Chicago Economists on the Stimulus Package

A panel of Chicago economists convened to discuss their views on the stimulus package recently, and video of the event is now available online. All the speakers had something interesting to say (including Nobel Laureate Robert Lucas being surprisingly sympathetic to government intervention).

Of particular interest, in my opinion, is Kevin Murphy‘s discussion, which comes in the middle of the video. (If you don’t have the patience for watching video, you can just look at Murphy’s PowerPoints.) It is vintage Kevin Murphy. He says that he can’t remember much from his macroeconomics courses, so he starts over from scratch and creates a perfect framework for thinking about how one should evaluate the case for stimulus.

What he comes up with seems totally obvious once he presents it, and yet I have never seen anyone discuss the issue in a manner even remotely similar to this. That is the mark of true genius.

I have only one thing to add to the panel’s discussion. Throughout the video, you will see that the speakers operate under the assumption that the economists who are advocating stimulus are doing so based on an economic analysis. For instance, Murphy says things like “Christina Romer [the head of the Council of Economic Advisers] must believe that the deadweight loss of taxation is very small.”

A very plausible alternative hypothesis is that the justifications being put forth for the stimulus package — even if those doing the justifying are economists — are based on politics, not economics.

U of Chi alumna

I'm going to tend to go along with the opinion that U of C economists place theory higher than politics on the value chain. And if the usual monetarist rah-rah of the Chicago school is supporting fiscal intervention, I'm going to take that into account when forming my own opinions.


Politics will trump Economics for the stimulus, unfortunately.


I see no skimming or kickbacks involved in equation...

a student of economics

Steve has one thing to add: "A very plausible alternative hypothesis is that the justifications being put forth for the stimulus package... are based on politics, not economics."

Interesting choice of words. Does that mean he doesn't think it plausible that the justifications for *attacking* the stimulus package are based on politics, not economics?

pat toche

Do you know how many Harberger triangles it takes to fill an Okun gap?


Did any of these geniuses figure out that massive borrowing to finance top-heavy tax-cuts was a bad idea?

How about appointing foxes to guard hen houses? Or were they cheerleaders for "financial innovation"?

Did any of them realize that loose monetary policy with a near-zero savings rate and a housing bubble might spell trouble a couple years down the road?

A lot of skeptics are probably right about the stimulus bill. If only their newly rediscovered skepticism had shown up 8 years ago. It would have done a lot more good then. There is a moral hazard to taking economists seriously if they didn't speak up while the damage was being done.


When they discuss government spending displacing private spending, why don't they consider the risk/return characteristics of the spending?

For instance, if private investors are investing their money in low-risk/low-return assets and the government is willing and able to invest in high-risk/high-return assets then the substitution is good (and vice-versa).

Kevin Murphy says that if his equation indicates doing the government spending now why wouldn't it always indicate that - i.e. he's claiming that the parameters in his equation don't change over time, but these particular characteristics of private investment (risk/return) are undeniably changed this year versus last year.


A few reactions to the PowerPoint slides: I like the simple model, but I disagree with some of the assumptions - some economic and some not.

The assumption that the government will be less efficient because it is trying to spend the money quickly may actually be backwards. If the money goes out as block grants, it may be less likely to have all of the interference that oversight often causes. What I am seeing is that local governments are planning to use the stimulus money to make up for shortfalls in existing budgets, not to do anything new. That could be less efficient, but, considering how lean local governments are at this point, I expect that the money will go straight to paying teachers and police, etc. As for the deadweight loss from taxation as 0.8, I am just curious (as a non-professional economist) where that analysis is published?

On a political side, we need a mental shift in this country that is more important than an economic one. People need to start thinking that things will be okay, otherwise we are stuck in a bad cycle and many individual decisions are being made irrationally. That is the real key to the stimulus.



Murphy's reductionist approach is appealing but wrong-headed. Or at least I take issue with his structure (he clearly isn't a macroeconomist). Two things up front:

a. His equation presumes that $1 of Gov't spending has a max. value of $1 to the economy. Surely he's heard of the multiplier effect. Perhaps he doesn't agree with it... maybe because he apparently puts stock in..

b. Ricardian equivalence? Somebody please tell me one study (empirical) which provides evidence of Ricardian equivalence in taxpayer behavior.

