Thomas Kuhn is most famous for two concepts: revolutions and paradigms. Looking at the history of science, Kuhn argued that it does not show a steady accumulation of knowledge, but shows long periods of relative conceptual stasis (what he called “normal science”) punctuated by “revolutions” where the conceptual foundations of a particular scientific field are overturned and replaced. During periods of normal science, scientists generally see the world and interpret observations in the same way, but, according to Kuhn, during revolutionary periods competing scientific camps see the world differently. In some sense, they inhabit different worlds.
Macroeconomics has gone through multiple “revolutions” in the twentieth century, most notably as economists largely came to consensus in the 1920s and 30s over John Maynard Keynes’s view of the economy after the Great Depression, then largely switched to Friedman’s monetarist view in the 1960s.1 Currently macroeconomists appear to be divided between the two camps: neither Keynesian nor monetarist macroeconomics is clearly dominant. Given Kuhn’s account of paradigms, this suggests that Keynesians and monetarists will see the world in different ways. This seems particularly plausible in the extremely complex domain of economics. However, I think the extent of this divide is easily overstated, for macroeconomics in particular and science in general. This post looks at an example where the disagreement between Keynesians and monetarists seems to be more rhetorical than conceptual, more about emphasis than perception.
Matthew Yglesias is a correspondent for Slate and has previously worked for such liberal bastions as ThinkProgress and The Atlantic. He recently posted about two talks he attended at the American Economics Associate annual meeting that both found evidence of “big fiscal policy multipliers“. Fiscal multiplies measure the change in GDP that will result from each dollar increase or decrease in government spending or taxation. For instance, if there is a fiscal multiplier of 2, then for each $1 of government spending the GDP will increase by $2. The higher fiscal multipliers are, the more effective policies such as fiscal stimulus will be in boosting the economy, and the more damaging cuts will be. Therefore when Yglesias posts about “big” fiscal policy multipliers, he is making an argument for government intervention in the economy through fiscal stimulus.
Yglesias cited two papers in his post.2 The first, by Daniel Shoag, found a fiscal multiplier of 1.43, while the second, by Blanchard and Leigh, suggested a fiscal multiplier between 0.9 and 1.7. Do these authors consider these numbers to be “big”? Do these papers support stimulus spending? On first look it seems so. A report authored by Blanchard and based on the research in the above paper argues:
If the multipliers underlying the growth forecasts were about 0.5, as this informal evidence suggests, our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession. This finding is consistent with research suggesting that in today’s environment of substantial economic slack, monetary policy constrained by the zero lower bound, and synchronized fiscal adjustment across numerous economies, multipliers may be well above 1.3
And Shoag’s paper concludes:
This study, like much of the literature cited above, finds that local, windfall-financed government spending has large employment and income effects…. While these results should be interpreted cautiously, the mounting evidence from a number of different studies on local, windfall multipliers suggests a growing consensus on this issue, both generally and post-2008. 4
Shoag suggests that his multiplier of 1.43 indicates “large employment and income effects” while Blanchard suggests that his range of 0.9 – 1.7 is “well above 1”.
But now look at what Garret Jones, an economist at the conservative George Mason University and blogger for the Library of Economics and Liberty has to say on this:
My view: 1.5 and 1.4 are not big multipliers. If a dollar of government spending or tax cuts genuinely boosted the short run economy by two or three dollars, I’d call that big: At that point, even if the government spending was purely wasteful, you’d be substantially growing the private sector in a big, obvious way. A prominent freshman economics textbook by Case/Fair/Oster says that “in reality, the multiplier is about 2,” but reality has been disagreeing with that assessment lately.
A multiplier of 1.5 or 1.4 is unimpressive as a grand argument for stimulus.5
Jones isn’t disputing the findings of either of these papers. Rather, he is disputing what they suggest about economic policy and how they effect economists’ beliefs about fiscal multipliers. He is arguing about what counts as a “big” multiplier. While the previous papers and Yglesias’s post suggested that these results were surprisingly large, Jones suggests they are surprisingly small. It isn’t that they are living in different worlds, or interpreting observations differently. Jones isn’t seeing ducks while Yglesias is seeing rabbits. Instead, they are using these results to different rhetorical purposes and juxtaposing them with different previous findings. It isn’t so much psychology as strategy.
- See: Harry G. Johnson, “The Keynesian Revolution and the Monetarist Counter-Revolution”, The American Economic Review, Vol. 61, No. 2 (May 1971) ↩
- Daniel Shoag, “Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Depression“; Olivier Blanchard and Daneil Leigh “Growth Forecast Errors and Fiscal Multipliers” International Monetary Fund. ↩
- International Monetary Fund “World Economic Outlook October 2012: Coping with High Debt and Sluggish Growth“, p. 43 ↩
- Shoag, p. 5 ↩
- Garrett Jones “When is a Spending Multiplier ‘Big’?” ↩