David R. Henderson  

Economists Against the "Stimulus"

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Posted from San Francisco airport while I'm en route to San Antonio.

Today's New York Times carries a full page ad, paid for by the Cato Institute, with a strong statement against President Obama's stimulus package. It quotes his statement:

There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.

Well, actually, of course, that's not true, as the Cato statement, signed by two of the three Econlog blogges (Bryan and me) points out.

Whenever someone says that there's no disagreement about what seems like a controversial idea, you should be suspicious. And when someone says there's no disagreement when you know that there is, you should be distrustful.


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COMMENTS (32 to date)
johnleemk writes:

I'm actually rather curious why Dr. Kling did not sign the open letter. I got the impression from his postings that he also opposes the stimulus package in its current form, although he has also said that he seems to agree more with stimulus proponents than he does with its opponents.

Kevin writes:

Here's hoping you guys are both wrong and aren't forced to be re-educated. Or am I just letting hope triumph over experience?

The Sheep Nazi writes:

I'm guessing that the signatories are all tenured faculty someplace. Arnold isn't a perfesser by trade.

brannigan writes:

Its the same rhetorical trick as Global Warming, a way of promoting radical action on weak or nonexistant evidence.

Jesse Rouse writes:

It seems like a lot of professors against the stimulus did not sign. It is impossible to get everyone's name, especially if they were trying to get the ad out in a short time.

Robert Waldmann writes:

I'm curious (honestly) when did Obama say that ?

I have a guess as to what happened. The Obama team talked to some economists focusing on those who had been in top advisory positions. All, including Martin Feldstein and Larry Lindsey supported a stimulus. Obama concluded that there was a consensus.

Obvoiusly there isn't, but you can't blame him for not knowing about things that were written after he made his claim.

So is he still claiming that there is a consensus ?

When did he make the quoted statement ?

I'm impressed that Arnold didn't sign this. It's sad that this will help confuse the public. They won't realize that the economists who signed this did so not because smart government investment won't increase growth in wealth, science, technology, and total societal utility greatly. Instead they signed this for these reasons:

1) They understand that smart government investment will increase growth in wealth, science, technology, and total societal utility greatly, but they are willing to give this up to gain even little bits of extra economic freedom, that is they're very libertarian.

2) They don't understand the macroeconomics. They became economics or finance professors producing research in a very different, and perhaps very narrow, specialization. It's like asking a civil engineer, or even a civil engineer who narrowly only works on a specialization in tensile strength, for advice on a computer engineering. Even if he's a great civil engineer he may understand very little about computer engineering. Fama's the quintessential example of this.

3) Government being more valuable would make their research less valuable, so they lie and/or mislead about the value of government.

4) They're well compensated, or hope to be, with high paying jobs, consulting, etc. by the right wing machine.

5) They just hate it when the government takes their money and the money of the wealthy and they care more about decreasing this than the fact that smart government investment will increase growth in wealth, science, technology, and total societal utility greatly.

It should also be noted that a petition in favor of smart government spending was signed by far more Nobel Laurents and top economists in 2003.

Randy writes:

"...when someone says there's no disagreement when you know that there is, you should be distrustful."

Already there. This is just fuel for the fire.

Zac writes:

@Richard- I think, for the majority of these economists, you were pretty close with 1) except let me reword it for you (your own rewording of #1, #5, is just redundant)--

They are skeptical that government will "smartly" invest in a way that would cause growth in wealth, science, technology commensurate compared to the opportunity cost of 800 billion dollars used privately. Many are very libertarian and are unwilling to support a plan that relies on the forcible theft of 800 billion dollars.

Your problem is that you greatly over-rate the ability of government and under-rate the ability of markets to provide an efficient distribution of resources.

Not everyone trusts the government like a 2nd grade social studies teacher. And not everyone believes it is ethical to steal.

Eric writes:

Disclaimer: I have no problem with smart government spending, and the 2003 declaration linked above is correct -- but spinning this stimulus bill as "smart government investment" flies in the face of common sense.

The stimulus plan is tax cuts, increased government spending through normal channels, and infrastructure appropriations. Only one of those categories could be correctly called "investment".

