Arnold Kling does not like the case for a big fiscal stimulus that Obama is advocating ($750 billion).
1. It is harder to spend larger amounts quickly and cost-effectively.
This strikes me as being true even with small amounts of money and when government is involved. After all, the bridge to nowhere in Alaska wasn’t that much money when you look at it from the perspective of the U.S. economy, the U.S. federal budget, or probably even the Alaskan economy. But as the amount being spent increases I’m sure the amount that is spent on firvolous and wasteful programs increases as well.
2. There is a greater risk that we will run into a “sudden stop,” in which foreign investors are no longer willing to fund our deficits (this is Buiter’s main worry).
In other words, Obama’s plans for spending hundreds of billions more depends on the ability to borrow money from both the U.S. and foreigners. If the latter are unwilling or unable to lend the kind of money Obama is talking about it just isn’t going to happen.
3. There is a risk that the intergenerational transfer imposed by the stimulus (from our children to ourselves) is excessive, particularly in the context of other intergenerational transfers of the same sort.
In other words, our children and their children will be left with the bill for bailing ourselves out of this mess. In effect, we are robbing…errr borrowing from them as well in that that money we borrow will have to be paid back with higher future taxes. But this isn’t the only bill we are saddling these generations with. Medicare’s numbers make the current fiscal stimulus package Obama is talking about look like pennies.
4. There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure.
There are arguments about the effectiveness of fiscal policy to stimulate the economy. If the side that says there is little or no stimulus irrespective of the amount spent, then we are just spinning our wheels and possibly delaying recovery.
5. There is a risk that much of the spending will kick in after a recovery is underway.
Fiscal policy is at best an extremely unwieldy policy tool. And if it does kick in after the recovery is underway it could result in the following:
- The economy grows quite fast.
- Inflation starts to go up.
- The Fed raises interest rates to clamp down on inflation.
- Another recession as the Fed clamps down too much.
6. The government’s capacity to deal with an emergency, such as a major natural disaster or a foreign attack, will be limited, because its credit worthiness will be damaged.
This is related to point 2 above. If there is a limit to how much foreigners are willing to lend to the U.S. government and even if we don’t hit that limit, if another emergency comes along we might hit it then.
7. There is a risk that government will absorb a permanently higher share of GDP. Policymakers will be reluctant to cut public spending for fear of causing a downturn. Moreover, it will be difficult politically to cut public sending.
In light of my post here, I’d say the probability of this last one occuring is…mmmm…1.
Kling’s last point paragraph is also good, so I’m going to post it here too,
Overall, on close examination, the case for the large fiscal stimulus, like the case for the Paulson rescue plan, is really quite weak. However, the same elite groupthink that made passage of the Paulson plan inevitable probably also makes the passage of the stimulus package inevitable. Opponents of the stimulus plan will be mocked and vilified in the media, even though they may very well have logic on their side.
I have to agree with this too. People are scared and they want someone to tell them it will be okay. Obama is more than willing to do that…after scaring them that the economy is in grave danger of imploding, exploding, both or something equally as bad.