I am now told that I have 15 minutes. My guess is that if I were paid $100 for every minute that my co-panelists exceed that limit, I would make thousands of dollars. But I will stick to the limit. Giving a short talk requires much more preparation than giving a long talk. It's a good discipline. Also, trying to stick to a time limit by talking fast is self-defeating. People will remember what you say more easily if you speak slowly and dramatically, rather than hurriedly.
1. Three main points: this is a big bill, but not a big stimulus; a better approach would be to cut the employer contribution to the payroll tax; the economics profession is in turmoil--no economist should be expressing opinions with great confidence.
2. Larry Summers famously said that the criteria for stimulus is fiscal policy that is timely, targeted, and temporary. The spending in this bill is partisan, pandering, and permanent.
3. Alice Rivlin, who is even more of a Democrat than Summers, points out that the bill contains both stimulus proposals and proposals for what she calls "transformational spending." I call it Radical Reconstruction. She is in favor of it, but she points out that it is not an emergency. She would have it taken out of the stimulus bill and considered separately. Whether or not you favor those spending priorities, it is wrong to put it on a fast track, with no hearings, no cost-benefit evaluation, and no deliberation.
4. For a real stimulus, I prefer Bryan Caplan's idea of a cut in the employer contribution to the payroll tax.
5. At first, cutting the amount that employers have to contribute to the payroll tax will put more money into businesses. Eventually, businesses will start to compete for workers, and unless the tax cut is reversed it will feed into wages.
6. For now, though, wages will not change. That means that the cost of hiring workers will drop, so businesses will do more hiring.
7. More importantly, profits will increase. I think that policymakers should be focused on profits in the nonfinancial sector, not on trying to revive banks and lending. When profits are low, businesses do not want to borrow, and investors do not want to lend. It is futile to prop up failed banks and plead with them to lend. The rest of the economy needs to step over the corpses of the failed banks, and profits are the key.
8. Profits are the most cyclical component of income. The latest data we have is for the third quarter of 2008. It shows that relative to the same period in 2007, wage and salary disbursements are up 3 percent, while profits are down 9 percent. The profit collapse is going to be even more dramatic when we have data for the fourth quarter.
9. When Larry Summers said that the stimulus should be targeted, he was thinking that it should go to those consumers who will spend the most money. I disagree. At this stage of the business cycle, the best target for a stimulus is profits. If you are against profits at this point in a recession, then you hate capitalism.
10. Again, it's futile to try to prop up banks and lending. Nobody wants to go on another borrowing binge. The path to recovery is to restore profitability to business and make hiring workers worthwhile. That is why cutting the employer contribution to the payroll tax is such a good idea.
11. Why do so many other economists have such different ideas? The economics profession is in turmoil. We did not see this coming, we have different opinions about what to do about it, and none of us has solid evidence to back our opinions.
12. Keep in mind, though, Herbert Stein's remarks that (i) Economists do not know very much but (ii) Non-economists know even less about economics than economists do.
13. Why is there so much support for a big stimulus, as opposed to a small stimulus? Because small stimulus efforts have a track record of not working. That's worrisome.
14. Back in the 1970's when I went to graduate school, the MIT guys and the Chicago guys disagreed strongly. Franco Modigliani, an MIT guy, once asked rhetorically of the Chicago guys, do you think that the Great Depression was just an outbreak of laziness?
15. As I was leaving graduate school, the MIT guys and the Chicago guys were starting to paper over their differences. The didn't resolved them. They just put them aside and focused on refining their mathematical methods.
16. In the current crisis, the unresolved disagreements from the 1970's have come back. Kevin Murphy (Chicago guy), says that every $100 of additional government spending produces a net social loss of $80. Brad DeLong (MIT guy, teaching at Berkeley), say that every $100 of additional government spending produces a net social gain of $87. (I won't have time to go into why they differ)
17. I'm an MIT guy, but I am more skeptical about stimulus than DeLong--I may be even more skeptical than Murphy. I think it's dangerous to go back to 1970's thinking. The economy has grown much more complex. For example, in 1950, 4/5 of the labor force had no more than a high school education. In 1970, 2/3 of the labor force had no more than a high school education. Today, only 1/2 of the labor force has no more than a high school education. My one-liner is that I cannot see unemployed investment bankers driving bulldozers on highway projects.
17. In general, with a heterogeneous work force, re-employment is going to require subtle, local adjustments. As I see it, the market mechanism is better suited than Washington to making those types of adjustments.
18. More broadly, any sensible economist has to be really uncertain about the impact of these policies.
19. Recap: big bill, small stimulus; recovery will require that businesses are restored to profitability (meaning the businesses in the nonfinancial sector; the financial sector needs to shrink); a cut in the employer contribution to the payroll tax would help with profits and also encourage hiring; economists are not certain about which course to take; if you hear someone who sounds certain, that person is probably not a very good economist.
This is closer to a script than an outline. If I just read1-19 slowly, it would take about 10 minutes. If some points require more elaboration, then other points probably have to be cut.