Alan Blinder gets an F in Macro 101

Alan Blinder is a very competent economist with lots of publications, textbooks, and real-world policy experience. He is a chaired Professor at Princeton and is a former vice chairman of the Federal Reserve. The Wall Street Journal  published an article by him yesterday November 1, 2012, page A17.

Alan Blinder joins with Larry Summer, Paul Krugman, Martin Wolf and other liberal economists who think that we don’t have enough stimulus in the US economy. He can have his opinion and he certainly influences a lot of important people – but when he is wrong on something he is wrong and there is no way else to call it. These guys have enough publications to sink a Japanese freighter on its way to Dokdo Island and about as much joint common sense as Sheldon (the Big Bang Theory TV Show).

In his article Blinder says, “…fiscal policy should be giving us a combination of sizeable stimulus right now and thorough going deficit reduction starting in a year or two….Instead it is doing neither…”

Translation: Alan Blinder said that fiscal policy is not now giving us a sizeable stimulus. Say that again – Alan Blinder says that fiscal policy is not now giving us a sizeable stimulus. Say it again….

Okay Professor Blinder – take out any textbook written for any level and you will find the following:

·         Government budget balance – neutral impact of fiscal policy

·         Government budget surplus – contractionary impact of fiscal policy

·         Government budget deficit – expansionary impact of fiscal policy

·         The average government deficit – through thick and thin – for the USA has been about 3%

·         Let’s call a budget deficit of 3% of GDP normal

For the USA the budget deficit in 2012 (Fiscal year 2012 ended on September 30, 2012) was 8.5% of GDP. That is almost three times its normal impact on the economy. Professor Blinder – that is a ton of stimulus. To say it is not a huge stimulus is to turn macroeconomics on its head and then twirl it around 10 times.  Would four times be better? Five times?

You might retort that the deficit was over 10% of GDP in 2009 and taking it from 10% to 8.5% in three years is contractionary. But please do not retort that. First, any size deficit is a stimulus. Second, at 3 times normal it is a huge stimulus. Third, recall that the economy has now been recovering from a recession that ended three years ago. When a country recovers its deficit ALWAYS improves. That is not because of a lack of stimulus -- it is a simple fact that when the economy recovers it generates more tax revenue and less spending automatically. If the deficit was declining because of legislated tax increases or spending cuts between 2011 and 2012 please show me the legislation. As far as I know Congress has not passed anything but continuing resolutions.

Professor Blinder can want more stimulus but he cannot say that we don’t have a huge stimulus now. It is beyond belief that given his second goal to reduce deficits in the future he can say with a straight face that he will actively promote smaller future deficits? When will the US economy be strong enough in Blinder’s mind to start working on smaller future deficits?  A year or two? Really? When hell freezes over?

Sorry to say this Professor Blinder but you get an F in Macro 101.