The PDF Serlin linked to states that an effective stimulus plan "should rely on immediate but temporary spending and tax measures". The investment portion of this bill is not immediate and should properly be discussed separately from the (immediate and temporary) spending and tax cut portions.

If I spend $50 by eating a $35 dinner and buying $15 worth of penny stocks, I don't get to say that I "invested" the whole amount. There may be some portion of the bill that is "smart" "investment", but lumping the other measures in with "investment" doesn't make them investments too. And calling them "smart" doesn't make them smart, either.

Spin doctor.

Lance writes:

Richard,

You've seemed to miss Edward Prescott who signed the letter. And I'm sure if you were to check the credentials of those who signed the letter, they would have the 'correct' credentials that you seem to demand.

If you make those conclusions (the list of five things the economists may have in common) unsubstantiated, there is no reason to not make a similar list of things for the economists who signed the letter in 2003.

But brandishing terms such as 'libertarian' in attacking stimulus skeptics is no effective way to rebut certain arguments.

RL writes:

DH: "Whenever someone says that there's no disagreement about what seems like a controversial idea, you should be suspicious. And when someone says there's no disagreement when you know that there is, you should be distrustful."

And when it's a politician saying it, double down on the above...

Bill writes:

Richard H. Serlin commented:

"They don't understand the macroeconomics. They became economics or finance professors producing research in a very different, and perhaps very narrow, specialization. It's like asking a civil engineer, or even a civil engineer who narrowly only works on a specialization in tensile strength, for advice on a computer engineering. Even if he's a great civil engineer he may understand very little about computer engineering. Fama's the quintessential example of this."

Or maybe...it's like asking a finance professor for advice on economics. Even if he's great at finance, he may understand little about economics. Serlin is the quintessential example of this.

smart government spending = 2009 oxymoron of the year

Tom of the Missouri writes:

I like the ad but was a bit worried too that certain of my favorite economist did not sign it. I find it interesting though that it appears that the recession does have its benefits. Remember back during the campaign season when the NYT's was rejecting full page ads from those with whom they disagreed (i.e. the Republicans and their supporters) and subsidizing the same from those they supported? Now that they just escaped bankruptcy thanks to their new foreign investors, I guess they have changed their tune and now welcome the likes of the nice folks over at CATO and their cold hard cash. Maybe they will let Rush Limbaugh take out a couple of pages tomorrow. I stopped my subscription long ago, for hopefully obvious to the folks in this forum reasons, but look forward to hearing about more of the same. Maybe I will re-subscribe someday.

MattYoung writes:

Split the difference.

We retract the remaining TARP. We let Obama give out $350 billion, election congratulations. Call it a truce,

A common response of people who are willing admit the well established in economics free market problems like externalities, inability to patent, etc. is that the government does not invest the money smartly or efficiently. But the question is compared to what? If the taxes were not raised on the wealthy, what would that money have been spent on? As we have seen and as has been shown in economics, overwhelmingly consumption goods of little or no investment value, bigger and more yachts and mansions or McMansions, $2,000 suits or $20,000 suits, etc.

The government could flush 90% of the money for an alternative energy project down the toilet, and still the remaining 10% would have a far higher return over the long run than these things. It would create far more wealth. It's just very easy for government investment programs to beat the alternative, and the evidence in economics shows this overwhelmingly. For a good start on that evidence, see here. Moreover, the amount of waste in government (under the Democrats) is grossly exaggerated. Yes, you can come up with dramatic examples, but so can you with private companies, like the $5,000 shower curtain and $1 million birthday party that TYCO CEO Dennis Kozlowski charged to shareholders.

MattYoung writes:

From:

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012802938.html

Martin Feldstein says:

"As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. "

Well, someone tell this idiot that if he wants to rewrite the thing, then it is not a stimulus, it is a Ricardian equivalent government restructuring.

