I really, really wish Karl Smith would not do this…
Karl Smith writes:
Cochrane, Krugman, Lucas, Wren-Lewis and Sumner: A Very Short Interpretation « Modeled Behavior: I think the response to Cochrane and Lucas should go like this: "When the government raises taxes to fund additional spending then in theory the effect on aggregate demand depends crucially on what the money is spent on…."
When Cochrane explicitly and Lucas implicitly thinks in terms of transferring purchasing power from one randomly chosen citizen to another there is no reason to expect that this will have any effect on either the marginal utility of consumption or the marginal product of capital.
[Related -Upbeat Forecasts For US Housing Sales In March]
Indeed, though Lucas trips himself up in the phrasing when he describes the government using money to purchase a bridge he is almost certainly describing a situation that will have an effect on the marginal utility of consumption and perhaps also the marginal product of capital….
My hope is that this closes the intuition around why reasoning from random cash transfers or reasoning from a fully employed economy gives such different results from reasoning about a bridge purchase during a recession.
But Lucas is not "implicitly think(ing) in terms of transferring purchasing power from one randomly chosen citizen to another". Lucas is explicity thinking of the government using money to purchase a bridge.
[Related -Happy Birthday, Moore's Law - Pearls of Wisdom for Investors]
You can say Lucas is confused. You can say Lucas is incoherent. You can say Lucas does not know his models. You can say Lucas has not done his homework. You can say Lucas is not thinking at all.
But to say that Lucas "Lucas implicitly thinks in terms of transferring purchasing power from one randomly chosen citizen to another" but "trips himself up in the phrasing"...
You do nobody any favors when you claim that somebody who grounds out to first really hit a home run...