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?

FILED UNDER: Economics and Business, Government, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. PD Shaw says:

    If the economist arguments are really cover for an underlying dispute about the proper role and limitations of government, then I know who I look to for advice: Joe the Plumber.

    I’m more amenable to using government spending (borrowing) to mitigate abrupt changes from irrational borrowing to irrational hoarding. But a lot of this longterm stuff should be packaged separately, like the energy program.

  2. Steve Verdon says:

    I’m more amenable to using government spending (borrowing) to mitigate abrupt changes from irrational borrowing to irrational hoarding.

    But what makes the government borrowing any more rational–i.e. sensible–than what private consumers and businesses were doing? Is the government really acting as a benevolent social planner that we see in the economic literature, or is it the product of self-interested politicians who can be influenced by special interest groups?

  3. Raoul says:

    You are missing the key element of the entire puzzle- an overreaction to the situation could yield collapsing confidence in the economy ceding to even worst results. Kind of reaping one’s rewards. Here’s the thing- the Republicans have no plan- they could get elected again (doubtful but possible)- which would accelerate the continuing deterioration. In other words- the GOP will never succeed- it is just a matter whether they would be given another chance- and if so- watch out.

  4. Drew says:

    Since he and I seem to share a relatively similar worldview, I’d like to bounce this off of SV.

    If you believe (as I do) that the the country’s economic issues are structural and very long term, those problems being:

    1. A 40 year trend of transfering resources and the buying power of the national income to government (govt taxes and spending), which is empirically not optimal (to be charitable), and GDP minimizing. Said another way: an ever increasing dead weight on the productive sectors of the economy that is reaching critical mass. (Oh, and a freight train called Medicare coming down the tracks.)

    2. Depending on what Obama actually does, an increase in taxation on the wealth producers.

    3. A diminished reservoir of future GDP increasing brainpower, because of an educational system that is simply a mess, not to mention polluted with big government ideology.

    4. For the first time in my lifetime (age 50) a real competitive threat to the US – from the BRIC’s. (Excepting Japan, circa 1982, which proved an illusion.)

    5. No macroeconomic event or asset class rising in value to facilitate people living beyond the country’s true economic means or protecting government from economic reality (See: the death of inflation (1980’s); See: stock market increases ( 80’s into the 90’s); See your house (the 90’s into the 2000’s)

    Then………….

    The only way out is (who was that actor who admonished us in those 80″s commercials??) “the old fashioned way, to earn it.”

    That is: innovation, productivity increases, successful investment, risk taking, hard work etc.

    And now we look at the “stimulus” package, and general public sentiment. In reality, a mismash of somewhat worthy expenditures (20%?) and garden variety pork. And a further public reliance on government. See #1, above.

    That does not appear to be a prescription for robust GDP and job growth. And since public policy takes years to change, and an economy as large as ours a long time to shift…..I’m talking 10 years of slog if we are not careful.

    10 years at least.

  5. odograph says:

    Russell starts out sounding like me:

    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?

    I disagree, slightly, with this:

    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?

    I think it’s more “if we can do all the ‘good’ stimulus, is that enough?” and “if it’s not, what do we do … give up or pull in some from the other category?”

    It comes down to whether your fear of a real crash is high enough to warrant messy spending.

    (stimulus is so last month, bank nationalization is the new black.)

  6. Web Smith says:

    The best anti-stimulus argument is the intelligence level of the people behind it.

    500 Million Americans will lose their jobs!

  7. spencer says:

    The fallacy in your argument is that you are assuming there is no difference between the ability of the US government to service their debt and the ability of the people who took out liars loans to purchases homes they could not afford.

    The financial crises is that the banks hold loans that are not being repaid.

    Unless you think the US government will not be able to print money to repay its debt the two cases are very different.

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