Saturday, May 03, 2008

No Answer

It's very annoying. Justin Wolfers replied to Freakonomics readers about the "likely economic consequences" of this year's tax rebates, but the papers he cites only discuss whether people spend the money, and if so, on what.

There's a microeconomist for you. I suspect when most people ask about the economic consequences they really mean, "Tell me, really, is this actually going to cut short the recession?"

It reminds me of the only math joke I know. A math professor is working away at his desk when the contents of his wastebasket spontaneously combust. He picks up the flaming trash bin, waves at it rather uselessly, then drops it on his desk and runs for a fire extinguisher. He then proceeds to put the fire out with the fire extinguisher.

The next day, the professor is again working away at his desk when the contents of his trash bin burst into flame again. The professor reaches over, picks up the trash bin, places it on his desk, and returns to work.

[Yeah, I know, not very funny unless you are a mathematician. In case you didn't get it, the joke is that the prof has proved he can put the fire out when the trash can is on his desk, so all he needs to do is place the trash can on the desk and the rest follows. QED.]

In other words, the papers Wolfer cites address the micro question of whether consumers will spend the money on extra consumption or pay off debt, but don't answer the macro question of how extra spending might get the economy moving again, and what might be the size of the effect.

Not that I'm going to tell you. I'm a microeconomist too. ;)

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