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Jacob Sullum on the Stimulus Package:
Read his critical take here at Reason Online:
This is the theory underlying the "stimulus" package: Since we can't depend on consumers to spend money they don't have on stuff they don't need, the government has to do it for them.
Thanks to Instapundit for the link.
alkali (mail):
This is the theory underlying conservative political discourse in this country: Since we can't meaningfully grapple with the actual rationale for the administration's proposals, new and silly rationales have to be ascribed to those proposals.
2.5.2009 6:07pm
OrinKerr:
Alkali,

Your suggestion is that Sullum's article fails to grapple with the actual rationale with the administration's proposals. It's up to you, but perhaps you could lead the way to pointing out how that is so, in a way that will showcase the facts that Sullum misses? Otherwise your comment is an accusation without supporting evidence, which is not very likely to appeal to readers who don't already agree with you.
2.5.2009 6:12pm
Brett:
I'll be delighted to meaningfully grapple with the actual rationales for the administrative proposals as soon as those rationales aren't self-evidently preposterous.
2.5.2009 6:14pm
RSF677:
I think alkali was just relying on Orin's reputation as a conservative hack and apologist for the Bush administration as sufficient to justify his statement. Also, does Jacob Sullum qualify as a conservative?
2.5.2009 6:17pm
MarkField (mail):

Since we can't depend on consumers to spend money they don't have on stuff they don't need, the government has to do it for them.


I agree with alkali. Those who oppose the stimulus should have the intellectual honesty to state the rationale for it accurately. If they can't do that, there's no reason to take their criticism seriously.
2.5.2009 6:24pm
CDR D (mail):
Why can't we depend on consumers?

Instead of just giving billions to the Detroit auto manufacturers to keep them afloat, why not offer 5K, 10K, or even more in tax credits to consumers, provided they buy Detroit's products?

Seems like that idea would "stimulate" just at least as well or better than handing out bailout cash to the big boys.
2.5.2009 6:26pm
RSF677:
I agree with alkali. Those who oppose the stimulus should have the intellectual honesty to state the rationale for it accurately. If they can't do that, there's no reason to take their criticism seriously.


Shouldn't those who want to pass the stimulus admit that much of it isn't stimulative, isn't near term, and is just a bunch of crap taken from the Democratic wish list for spending? I don't even know that I am opposed to the idea of stimulus, but I don't think this is it.
2.5.2009 6:28pm
OrinKerr:
MarkField,

To repeat my respons to Alkali:
Your suggestion is that Sullum's article fails to grapple with the actual rationale with the administration's proposals. It's up to you, but perhaps you could lead the way to pointing out how that is so, in a way that will showcase the facts that Sullum misses? Otherwise your comment is an accusation without supporting evidence, which is not very likely to appeal to readers who don't already agree with you.
2.5.2009 6:29pm
Calderon:
RSF677 -- I demand proof of Orin's status as a leading conservative hack and apologist for Bush. If you link to 4 or 5 random posts by Professor Kerr about Bush's admininstration, even if they are critical or neutral re Bush's policies, that will fully convince me.

On a more serious note, the likely effects of the stimulus are being argued by people who at least in some sense are probably qualified than Sollum, such as Mankiw, Krugman, Feldstein, Becker, Delong, etc. and so forth. And the CBO had an interesting blog post yesterday saying the stimulus would have some short term benefits over the next 1 to 3 years but by 2019 would reduce GDP by .1 to .3 percent.

What I do find surprising is that Obama and/or the Democratic Congressional Leadership (and some reports are that they aren't aligned on this) is having some difficulty passing the stimulus. I had thought handing out a lot of money would be fairly easy politically. One wonders what's going to happen when the legislators face more complicated issues such as health care "reform."
2.5.2009 6:29pm
Thales (mail) (www):
The distinction between willingness and ability to pay comes to mind, as does the macroeconomic effects of diminished aggregate demand.

Sullum's larger snarky point, that Americans (individuals, corporations and governments alike) have lived too long on borrowed funds to finance things they cannot afford is no doubt correct as a matter of the long term. However, we're talking about a short term paradox of thrift, where the lack of consumption and activity is positively paralytic and is shutting down not only wasteful and stupid activity, but also productive and credit-worthy activity. More concisely, the free(er) market is delivering suboptimal social output.

But (as is a generally convenient feature of closed and rigid ideological systems of thought) Sullum would not admit a word of Keynesianism to be true, even if confronted with facts establishing it. So instead the notion of fiscal stimulus is simply mockable. I occasionally like reading Reason for this reason, but there's a reason I canceled my subscription.
2.5.2009 6:39pm
wfjag:

alkali:
This is the theory underlying conservative political discourse in this country:

No, it's the source of the funds that determines whether it's "conservative" or "progressive". Example:

"Oh God! Won't you buy me a Mercedes Benz?"
The reference to "God" means that Janice was obviously a conservative.

If, however, she'd sung:
"Obama! Won't you buy me a Mercedes Benz?"
that would obviously been the statement of a progressive.
2.5.2009 6:44pm
Arkady:
But Orin, isn't it the case that our economy has been driven by people spending money they don't have on things they don't need? See credit card. I mean, 251,000,000 hits in the link!
2.5.2009 6:44pm
byomtov (mail):
Your suggestion is that Sullum's article fails to grapple with the actual rationale with the administration's proposals.

OK.

The idea behind the stimulus is that there is inadequate private demand in the economy and the government needs to pick up the slack. Monetary polcy won't work because we are at zero interest rates. Tax benefits for business expansion aren't going to do much good because businesses don't expand when inventory is piling up in the warehouse, tax cuts or no.

Aside from making snarky comments, like the one you quote, he gives no evidence of understanding any of this, or why private savings can create a problem in the current circumstances. Instead he makes what he imagines to be clever remarks.

That's why I think he "fails to grapple."
2.5.2009 6:44pm
Nick056:
I fail to see the thoughtful analysis I might've expected, and disagree that thhe Reason piece contributes meaningfully to the discourse on stimulus.

Does Sollum mean to dispute that if households fail to spend or invest capital, that doesn't lead us into further recession? Or would he merely like to find a cudgel with which to attack Obama for his bromides about responsibile use of wealth?

Here's a flash for Sollum: reprobate spending and investment have lead to a massive amount of capital simply vanishing from the economy, and government spending is one (effective) way to reinject the lost capital. Irresponsible spending sucked money away and reduced growth, which government spending will now attempt to repair.

Allow me a crude metaphor: "Obama says blood is valuable, don't shed yours just anywhere. And yet now that Americans have stopped giving blood, keeping it out of circulation, people claim bleeding is worse than ever!"

As for Sollum's fears that the money would sit unspent, the CBO concluded that 78% of the Senate proposal would be spent within 18 months. That figure's not very kind to Sollum's arguments. It also bears pointing out that the CBO concludes that a dollar spent on stimulus is more efficient for growth in a recession than a dollar returned in taxes, especially income or capital gains taxes.
2.5.2009 6:47pm
Thales (mail) (www):
Incidentally, the Heritage "data" he cites on the US in the 1930s and Japan in the 1990s is taken by neoKeynesians to show that the government pulled back too soon--in FDR's case, he had a panic attack about deficit spending and yanked some stimulative programs (and some dumb nonstimulative ones, like the NIRA were tanked by the Supreme Court) but then we ran into the ultimate need for stimulative spending, World War II.

In Japan's case, the argument goes, the government did many incremental attempts over a long period but each time pulled back short of stimulating a sustainable recovery because of fiscal conservatism.

I'd love to see a more targeted improvement of the national power grid, and turn it into a more decentralized, efficient and clean system. Virtually no economist thinks that would be a bad use of funds. Lots of crap in the stimulus bill could no doubt be junked and replaced with that.
2.5.2009 6:48pm
jim47:
alkali,

Sullum's description is uncharitable and doesn't attempt to explain why the administration would hold such a view, but at its heart his words are an accurate reflection of the Keynesian theory of demand-side stimulus that underlies the administration's policy.

It is a rational theory if you think 1) that aggregate demand, particularly consumer demand, is the main driver of short-run production, 2) that government demand can meaningfully substitute for lost consumer demand, and 3) that investment demand has not occurred to substitute for lost consumer demand.

Conservatives tend to find fault in all three of those assertions, tending to think 1) that productive capacity is more important to production, even in the short run, 2) that government demand distorts GDP as a measurement of actual value produced by the economy, and 3) that a fall in consumer demand will free up resources for investment.

The biggest challenge to the conservative view is that #3 comes into question when lending institutions are not functioning properly, meaning that a fall in consumer demand can produce a glut of liquidity that does reduce overall demand, and if deflationary, can incentivize greater liquidity.

I see the biggest challenges to the Keynesian view being 1) that in such a circumstance the same "animal spirits" preventing savings from working their way through the system to become investment demand are also likely to prevent government stimulus from working its way through the system as well, and 2) skepticism that government can really fund its expenditures without draining funds that would have been put to other productive uses.
2.5.2009 6:51pm
MarkField (mail):

MarkField,

To repeat my respons to Alkali


And I'd repeat my response to Sullum: if he wants me to take him seriously, state my argument accurately. It's a test of good faith; Sullum failed it.
2.5.2009 6:54pm
MarkField (mail):
I should add that if you, or someone else who I know to be acting in good faith wants to know the rationale for the stimulus, then I'd be happy to have such a discussion with him/her.
2.5.2009 6:55pm
keypusher64 (mail):
OK, so government spending is needed to address the short-term "paradox of thrift".

