Those poor New Classical Economists...

Fiscal stimulus works, and it works more than most economists and analysts give it credit for. Since the field of econ has slowly steered away from studying short-run effects, in favor of focusing on supposedly long-run topics, it seems have ignored the fact that fiscal stimulus works exactly like the neo-Keynesian model says it should. One can still credbly argue whether or not stimulus is worth it, but you can't argue it doesn't work. There are still a few prominent (mainly Chicago school?) new classical economists arguing that even short-run effects of tax cuts are negligible to non-existant; if reality doesn't change their minds, I don't know what will.

It seems like all those bogus and unrealistic assumptions about: perfectly "rational" people with "rational" expectations (people that take into account their entire life-cycle at all times when making decisions and are in the aggregate generally 'correct' about their expectations), costless information gathering, perfect inter-generational altruism, etc, ... are exactly that - bogus.

From Bloomberg (quotes)
Tax cut effect on income/GDP:
"The gain in income was almost five times larger than the median forecast of a 0.4 percent gain. Disposable income, or the money left over after taxes, surged 5.7 percent, the largest increase since May 1975. "

Tax cut effect on spending:
"Adjusted for inflation, spending rose 0.4 percent, the biggest gain since December [Holdiays] 2006. "

Having said that though, there is a 'kernal of truth' to ricardian equivalence and rational expectations. Tax cut effect on savings:
"Because the increase in spending was smaller than the gain in incomes, the savings rate jumped to 5 percent, the highest since March 1995, from 0.4 percent in April. " ... That's a huge jump in savings, but I would suspect that spending will continue to be higher than normal for the next few months because of the tax decrease - which will serve to depress the savings rate during that timeframe.

All in all though, it seems like all those bogus and unrealistic assumptions about: perfectly "rational" people with "rational" expectations (people that take into account their entire life-cycle at all times when making decisions and are in the aggregate generally 'correct' about their expectations), costless information gathering, perfect inter-generational altruism, etc, ... are exactly that - bogus.

Why am I all of a sudden agreeing with Mankiw....

First I was persuaded about the oil speculation topic, now I find myself agreeing with Mankiw about opening our immigration laws to allow more higher education seekers into our country.

I've spoken on this topic before, and have been advocating this for some time myself. Nothing is more important in terms of long run growth than education and the knowledge and positive network effects and externalities that can flow from that.

I would actually go farther. I understand the need to limit immigration to some degree, but in my opinion, foreigners that want to come to our country to pursue high degrees (Masters or above) should be given an automatic and speedy path to citizenship (providing the individual agrees to stay in the United States X number of years), in addition to the instant access to a green card.

Oil Speculation - debunked?

Thanks to Mankiw for this.
Both Paul Krugman and Alan Reynolds (and Mike Moffatt) don't believe oil specualation is significantly driving prices.

Last week I made the argument that it could be, in so far as more and more speculators enter the market (as perhaps measured by increasing volume of "buys" in the oil futures markets).

I also noted that perhaps speculation itself was feeding global demand (inventories etc).

But I think the empirical data presented particularly by Alan Reynolds suggests otherwise.

So I concede the point. It's the fundamentals stupid.

Temporary Irrationality (re: craziness) Hits Home

Sticker shock at the pump, as I mentioned, I believe has caused a kind of temporary mass hysteria - with large corporations changing production plans, and people making rash decisions, like this one here via my hometown newspaper.

I'm confident the craziness will abate, but until then, it is kind of comical.

The mental image of using golf carts to save a few bucks on gas to drive on busy streets (in some cases) going 20 MPH and causing huge traffic jams and congestion is funny and really makes no sense to me whatsoever.

I drive a little Miata - not altogether unsafe car, but not the safest car in the world either due to its size. Imagine getting hit by a Ford F150 when you are in a golf cart.

The fact that it is even a debate is crazy.

A Sad Day for this World

I teach about Zimbabwe in my Intro To Macroeconomics class. We use it as a case study as to how corruption, out of control government spending, money printing and dictatorship can destroy the economy of a country.

It appears the continued collapse of the once relatively strong Southern African nation will only continue now thanks to Dictator (he's technically not one, but given how he operates his government he is one de facto) Robert Mugabe.

The fact that the U.S. and Britain and many of Zimbabwe's African neighbors have only paid lip service to the plight of the Zimbabwe people is nothing short of disgusting to me. The fact that major Western powers continue to waste lives, money and general resources in Iraq while failing to assist one iota the suffering Zimbabwe people who currently live with inflation in the hundreds of thousands and 80+% unemployment is proof positive that our notion of "priority" is backwards to say the least.

What is McCain (and Sen. Lindsey Graham) Thinking Pt. II

I know exactly the answer. Ok, I don't really, but I have an idea. The answer could be they aren't. They, like many, are making short-run irrational responses to the gas issue. Today on "Meet the Press," when asked why he (LG) himself has flip-flopped on the issue (he used to be against drilling off his State's shores, now he's for it). His response was that now he's for it because "gas is $4 a gallon." That just doesn't make sense to me. If he was against drilling a year ago when gas was $3.20 or whatever it was, does anyone honestly believe that now he's for it just because gas is a dollar or so give or take higher today? I seriously hope not ... Especially since drilling would not really increase supply for another 10 years out, and who knows what gas prices are going to be then. I think he, like perhaps some people and maybe some companies (GM? Ford?) are being a bit short-sighted and irrationally risk averse (more risk averse than they otherwise would/should be in the current economic climate) due to the negative psychological 'shock' that oil price spike, the recession, the wars, etc cause.

Obviously I have no hard evidence, but it seems to me the way things are going now, we could be creating something akin to the opposite of a bubble. With a bubble, irrational exuberance creates a boom, and then it bursts. What I think we are seeing now, is potential stagflation combined with all the other "bad" stuff going on globally causing an irrational malaise (beyond what you'd expect in a typical downturn) - a black hole that will only serve to further our economic downturn. Hopefully, and this is my belief - just like bubbles can burst, the malaise can and will be naturally "shocked" back into a sense of drive and relative risk seeking once people realize they are putting too much emphasis on gas prices etc.

Oil Speculation

Mike Moffatt doesn't necessarily think oil speculation is a substantial cause of price hikes (or rather that a ban on speculation would necessarily reduce prices).

My response:

Mike,
That logic makes sense to me, but couldn’t it also be that global demand issues (beyond futures markets) are confounding things a bit?

UPDATE: In fact, futures speculation, in so far as it increases the expectation of future price spikes of oil in the eyes of consumers might actually be a root cause of the increase in global demand now. If people expect prices to rise a lot in the future, and they use futures markets that they hear in the news to guage this, then we would expect demand for oil now to rise.

Also, could it further be that once you add ‘time’ into the mix, that prices temporarily rise at time t as speculation occurs, then as people sell back their futures as you suggest we would expect prices to fall, but by that time the seeds of a bubble have set in causing MORE speculators to enter the market at time t+1 meaning that prices actually appear to rise continually until such time that the bubble bursts. I think that is a pretty likely scenario.

For another more detailed and thoughtful explanation of how oil speculation may be feeding a longer-termed bubble, see econbrowsers thoughtful analysis.