I mentioned in my last blog entry three recent articles in the Economist magazine that criticize macroeconomists and finance theorists for their inadequate performance in regard to the current financial and economic crisis. The articles rely heavily on criticisms from within economics itself, notably from Joseph Stiglitz, Paul Krugman, and Bradford DeLong.
But here is what is notable about those criticisms: the economist critics do not themselves have a firm grasp on the crisis. You can tell this from their views on the stimulus. The "stimulus" is the $787 billion dollar program of deficit spending that Congress at the urging of the Obama Administration enacted in February. The stimulus is criticized by some conservative economists, such as Robert Barro, Eugene Fama, and John Cochrane, as incapable of increasing employment. Their argument is that because government expenditures must be paid for one way or another, a dollar of deficit spending subtracts a dollar from private investment, and so there is no net increase in output. The argument is unconvincing. If private demand falls, investment geared to production of goods and services for private consumption will fall. People's savings (other than cash savings) will be invested, but in assets such as Treasury securities and money-market accounts that do not generate productive activity, or much such activity. Even investments in equities and commercial bonds have only an indirect, and often long-delayed, effect on production. In contrast, if government hires private firms (road contractors, for example) to produce goods and services that they would not otherwise produce because private demand is insufficient, there is an immediate effect on output and therefore on employment--immediate, at least, when the private firms begin to hire and produce.