However, as Sullum also points out, most of the stimulus money will not be spent until the recession is over, i.e. after the need for stimulus has passed.

According to the Congressional Budget Office, only a fifth of the spending and tax breaks in the House version of the "stimulus" bill would be felt in 2009. The vast majority of the money, ostensibly intended to jolt the economy out of recession, would be spent after the recession is expected to end.

Spending a trillion bucks is not as easy as it looks, even for a government accustomed to throwing money around. The House bill allocates $9 billion to the expansion of broadband Internet service in rural areas, for instance, but the CBO predicts the resulting projects would not be completed for five to eight years, partly because they would require "technological features that are not widely available today." Similarly, "much of the construction and procurement work associated with highway and transit projects would occur over an extended period of time, leading to federal outlays over several years."

A particular telecommunication or transportation project may or may not be a sound investment, but nothing funded by the "stimulus" package has to meet that test, since spending the money is an end in itself. Hence there is no need to justify the $127 billion for health care and the $150 billion for education (which would more than double the Education Department's annual budget) as proper and wise uses of taxpayer money.


What about that?
2.5.2009 6:56pm
titus32:
Sullum doesn't just focus on the idea of a stimulus package in general, he also goes after specific beneficiaries of the stimulus package -- with some effect, it seems to me.

How could investing $150 billion in public education possibly be seen as a short-term stimulant to the economy? How do Sullum's detractors "grapple" with this?
2.5.2009 6:57pm
Thales (mail) (www):
Last point: The principal policymaker advocates of a relatively laissez-faire hand in matters monetary and fiscal in recent years, namely Alan Greenspan and Ben Bernanke, warned for years about a net global savings glut, particularly in Asia, and pooh-poohed warnings that Americans were overleveraged. Was that good rather than bad then, and if that global savings glut presaged our current global depression (as it did), does Sullum think more savings will somehow get us out?
2.5.2009 6:57pm
Houston Lawyer:
The primary motivation behine the stimulus package is "we want to grow the government and we have a crisis to justify it". The public has apparently caught on to this. My only question to the public is "what did you expect when you voted for these yahoos?" If you let people keep their own money, they will spend it on things important to them instead of things important to Nancy Pelosi.
2.5.2009 6:59pm
byomtov (mail):
Jim47,

Conservatives tend to find fault in all three of those assertions, tending to think 1) that productive capacity is more important to production, even in the short run,

But we have plenty of productive capacity. It's not being used because of lack of demand. Why do you think Caterpillar is laying off 20,000 workers? Because they don't any place for them to work?

2) that government demand distorts GDP as a measurement of actual value produced by the economy,

Why? And since government purchases are part of GDP anyway what difference does it make?

3) that a fall in consumer demand will free up resources for investment.

See my response to 1).

In any case, Sullum makes none of these points. He mostly just says he thinks Keynesianism is wrong, without ever really explaining why, or acknowledging that it is Keynesianism he's talking about.
2.5.2009 7:04pm
OrinKerr:
And I'd repeat my response to Sullum: if he wants me to take him seriously, state my argument accurately. It's a test of good faith; Sullum failed it.

Mark, Maybe I'm mistaken, but I thought I was "OrinKerr," not Jacob Sullum. That is, I thought I was the one asking, and I was asking because I am genuinely interested: I thought Sullum's column had a lot of force, and I wanted to hear why it was misleading.
2.5.2009 7:04pm
OrinKerr:
Mark, just saw your follow up -- yup, just interested in knowing why you think Sullum's column was weak and why the argument is misstated. My own instincts are pretty free market (or rather, after once being relatively interventionist, I concluded over time that I had been naive and that interventionist policies didn't tend to work, making me generally inclined to agree with market-based approaches), so I'm just interested in hearing more about the contrary view.
2.5.2009 7:08pm
Bruce Hayden (mail):
But (as is a generally convenient feature of closed and rigid ideological systems of thought) Sullum would not admit a word of Keynesianism to be true, even if confronted with facts establishing it. So instead the notion of fiscal stimulus is simply mockable. I occasionally like reading Reason for this reason, but there's a reason I canceled my subscription.
The problem there is that there still aren't any facts showing it working, and a lot to show that it didn't in much more dire circumstances. After the New Deal, and how it appears to have extended a recession into the Great Depression, and extended it by maybe a decade, the burden should be on those who are asking that we follow FDR to show that this massive of expenditures will work, and not the other way around.

Nevertheless, even if we are to assume that Keynesian stimulation works, there would still be the problem that this bill mostly doesn't even do that. A lot of the spending is likely countercyclical, assuming that it doesn't do what it did in the 1930s and extend the recession from a year or two to over a decade. But assuming a normal recession, much of the spending will presumably hit when it is least needed and will do the most harm - when employment is tight and demand booming already.

Part of the problem is that item after item when finally identified turns out to either not have a plausible Keynsian effect, or be almost totally irrelevant as a stimulus. If the Democrats, in Congress and in the White House, had stripped out all those things that aren't really necessary for the recovery, then their arguments would be much more persuasive.
2.5.2009 7:09pm
Thales (mail) (www):
One important point of contention in the competing theories for and against stimulus not being discussed in the column or these comments is the extent to which Say's Law is true:

http://en.wikipedia.org/wiki/Say's_law
2.5.2009 7:10pm
common sense (www):
I don't think a lot of people would object to government spending, in the abstract, to help with the current crisis. Even those who point to FDR's policies as extending the depression acknowledge that WWII pulled us out. However, the execution of the current package, both in scope and in application, is open to wide spread criticism. Indeed, I question whether a government not involved in a total war can successfully execute such a policy that may be acceptable in the abstract. The temptation to fund pet projects that may or may not stimulate the economy is too great. I have also read plenty of analysis that points out to the disruptive effects of taxation. So, assuming true the CBO report that government spending is more efficient than a tax rebate, what is the disruptive effect of collecting the tax and then spending the money, as opposed to a tax cut going forward, which would eliminate the disruptive effect of the initial tax collection?
2.5.2009 7:10pm
Bruce Hayden (mail):
There are also some other negative aspects of the bill. For example, if the goal is to increase employment, then mandating the equivalent of union wages is the worst thing that could be done. But at one point, not only were "prevailing wages" required, but there was going to be a requirement that the jobs go to minorities and women, instead of the trained white male construction workers. Hopefully, they were embarrassed enough to pull that out.
2.5.2009 7:13pm
pintler:

Sullum's larger snarky point, that Americans (individuals, corporations and governments alike) have lived too long on borrowed funds to finance things they cannot afford is no doubt correct as a matter of the long term. However, we're talking about a short term paradox of thrift, where the lack of consumption and activity is positively paralytic and is shutting down not only wasteful and stupid activity,


If I understand you, living beyond our means has caused economic problems. However, stopping living beyond our means is making things worse; we have to live even farther beyond our means to fix the crisis.

Sooo.....do we spend until the crisis is over, and then stop living beyond our means? Won't that trigger another crisis, requiring spending until ..... repeat ad infinitum.

What is the plan to return to living within our means without a painful transition?
2.5.2009 7:15pm
Bruce Hayden (mail):
It is a rational theory if you think 1) that aggregate demand, particularly consumer demand, is the main driver of short-run production, 2) that government demand can meaningfully substitute for lost consumer demand, and 3) that investment demand has not occurred to substitute for lost consumer demand.

The biggest challenge to the conservative view is that #3 comes into question when lending institutions are not functioning properly, meaning that a fall in consumer demand can produce a glut of liquidity that does reduce overall demand, and if deflationary, can incentivize greater liquidity.
Fine, except that government "investment" won't help here, because of the timing. It is one thing when you have a 14 year Depression to do a lot of long term infrastructure spending. It is quite another when it takes months, if not years, to get the construction online, and by then we should be in a recovery where the government "investments" are doing more harm than good.
2.5.2009 7:18pm
alkali (mail):
@OrinKerr: Your suggestion is that Sullum's article fails to grapple with the actual rationale with the administration's proposals. It's up to you, but perhaps you could lead the way to pointing out how that is so, in a way that will showcase the facts that Sullum misses? Otherwise your comment is an accusation without supporting evidence, which is not very likely to appeal to readers who don't already agree with you.

The short justification for my comment is that I was teasing and generally being a smart-a**, and I reserve my right to play that role on occasion (provided, of course, that I don't waste too much of people's time with it).

The long justification for my comment is that the quotation, standing alone, erects a straw man by ascribing a false rationale to those who support a stimulus package. The point of the stimulus package is to jumpstart the economy and minimize the disruption of the recession by keeping people working or putting them back to work, not the spending as such. (Thales' comment above explains further.) Sullum's article does go on to argue the point more seriously, but you don't quote his argument -- you are quoting his rhetorical fillip in lieu of argument.

@RSF677: I think alkali was just relying on Orin's reputation as a conservative hack and apologist for the Bush administration as sufficient to justify his statement.

For what it's worth I don't think OK is a hack or an apologist. If I did, I wouldn't be teasing him.

Shouldn't those who want to pass the stimulus admit that much of it isn't stimulative, isn't near term, and is just a bunch of crap taken from the Democratic wish list for spending?

I don't really think that's so.