Floccina writes:

David Henderson, Arnold Kling & Bryan Caplan, I would love to read your take on Jim Powell’s article about the 1920-1921 depression. Is Jim Powell showing huge bias? Can we learn anything that would be helpful in the current situation from the 1920-1921 depression? Could it be that there is a trade off between a shorter more severe down turn were certain workers are crushed and a longer but less down turn were pain is less but more persistent.

http://article.nationalreview.com/print/?q=MWI2OWUyOWE2NmZjMmQ2ZTg5YzIzZjczY2I2Mzg2N2Q=
Not-So-Great Depression
How Warren G. Harding got us out of it.

By Jim Powell


Which U.S. president ranks as America’s greatest depression fighter?

Not the fabled Franklin Delano Roosevelt, since unemployment averaged 17 percent through the New Deal period (1933–1940). What banished high unemployment was the conscription of 12 million men into the armed forces during World War II. FDR actually prolonged high unemployment: he tripled taxes; he signed laws that made it more expensive for employers to hire people, made discounting illegal, and authorized the destruction of food; and he launched costly infrastructure projects like the Tennessee Valley Authority that became a drag on states receiving TVA-subsidized electricity.

America’s greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed the much praised Woodrow Wilson — who had brought America into World War I, built up huge federal bureaucracies, imprisoned dissenters, and incurred $25 billion of debt.

Harding inherited Wilson’s mess — in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million.

(continued at the link above…)

Floccina writes:

@Richard H. Serlin I think you and those debating you need to get more specific. Many libertarians might applaud more spending on basic research and if and where roads need repair the repair of those roads. You on the other hand might be ok with privatizing some roads some aspects of education etc. Education is a particular peeve with me. We seldom ask what knowledge would have the biggest bang for the buck and what is the most efficient way that we can get that knowledge to the people who need it or could use it most (PBS is one way to get knowledge to the people /internet is another). Instead people often just say we need to spend more on schooling (se Kansas city MO and how more spending can fail).

One illustration on funding the sort of thing that you seem to recommend:
Many liberals will fight funding for nuclear power tooth and nail.
Many conservatives will fight funding for stem cell research to the death.
Some liberals will fight funding for more roads in favor of mass transit. Many object to the interstate highway system because it helped to kill the more energy efficient rail service and contributed to sprawl.
Some liberals strongly oppose what I think could be the biggest boon to humanity which is biotech to make more pet resistant /drought resistant/ salt tolerant/vitamin rich food crops.

You end up with politics deciding thinks and then you have congress fighting over where each is to be done. Another point is that knowledge due to research exists in all the world and yet the people in parts of world are still desperately poor so research may not have quite as much bang for the buck as you seem to think, you do need people to have private money also.

Zac writes:

@Richard - So you are saying the government can spend my money better than I can. That's an interesting proposition. Perhaps you should surrender all of your personal wealth to the government, who will invest it smartly in energy projects and the like (of course they would never waste it) and generate more wealth for all of us.

Government waste over-exaggerated? Are you honestly for real?

Carl The EconGuy writes:

1. If there are huge unused resources in the economy (a BIG aggregate demand failure), the keynesian hypothesis is that government spending can ameliorate it. That proposition has been tested empirically, but has not really been proven. Economists are still divided on it.
2. If you are not facing a huge aggregate demand failure, i.e., something like 20% or more general unemployment for years on end, then all government expenditure is purely redistributive. It takes resources from some people, and gives them to others, which means that the net increase in expenditures (consumption and investment) may be small positive, small negative, or indifferent. We just don't know how the current "stimulus" bill will work out -- but it certainly looks like it's mostly redistributive, and is therefore likely to do little or nothing, or perhaps even make us worse off.
3. But Obama is clearly hanging his Presidency on the stimulus bill -- a huge increase in government, for very uncertain payoff. That's his prerogative, never mind the unconvincing rhetoric. The voters will decide. They put the current crowd in, and you get what you vote for. Let's wait and see.

mjh writes:
Yes, you can come up with dramatic examples, but so can you with private companies, like the $5,000 shower curtain and $1 million birthday party that TYCO CEO Dennis Kozlowski charged to shareholders.
No private company that I am aware of has ever taken my money from me at the end of a gun. I have always given it to the private company freely in exchange for some good or service they offer. After that trade, the money is no longer mine; it's theirs to do with what they want. My opinion of how they use it is irrelevant.

