Wednesday, October 24, 2012

A Chicagoan Dangerously Infatuated with Say's Law.


Posted this in response to Casey Mulligan's Piece in the Times :
The Problem with the Stimulus. 

Clearly, Professor Mulligan is mixing up his multipliers. In periods of cyclical slack, when businesses are afraid to invest and governments to spend, transfer payments to very low income earners bolster aggregate spending with very little leakage to savings. Government spending has a lower impact on aggregate demand  because payments are distributed (presumably normally) through all levels of income and some beneficiaries would not increase consumption. If tax policy skews the distributions to higher income levels than the benefit of government spending is even further reduced. The impact therefore of a $1 transfer in redistributive efforts from high earners who save more( and presumably in the current market have a high preference to hoard cash (liquidity)) to low earners can have substantially more than a $1 impact if the economy is operating less than full capacity. 

The notion that transfer payments can have a negative effect on incentives in the labor market is nothing more than a restatement of Say's Law that supply creates its own demand. In times of slack the confusion here is not just weak minded but positively perfidious to society's benefit as a whole.

here's a link to the piece.The Trouble With the Stimulus

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