With regard to being stimulative, I think the opponents of the stimulus are putting an awful lot of weight on rhetorical questions that don't bear that weight: "How is spending money on X stimulus?" Well, if you have to hire people to do X, it's stimulus.

With regard to being near term, the site Sullum relies on makes a big deal of the fact that something like 3/4 of the money is being spent "after 2009." Yes, but half of it is being spent in 2010, with much smaller amounts thereafter. If you can think of some productive way of getting the money out there faster, please say so.

As to whether it's the Democratic wish list, um, no. I think most Democrats (including me) would like to see some health care deal, but that's not stimulative (cost spread over many years), and it isn't in this bill. I think we'd like to see more mass transit, but there's not that much that's "shovel-ready."
2.5.2009 7:18pm
A. Zarkov (mail):
The stimulus package is a direct application Keynesian economics: the government supports aggregate demand through deficit spending. But it didn't work in the 1970s. We got high unemployment with high inflation. That's why Keynes fell out a of favor. Mainstream economists adopted Friedman's approach where the Fed lowers interest rates to boost the economy. We learned in 2008 that won't work either, so it's back to Keynes again. But that's a gamble-- a big gamble, but with the Fed our of bullets, Obama thinks he must do something so we get a trillion dollar stimulus package.

Even if the stimulus does put people to work, what do we get out of it? If we spend money on projects with a negative net present value, we do more harm than good. Look at the construction of the Great Pyramid in Egypt. While that put people to work, it gave the ancient Egyptians nothing but a pile of blocks. The stimulus package needs to result in income producing assets otherwise we just get more debt.
2.5.2009 7:19pm
OrinKerr:
Got it, Alkali. Yes, I was assuming that you were responding to the article, not the one "teaser" sentence.
2.5.2009 7:23pm
alkali (mail):
@keypusher64: However, as Sullum also points out, most of the stimulus money will not be spent until the recession is over, i.e. after the need for stimulus has passed.

I'm not sure how he knows when the recession is going to over.

@titus32: How could investing $150 billion in public education possibly be seen as a short-term stimulant to the economy? How do Sullum's detractors "grapple" with this?

Because it means a lot of school districts won't lay teachers off during the recession.

@Bruce Hayden: It is one thing when you have a 14 year Depression to do a lot of long term infrastructure spending.

To the contrary, it is kind of amazing how quickly the WPA, CCC, and so forth put people to work -- it was literally a matter of weeks before people were working on projects. (I'm not talking about whether or not the New Deal was generally efficacious, which is a separate argument, but just how quickly the government started putting money in workers' hands. The current stimulus package is nowhere near as aggressive.)
2.5.2009 7:24pm
Thales (mail) (www):
Zarkov is partially right, and managed to say it without a crypto-racist remark about Obama. Bravo!

At the end of the 70s Paul Volcker did exactly what he was supposed to do and raised interest rates through the roof to break the back of inflation.

Here we have high unemployment with *de*flation. So it's more like the Great Depression and the bank panic that preceded it. The Fed is indeed out of monetary tools. So the only tool left, if government can help (which libertarians simply and categorically don't believe) is stimulative spending. Obviously it would indeed be dumb to spend on negative net present value projects. I don't think shoring up levees, bridges, broken highways, collapsing or energy inefficient buildings, more interconnected power and broadband and scientific research into more efficient energy sources falls into that category though.
2.5.2009 7:28pm
Bruce Hayden (mail):
To the contrary, it is kind of amazing how quickly the WPA, CCC, and so forth put people to work -- it was literally a matter of weeks before people were working on projects. (I'm not talking about whether or not the New Deal was generally efficacious, which is a separate argument, but just how quickly the government started putting money in workers' hands. The current stimulus package is nowhere near as aggressive.)
It isn't as aggressive because it can't be any more. We can't just hand someone a pick or shovel and put them to work. Real useful construction projects take months, if not years, to spool up. They have to go through design phases, bidding, etc.
2.5.2009 7:31pm
jim47:
byomtov,

But we have plenty of productive capacity. It's not being used because of lack of demand. Why do you think Caterpillar is laying off 20,000 workers? Because they don't any place for them to work?


Caterpiller is laying off workers because it relies on credit to make its payroll, and the market seems to have determined that Caterpiller isn't very credit-worthy, and thus isn't extending them the money to pay those workers. This would not be a worrisome event if Caterpiller was being denied funds because someone else was more creditworthy and was using up those funds. It would simply be an example of creative destruction as the market reallocated resources without reducing the amount of resources being employed. The worry is that the money denied to Caterpiller isn't going anywhere else, it's just sitting around as cash. (a la point #3, which I think I talk about in the third paragraph of my first post)


Why? And since government purchases are part of GDP anyway what difference does it make?


What GDP is trying to measure is the value of things produced. What it does measure is the price of things produced. For goods and services bought by, and provided by, many people in a market, the priced paid for a good or service should end up being a discovery of the value of a good or service. So given that constraint the measurement should be pretty accurate.

For things bought by government there isn't such a tight link. There is only one buyer and that buyer isn't so good at determining intrinsic value, so for certain goods the price it pays will be more than the value of the good. (for other things the value to society is higher than the price the government will end up paying. these things are called public goods and even minimal-state libertarians want the government to pay for these things.)

An easy example is if the government simply pays people to dig a bunch of holes, and then fill them in. There is a price they paid for that service, and that price is added to GDP, but there isn't a value to that service because you haven't actually produced more, and it is value that you are really trying to get at when you use GDP.
2.5.2009 7:39pm
A. Zarkov (mail):
Thales (mail) (www):

"Zarkov is partially right, and managed to say it without a crypto-racist remark about Obama. Bravo!"


I guess any critical remark about Obama is racist in your book. But more to the point your remark,

"I don't think shoring up levees, bridges, broken highways, collapsing or energy inefficient buildings, more interconnected power and broadband and scientific research into more efficient energy sources falls into that category though."
needs more analysis. Even it the net present value is positive, we need to consider opportunity costs. If we spend money on (say) levees we don't spend it on something else that might yield a more productive asset. Obama's "green energy" projects are losers with the possible exception of advanced battery technology. They fail to use our most abundant asset-- coal. If Obama wanted to spend money on the construction of coal-to-liquid fuel conversion projects, I'd say he has a winning strategy. But we would need to levy a tax on imported oil, otherwise OPEC could make it uneconomic by lowering the price of oil. The constant threat of cheap oil has sabotaged our plans for energy independence, and that has to stop.
2.5.2009 7:46pm
jim47:

One important point of contention in the competing theories for and against stimulus not being discussed in the column or these comments is the extent to which Say's Law is true:


I'd like to think I was talking about that, though not by name.

Incidentally, when did we start referring to Say's Law when a mere 4 extra words are required for:

"Supply creates its own demand" - Say
2.5.2009 7:51pm
alkali (mail):
@Bruce Hayden: It isn't as aggressive because it can't be any more. We can't just hand someone a pick or shovel and put them to work. Real useful construction projects take months, if not years, to spool up. They have to go through design phases, bidding, etc.

I take your point although the same was true at least to some extent back then, and some of the WPA era construction is still in use today and seems to be quite serviceable. I don't know how they did it.

@A. Zarkov: Even it the net present value is positive, we need to consider opportunity costs. If we spend money on (say) levees we don't spend it on something else that might yield a more productive asset.

I'd note that's an argument against the form of the stimulus, not an argument against the stimulus itself. More broadly, the idea of the stimulus is that if the economy suffers generally, a lot of productive resources are going to be idle, and you could look at that as opportunity cost.
2.5.2009 7:51pm
Bruce Hayden (mail):
@keypusher64: However, as Sullum also points out, most of the stimulus money will not be spent until the recession is over, i.e. after the need for stimulus has passed.

I'm not sure how he knows when the recession is going to over.
I would first think that we could look at the historical record. And why should this be the worst recession in the last 60 years? Yes, the banks have a liquidity problem, but this package does little to address that (TARP, etc. were designed to address that). And when they have unraveled their subprime loans, credit default swaps, etc., then why shouldn't we recover at the usual speed. The fundamentals weren't looking that bad until the subprime mess blew up last fall.

In any case, those proposing the "stimulus" package should provide us with their estimates of how long they expect the recession to last before they expect to see public backing for it. Why? Because different length recessions require different approaches. And, indeed, much of the Keynsian stimulus justification falls away in the case of longer recoveries. Why? Because underneath it, is the idea that demand can be shifted in time. In the long run, the government cannot create demand, since government spending takes away from private sector spending (which often goes into plants and equipment, instead of monuments and make work). But in the short run, shifting future demand to the present through government spending might help.

But that is the problem here. The longer the recovery, the less positive effect fiscal stimulus is going to have, and the more negative effect it will have. But on the other hand, much of the bill involves long term spending that won't come online until either we are in a recovery, or we are in a long term recession/depression.

So, a viable estimate of how long the Administration expects the recession to last is critical in determining what should and should not be in the "stimulus" package.
@titus32: How could investing $150 billion in public education possibly be seen as a short-term stimulant to the economy? How do Sullum's detractors "grapple" with this?

Because it means a lot of school districts won't lay teachers off during the recession.
Superficially, this has some appeal. However, what should be happening is that teachers, along with the rest of us, should be taking pay cuts. That, of course, never happens, since it is much easier (and makes better press) to cut band, art, and football programs than it is to go up against the teachers' unions.