But not so with the government. If I decide I'm not getting a good deal for my taxes, I can't withhold it. The government comes and puts me in jail!

Granting that companies like Tyco, etc, spend money foolishly, so what? They are the only one's who pay the price of that waste. But if the government wastes money, they simply pull out the tax pen and forcibly extract some more.

robert mcclelland writes:

Carl the ecoguy wrote that the current stimulus bill looks to be mostly redistributive. I'm curious to know who the bill will take resources from and who will these resuorces be given to? Thanks

Brad Hutchings writes:

This stimulus bill is example one of an emerging pattern of the Obama administration. It goes like this. To get its way, it will claim that "this administration listens to the science and recognizes facts". It's a slap at Bush, of course, but it also sets down the presumption that any opposition is rooted in falsehoods and voodoo. I thought this mantra would be distinct from the Bush approach of "we have to act now or bad things will happen", but it seems to have subsumed that rhetorical hammer as well.

The Obama administration has the upper hand with this line of argument because of stem cells. When it applies it to areas where there is reasoned scientific dissent, they need to get hammered for claiming consensus. And that's what makes the Cato ad so important.

Zac,

It's not just an issue of you can spend your money better than the government. There are certain options to buy things that you have through the government that you don't have otherwise. For example, suppose you -- and everyone else -- would all be better off if you all spent $100 on a basic scientific or medical research project. The government could make this possible, the private sector couldn't, because too many people would just free ride. It would be worth it for your own personal gain to just not pay your $100 and free ride off of the $100s that others have paid.

It's like at a stadium; you have the option to sit during the game or stand, and you know which you like better. The vast majority prefer to sit if everyone else would sit, but if you chose to sit and everyone else chooses to stand, then you are worse off than if you stood too.

Everyone would be made better off if they could be coordinated to all sit most of the time, but coordination is often only possible, or practical, with a government role due to free riding, other externality issues, and many other long established in economics free market problems.

Floccina,

Yes, I do support a mix of private sector and government. This is well proven to create the greatest wealth, total utility, and advance in science, technology, and medicine.

I'm not saying there isn't bad government spending. I'm just saying there's also great government investment, and when that comes up in congress, as it is now, it should be supported, not opposed kneee-jerk because of some simple and false reasoning that all government spending is bad.

I do support much more choice in schools, either charter schools allowed nationwide or voucher programs where the private schools are highly regulated and monitored by the government. Why highly regulated and monitored? because in many cases people don't make good decisions. It should be very obvious that many parents are poorly educated and irresponsible, and left to choose a completely unregulated school on their own could make horrible choices, or be virtually bribed by a private company to put their child in a horrible school.

Moreover, it's extremely time consuming to monitor and study a school well, especially if the school wants to hide things. Every parent in the community having to do all of this separately is much more time expensive and inefficient than having a government board of experts do much of it for the entire community, and the government board of experts can use it's power to get at things private individuals can't with the ability to open the books and make unannounced intrusive inspections. Plus, the government investigators have no profit incentive to lie about how good the school is like Moodys had to lie about how good bonds were.

Also, I strongly support biotech. It's horrible to put butterfly eggs and intimate objects like rocks and trees ahead of people, often the poorest people in the world.

But advances in science really have made an enormous difference. The number of people lifted out of severe poverty over the last generation has been amazing. The increase in food yields has been amazing.

Carl The EconGuy writes:

