kling should be discussing what’s actually in ACES, rather than some hypothetical stimulus bill that was largely devoted to new government programs; in fact ACES is mostly about federal aid to states to keep their budgets from crashing due to the pro-cyclical nature of state tax revenues. […]

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