This is a follow-up article to the one last week that concerned Jim Manzi’s debate with Karl Smith. In this new article, I walk through Paul Krugman’s citation of Mark Zandi’s forecasts. Krugman thought Zandi’s projections of the impact of the Obama stimulus–coupled with the ex-post record of actual GDP performance–was a great confirmation of Keynesian models. Yet I argue that Krugman is conveniently looking at rates, and not levels.
This leads me to revise the popular swimming pool analogy:
When the stimulus was a hot topic, conservative and libertarian opponents often invoked a swimming-pool analogy. They would point out that every dollar the government spent, it had to first get from the private sector through taxing or borrowing (we’ll ignore inflation). With this insight, the critics said that trying to boost the economy with stimulus spending was like trying to raise the water level in a swimming pool by taking buckets of water from the deep end and dumping them in the shallow end.
Now it’s true, things are a bit more complicated than this. An extra dollar spent by the government doesn’t necessarily translate into a dollar less spent by the private sector, because of issues of expectations and how a private household or firm adjusts its present spending in light of permanently higher future taxes. (That’s why Brad DeLong expressed disagreement — in his usual way — with what he viewed as an improper oversimplification by Steve Horwitz.)
Even so, let’s take the swimming-pool analogy as a good proxy for the free-market view, but with a tweak: because the people carrying the buckets will inevitably let some of the water spill out onto the patio, in practice the plan of redistributing water from the deep to the shallow end will actually lower the level of the pool.
In this context, what would be the analog of Paul Krugman’s defense of Keynesian stimulus policies, when he relied on the two charts above? It would look something like this: Krugman would look at the level of the pool right before someone dumped in a bucket. He would exclaim, “Aha! When someone empties a bucket into the pool, the level goes up, just as I predicted. And what’s more, when they empty a big bucket, the water level rises more than when they empty a little bucket.”
The critics of course come back with this retort: “Hold on a second, Dr. Krugman. After implementing your bucket plan all afternoon, the water level is lower than when we started — just like we predicted!”
To this, Krugman could only reply, “Nonsense! You Neanderthals need to study your fluid dynamics; I can write some differential equations if you want. Obviously what is happening is that there is a leak somewhere in the pool. If it hadn’t been for my bucket plan, the water would be three feet lower right now than it is. If only we had had the willpower to go find bigger buckets this morning, like I suggested …”