More Anti-Stimulus Arguments
First up is Russell Roberts in the Boston Globe,
I think the real divide between economists isn’t over different macroeconomic theories but over underlying differences in philosophy and ideology. So where does that leave you, the curious, intelligent, non-economist citizen?
You could try to master the empirical evidence of each side. Perhaps one side is more persuasive than the other. Let me suggest a simpler strategy that gets at the underlying philosophic disagreement that I suspect is the heart of the matter.
Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.
I think most economists would argue that the first program would be a bad use of federal money at a time when we’re already running a growing budget deficit. Yes, it would put money in the hands of workers but the effect on the non-hole-digging part of the economy would be insufficient to justify increasing the future taxes necessary to repay the borrowing that financed the program. Most economists would also agree that the second program would be a bargain that would yield benefits well beyond the money put in the hands of those executing the project.
I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?
Rather than spending money we don’t have, I wish Obama would use his political capital to change the parts of our political system that are dysfunctional – our entitlement programs that are demographically bankrupt, our broken budget system, our Byzantine tax system, our financial system that is in disarray. These changes would be more likely to create the confidence and trust in the future that our economy needs to get healthy again rather than borrowing and spending. Borrowing and spending is how we got into this mess. Let’s look in a different direction.
And here is Donald Boudreaux,
Because Frank Rich sensibly claims that “the job growth the Bush administration kept bragging about (’52 straight months!’) was a mirage inflated by the housing bubble,” I’m mystified that Mr. Rich so unquestioningly supports stimulus spending (“Herbert Hoover Lives,” Feb. 1.)
Today’s woes are the result of this bubble having burst. Many of the consumption and production plans made during the bubble period — plans made on the basis of out-of-whack prices — are now proven to be unsustainable. Workers and entrepreneurs must adjust to a new and more realistic pattern of prices. These adjustments, although painful, are necessary if we’re to have sustained and real economic growth.
But injecting massive additional government demand into the economy risks recreating, if only for a short time, the faulty pattern of demands, prices, and production plans that got us into this mess to begin with.
One of the claims I’ve seen about the current economic situation is that it is the result of too much borrowing and spending. People who don’t have the incomes and/or credit history for the house they bought and are in the process of losing. People who treated their homes like an ATM machine taking out so much equity and eventually on bad terms that they too are now in danger of losing their homes. Banks foolishly loaned vast sums of money to such people, and now they are in trouble. Because people are seeing their wealth shrink they are not spending as much so industries like the automotive industry see their business drying up.
But the solution is to borrow more money? If a recession is a correction to incorrect expectations and beliefs about the economy, then the stimulus spending strikes me as an attempt to preserve those incorrect expectations and beliefs. An attempt to go back to where the economy was a year ago…but, we are told that economy was not sustainable.
In short, why will the stimulus not end up distorting prices, beliefs and expectations in a way similar to what we saw in 2005, 2006 and 2007?