Knowing and Making

Menzie Chinn attempts a valiant defence of fiscal stimulus against innumerate accusations from Richard Posner and others. Posner, to be fair, has corrected his arithmetic now and restated a few of his points in a more nuanced way. However Chinn is now having to fight a battle against his own anonymous commenters, who say things like: So explain to me still, how an 89B (regardless of interest expense) is a good investment if we only get a 39B return. It seems even if we got a multiplier of 2, we'd still only be at 80B and that is still a negative return. It seems like we're just delaying the pain. This comment misunderstands the nature of stimulus and imposes a meaningless standard on the "return" on government spending. Here is what has actually happened: The government borrows $89 billion. Savers have handed over an asset ($89 billion in cash) in return for another asset ($89 billion of government bonds). The government gains an asset ($89 billion cash) and create...

Lots of behavioural finance conversations going on on the blogs today and yesterday. Chris Dillow of Stumbling and Mumbing replies to my proposal for governments to take into account cognitive bias while regulating. Simon Johnson of Baseline Scenario responds to a debate between Richard Thaler and Richard Posner about financial regulation. Alex Tabarrok from Marginal Revolution highlights the difficulty of fighting asset bubbles , even if you have overcome the challenge of identifying them . Kenneth Arrow (via Conor Clarke of The Atlantic) argues that behavioural economics doesn't predict anything . Update : A friend points out this letter in the FT from John Maule calling for behavioural approaches to be used more in regulation and investment decisions. I'd love to have time to engage in depth with all of these debates, but let me start with a couple of key points. Commenters on both Chris's and Simon's posts use a familiar argument to dissent from the idea of beh...

More on bailouts: Paul Greenberg in the New York Times says we should bail out writers. Of course, he doesn't analyse the economics properly - but what should we expect - he's a writer. No doubt it would be useful to reduce the oversupply in the writing market; but should we also then be paying bloggers not to post? Is this how farm subsidies got started? And Richard Posner follows up an earlier article about the US automotive bailout arguing that the three big US car companies are fundamentally insolvent but it is better to support them another couple of years and then  let them go bust. I sympathised initially with this view but the comments on that posting - mostly taking the opposing view - are actually quite persuasive. If the companies are going to go bust anyway, maybe now is the time to get the bad news out of the way; rather than wait till a fragile confidence is taking hold and then shatter it again. Posner's argument is (I think rightly) psychological; but so i...