Good Politics Is Often Bad Economics - Why the Stimulus Plan Won't Work 18 comments
Robert A. Weigand
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By David Sollars
It appears that the U.S. Congress is set to pass a $850 billion dollar spending package designed to provide fiscal stimulus for the U.S. economy. It is a mix of spending increases, transfers and tax cuts purportedly designed to pump up aggregate demand. Both tax cuts and spending increases create budget deficits, and therefore the government must increase borrowing to finance its operations. Add in the interest charges and this legislation easily surpasses a trillion dollars in total cost.
They idea of fiscal policy stimulus goes back to the Great Depression and the work of John Maynard Keynes. The basic idea is pretty simple — in times of weak aggregate demand, government could fill the void by spending more directly, or taxing less, thereby increasing consumer demand and business investment. All policy-makers would need to do is measure the needed stimulus (taking into account the multiplier effect, and then properly time the injection of stimulus in the economy. If the economy got overheated and inflation became a problem, then presto, the federal government could raise taxes or reduce spending to slow down the economy.
In theory, traveling to the moon is easy as well. All you need was the right vehicle, pointed in the right direction, traveling at the right speed, etc. But in practice, manned space flight turned out to be a little more complicated and costly. Unfortunately, economic theory and policy tools have not advanced to the point that we should have any confidence in the ability of this short run program to work as advertised. There are timing problems, scale issues and efficiency costs associated with discretionary fiscal policy that are well known (and discussed in any Econ Principles textbook) and will reduce the potential benefits and create unintended consequences. But the political need to do something will win the day, and Washington is all a-twitter with the single largest discretionary budget package ever devised.
Good politics is often bad economics. Even a cursory look at the bill being rushed through the Congress reveals its Frankenstein-type nature. It is a wish list for unrelated spending programs that, on their own, would not be considered reasonable. Even the parts that make some sense, like the much-touted infrastructure spending, are small potatoes in the bill. Instead we get millions for the National Endowment for the Arts. The Department of Education gets $66 billion for . . . well, we aren’t sure, but how can you oppose to education? Amtrak gets a billion so that it can continue to lose money each year. Congress even provides more millions to help those poor souls who will flounder from a lack of analog television transmission. Some of the items are laughable – Speaker of the House Pelosi defending contraception subsidies as stimulus on the weekend new shows was a sure sign of some of the insanity behind this bill. Even traditional liberals can’t stand the stench. Former CBO head and Clinton budget guru Alice Rivlin suggests separating the defendable stimulus pieces from the pork and the other things that have magically appeared without the usual substantive review. According to some analysts only 5 to 10 percent of the total bill is actually related to stimulus spending. Even worse, the “buy-American” requirements will likely result in WTO sanctions and encourage retaliation by our trading partners, hurting U.S. companies and workers in the export market – one of the few remaining shining lights in our current economy. Just ask Caterpillar (CAT).
The little hard analysis that has been done reveals another serious flaw in the bill. Much of the actual stimulative spending won’t occur this year, or the next year. The recent CBO report suggest that most of the new spending that is part of the omnibus-bill won’t kick in until next year and the year after, long after our best estimates on when the trough is reached (.pdf). The levers of government are slow and unwieldy even for someone as brilliant as Larry Summers! Even Keynes later thought that public works and infrastructure projects were poor vehicles for short run stimulus given the realities of actual government expenditure — it takes time to build roads and bridges.
My proposed solution: Take a deep breath and let’s consider what useful things might be in the bill. The less controversial things like temporary transfers to the states to extend unemployment benefits, foodstamps or Medicaid make some sense in the interest of helping those who have lost their jobs in the recession. But these aren’t job creators; they are more in the spirit of what we used to call public assistance. Speeding up some public infrastructure spending might be useful, but it is limited. If you really want to spur investment then include investment tax credits. If you want to help working consumers, then halve the payroll tax for the next year. Let the results show up in the end of February paychecks, and let actual taxpayers choose how to spend it. The Senate version of the bill has the Alternative Minimal Tax (AMT) fix for 2009, which is a good thing—but why don’t we just fix AMT now and forever instead of relying on one year fixes? Any pretense of fiscal discipline is now officially shattered, so get on with it already.
Will any of this really work to stimulate the economy? Probably not. But it will impose fewer costs and not drive up the deficit as much as the current bill, which won’t work either. We seem to forget we tried the lump-sum tax rebate trick last year. The emergency TARP bill that was passed year is starting to reveal its immense shortcomings. Why do we expect this outcome to be different? If we are going to go into debt for a trillion dollars, could we require some standard Return on Ivestment (ROI) analysis to demonstrate how this spending is going to stimulate the economy? At least that might actually create jobs for the thousands of financial analysts laid off in New York and around the country.
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This article has 18 comments:
Overall, this legislation is one of the finest examples of why democracy is slow and inefficient, except for all the other forms of government. By the way, the best among the least may be the booby prize in government. We have serious problems and Congress has caused about 75% of them.
As for the deficiencies of economic theory, I prefer to hear about these from the cream of economic theorists rather than hysterical bloggers. But even so I think that this article deserves a good grade. Let's say +3 and -1.
> jack
the failed football team in TX and the shareholder losses @ harken energy indicate rather conclusively that george dubya is not a 'business type'.
> jack
Doesn't matter who has the best plans for their own money. It is taken by force of law, unconstitutionally, for the politically wired interests. To create "recoveries" in this artificial environment we have the Fed and the financial engineering specialists on Wall Street.
Now the emperor's clothes are off for this dysfunctional system and, who is left to speak for people who contribute positively in the remains of the free market part of the economy?
One of the talking heads on TV this AM said, speaking about the stimulus plan, "We can't do nothing !!" And that pretty much sums it up. EVERYONE knows if left alone, the economy and the markets will eventually work out all their problems and NOBODY in a position of influence is willing to let it happen.
At best, throwing good money after bad will not slow recovery. At worst, it will prolong the mess, perhaps even "zombify" the economy like Japan's massive spending did in the 1980's.
Change ? What we need is to refer to the third part of the "alcoholics' prayer" - the wisdom to know the difference.
I am fed up listening to hollow arguments in favor of tax cuts.
at least we don't have rush (clone of k.rove) limbaugh running the country - yet.
> jack
Obama promised not to be business as usual. He said he would bring change and the yes we can slogan. Did you see the pork in the
stimulus. I can't believe he's trying this.
So, at this point, spending is better than violence. The question is: what kind of spending might work?
From the viewpoint of saving our economy, three things stand out: intensive R&D on alternative energy sources, selective investments in infrastructure, and education.
These things are not single year quickies but they are needed.
In the shorter term, there are important humane considerations such as unemployment insurance, mortgage refinancing, health care, and careful revisions of our financial system to stabilize it.
These things will require significant deficit spending. The only way to deal with that, other than default, is subsequent inflation. This will follow without fail. It is the best choice that I know of.
Whining will not help. Suck it up.
Like playing golf, your first stroke is the most important one.
What scares me most is that it makes Mr. Obama look over-rated; and that is deadly.
On Jan 30 02:08 PM Socialism cannot compete! wrote:
> It's not only poor economics, it's ALSO poor politics!! Even liberals
> have been forced to recognize the pure waste that is in this bill...much
> of it just in there because economic fear gives them an opportunity
> to ram through social engineering spending that would otherwise never
> make it.