Another problem here though is the ratchet effect. The rest of the economy take pay cuts at a time like this, but teachers don't, because they have another funding source now. But then when times get good again, they are going to expect their usual pay increases. Thus, while most wages in the private sector adjust during a recession, those of teachers won't.

And then what happens after the recession to those extra teachers who are paid more than they should be, in comparison with other workers? Do we really expect that the fed will stop helping to pay for them? After all, the states will have gotten used to all that extra help, and so there will be a lot of pressure to continue this support, so that the states won't have to make the hard choices.
2.5.2009 7:53pm
SassKwatch:

However, as Sullum also points out, most of the stimulus money will not be spent until the recession is over, i.e. after the need for stimulus has passed.


Seems to me it takes a rather accurate crystal ball, or a VERY large leap of faith, to say when the recession will be over.(??)
2.5.2009 7:55pm
jim47:
Bruce Hayden,


Fine, except that government "investment" won't help here, because of the timing. It is one thing when you have a 14 year Depression to do a lot of long term infrastructure spending. It is quite another when it takes months, if not years, to get the construction online, and by then we should be in a recovery where the government "investments" are doing more harm than good.


That's obviously a fair enough critique, but it implies that we should still be spending stimulus money, just not on infrastructure. I felt it more important to convey my skepticism of the efficacy of any form of stimulus spending, regardless of timing.
2.5.2009 7:56pm
A. Zarkov (mail):
alkali:

"I'd note that's an argument against the form of the stimulus, not an argument against the stimulus itself. More broadly, the idea of the stimulus is that if the economy suffers generally, a lot of productive resources are going to be idle, and you could look at that as opportunity cost."


I agree. I am not against the stimulus package if it optimizes the money spent. But let's be realistic, it's a gamble in any case.
2.5.2009 8:00pm
keypusher64 (mail):
With regard to being near term, the site Sullum relies on makes a big deal of the fact that something like 3/4 of the money is being spent "after 2009." Yes, but half of it is being spent in 2010, with much smaller amounts thereafter. If you can think of some productive way of getting the money out there faster, please say so.

We are talking about adding a trillion dollars to the national debt. If there has to be a stimulus bill, I would prefer that any stimulus not spent in the next 12 months or so not be spent at all.

Of course we don't know when the recession will be over. But it is already a year and a half old.

Ask yourself -- suppose economic growth returns in the last quarter of 2009/first quarter of 2010. Do you expect the remainder of the stimulus not to be spent? Do you even expect it to be scaled back?
2.5.2009 8:04pm
Bruce Hayden (mail):
An easy example is if the government simply pays people to dig a bunch of holes, and then fill them in. There is a price they paid for that service, and that price is added to GDP, but there isn't a value to that service because you haven't actually produced more, and it is value that you are really trying to get at when you use GDP.
And that is to some extent one of the problems with Keynsian stimulus. Dig holes, fill them in, pay those doing it, and they have money in their pockets to spend.

Fine, but what have they accomplished? The net worth of the economy is no greater as a result. Those refilled holes have no intrinsic worth. Rather, the government has borrowed money to pay them, money that ultimately could have been borrowed by the private sector to build plants and equipment.

The general argument in favor of Keynsian spending seems to be just that, that paying for someone to dig holes and then to fill them up is the way out of our current economic problems. That is presumably why no effort is really being spent justifying why each element in the "stimulus" package would ultimately benefit the economy. Rather, the assumption seems to be that federal spending is all that matters, and output is irrelevant.
2.5.2009 8:05pm
jim47:
alkali,


More broadly, the idea of the stimulus is that if the economy suffers generally, a lot of productive resources are going to be idle, and you could look at that as opportunity cost.


Indeed, and if we are talking solely about human resources, it is hard to argue with that. But I want to bring up a limit to that point in so far as we are also talking about capital resources, so it isn't such a sure bet that we can limit ourselves to unemployed resources.

The spending we do now will be financed either by taxes paid in the future, inflation that occurs in the future, or federal debts that will be rolled over for the foreseeable future. That means that after the recession is over, the stimulus will be eating up capital resources that probably could be employed.
2.5.2009 8:07pm
Bruce Hayden (mail):
That's obviously a fair enough critique, but it implies that we should still be spending stimulus money, just not on infrastructure. I felt it more important to convey my skepticism of the efficacy of any form of stimulus spending, regardless of timing.
I don't disagree. However, I do think that it is useful to point out what I see as internal inconsistencies in the "stimulus" package and how it is being sold.
2.5.2009 8:07pm
PlugInMonster:

MarkField (mail):


Since we can't depend on consumers to spend money they don't have on stuff they don't need, the government has to do it for them.



I agree with alkali. Those who oppose the stimulus should have the intellectual honesty to state the rationale for it accurately. If they can't do that, there's no reason to take their criticism seriously.
2.5.2009 6:24pm


Why? Because it's Porkapalooza!
2.5.2009 8:10pm
PlugInMonster:
byomtov - the burden of proof is on you to prove why Keynesianism is a good thing.
2.5.2009 8:13pm
MarkField (mail):

Mark, just saw your follow up -- yup, just interested in knowing why you think Sullum's column was weak and why the argument is misstated.


Since you asked so nicely....

I'm going to re-frame the discussion just a bit and start with why deficit spending is justified under current conditions. I think that burden of proof is incumbent on those taking my position.

The basic justification is Keynesian. In essence, the economy is, due to the breakdown in credit and trust, operating at substantially less than full capacity (roughly 7% less according to CBO estimates using standard economic estimates).

One way to approach this problem is to treat it as self-correcting. This was the approach which failed in the Great Depression, and it failed essentially because certain conditions can reinforce counterproductive tendencies which send the economy into a downward spiral. Private actors, on their own, can't easily break that spiral.

Ordinarily, monetary policy is a good tool for this problem, because it works over a shorter period of time and can be more quickly reversed. It allows for finer tuning, if you will. The problem with the current situation is that the Fed has tried to use monetary policy to arrest the decline and hasn't succeeded. Because nominal interest rates can't go below zero, there's little else the Fed can do by way of monetary policy.

That leaves fiscal policy as the only bullet left in the gun (I'm simplifying -- see here). As I understand it, some of the criticisms of the particular bill under consideration are that (1) it spends borrowed money, when the problem is that we have borrowed too much money; and (2) some of the spending won't take effect until it's too late.

The first objection simply misconceives the situation. It seems to assume that the rule for government should be the same as the rule for private households. It's not, due to the paradox of thrift and other problems.

The second objection seems inconsistent with the first, but no matter. As alkali points out, there's no basis for knowing when, exactly, the recession will end. Any cut-off point is arbitrary. Moreover, much of the criticism is inconsistent. For example, the education part of the package has been criticized as not infrastructure spending. Assuming this to be accurate, the spending takes place immediately and is therefore going to happen before the recession ends. Infrastructure spending, on the other hand, may be spread out, but the ability to make long term plans is a critical feature of restoring the economy.
2.5.2009 8:14pm
jim47:

Rather, the assumption seems to be that federal spending is all that matters, and output is irrelevant.


I think it would be more accurate to say that output is secondary. Even the full-throated Keynesians who would say that paying for hole-digging-and-refilling is a good idea are advocating programs whose value is greater than zero, and are not deaf to arguments about comparative value.

But fundamentally I agree that the Keynesians are making an argument that saying "it's for the stimulus" justifies spending that cannot be justified by its intrinsic value.
2.5.2009 8:15pm
jim47:
MarkField,


One way to approach this problem is to treat it as self-correcting. This was the approach which failed in the Great Depression


I am curious if you could unpack this statement. Where was an approach of treating the problem as self-correcting tried, and how? My impression is that at least in the United States, this approach was not tried either under Hoover or Roosevelt, each of whom took interventionist measures that either everyone agrees were bad ideas or everyone on half the political spectrum agrees were bad ideas. We can argue theory about what would have happened with the depression under laissez-faire, but we can't point to experimental evidence from the US.


It seems to assume that the rule for government should be the same as the rule for private households. It's not, due to the paradox of thrift and other problems.


It may seem to make the assumption that the rule for government should be the same as the rule for private households, but it does not. It merely comes to a conclusion compatible with that rule for reasons that have to do with the rejection of the paradox of thrift and other reasons.
2.5.2009 8:27pm
Steve:
Those refilled holes have no intrinsic worth. Rather, the government has borrowed money to pay them, money that ultimately could have been borrowed by the private sector to build plants and equipment.

But the private sector isn't looking to build plants and equipment when the economy is in recession. Look around you. The government has yet to pass the stimulus bill, and yet private industry is hardly clamoring to engage in new capital expenditures. Your comment puzzles me because it doesn't seem to acknowledge that the economy isn't functioning as it normally does.

