David R. Henderson  

Russ Roberts on "Stimulus"

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In yesterday's Boston Globe, GMU economist Russ Roberts has an excellent piece on the proposed "stimulus" package. The article is directed against the huge spending and tax rebate bill working its way through Congress.

Roberts recognizes upfront that even Nobel prize-winning economists are on opposite sides of the issue and so he goes to basic principles. Good paragraph:

I think it will be mostly squandered, so I'm against the stimulus. Plenty of people think it would be money well spent. Many people want a role for government closer to that of Europe's. Most of us against increased government spending want to move in the other direction.

And the best two sentences:

But maybe we simply don't have the knowledge to repair the economy from Washington. The economy is complex and the interaction between the financial sector and the real economy - between Wall Street and Main Street - is not well understood.

In other words, if you don't know what you're doing, don't do it. Hayek's argument in two sentences.

One of the commenters wrote:

Funny, I missed your column criticizing the $800 Billion bailout of the financial industry. Talk about squandered money. Perhaps you are a very recent convert to the philosophy of governmental frugality?

I think Russ was against the bailout, wasn't he?

HT to Don Boudreaux

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COMMENTS (11 to date)
MHodak writes:

Robert's was skeptical of the Bear Stearns bailout:


and deeply skeptical of the Paulson bailout:


[Comment edited for flaming. Please stick to the subject and do not descend into name-calling on EconLog.--Econlib Ed.]

Les writes:

I think Russ was too conciliatory in saying that few people fully understand the situation, and that economists have varying opinions. That does not inspire much public confidence in economists.

It seems to me that economics tells us quite plainly that the bailouts and the so-called "stimulus" are not working, and will not work. It is true that economics tells us less than we'd like to know about what will work.

But if anything is clear, it is that the more government intervention, the longer and deeper the recession. And only government can turn the recession into full-fledged depression.

So, without being boastful, I don't think we should be too modest either.

Barkley Rosser writes:


Ummm, just offhand, what is the evidence from "economics" that tells us "quite plainly that the bailouts and the so-called 'stimulus' are not working and will not work," please? The credit markets have actually stabilized quite a bit recently as measured by the TED spread and some other such indices, which some people would say is evidence that the bank bailouts and Fed policy are working. As for the so-called stimulus, it has not been passed yet, much less started to do anything (or nothing), so it is a bit hard to say that it is "not working." It does not exist yet, so of course it is not working.

Regarding Russ Roberts, there certainly is a serious danger of lots of "bridges to nowhere," but does he completely deny the possibility of some federal government funded infrastructure projects that would not be likely to be funded by the private sector being productive? No roads or high speed rail or mass transit or broad band or improving the energy efficiency of government buildings? None of this?

RJ writes:

That's such an incomplete argument David! Economics is complex, so it's better left to its own ends?
Government exists because of the implicit social contract between the denizens of one geographic area and the entity known as the government. It exists to stabilize society, to effectively police laws, to provide for common defense, and as a powerful extension of the will of the people. Recently, it seems that the largest problem in our country is not a wasteful war in a country we shouldn't have invaded, nor is it the miniscule threat of terrorist activity, it is the fact that our financial system clearly failed us.

And the prescription that libertarians offer us is, "ok, I know that the economy messed up, but hey, if we all just give it a little time, everything will be fine again".

Yeah, in the long run everything will get back on track, that is for certain. But hey, let's not care that investment in the third world has basically stopped, which will cause millions of lives to be lost. Let's not care that many decent, hard working people will lose jobs, houses, cars, livelihoods, and hope. Lets not point out that the economic crisis has brought some bubbling international disagreements to the forefront, and maybe cause international crises.

Too much is at stake to do NOTHING. People will die, not in the U.S., but in every impoverished country around the world, all because a bunch of animal spirits driven consumers were led astray by power hungry bankers, derivatives traders, and mortgage lenders. True political economy is cyclical by nature, and the way the bubbles get to this point is by doing NOTHING.

And besides, it doesn't take genius to notice a single problem in the economy and fix it. We aren't trying to transform the economy, the bailout has no intention of that. It's the liberal idea of where there are gaps in the economy. Not enough transportation spending? Check! Underfunding of education, fixed. Banks need capital? Here's some cash, give us some stock.

THis argument is one of the weakest I have ever heard. The economy is too complex? Of course it is. But it doesn't take a genius to know our K-12 education needs fixing or that our transportation system is inefficient.

clayton writes:


Your argument is unclear--That something decreases public opinion in economists is a reason that it is false?

The reason I target so specifically is that Roberts recently did an EconTalk podcast on this very issue. He was quite willing to discuss that very possibility, that economists don't know nearly enough, but that on the other side there is a lot of agreement among economists too.

MHodak writes:


I don't see Russ as being as extreme as you seem to be making him out to be. I don't think that arguing that government is likely to invest in a lot of negative return projects is the same as saying that ALL their projects will be negative, or even low return.

bil. writes:


I doubt that Russ Roberts believes that absolutely no fedgov-funded infrastructure spending beyond what the private sector would fund would be of positive net value. But anyone familiar with public choice would know that most of the spending is likely to be driven by political considerations, not by high quality cost-benefit analysis (analysis which takes a long time, thus isn't good for purposes of 'stimulus').

So the question becomes: Does the net positive value created by wise fedgov infrastructure spending outweigh the net value destroyed by the non-cost-benefit-justified spending?
Since the overlap between what is politically optimal and what is value-creating is very small, and political actors will be making the decisions, my guess is that the answer is no.

Additionally, one has to keep in mind a couple of things:
1) If we assume that there is $X worth of justified (value-creating) spending on infrastructure, there is a strong presumption that at some point the more infrastructure spending there is, the less likely additional spending will be value-creating instead of value-destroying.
2) Fedgov and Stategov regularly spend billions on infrastructure already.

So, 'stimulus' infrastructure spending has a very high likelihood of being on harmful on net. The ability to point to some current or past projects (Eisenhower's interstate system, for example) that are likely of positive net value provides no support to the current arguments for 'stimulus' infrastructure spending.

Mr. Econotarian writes:

People like Krugman are calling on Keynesian macro arguments for the stimulus, and I think that is where the discussion should be held.

1) Keynesian macro theory is nice, but is there any empirical evidence that it works in today's economy? If you do an autocorellation of government spending as percent of GDP and GDP growth data from 1970 to current, do you see any peaks, or is it uncorrelated?

2) How does Keynesian theory scale the multiplier on the size of the stimulus? The USSR had a 100% GDP government spending stimulus every year, how did that work out? (Japan has 6-8% GDP stimulus during most of the "Lost Decade").

Perhaps government is already spending as much as it can efficiently do (nearly 30% of GDP if you add up Federal, state, and local spending). Perhaps the multiplier is already "tapped out".

Greg Ransom writes:

Hayek's argument is that we _know_ as a matter of science that "Keynesian" stimulus won't work, we know as a matter of science that what Washington is proposing will make things worse.

That's Hayek's argument in ONE sentence.

David wrote:

"In other words, if you don't know what you're doing, don't do it. Hayek's argument in two sentences."

David R. Henderson writes:

That's actually 2 sentences separated, incorrectly, by a comma. :-)

Russell writes:

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