Monday, May 31, 2010

Brad DeLong Channels His Inner Shopaholic

Addressing Tyler Cowen's take on the crisis, Brad DeLong writes
So I don't see how Tyler then gets to:
But even if that fiscal policy is a good idea...
Where does the "but even" come from? I see no "but even" earlier in the market: the cost of borrowing for the government has fallen--the market value troday [sic] of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea,
Just because something's cheap doesn't mean you should buy it.

To DeLong's credit he acknowledges that the low interest rate means fiscal policy passes various cost-benefit tests. However many economists question the fundamental effectiveness of expansionary fiscal policy; indeed, this is exactly what Cowen was addressing. That then puts into question every cost-benefit test you can cite. I don't care how pretty the dress is. If it turns out to have a big hole in it, the sale doesn't matter. Not unless they pay you to take it. (And a negative interest rate is the only condition I'd like to see the government borrow at this point.)

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