Arnold Kling  

Evening Commentary

Summers' Warning?... For a New Liberty on iT...

From Brad DeLong, Michele Boldrin, Clive Crook, and David Brooks. Thanks to Greg Mankiw for the first two pointers. Comments below.

DeLong writes,

spending works--eras when some group or other gets excited about future prospects and starts spending money like water are eras in which production and employment are high and unemployment low. And the government, in this respect, is just like any other group of starry-eyed optimists whose eagerness to spend pulls the economy into a high-employment high-pressure boom.

Boldrin writes saracastically,

Because demand, for no good reason, suddenly dried up, we are in trouble. People have suddenly, and irrationally, decided not to spend anymore. Hence, the government must spend even if it does not have the means for it.

DeLong writes simplistically, as if all government spending is a net increase in total spending, with no crowd-out of private spending. Boldrin writes simplistically, as if all government spending crowds out private spending, with no net increase in total spending. Generically, I think that the answer is somewhere in between. However, the specific bill that passed Congress is almost designed to minimize the net increase. The lags in spending mean that crowding out from higher interest rates can take place long before the spending even kicks in. Brilliant.

Crook writes,

The US system is mostly private, yet the country still spends about as much public money on healthcare, in relation to GDP, as Britain spends on the National Health Service.

Brooks writes,

President Obama has concentrated enormous power on a few aides in the West Wing of the White House. These aides are unrolling a rapid string of plans: to create three million jobs, to redesign the health care system, to save the auto industry, to revive the housing industry, to reinvent the energy sector, to revitalize the banks, to reform the schools -- and to do it all while cutting the deficit in half.

Crook believes that it can be done, but we might need to raise taxes a bit. Brooks, on the other hand, is actually worried that his beloved Bobo elites might not be as brilliant as they think they are.

I have two books coming out later this year. The second one is focused on the discrepancy between increasingly dispersed knowledge and increasingly concentrated political power. It's sort of like Brooks' column, except that I think we need to do more about it than hope that the elites come through.

Comments and Sharing

COMMENTS (7 to date)
MHodak writes:

Most people commenting on economic policy tend to accentuate certain points and minimize others in order to tell a story or make a point. DeLong is a more extreme example than most on this score. He either cynically suppresses the other half of the story, or is truly ignorant of it. In other words, he's either a liar or an idiot. (I don't think he's an idiot.)

Private sector attorney with questions writes:


Would you accept the economic equivalent of vouchers if it were labeled for purely political purposes "universal care?" Assume the economic impact of the legislation were objectively (i) deregulatory toward a private market, (ii) no employer incentives for care (a/k/a "original sin" I think you have called it) and (iii) otherwise is a near match to your last book. Would you care over the semantic split between "universal care" and "private market with subsidized vouchers"?

I would note that Geithner appears to be moving in a three tier analysis of the banking system of (i) shut down "zombies" whether you call "nationalization" or something else using an unknown combination of Chapter 11 or FDIC liquidation (the almost certain Citibank option), (ii) a watch list of questionable banks (the Bank of America option) where the assets are likely less than liabilities but cash flows meet current obligations (what is the proper test for insolvency anyway?) and (iii) solvent banks and financial institutions (god, I hope JP Morgan and Wells Fargo are different than Citi and BOA, Nouriel R. or Meredith Whitney, please confirm). If Geithner's plan is really a slow motion implementation of the foregoing three tiers, only delayed for lack of political support, is it so bad?

Could the administration announce a three-tier plan? Could it propose a policy that offered free-market health care?

In either case, do you care about the media lead semantics, or the end impact of the legislation (or underlying executive policy)?

I understand there is no reason to trust this administration to date, but, given the scope of the problems as of Nov. 3, 2008, do owe a continued look at the background noise as announcements come out?

It is, and always will be, Morning in America; we sometimes need to remind ourselves. Marc Andressen is right, and the rest is noise, especially jack-asses like James Wolcott.

Keep up your posting; you are invaluable.

Jayson writes:

Delong is not ignorant of other points of view; he reads them before he deletes them from the comment section of his blog.

Niccolo writes:


Question, why do you disagree with the statement made by Boldrin that all government spending crowds out private spending?

Isn't it essentially true? And I'm not taking this from an ideological perspective either. I'm taking it from basic arithmetic.

If we have 99 apples, isn't it a decrease in productivity to allow a man to take 33 apples from us for doing nothing more than deciding that he would get 33 apples and we would both get 33 apples too?

I think when economists familiar with the libertarian background concede to non-libertarian economists aspects of government spending as possessing possible goods, it is done for no other real reason than to just fit in.

Sorry, I'd like to fit in with the majority of economists too, but when I realize they can't even get basic mathematics of addition and division correct, I realize that I'm better off siding with the math than I am with the political economists.

Dan Weber writes:

While I think government spending tends to drive out private spending, it's not always the case. And particularly in a situation like what we have right now.

As for health care policy, the devil is in the details. There are a lot of things that government can do to improve health care in this country. I'm scared that the default answer is "Medicare for everyone" which would be a big mistake.

ionides writes:

What about the other type of crowding out, from the production standpoint, rather than demand. If government spending draws labor out of some sectors and into others, it is not a net increase. The degree of expansion is the extent to which new spending provides jobs for the unemployed. Barro has been arguing that the extent is not large.

scineram writes:

Where is the proof not spending like crazy is irrational?

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