Smart People Critique the Stimulus
James Hanley on Jan 10th 2009
Why should you pay any attention to me, when you can listen to what the smart people are saying about the looming fiscal stimulus?
Leading off, David Brooks:
Today there is wide support for fiscal stimulus. It’s just that there is no historical experience to tell us how to do it, and there is no agreement on how to make it work …
[Obama] proposes broadband projects, special education programs, a new power grid, new scientific research, teacher training projects and new libraries…
The problem is overload. Four months ago, no one knew how to put together a stimulus package. Now Obama wants to use it to rush through instant special-ed programs and pre-Ks. Repairing the power grid means clearing complex regulatory hurdles. How is he going to do that in time to employ workers in May?
Next up, Bruce Bartlett:
Despite claims by the Conference of Mayors and the transportation lobby that there is as much as $96 billion in construction “ready to go,” the fact is that it takes a long time before meaningful numbers of workers can be hired for such projects.
As a recent Congressional Budget Office study explains, “Practically speaking … public works involve long start-up lags. … Even those that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”
The prospects for unconventional projects such as alternative energy sources are even worse. The CBO calls them “totally impractical for counter-cyclical policy” because they take even longer to come online…
Finally, the impact of increased public works spending on state and local governments cannot be ignored. Most federal transportation spending goes for projects initiated by them. When they think there is a chance that the federal government will increase its funding, they tend to cut back on their own spending in hopes that the feds will foot the bill. A study by economist Edward Gramlich found that the $2 billion appropriated by the Local Public Works Act of 1976 postponed $22 billion in total spending as state and local governments competed for federal funds and actually reduced GDP by $30 billion ($225 billion today).
Batting third, Hal Varian:
That brings us to government expenditure, which is getting most of the press. The danger with this form of stimulus is twofold: First, it takes too long for the government spending to kick in, and second, spending may easily focus on pork-barrel projects that have little inherent value…
One further warning about government stimulus: It makes little sense for the federal government to spend more if the states are forced to spend less. ..
That brings us to private investment, which hasn’t been getting nearly as much attention as it deserves. This is unfortunate, since private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private-sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn’t increase, where will the extra consumption come from in the future?
And our cleanup batter is Arnold Kling:
The case for a large stimulus appears to be based on the notion that small stimulus might fail completely, while large stimulus might succeed. This might be true if there are increasing returns to fiscal stimulus or there are threshold effects of fiscal stimulus. I think it is fair to say that the case for increasing returns or threshold effects is not well established either theoretically or empirically…
There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure…
With at least one run batted in, our 5th batter, Edward Glaeser, steps up to the plate:
…spending hundreds of billions wisely on infrastructure is hard. Currently, the federal government spends about $40 billion a year in transportation, and another $20 billion on other forms of infrastructure. There is a case for significantly increasing this amount. Our roads do need repairing, and it makes sense to invest more in a downturn when unemployment is high. But even doubling the current federal infrastructure expenditure, a vast increase, would represent only 8 percent of a $750 billion package.
The rally continues with Robert Lucas:
But monetary policy as Mr. Bernanke implements it has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in future months. It is fast and flexible. There is no other way that so much cash could have been put into the system as fast as this $600 billion was, and if necessary it can be taken out just as quickly. The cash comes in the form of loans. It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.
And bringing in all the baserunners with a home run is Tyler Cowen
…quick projects are usually wasteful projects. Good new projects need to be thought out and planned. The environmental impact study alone can take years. But Obama has told the state governments they will have to “use it or lose it” when it comes to federal grants. The result will be a lot of poorly conceived projects just to capture the money.
The biggest problem with a fiscal stimulus is this: our economic problems stem from having spent too much in the first place. Now that our homes are no longer rising in value every year and America is aging, more saving is in order, not more spending. Recovery will come only when we discover which new and valuable things the economy should produce as it shifts out of real estate and finance. Simply borrowing and doling out more cash doesn’t solve that problem.
Filed in The Bailout
Meh, these smart people are not, on the whole, very convincing.
The main point seems to boil down to timing–That the stimulus won’t be employing people quickly enough to make a difference, and that money spend hastily on infrastructure projects is going to lead to poorly designed projects.
Call me ignorant, but I don’t really see why those new jobs need to show up in the next three months, rather than in a year from now–sure jobs right away would be nice, but jobs a year from now are better than no jobs at all.
And as for quickly-planned projects being poorly planned, I think we’re probably giving too much credit to slowly-planned projects.
Peter Schiff has the best criticism of the economic stimulus. Schiff predicted the economic mess we are in several years ago, and was ridiculed then by other economists like Arthur Laffer. Of course, we now know that Schiff was correct in everything he said. Google Peter Schiff stimulus.
Minor quibble (is that a word?), the planning stage of a construction project also employs people and costs money. If this did work as planned, and I won’t pretend to know enough economics to have an opinion, what is the difference between a new vacancy for a design engineer and a new vacancy for a JCB driver?
Respectfully, I believe these folks are saying it’s just not that simple. E.g. Bartlett’s point about displaced investment; Cowen’s point that too much spending caused the problem, so more spending is not a real solution; and Kling’s point that we don’t actually even know if fiscal stimulus really works (it doesn’t really have a track record to provide empirical support for the theory, which itself is very problematic).
Second, you have posed a dichotomy–there will be jobs a year from now if the government spends a boatload, but there won’t if they don’t. That’s a mighty big assumption. Because government tends to invest/spend less efficiently than private investors/spenders, and because the money Obama is talking about is borrowed from private investors, government spending could result in fewer jobs than we would otherwise have.
Your argument is based on the economy being incapable of self-correction. And if government borrows yet another trillion dollars, how will that affect the ability of the private to borrow for business investment?
(a) Fewer. (b) Not the blue collar people who are most at risk right now–no cement truck driver or auto plant riveter is going to benefit early on.
But the economy will probably be in better shape a year from now, whatever Obama does (unless he goes for massive regulation ala FDR), and the proponents of whatever path has been chosen will claim vindication.
Fair enough, as I say I’m far to ignorant to evaluate the stimulus plan in any interesting way. I just read the original quote as ignoring the existence of the economic sector I work in and wanted to make a factual correction.
[...] [hat tip: Positive Liberty] [...]
Well, Matt, I certainly hope you get plenty of work! (Whatever the source.)