@Robert McClellan

The empirical evidence amassed by economists, including Barro and Romer and others, is pretty clear in the conclusion that the multiplier effects of deficit spending in the range we're talking about now are insignificant. Add to that that there is still considerable unresolved issues about the effects of deficit spending and government jobs creation even during the great depression. That means there is little to no evidence at all for the vaunted multipler effects promised by the bill's proponents. And if you can't show a significant correlation between expenditure/deficits and growth/unemployment, it follows, ipso facto, that government expenditures displace private, and therefore are redistributive and not increasing the aggregate effectiveness of the economy. The theoretical explanation for that lies in the Ricardian equivalence theorem, which has also been tested and fairly well validated. Ergo, the kind of expenditures we will now see cannot be expected to be anything but redistributive, in the sense that they will move resources from one use to another, for little or no aggregate effect.
Which leaves us where I came out: if you like the politics of the bill, you'll like the bill; if not, you won't. The bill has little to do with stimulus, and is all about what kind of government you want, and what favored groups you want to support. We will know more about what people think about that in two years, in the next election cycle. Meanwhile, don't expect much stimulus from this bill or you'll be disappointed. The economy will most likely recover, with or without this bill, but the growth of government is here to stay, whether you like it or not. Begala called this one right a couple of months ago, it seems to me, when he said that a crisis is an opportunity not to be wasted. I think we all know what this is about, just read the bill if you can stomach it, and real stimulus is way back on the list of political priorities right now. The fastest way to get real stimulus would be to offer a five-year pause in all FICA taxes, along with accelerated depreciation allowances for new investments, and tax write-offs for consumer loans -- ideas that the Obama Administration would reject on the basis that "we won the election", which is what Obama told the Republicans last week to the cheers of all the liberals. So, let's call this for what it is: pure politics dressed up in the usual fog of confusing rhetoric. I'm not complaining, mind you. It's a bit late for that -- the liberals and the keynesians are in charge, for now, and to the victor go the spoils. Or, as they used to say: Ave, Victor, satagatori te salutant! Loosely translated: Hail, Conqueror, those shall pay salute you. Congratulations, may you spend it well.

Jim Chappelow writes:

Richard,

So, your original arguements boil down to assertions that economists who oppose the stimulus:

1. Are politically biased
2. Are ignorant
3. Are financially biased
4. Are financially AND politically biased
5. Are greedy

Thanks for raising the level of discussion by not engaging in ad hominem attacks :). On the other hand, I'm willing to admit for the time being that economists who support the stimulus are not doing so simply to further their careers by going with the politically popular flow and ingratiate themselves to the powers that be.

Your sole substantive argument revolves around the idea that public goods have at least some value so we can't just assume that every dollar of goverment spending disappears down a rat hole somewhere. Granted (and the vast majority of those who oppose the stimulus would surely agree), but completely irrelevant. If an increase in spending for public goods is needed, than it ought to be able to get through the appropriations process on it's own merits and the proper mix of private sector and government in the economy arrived at by normal, open deliberations, rather than being rushed through. To claim that the desirability of public goods in itself justfies massive emergency expansion of the size and scope of government immediately and with no discussion is absurd.

Mike Moore writes:

Richard,

In addition to the problems above that others have pointed out, you equate high income earners with rich people in the following:

"But the question is compared to what? If the taxes were not raised on the wealthy, what would that money have been spent on? As we have seen and as has been shown in economics, overwhelmingly consumption goods of little or no investment value, bigger and more yachts and mansions or McMansions, $2,000 suits or $20,000 suits, etc."

You are correct that rich people often splurge on these examples. Some of these rich people are often high income earners as well. However, in order to stop and get a wonderful increase in utility that you seem to be so fond of, you must tax only the high income earners.

This is an important distinction, as high income earners are often among the most productive in the country, working an average of 60 hours or more. With higher taxes, their return to work is reduced and some will retire from working or work less and become rich snobs. You're not taxing their wealth so much as their productivity, decreasing the incentive to be innovative or productive.

The rich will work substantially less argument for a large tax increase from its current level is well disproven. They may easily work more due to the long established income and substitution effects which can be found in any university intermediate microeconomics text, and most beginner ones too. For more on this see here. With higher taxes they have to work harder to maintain their desired lifestyle, and they want to keep up in the prestige arms race with the Jonses. Positional/Context/Prestige Externalities are enormous.

As far as my financial incentives, we are wealthy. It's not that we won't pay these increased taxes; we just think it's worth it.

George writes:

Richard Serlin wrote:

"...intimate objects like rocks and trees..."

Way too much information about your sex life.

(Before you complain that's an ad-hominem attack, go back and look at your first comment.)

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