Sunday, March 15, 2009

Late Night Thoughts on Macro

I have been following the DeLong v. Horowitz v. White debate over Hayek and Austrian Business Cycle Theory as a larger part of trying to understand the various business cycle theories in general. The more I try to understand Keynesians, like DeLong and Krugman, the less convinced I am of their position.

What is so special about how we define spending in GDP to the real economy? Consider the common Keynesian example of a project where unemployed people are paid to dig and then refill holes.

Suppose instead of spending on a dig and refill program, we pay them to open an envelope. Fairly simple program to administer, we'll just put a check inside the envelope, so they get the money when they do the work.

Nevertheless, I believe Keynesians would still call my envelope-opening program a "rebate" (especially if we mail the envelopes from the IRS) and their dig and refill program a "increase in spending." As such, my envelope program gets a low multiplier (.99 I think) and dig-n-fill program gets a larger multiplier (1.27 if I recall).

Yet the only real difference I can discern from these two programs is how we count these activities in GDP. In this respect, Keynesians to me are looking a lot like the executives of Enron, who relied on accounting tricks at the expense of real performance.

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