A No-Nonsense View of Fiscal Stimulus

This set of opinions is going to be hard to swallow. They are from an economist, Hal Varian at UC Berkley. Unfortunately he writes in plain English with out a lot of charts, graphs or Econspeak. So buck up and take a look.

I really want to post the whole article but that would be unfair, not to mention plagaristic (is that a word?). So let me give you a couple snippets.

These days it seems like it is our patriotic duty to consume more. And if we don’t choose to spend more money ourselves, the government will do it for us.

But wait a minute. Isn’t it excessive spending that got us into this mess in the first place? Spending more now seems like drinking Scotch to cure a hangover.

Despite this apparent paradox, there is some logic to providing a dose of economic stimulus. But it should be more like Alka-Seltzer than Scotch. To understand what sort of stimulus makes sense, consider the economic forces at work:

He goes on to discuss the four sources of demand in an economy and the two sources of supply (his description), and notes that existing demand has been or should be reduced to two, government spending or investment. In essence, either government demand or private investment has to be the vehicle to spur growth. While not dismissing government spending he makes the following common sense observations:

That brings us to government expenditure, which is getting most of the press. The danger with this form of stimulus is twofold: First, it takes too long for the government spending to kick in, and second, spending may easily focus on pork-barrel projects that have little inherent value.

There are worthwhile public infrastructure projects; the trick is to find them and fund them promptly. One possible plan is to set up an independent commission to prioritize public investment projects, and then subject the plan to a single up-or-down vote in Congress.

One further warning about government stimulus: It makes little sense for the federal government to spend more if the states are forced to spend less. A significant part of the increase in federal government spending should be transfers to the states in order to keep basic government services available at the state and local level.

Professor Varian then goes on to state his case for an increased emphasis on the investment component of demand. Noting properly that in the long run this is how wealth is created.

I am doing a poor job of paraphrasing his work. The article he wrote is beautiful in its simplicity and so straight to the point that it must be read directly for impact. Read it and save it. It is a useful tool to pull out when others try to make something more complex than it truly is.

more: here

Comments

[kruser53:]

My bottom line:

Stimulus for consumption is inefficient, stimulus for future economic growth is good.

Jan 08 10:42 AM

[Leftfield:]

I believe "plagiaristic" is the word. Probably not.

After denying all until we fell into the present pit, most commentators still think we'll come out as before. Finally most see a longer than usual recession. What a help. I think we've recklessly played with fire for so long, we're going to pay awful prices of lost freedom, opportunity and fully recovered markets. The day after TARP I considered the US in past tense.

Next, it seems few are thinking about how this time will be different for the US. All the elements are in place for full fledged fascism.

We have it now, but as increasing government involvement works poorly, the government will show its teeth ever more. For example, buying houses, once a reward of American capitalism, will be a government program that feels like a gulag. Maybe cars, too.

We have extreme wealth stratification and just handed the perpetrators of the present debacle trillions more. The Patriot Act. A populous largely in bad shape, largely ignorant of economics or the constitution that will go along with "doing something." I don't believe the people gaining power playing or are stupid. They're gaining and will continue to gain far too much for the little people to matter.

I have trouble understanding why the free market advocates I voted for have kept the same albatrosses of taxes, regulations and costs over the neck of our economy while making mostly relatively less-off folks without political clout face third world competition alone. I'm sure government works programs will be awful, but look at the trillions for billionaires we've already thrown away!!!!!!

Jan 08 12:46 PM

[Kunst:]

It's interesting how everyone seems to assume, and long for, a return to the good old days. I think we have crossed a divide, and our future is going to look a lot different than our past. I imagine the same phenomenon occurred in the USSR in 1988 or Europe in 1913 and 1938. Sometimes things change and can't go back.

Jan 10 02:18 AM