There's certainly an argument to be made for government spending having a crowding-out effect, but I don't think it applies during a recession when the whole problem is that the private sector isn't doing much on its own. I also question whether the Chinese bankers would be making many construction loans in my neighborhood if the US government wasn't selling them Treasuries to raise money for the stimulus.
2.5.2009 8:29pm
Horatio (mail):
I say we eliminate the Federal income tax for 1 year minimum, then reduce every government program's budget by the percentage it receives of the amount collected by the income tax.
2.5.2009 8:42pm
Bruce Hayden (mail):
One way to approach this problem is to treat it as self-correcting. This was the approach which failed in the Great Depression, and it failed essentially because certain conditions can reinforce counterproductive tendencies which send the economy into a downward spiral. Private actors, on their own, can't easily break that spiral.
I am not sure where you think that this happened? Surely, not once FDR started into his New Deal.
The second objection seems inconsistent with the first, but no matter. As alkali points out, there's no basis for knowing when, exactly, the recession will end. Any cut-off point is arbitrary. Moreover, much of the criticism is inconsistent. For example, the education part of the package has been criticized as not infrastructure spending. Assuming this to be accurate, the spending takes place immediately and is therefore going to happen before the recession ends. Infrastructure spending, on the other hand, may be spread out, but the ability to make long term plans is a critical feature of restoring the economy.
I would suggest just the opposite, that much of the justification is contradictory. Do we need immediate Keynsian spending by paying people to dig holes and then to fill them? Then, fine, do it. But then, why do we need the long term spending, some of which goes on for the next decade? Esp. when the Keynsian justification falls apart when you are talking long term spending.
2.5.2009 8:44pm
Andy Freeman (mail):
> Because nominal interest rates can't go below zero,

Um, sure it can.

It's just as easy to write a contract stating that party B will give party A $90 one year from now in return for party A giving party B $100 today as it is to write a contract with those numbers reversed.

Yes, nominal rates less than 0 are effectively a gift ($10 plus some time value adjustments in this case), but advocates of "stimulus" have already agreed to gifts in the abstract so they get to explain why giving via a negative nominal interest rate is worse than the gifts that they support.

Note that we could place conditions on folks who get these gifts. For example, we could require them to loan $105 for every $100 borrowed (even though they only have to pay back $90).
2.5.2009 8:45pm
Andy Freeman (mail):
> As alkali points out, there's no basis for knowing when, exactly, the recession will end. Any cut-off point is arbitrary.

Yes, we don't know what will happen in the future.

That is a reason for building in some mechanism for revisiting the spending plans for the out years based on what's happening as we approach them.

One such mechanism is a "spending bill" for 2011 spending that we don't start work on until 2010. In other words, we defer decisions about spending in 2011 and beyond until 2010 and beyond.
2.5.2009 8:50pm
Bruce Hayden (mail):
But the private sector isn't looking to build plants and equipment when the economy is in recession. Look around you. The government has yet to pass the stimulus bill, and yet private industry is hardly clamoring to engage in new capital expenditures. Your comment puzzles me because it doesn't seem to acknowledge that the economy isn't functioning as it normally does.

There's certainly an argument to be made for government spending having a crowding-out effect, but I don't think it applies during a recession when the whole problem is that the private sector isn't doing much on its own. I also question whether the Chinese bankers would be making many construction loans in my neighborhood if the US government wasn't selling them Treasuries to raise money for the stimulus.
Probably my fault, but I think that you missed my point. First, the justification for Keynsian stimulation is short term. (Remember, it was Keynes who pointed out that in the long term, we were all dead). The government cannot create wealth. Rather, all it can do is shift demand forward in time with such Keynsian stimulus.

But it isn't free. Rather, all those holes that are dug and filled have to be paid for some time, and that will necessarily reduce our national economic wealth when that happens. Money will come out of the pockets of our children or grandchildren, and into the pockets of the children or grandchildren of the Chinese who lent the money to us to dig and refill those holes.

There are several potential problems with shifting demand forward in time. One is that it only works for a short period of time. A related one is that it can be counter-cyclical. Remember, the justification is that it creates demand when there isn't sufficient demand. But when we start the recovery, that is soon no longer the case. But that is when we have to start paying off the stimulus, assuming that we can stop it. And that is the next problem, that much of the real construction in the bill won't hit the economy until we are likely coming out of the recession. Thus, instead of providing demand when there isn't enough, we will find ourselves with the government soaking up resources to dig and fill holes precisely when there is a demand to spend the money on building economic assets such as plants and equipment.
2.5.2009 8:58pm
Bruce Hayden (mail):
That is a reason for building in some mechanism for revisiting the spending plans for the out years based on what's happening as we approach them.

One such mechanism is a "spending bill" for 2011 spending that we don't start work on until 2010. In other words, we defer decisions about spending in 2011 and beyond until 2010 and beyond.
Let me suggest that even that is insufficient. First, government construction projects have long lead times, typically in terms of years (and hence part of the basis of the CBO estimates). Secondly, we are likely to come out of a recession far faster than we can shut down spending, and you are adding an additional year in there.
2.5.2009 9:01pm
wfjag:
Dear Alkali:
Interesting points and counter-points. Now a serious question.

An issue I haven't seen addressed in this thread is the failure of the proposed stimulus to provide for paying off the debt that will be borrowed to cover its costs.

The useful live of many of the items to be purchased or built is limited. The US government has, in the past, engaged in deficit spending, and then borrowed more to cover existing debt as it became due. At best, the US government has paid interest, but not principal.

The size of this proposed stimulus is so huge that it dwarfs anything previous. Unless there is an established plan to pay it off, the US could find itself in a stagflation spiral similar to the late 1970s, but, unlike the 1980s, the amount (coupled with other amounts that will come due, like Soc. Sec. benefits) will be so large that there will be no way to grow the economy enough to increase tax revenues, and nothing like the "peace dividend" of the 1990s that reduced US government borrowing so that available money was left in the private sector.

Historically, this is similar to the Peronist policies that harmed Argentina's economy to much. When Peron came to power, Argentina had the world's largest gold reserves. When he was finally kicked out, those were gone and Argentina could not maintain its debt payments and pay for gov't services, and was so weak that it took decades to bring the problems under control.

How do you address the objection that the stimulus has no provision for paying off the debt borrowed? (I don't think that neither Repubs. nor Dems. have acted responsibly in this area in the past is a defense).
2.5.2009 9:20pm
Jeff S. (mail):
jim47,

You are wrong about why Caterpillar is laying of 20K.
2.5.2009 9:29pm
byomtov (mail):
Jim47,

Caterpiller is laying off workers because it relies on credit to make its payroll, and the market seems to have determined that Caterpiller isn't very credit-worthy, and thus isn't extending them the money to pay those workers.

Could you provide some evidence for this? I find none in Caterpillar's press releases, which mostly talk about falloff in demand, reduced sales, etc. And of course, reduced sales is a pretty good reason for lenders to be reluctant to finance Caterpillar's short-term working capital needs.

As for GDP, of course I'm aware of its shortcomings as a measure of economic well-being. So what? How does that affect the validity of the stimulus package as an attempt to improve the economy? It doesn't.
2.5.2009 9:36pm
MarkField (mail):

That is a reason for building in some mechanism for revisiting the spending plans for the out years based on what's happening as we approach them.

One such mechanism is a "spending bill" for 2011 spending that we don't start work on until 2010. In other words, we defer decisions about spending in 2011 and beyond until 2010 and beyond.


Since a good part of the current problem is the low level of confidence and trust, it makes more sense to plan the spending now and then revoke it if the economy does recover. That way, businesses can make long term plans with confidence that either the market or the government will be there for them.


It's just as easy to write a contract stating that party B will give party A $90 one year from now in return for party A giving party B $100 today as it is to write a contract with those numbers reversed.


The Fed cannot lower interest rates below zero. At that point, all instruments become equivalent to cash.

What the Fed can do, of course, is deliberately cause inflation, which is the practical equivalent of your suggestion. That has its own long-term consequences and can also spiral out of control. It is, however, an option if you prefer it.


Surely, not once FDR started into his New Deal.


Agreed. The only criticism of FDR is that he failed to do as much as he probably should have. It was Hoover and others (e.g., the British Treasury and the Deutschebank) who argued for doing nothing.


Do we need immediate Keynsian spending by paying people to dig holes and then to fill them? Then, fine, do it. But then, why do we need the long term spending, some of which goes on for the next decade? Esp. when the Keynsian justification falls apart when you are talking long term spending.


The argument for longer term projects is the one I noted above. I generally agree that these are not Keynesian to the extent the money gets spent after the recession ends (whenever that may be). They're still justified as Keynesian to the extent that money gets spent before the recession ends and may very well be good ideas long term anyway for other reasons.


My impression is that at least in the United States, this approach was not tried either under Hoover or Roosevelt, each of whom took interventionist measures that either everyone agrees were bad ideas or everyone on half the political spectrum agrees were bad ideas.


Hoover treated the economy as essentially self-correcting. He did offer a few palliatives, but they were so weak that I don't feel it inaccurate to say that they were the equivalent of doing nothing.
2.5.2009 9:55pm
David Welker (www):
Orin,

Are you seriously linking to this because you think this is insightful in anyway?

Lets look at this article a little, shall we?


Since we can't depend on consumers to spend money they don't have on stuff they don't need, the government has to do it for them.


There is such a thing as too much savings. What if we all saved 100% of our income? There would be no economy and everyone would be unemployed. We can say that there is such a thing as too much savings, right? Is that difficult to understand?

Now, there is the argument that savings turns into investment, which is a form of spending just like consumption. This is a good argument in times of full employment where the economy is running at full capacity. But, what if money, instead of being spent on investments, is instead hoarded? What if investors are will to accept extremely small returns to purchase government securities in exchange for safety? In that case, then the translation of savings to investment takes longer. Observe banks who are now hoarding bailout money to improve their balance sheets. Savings translate into investment, but not instantaneously.

