Dramatic changes (or not) in government spending

I’m teaching Methods again this semester, this time two sections with a total of 24 students. They’ll all be blogging again, so if you’re curious, I do recommend you check out their blogs. Links are forthcoming in the sidebar.

We started class this week with a little data work and a statistics refresher using data from the Bureau of Economic Analysis. It’s probably the only macro example I use all semester in great depth, but it serves to help students link their past work to what they are going to do in this class as well as give me the opportunity to show off impart some Excel shortcuts and basic data analysis skills and tips while reviewing statistics.

Since we use the entire set of GDP data from the NIPA tables, I like to take a bit of the class to talk about a few major events in economic history and highlight the idea that an action such as increasing government spending can both increase GDP and decrease it, according to economic theory. Which effect is bigger determines the outcome we see, even when both are happening.

Most students know that federal spending went up as a result of wartime production in the early 1940s and as a result of the New Deal in the mid-1930s, but I was surprised at how students answered my question of what effects does government spending have. Several students in both classes answered “debt” before anything else, and no one came up with “crowding out” (where government spending replaces private consumption and investment or drives up interest rates such that firms don’t invest but save) without significant prompting.

Once I said it, of course, they all recognized what I had been getting at, but I think it’s so indicative of the current political and news climate that students would default to an answer that’s not particularly true as a result of having heard it over and over again. Government spending, as anyone who was alive in the 90s knows, doesn’t have to result in more debt. A balanced budget is not outside the realm of possibility, and while crowding out is not necessarily a foregone conclusion either, it should fit much more nicely into students’ understanding of theory and a review of national income accounting. I know that Prof. Weise or Prof. Hu taught them about crowding out. It’s amazing how hammering on a subject can replace an outcome of an action in one’s mind. I was surely told over and over again that government spending caused crowding out, so it’s always first. These students have clearly been told that government spending causes debt. Weird. (As a side note, the Chronicle has a great article on how students struggle to transfer skills learned in one class to others.)

I’m getting away from the initial trajectory of this post, though. In addition to forgetting about crowding out, my students wanted to tell me that government spending had accelerated over the past few years. I immediately shot down the idea, saying how spending growth had slowed dramatically since we had officially left the recession, even if there had been an initial spike.

I was a little nervous when I said it that I had misspoken, but was grateful to come back to my office to this Krugman post: “the narrative that says that spending has surged under Obama is just wrong – what we’ve actually seen is a slowdown at exactly the time when, for macroeconomic reasons, we should have been spending more.” Ah, sweet vindication and relief.

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On the state of economics

I haven’t yet written much about the Nobel Prize this week. There was little discussion of it within my department, likely due to a dearth of macroeconomists and a few days off for “reading days”. I will try to write something more in depth about it, perhaps over the weekend, but I found this piece, by John Kay, rather insightful for several reasons, two of which I’ll highlight here.

The first has to do with teaching. Students often struggle with the concept of a model. It’s something that is so profoundly simple, and even simplistic, that they struggle to see the use of it. I really like Kay’s description of the necessity of simplifying assumptions

All science uses unrealistic simplifying assumptions.  Physicists describe motion on frictionless plains, gravity in a world without air resistance.  Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once.  A simplifying model eliminates confounding factors and focuses on a particular issue of interest.  To put such models to practical use, you must be willing to bring back the excluded factors.  You will probably find that this modification will be important for some problems, and not others – air resistance makes a big difference to a falling feather but not to a falling cannonball.

At lunch today with my chair, we discussed the decline in female economics majors. Our department, unlike many economics departments, has quite a few female faculty members. I didn’t have a single female economics professor at Duke, though I did in my time abroad. In fact, the female economics faculty with whom I did interact at Duke left a not-fantastic impression. At least anecdotally, I can say that high female-to-male faculty ratios didn’t push me down my current path, or low ones didn’t discourage me, either. Rather, Kay suggests there is something about the nature of our model-making that is profoundly asocial and disconnected, and thus, perhaps, male.

The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need.  For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial.  It is probably no accident that economics is by far the most male of the social sciences.

The whole piece is incredibly well done and provides a clear, straightforward critique of economics today; it is a bit dense. It addresses much of the debate behind current arguments for and against deficit spending, which, sadly, are likely not well understood by those pushing for either side. I highly recommend reading it.