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The Skeptics

Not everybody is pumped about Obama's $825 billion stimulus plans, especially the part that includes billions of taxpayer dollars being spent by the government in the hopes of jump-starting the economy.  Here's what we've said about it:

But don't just take our word for it: There is a growing number of economists speaking out against the logic behind Obama's stimulus package.  Harvard economics professor Greg Mankiw (who've we've mentioned on here a few times before) has been recording these economists' statements against the stimulus plan.  This is some of what Mankiw has compiled:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Perhaps their [Romer and Bernstein's] estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive. For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.
  • Kevin Hassett, American Enterprise Institute director of economic-policy studies

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.
Hard to do. It's not easy to spend large amounts of new money quickly. Harder still to do it in a way that creates good value for society and doesn't bring out the worst in our politicians. (I can hear Jon Stewart on the Daily Show: "Where's Ted Stevens when we need him?")

Bad timing. Right now, most forecasts call for continued shrinkage in the first half of 2009, modest growth in the second half, when the stimulus starts to come online, and faster growth in 2010, when spending hits high gear. This is, of course, the classic argument against countercyclical fiscal policy: it's hard to get the timing right.

Small multiplier. Let us say that for every dollar of extra government spending, GDP goes up m dollars, where "m" is the multiplier. Undergraduate textbooks, including your favorite, sometimes suggest m is large. The evidence is fuzzy, to be sure, but to me it suggests a multiplier around one, maybe smaller. Even stimulus cheerleader Paul Krugman only claims 1.1. If that's the case, the impact of government spending (say 700b over two years) is barely enough to reverse the decline in GDP we expect to see over the next two quarters.

Long-term budget issues. I don't spend much time in Washington, but I thought the mainstream view among government economists was that our retirement and health-care programs were likely to bust the budget over the next 2-3 decades. Recent directors of the CBO under both Republican and Democratic Congresses have made this point, and I hope I wasn't the only one listening. The US is not Argentina, but it still seems a little incongruous to advocate massive increases in spending when the long-term problem is paying for spending already on the
books.

It's the financial system, stupid. Japan in the 1990s is a Rorshach test for macroeconomists, so I can't claim everyone sees this as I do. But my take (borrowed from Anil Kashyap) is that Japan demonstrated that the real issue in financial crises is the financial system. If we don't fix it, no amount of fiscal stimulus will make much difference. That's one of the reasons I'm optimistic about the US right now: unlike Japan, we faced our problems, ugly as they were, and have acted decisively to correct them.

The bottom line is this: we are being asked to believe that a big, trillion or even multi-trillion fiscal stimulus can boost the current macroeconomy.  If you look at history, there isn't good reason to believe that.  Any single example, such as the Nazis, can be knocked down for lack of relevance or lack of correspondence to current conditions.  Fair enough.  But the burden of proof isn't on the skeptics.  It's up to the advocates of the trillion dollar expenditure to come up with the convincing examples of a fiscal-led recovery.  Right now we're mostly at "It wasn't really tried."  And then a mental retreat back into the notion that surely good public sector project opportunities are out there.

So what you have is the possibility of faith -- or lack thereof -- that our government will spend this money well.

GOP House Leader John Boehner has also put a list together, which you can read here.

Unfortunately, economics is not a highly-pressed study in our schools, at both the high school and collegiate levels.  While students may be forced into workshops and classes about diversity training, far too few students leave college with a good understanding of even the most basic economic principles.  As such, it's easy for politicians to put together great-sounding proposals that make little economic sense, as we believe the case to be with Obama's stimulus package.

It's nice to think that government can easily spend its way out of a recession.  Government (both Republicans and Democrats) has no problem dropping a couple of billion here and there, and this will be made much easier with the moral imperative of economic recovery.  And, it seems so simple: Government spends money and the GDP increases! How come we don't do this all the time?

Answer: because it doesn't work.  As Cowen pointed out in the quotation above, there is little (if any) historical evidence suggesting that this type of Keynesian spending actually works.  It didn't work for Argentina, Zimbabwe and most notably, Japan.  It didn't work for Hoover.  It didn't work for Roosevelt.  It didn't work for Ford either. What suddenly has changed to think that it may work for Obama?

We've said it over and over again: Obama's stimulus plan is a sham that will cost taxpayers near a trillion dollars with no tangible economic benefit.

Our solution?

Cut taxes, permanently.  Reduce spending, drastically.  And, over all, keep government from micromanaging the economy.

Editor's Note: Many readers of this blog may be out of a college, and therefore not registered for a semester of Econ 101; however, it is never too late to begin brushing up on your economics.  The Age of the Internet has made this terrifically easy, as that many economics professors now run their own blogs.  Mankiw, for example, has an excellent blog on economics that is easy to understand, frequently updated and usually has great insight into current political topics of an economic persuasian.  Here is a list I've found of other great economics blogs for your reading pleasure.