Also, when is savings translated into investment? Only when people think there are profitable business opportunities. But if spending is inadequate, then it is not profitable to invest. So, people accept much lower returns by bidding up government debt. Banks hoard instead of loan money, because the business plans out there that come through the door do not appear to be profitable. There is an optimal rate of savings. It is certainly higher than 0%. It is certainly less than 100%. It is not a contradiction to be concerned one day (when the economy is running at full capacity) to be concerned about too little savings and then on another day (when the economy is running far below capacity and savings is not being translated into investment spending in a timely manner) to be concerned about too much savings. And, it is not really the savings rate itself that is bothersome per se, but rather the reason that it is increasing. If it were increasing because confident people wanted to shift from current consumption to future consumption, that would be one thing. When it is desperate people who are saving because they are freaked out and pessimistic about the future, that is another. Basically, people and financial institutions lack the confidence to translate those increased savings into investment spending fast enough to prevent unemployment from increasing, much less fuel a recovery.

I honestly don't know why you linked to Jacob Sullum. I found nothing in his article to be even slightly insightful. He is not an economist. Either am I. Anything I say should be taken with a grain of salt. This economics stuff is hard. But, not only is Sullum not an economist, he isn't even engaging in the economic debates. It is pretty clear to me that he knows very little.

A more interesting perspective from a stimulus opponent who actually knows something is Chicago Business School Professor of Finance Eugene Fama can be found in this article here. His argument sounds superficially persuasive (at least he sort of has an idea of what he is talking about, unlike Sullum, who appears to be very confused) but he is missing some critical variables, as is revealed by this critique of his reasoning by Princeton economist Paul Krugman here. For a view of Fama argument by conservative Harvard economist Greg Mankiw that disagrees with him, but in much less harsh way than Krugman, check out this link.

Finally, for an acknowledgment of the need for fiscal stimulus, but with a focus on tax cuts (immediate payroll tax cuts but gradual gasoline tax increases) see this very interesting post by Greg Mankiw. I think that Mankiw's approach, while helpful, would be inadequate. But, at least, in contrast to Jacob Sullum, Mankiw knows what he is talking about.
2.5.2009 9:58pm
David M. Nieporent (www):
With regard to being near term, the site Sullum relies on makes a big deal of the fact that something like 3/4 of the money is being spent "after 2009." Yes, but half of it is being spent in 2010, with much smaller amounts thereafter. If you can think of some productive way of getting the money out there faster, please say so.
Really? I can think of a way of getting the money out there faster: write checks. Send $3,000 to everybody in the country.

What's really puzzling, as Megan McCardle points out, is the notion of liberals who propose spending a trillion dollars that the government doesn't have that the burden of proof should be on skeptics to show why it isn't a good idea.

As Megan further notes, proponents sort of want to steamroller over objections by treating it as though it were established truth that this sort of program "works," and thus shifting the burden to opponents. But it certainly is not established truth. It failed in the 1930s, and it failed in Japan in the 1990s. It worked in the U.S. in the 1940s. 1-for-3 is a lousy on-base percentage.

As for Jacob Sullum's quote, it's phrased snarkily, but it certainly does capture the rationale behind the proposal. People aren't spending enough money because they don't have it, so the government (which also doesn't have it) should borrow it and spend it for them. But rather than spend it on the things actual people would spend it on if they did have it, it should spend it on the things Democratic politicians want to spend it on.
2.5.2009 10:02pm
David M. Nieporent (www):
Agreed. The only criticism of FDR is that he failed to do as much as he probably should have. It was Hoover and others (e.g., the British Treasury and the Deutschebank) who argued for doing nothing.
Hoover at no point "argued for doing nothing."

And as Megan points out (I hate to keep stealing from her, but she addressed this argument so well), the claims about FDR have the wonderful benefit, for liberals, of being completely unfalsifiable. If it didn't work -- and it didn't -- it's not that it was wrong; it's because he didn't do enough. You can never refute it, because, hey, one can always say that they needed more of it.
2.5.2009 10:11pm
MikeK (mail):
For some reason, this thread (and the stimulus bill) reminds me of a recent debate I saw about whether to close the National Money Hole.

http://www.youtube.com/watch?v=JnX-D4kkPOQ
2.5.2009 10:15pm
Bruce Hayden (mail):
It worked in the U.S. in the 1940s. 1-for-3 is a lousy on-base percentage.
I am not even sure of that. For one thing, a lot of the world had shipped their gold to us either for safety, or to buy arms. Apparently part of the Marshall Plan was because of that - that we had their money, and needed a way to get it back to them.
2.5.2009 10:17pm
David Welker (www):
I forgot to include the link to Mankiw in my previous post. So here is the last paragraph, link included.

Finally, for an acknowledgment of the need for fiscal stimulus, but with a focus on tax cuts (immediate payroll tax cuts but gradual gasoline tax increases) see this very interesting post by Greg Mankiw. I think that Mankiw's approach, while helpful, would be inadequate. But, at least, in contrast to Jacob Sullum, Mankiw knows what he is talking about.
2.5.2009 10:22pm
Andy Freeman (mail):
> Observe banks who are now hoarding bailout money to improve their balance sheets.

Because if they don't improve their balance sheets, they get shut down by govt.
2.5.2009 10:28pm
David Welker (www):

What's really puzzling, as Megan McCardle points out, is the notion of liberals who propose spending a trillion dollars that the government doesn't have that the burden of proof should be on skeptics to show why it isn't a good idea.


Of course the burden of proof should be on the side of skeptics. We are in a liquidity traps (interest rates at a zero bound) just as we were during the Great Depression. There is a huge risk of deflation, which is very difficult to get out of if it comes to pass.

The burden of proof should be on the skeptics, because the consequences of doing nothing if you are wrong (the economy will not improve by itself) are very severe. The consequences if stimulus advocates are wrong are much less severe (we at least get something in return for our spending).

Right now, I don't think that stimulus advocates are thrilled with the bill going through Congress. It is too small and it is isn't targeted enough. My prediction is that the bill will help, but the recovery will be ambiguous enough that the debate will never be resolved. Stimulus skeptics will say that the economy would have improved anyway. We need is a much larger stimulus package.

By the way, just to keep things in perspective here, our current national debt is over 10.6 trillion dollars. The stimulus at 0.8 trillion dollars is about equal to 7.5% of that.

Given the significant but relatively moderate impact of the stimulus package on the national debt (even if all that money is wasted, which it will not be) and the dire consequences that we face if stimulus skeptics are wrong, of course stimulus skeptics should face a heavy burden of proof.
2.5.2009 10:33pm
Andy Freeman (mail):
>> One such mechanism is a "spending bill" for 2011 spending that we don't start work on until 2010. In other words, we defer decisions about spending in 2011 and beyond until 2010 and beyond.

> Let me suggest that even that is insufficient. ... Secondly, we are likely to come out of a recession far faster than we can shut down spending, and you are adding an additional year in there.

Perfection is rarely an option. Yes, it would be better to do 2011 spending decisions in 2011, but surely it's better to do them in 2010 than it is to do them in 2009.
2.5.2009 10:33pm
David Welker (www):

Because if they don't improve their balance sheets, they get shut down by govt.


Really? So, if the banks loaned the bailout money, the would get shut down by the government? But, if instead they use that money to buy other banks instead of improving their balance sheet, they won't be shut down by government?
2.5.2009 10:34pm
David Welker (www):

You can never refute it, because, hey, one can always say that they needed more of it.


Not true. You can refute it by spending enough money in a way that is properly structured and observing the economy nevertheless sink deeper into recessions for a much longer than expected period of time. That FDR failed to provide adequate stimulus is unfortunate. That doesn't mean that actions to actually provide what is theoretically adequate stimulus that was properly structured would not refute the idea if it failed.
2.5.2009 10:39pm
Andy Freeman (mail):
> The Fed cannot lower interest rates below zero. At that point, all instruments become equivalent to cash.

As the example I gave demonstrated, that's not true because instruments can have conditions. Cash doesn't.

My example was a $100 loan to be repaid with $90 with the condition that the borrower loan at least $105. In that case, the borrower had to have $5 AND loan it. Since we're working under the assumption that folks are sitting on cash, such instruments change behavior.
2.5.2009 10:41pm
Andy Freeman (mail):
[Welker pointed out that banks are sitting on bail out money to improve their balance sheets instead of doing other things.]

>> Because if they don't improve their balance sheets, they get shut down by govt.

>Really? So, if the banks loaned the bailout money, the would get shut down by the government?

Not necessarily. I only said that banks with inadequate balance sheets get shut down. Yes, there are probably other ways to get shut down.

Hoarding cash improves bank balance sheets 1:1. Other things that they can do, such as loans and buyouts, have different effects.
2.5.2009 10:49pm
Andy Freeman (mail):
> The consequences if stimulus advocates are wrong are much less severe (we at least get something in return for our spending).

Not so fast - you're ignoring costs.

Doing dumb things wastes resources. Yes, there may be some return, but you can easily end up worse off than if you'd have done nothing.

If it's reasonable to ignore costs, why not have a $100T stimulus package? Let's do everything that anyone can imagine.
2.5.2009 10:53pm
Andy Freeman (mail):
> Since a good part of the current problem is the low level of confidence and trust, it makes more sense to plan the spending now and then revoke it if the economy does recover.

