I was just reading Delong

He quotes a post by Karl Smith who in a humble manner confesses that he does not understand how economists such as John Cochrane believe that a fiscal stimulus cannot effect aggregate demand. Brad Delong says that the problem is that Cochrane has believed this for years and it should be noted that no matter Cochrane's genius in other issues of economics he is completely out of his mind on this issue.

My problem has to do with trying to understand how someone could believe that deficit spending or could not in the right circumstance have an expansionary effect. You either have to believe that people have infinite time horizons, perfect information (which in part goes along with infinite time horizons) or that directed infusions of money into the economy taken from another area are washed out like taking a drop of water from one end of the pool and placing it on the other end.

Delong says that the misconception could occur because they are taking the savings investment identity as more than it really is which is a short hand for a much more complicated behavior. In the current conditions or at least the conditions we saw a couple of months ago you would have to have had your head under the rock to believe that the identity perfectly described the actual behavior of the economy.

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