Lawrence Boyd

The problem with Murphy's presentation is his pretense that people "have opinions" about the value of these parameters rather than empirically validated estimates. Thus Murphy can have "an opinion" or say "it is likely low" and that the disagreement is about "opinions" of the value of these parameters. In fact Romer doesn't have an "opinion" but an "estimate," meaning that she has gone to the real world, applied statistics, and derived values for these parameters or others similar to them. So has the Congressional Budget office, and even Mark Zandy. The pretense that these are merely opinions, rather than empirically valid results is shameful at a school whose "star" was Milton Friedman a fan of positivist economics. Perhaps the Econ department there should simply transfer into the Religion depaertment where they won't have all this hard work to do.


The government has postponed the date for changing from analog to digital tv so that 6,000,000(?) users can have more time to obtain coupons for a free converter but is pushing the stimulus package as early as feb 16, without heavy debate, where as many as the whole population of this country can suffer terrible consequences should not all alternatives be weighted.

Jar Jar Binks

Anyone know where Lucas's slides could be found?

Eric M. Jones

Having had a modest meal of only white foods--milk, cauliflower, mashed potato, with salt and white pepper, and whitefish with the skin removed....and having bathed and dressed only in white, and now sitting in my white room....I seek not to disturb my pure objectivity by actually reading the opinions of these economics reprobates...

But on the other hand--why does anything they have to say have even the merest glint of credibility? Haven't they shown themselves to be (with all due respect) complete imbeciles?


this is what I want to, need to know--what are the criteria (the real standards) on the basis of which this package is being developed- I have heard absolutely nothing (only vagaries) about this- the focus has been on the bits of fluff that should have been excluded-

this makes me skeptical- real skeptical. How does one buy anything when you don't know what you are buying into-

What do I mean? AS a teacher, I was forced into investing a while back in an account set aside just for teachers. The choices were limited as to what I could invest in.

My first inclination, since the market was doing well at the time was stocks. Not knowing about it, but seeing that the market seemed to be doing well- I went into it. trying a few different possibilities- I then let it go for a while- and low and behold when my next statement came- I had lost 1/4 of it. Well, that was enough for me to begin to monitor the situation---- I got a bit more agressive- when the market was doing well nationally or internationally or property values were going up, I went into the better situation. When, it started to go down, I got out. that was 2 years ago and I am still getting the same low interest rate- but guess what --I have gained back all I lost and then some- it's not alot of money- but - I learned from this- somebody's gotta mind the ship- so I wanna know how our national ship is going to be minded before I say-- go to-- this needs to be made clear not just to me- but as I hear - to us all- so rikman- I agree- we need a debate and a healthy package- no more of a strong arm- been there and heard that for 8 years.



calling it "petty" for the author to suggest economists that don't agree with him are politically motivated is neither off-topic, nor abusive.
why remove my comment?



You haven't correctly understood the model. In the model, government spending can be worth more than $1: alpha is all about measuring how much government spending is worth, and if you want to make it worth more than $1 in private spending, just make alpha negative. Regarding the multiplier, Murphy's F is the proportion of spending that comes out of currently unused resources. This can be greater than 1 as well. A multiplier of 1.5 means F = 1.5

Hope this helps.


To Jason:

Your bit on the 'need for a mental shift' is misguided. The reason the US is in as much trouble as it is, is because banks were too willing to lend and people too willing to borrow. The mentality that domniates now is a bit too conservative, but not far off from the mark. The average US citizen needs to understand that buying a house, car, tv ... with borrowed money and having no savings is crazy. (even if the banks tell them that everybody is doing it). Live within your means- not within your percieved views of the means of your neighbor. If you earn $30000, live like it!

Thomas B.

Kevin Murphy starts at 17:20.

David Heigham

Kevin Murphy's piece was a tour de froce, and illuminating. However, listen with care to Robert Lucas. He was tentative, but thoroughly original; and probably right.

Mark Brucker

Embarrassing to see this kind of work coming out of my old school. Yikes! "Gov't in general is inefficient" specification of how it's inefficient in doing what. Apparently, e.g., Medicare wastes something like 60% less money on overhead than private insurers. Not inefficient there. No evidence presented on whether it's efficient or not in this particular area...presumably saving/creating jobs or maybe increasing GDP. Efficiency in doing so probably varies tremendously. I'd bet that agrisbusiness welfare is extremely inefficient for job creation and GDP boost. Other areas are probably much more efficient. Many of the other propositions look dodgy, too. Do I have to stop telling people about my time at the U of C...? My proposition: the stimulus plan's success will be inversely proportional to the number of U of C economists who have input on its design and implementation.