In what universe is the US govt likely to "revoke spending" when the economy recovers?
2.5.2009 10:56pm
Perseus (mail):
2.5.2009 11:06pm
Bruce Hayden (mail):
Of course the burden of proof should be on the side of skeptics. We are in a liquidity traps (interest rates at a zero bound) just as we were during the Great Depression. There is a huge risk of deflation, which is very difficult to get out of if it comes to pass.

The burden of proof should be on the skeptics, because the consequences of doing nothing if you are wrong (the economy will not improve by itself) are very severe. The consequences if stimulus advocates are wrong are much less severe (we at least get something in return for our spending).
I think that is just plain silly. You are suggesting that we run out and spend some trillion dollars on the mere possibility that it just might do something good. Sure, it might hurt the economy, but apparently the chance that it might possibly do some good is sufficient to justify spending all that money (that we don't, of course, have).
2.5.2009 11:19pm
David M. Nieporent (www):
The burden of proof should be on the skeptics, because the consequences of doing nothing if you are wrong (the economy will not improve by itself) are very severe. The consequences if stimulus advocates are wrong are much less severe (we at least get something in return for our spending).
Yes, but the things we get are bad. Which is worse than getting nothing.

Sorry, but your argument proves too much and therefore nothing at all. It's just a slightly wordier way of saying, "We must do something. This is something. Therefore, we must do it."
2.5.2009 11:23pm
MarkField (mail):

1-for-3 is a lousy on-base percentage.


But a pretty good batting average. Striking out looking (a la Hoover) isn't even a productive out.


And as Megan points out (I hate to keep stealing from her, but she addressed this argument so well), the claims about FDR have the wonderful benefit, for liberals, of being completely unfalsifiable. If it didn't work -- and it didn't -- it's not that it was wrong; it's because he didn't do enough. You can never refute it, because, hey, one can always say that they needed more of it.


You may want to be cautious about what Megan says.

In any case, you're misstating the liberal argument about FDR. The claim of conservatives is frequently that FDR didn't end the Depression, WWII did. The obvious retort to that is that it proves that "more of it" was, in fact, exactly what we needed.
2.5.2009 11:30pm
OrinKerr:
Thanks, Mark Field-- I appreciate it. (Sorry I was away from the thread for a while there...)
2.5.2009 11:31pm
BGates:
Of course the burden of proof should be on the side of skeptics.
That suggests that the real question is not whether to spend one trillion or none, but whether to spend one or five. Or one hundred.
Could anyone skeptical of the idea of a five trillion + spending package explain why we should settle for a mere one, when the evidence from FDR and Japan suggests the government's problem is always that it is too reticent to correct the errors of the market?
2.5.2009 11:43pm
David Welker (www):

Doing dumb things wastes resources. Yes, there may be some return, but you can easily end up worse off than if you'd have done nothing.


Allowing the economy to run at less than full capacity wastes resources. Allowing recessions to drag on and on as you read about more and more people getting laid off wastes resources.
2.6.2009 12:09am
A. Zarkov (mail):
For a contrarian view on the stimulus package see Can the US economy afford a Keynesian stimulus? Willem H. Buiter writes,
First, the fiscal policy actions pursued thus far by the Bush administration, but even more so the policy proposals leaked by Obama's proto-administration are afflicted by the Keynesian fallacy on steroids. They appear to exist outside time, with neither the long-run consequences of the actions like to be implemented over the next couple of years, nor the history that brought the US to its current predicament, the initial conditions, being given any serious attention.

...

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama's advisers appear to realise. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets. Keynesian cyclical policy options that would be open to more structurally sound economies should therefore not be tried on anything like the same scale by the US authorities.
Pretty strong stuff here.
2.6.2009 12:13am
SG:
The claim of conservatives is frequently that FDR didn't end the Depression, WWII did. The obvious retort to that is that it proves that "more of it" was, in fact, exactly what we needed.

It's overly reductive in the extreme to claim WWII was just "more" government spending. If WWII proves anything, it's that we might recover if we have broadly supported plan of enforced deprivation of the citizenry for 4 years while we bomb all of our industrial competitors into dust.

I would hope that WWII was sui generis and any lessons that could be learned from it aren't anything that we can conceivably apply today.
2.6.2009 12:21am
David Welker (www):
A. Zarkov,

Good link. This blog post was discussed by Paul Krugman here.
2.6.2009 12:22am
David Schwartz (mail):
Simply put, our economy is screwed up because the illusion of wealth caused a number of economic enterprises that were not in fact productive to appear productive. All of a sudden, it became quite clear that they were not productive. Engaging in new non-productive economic enterprises is not a very good solution.

Money has a very important role in an economy. It provides a way to distinguish the productive enterprises from the non-productive ones. In a crisis, it stops performing that role.
2.6.2009 1:13am
Perseus (mail):
Could anyone skeptical of the idea of a five trillion + spending package explain why we should settle for a mere one, when the evidence from FDR and Japan suggests the government's problem is always that it is too reticent to correct the errors of the market?

In his post on Joe Biden's claim about the supposed consensus among economists in favor of government spending stimulus, Greg Mankiw has a nice roundup of links to articles written by economists who are skeptical. See here.
2.6.2009 2:06am
David M. Nieporent (www):
It's overly reductive in the extreme to claim WWII was just "more" government spending. If WWII proves anything, it's that we might recover if we have broadly supported plan of enforced deprivation of the citizenry for 4 years while we bomb all of our industrial competitors into dust.
Not just enforced deprivation, but conscription; don't forget about the enforced employment, too.
2.6.2009 2:52am
A. Zarkov (mail):
David Welker:

It's not just our foreign debt. Americans are taxed too little to sustain SS, Medicare and other welfare programs. Obviously if we want a welfare state, we have to pay for it. Another problem. We let in about a million immigrants per year who make further demands on the welfare system. You can't have open borders and a welfare state. Choose one or the other.
2.6.2009 4:12am
David Warner:
MarkField,

"In any case, you're misstating the liberal argument about FDR. The claim of conservatives is frequently that FDR didn't end the Depression, WWII did. The obvious retort to that is that it proves that "more of it" was, in fact, exactly what we needed."

If by "it", one means guns, bombs, and austerity, sure. Anyone who's ever been through boot camp could tell you that unemployment and/or lack of demand(s) is not a problem when one puts Uncle Sam in charge of one's life. What I can't figure out is why a liberal would think that a good idea, especially now.

Bretton Woods and mature post-war leadership, civilian and otherwise, ended the Depression. FDR did help us survive it, and win WWII, for which he is one of our five finest Presidents. Being born rich, like TR (and W), economics was not his strong suit.
2.6.2009 6:40am
David Welker (www):

Being born rich, like TR (and W), economics was not his strong suit.


There are people born poor from whom economics is not their strong suit and people born rich for whom economics is their strong suit. This seems like a silly statement.
2.6.2009 6:55am
paul lukasiak (mail):
much of the problem lies in the use of the word "stimulus" to describe the intent of the "package". The fact that Obama refers to it as a "recovery and reinvestment plan" gives you a better idea of its intent. By limiting the discussion to "economic stimulus", the deck is stacked against the proposal.

Much of the spending is aimed at preventing additional job loss, especially in state and local governments who are hard pressed to balance their budgets, and to maintain and expand the "social safety net" for which there is more demand when the economy goes south. So while this spending is inefficient in terms of job creation, it is a necessary component the response to this crisis.

Then, there is the question of "pork" -- when it comes to stimulating the economy, you can't beat "pork", because (in general) "pork" focusses on job creation. And while there is certainly a good argument available regarding how the pork is distributed (it shouldn't be going to wealthy areas), the argument that is made against the package presents pork as a generic evil. Its not.

Finally, there is the criticism that the money won't be spent in a timely fashion. This is a bogus argument against the package based on a bogus presentation of the package. It should have been made far more explicit in the presentation that much of the money being appropriated is to finish long-term infrastructure projects that will be jump-started in the next 18 months with the "re-investment" package in a way that will create jobs.

As for the other part of the package -- the tax cuts -- there is simply no excuse for them.
2.6.2009 7:30am
Michael B (mail):
50 De-Stimulating Facts: Chapter and Verse on a Bad Bill, with commentary, lists seventy or more categories within which the spending, if the bill should pass, would occur. Does not include the interest that would additionally accrue, but it otherwise appears to be a comprehensive listing.

"... something like 3/4 of the money is being spent 'after 2009.'" alkali

Then, and additionally given your own demand for an explanation, what's the rush? Why not a better targeted and much better explained set of legislative initiatives over the 2009, 2010, 2011, etc. legislative calendars? BHO himself, in his recent op-ed, provides no well grounded support for this package and certainly provides no support for the "hurry-up and pass it" mentality, beyond the Keynesian conception/assumption in very general terms only.

Thus, to take one example from the link provided above, emphasis added:

"The stimulus would spend $4.5 billion to modernize the nation's electricity grid. But as Robert Samuelson has pointed out, "An industry study in 2004—surely outdated—put the price tag of modernizing the grid at $165 billion." Most important, the stimulus bill is not the place to make these changes. There is a regular authorization process for energy spending; Obama is just trying to take a shortcut around it."

