Ralph Musgrave

What Constitutes 'Worthy' Stimulus Spending?

Dianne Rogers claims at the end of her article that “bang per buck” (i.e. “jobs created per $m of government spending”) is important. Prof Joseph Stiglitz agrees with her. E.g. see Financial Times article by Stiglitz at www.ft.com/cms/s/0/a78...

I strongly disagree with Rogers and Stiglitz. “Job creation” is an example of what economists call and “intermediate objective”: that is, something that sounds worthy, but is not always closely related to the basic purpose of economic activity: creating work for those who want it, and maximising output per head (within environmental constraints). Intermediate objectives are generally frowned on in economics.

A classic example of the harm that comes from targeting “job creation” occurred in Japan: the so called “bridges to nowhere”. The attraction of civil engineering projects and other forms of government spending is that more jobs are created per $ of government spending than is the case with tax cuts. This lead to some totally pointless civil engineering projects in Japan: “bridges to nowhere”.

Another reason for the irrelevance of “bang per buck” is that the bucks absorbed by a civil engineering project are a measure of real resources consumed (labour, concrete, etc). In contrast, printing money and handing it out to citizens cost virtually nothing. One is comparing chalk to cheese here.

I therefore favour printing whatever amount of money is needed to get households spending again, and if that is $10,000 per household, then so be it. If market forces are operating properly, that will automatically bring about the optimum number of “bridges”. This printed money may well prove inflationary in two years time. But if that is the case, governments will have to claw back the money (e.g. increase taxes). Strangely enough Stiglitz has long advocated money printing as the cure for Japan. He now seems to be contradicting himself.