Keynesian Over-Exuberance

Arnold Kling fears the Obama administration may take deficit spending too far:

at which level of additional government spending would the path of U.S. real GDP be the highest?

(a) $100 billion in spending above the baseline
(b) $1 trillion in spending above the baseline
(c) $100 trillion in spending above the baseline

If you use a constant multiplier of 1.57, the right answer is (c). Yet we know that this is not the right answer. At $100 trillion in additional government spending, the United States would be operating like Zimbabwe, with similar results.

So to talk about “the” multiplier, as if it were linear, has to be wrong at some level. Is the multiplier linear over the range between $100 billion of additional spending and $1 trillion of additional spending? I think that is unlikely. Between, say $400 billion and $800 billion, is the incremental multiplier still in a range between 1 and 2? I worry that it is much lower. I worry that it turns negative somewhere in that range.

The Obama Administration is being populated with outstanding academics, like Larry Summers and Cass Sunstein. It is not surprising that the academic world is expressing a lot of confidence in giving them huge amounts of power. These are people who are more than three standard deviations higher in IQ than average, but I still suspect that this leaves them more than three standard deviations below what would be needed to justify giving these technocrats $10,000 from every household in America to spend at the their discretion (I’m adding the remainder of the TARP to the stimulus, since it is getting harder and harder to distinguish the two concepts from one another). The folks working on the stimulus package are not people who have spent time in middle management in a large organization, where you see how life differs from a calculus problem or a term paper.

Right now, the typical academic cannot imagine Obama’s team doing anything stupid. The upper class in Britain felt the same way about its generals in 1916.

The District’s Gilded Age

Apparently the greater DC metropolitan area is the only part of the country that has grown wealthier since the 2000 census. In fact, our country’s 3 richest counties are in the DC suburbs. An incisive column by Radley Balko from, gulp, Fox News Channel.com spells out the dangers that come with wealth exclusively accumulating around the seat of our Federal Government:

The problem is that, save for the tech corridor in D.C.’s Virginia exurbs, the Washington Metro area doesn’t actually produce anything. Washington doesn’t create wealth, it just moves it around — redistributes it. As government grows and takes control of more and more of the private economy — either through spending, regulation, or taxes — more and more wealth that’s created elsewhere comes to Washington to be devoured.

Nationalize Fannie and Freddie?

Interesting new idea courtesy of J. Bradford Delong:

My favorite idea right now is that of nationalizing Fannie Mae and Freddie Mac completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up–and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.