U.S. Senate: for phone numbers, email addresses of individual senators, see search tool in the upper right corner
2.6.2009 8:21am
Michael B (mail):
"... there is the question of "pork" -- when it comes to stimulating the economy, you can't beat "pork", because (in general) "pork" focusses on job creation ..." paul lukasiak

This is the Rooseveltian myth, '33 - '41. Plus, you had just previously indicated the very idea of stimulus was largely misplaced.

Likewise, there is literally nothing in this bill that can be compared to infrastructure on the scale of the Interstate Highway System, the TVA, Hoover Dam. Even to the contrary since a great deal of it is slotted to simple, money draining areas, political paybacks, etc.
2.6.2009 8:30am
Michael B (mail):
Within the last 24 hours the campaign rhetoric m.o. - together with the hypocrisy and flim flam - has worsened: Obama from Thur. at the Democrats' luxury retreat in Williamsburg (also contains additional global warming info).

Does he have an off switch for this campaign rhetoric m.o.? Even his press secretary has begun to sound like a wind-up doll or automaton more than a real, thinking person. This continuing descent into caricature needs to end - preferably before the Trillion Dollars (TD™) is mandated. A trillion here, a trillion there, and soon enough we're going to be talking some real money - for this generation, for the next as well.

The richest irony of all is that, essentially, this is being forwarded on the basis of anything but change, it's being forwarded on the basis of the idea that the status quo - stop a minute to fully appreciate the multiplicity of ironies at play here - works.
2.6.2009 9:26am
Sarcastro (www):
Obama had better stop speaking well, or I'm totally going to hate him!

The stimulus is full of pork, and by pork I mean spending!
2.6.2009 9:41am
Andy Freeman (mail):
>> Doing dumb things wastes resources. Yes, there may be some return, but you can easily end up worse off than if you'd have done nothing.

> Allowing the economy to run at less than full capacity wastes resources. Allowing recessions to drag on and on as you read about more and more people getting laid off wastes resources.

That's true too.

The point is that there are costs and benefits to every response, including "do nothing". It is completely wrong to claim that every "do something" is better than "do nothing".

It's also dis{something} to suggest that the only alternative to the current stimulus bill is "do nothing". The opponents are proposing responses that do something.

It may be that their responses are worse than Obama's stimulus package, but the "something is better than nothing" folks can't make that argument.

Details matter.
2.6.2009 10:13am
Gabriel McCall (mail):
Of course the burden of proof should be on the side of skeptics. We are in a liquidity traps (interest rates at a zero bound) just as we were during the Great Depression. There is a huge risk of deflation, which is very difficult to get out of if it comes to pass.

The burden of proof should be on the skeptics, because the consequences of doing nothing if you are wrong (the economy will not improve by itself) are very severe. The consequences if stimulus advocates are wrong are much less severe (we at least get something in return for our spending).


We're stuck in an elevator. I'm going to cut off your left little finger so we can get out.

-Wait. Wait! What?! Leave me alone!

What's your gripe? We obviously can't stay in this elevator until we starve to death. Hold still.

-What does my little finger have to do with getting out of the elevator?

Prove that it won't help. Meanwhile, hold still!

-Shouldn't it be your job to prove that it WILL help?

Oh, you'd rather starve to death in this elevator, eh?
2.6.2009 10:36am
MarkField (mail):

If by "it", one means guns, bombs, and austerity, sure. Anyone who's ever been through boot camp could tell you that unemployment and/or lack of demand(s) is not a problem when one puts Uncle Sam in charge of one's life. What I can't figure out is why a liberal would think that a good idea, especially now.


The answer to questions like this is always and forever: compared to what?

I've never seen an economist argue that the enormous deficit spending of WWII was not the basis for ending the Depression. Unemployment was 14.6% in 1940 and 9.9% in 1941 (I believe those are Lebergott figures, which have themselves been criticized as overstating unemployment). That's a fall of nearly 5% in one year with none of the other factors you mentioned yet in operation. Do you have a cite to an economist or study which supports the claim that other factors were dominant?
2.6.2009 11:19am
Dan Weber (www):
Not true. You can refute it by spending enough money in a way that is properly structured and observing the economy nevertheless sink deeper into recessions for a much longer than expected period of time.
Unless we can agree ahead of time on how much money was "enough" or how it is "properly structured," then we're back to an unfalsifiable proposition.
2.6.2009 11:35am
Sarcastro (www):
Here's what we need to do to get to the bottom of this situation.

Start 2 new countries. We'll call them
"Keynsia" and "Austria."

We'll give each person in the country the exact same amount of resources.

We will have two economist-kings rule over each.

We wait about 40 years.

Then we can finally figure out what theory is right.

And start arguing about how it applies in America...
2.6.2009 12:00pm
not a bad idea:

Here's what we need to do to get to the bottom of this situation.

Start 2 new countries. We'll call them
"Keynsia" and "Austria."

We'll give each person in the country the exact same amount of resources.

We will have two economist-kings rule over each.

We wait about 40 years.

Then we can finally figure out what theory is right.

And start arguing about how it applies in America...


we fight proxy wars...why not proxy ideological experiments!?
2.6.2009 12:08pm
Sarcastro (www):
not a bad idea Except this would be a Civil Proxy Experiment.

We could free the (ideological) slaves all over again!
2.6.2009 12:15pm
Perseus (mail):
I've never seen an economist argue that the enormous deficit spending of WWII was not the basis for ending the Depression.

Robert Barro does not go quite that far, but he does denigrate its importance when he notes that:

"the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays."
2.6.2009 2:10pm
Michael Ejercito (mail) (www):

Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays."

If there was rapid growth in the U.S. economy after 1933, does this not mean the Depression ended then?
2.6.2009 2:23pm
Perseus (mail):
If there was rapid growth in the U.S. economy after 1933, does this not mean the Depression ended then?

If you define "rapid growth" as meaning that "the Depression ended," then yes. But others could plausibly argue that "rapid growth" (which is itself a disputable definition and characterization) that does not return the economy quickly to something near "full employment" or pre-Depression GDP levels is not sufficient to warrant saying that "the Depression ended then."
2.6.2009 2:48pm
Steve H:

How could investing $150 billion in public education possibly be seen as a short-term stimulant to the economy? How do Sullum's detractors "grapple" with this?


Maybe this has falled too far by the wayside at this point, but we "grapple" with this by pointing out obvious facts.

I'm on my kids' school's budget committee, and we have been told to expect a 10.5% reduction in funding for next year. This means layoffs, postponement of school construction projects, etc. (And the teachers are definitely not negotiating for a raise.)

More federal money for the schools means fewer people getting laid off for the 2009-10 school year which means more people with money to buy stuff from July 2009-June 2010 which helps stimulate the economy in July 2009-June 2010. That's a short-term stimulant to the economy.

Maybe the long-term cost is not worth the stimulative effects of short-term spending -- there's room for legitimate disagreement on that point. But I can't see how anyone can doubt that getting more money into the hands of teachers, etc., will stimulate the economy in the short term.
2.6.2009 2:53pm
Dan Weber (www):
Steve H raises the point of communities doing cutbacks and the problems they create.

Which suggests that a much better stimulus would be just give money straight to the states.
2.6.2009 4:26pm
Steve H:
As far as I understand, big chunk of the stimulus is going to states.

But there are national infrastructure and social needs as well.
2.6.2009 5:03pm
David Warner:
MarkField,

"That's a fall of nearly 5% in one year with none of the other factors you mentioned yet in operation. Do you have a cite to an economist or study which supports the claim that other factors were dominant?"

Weren't they largely employed building munitions for Lend/Lease and/or the beginning of the U.S. buildup? Reminds me of the 70's-era arguments of the superiority of the Soviet system with its high output and low unemployment. The question is "employed doing what?" isn't it?

Also reminds me of all the campaign commercials touting new kasinos (avoiding the filter) and all the jobs they would create. If there's anything worse than munitions jobs (lacking, you know, a Hitler to defeat), its got to be kasinos. Give me digging holes and filling them up any day.
2.6.2009 9:42pm
MarkField (mail):

Weren't they largely employed building munitions for Lend/Lease and/or the beginning of the U.S. buildup? Reminds me of the 70's-era arguments of the superiority of the Soviet system with its high output and low unemployment. The question is "employed doing what?" isn't it?


I don't know what the extra money got spent for, but military hardware would be a good bet. Now, while I'm not a particular fan of military Keynesianism, better that than people begging on the streets. And the fundamental point remains valid: that it was the extra spending which solved the problem.
2.6.2009 10:24pm
David Warner:
MarkField,

"Now, while I'm not a particular fan of military Keynesianism, better that than people begging on the streets. And the fundamental point remains valid: that it was the extra spending which solved the problem."

I'm not exactly clear on what problem it is that you're trying to solve. Seems to me the problem is that political cycles turned out to be more volatile than the economic cycles Keynes originally set out to calm and the result is an economy hopped up on overly stimulative monetary and fiscal policies finally hitting the wall.

Such was not really the case leading up to WWII, and the easy high of government-spending stimulus was uniquely appropriate in that case because we had an actual war to fight, which is, you know, government's job, by any reckoning. Public infrastructure is too, and there is some room there, but a lot of that is healthy long-range investment, and not the quick fix our junkie economy is currently screaming for.

I say rehab over hair of the dog, and we'll deal with the beggars. This ain't the 30's.
2.7.2009 1:51pm

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