Bryan Caplan  

Change I Believe In

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Writing in the Washington Times, my former student Ben Powell advocates change I can believe in:

America's move to act swiftly and boldly misses the point. Bank bailouts and fiscal stimulus bills don't work because they strive to maintain the status quo. But the status quo is the problem and exactly what needs to be corrected.

The U.S. housing bubble drew too many workers and too much capital into construction and related industries. So funding public works projects to keep those companies in business is the wrong solution.

Powell also shares some surprising facts about Japanese fiscal policy:
Between 1992 and 1995 the Japanese passed six different stimulus packages totaling 65 trillion yen. The average yearly stimulus amounted to a little more than 3 percent of the total Japanese gross domestic product (GDP). The nearly $800 billion U.S. stimulus bill amounts to about 6 percent of GDP.

Yet bigger is not better. In 1998, Japan's stimulus effort amounted to about 8.5 percent of GDP. The results were negligible.

It's important to keep these facts in mind when Krugman dismisses Japanese fiscal policy for its stinginess.  What's small by Krugmanian standards is large by almost anyone else's.

Comments and Sharing

COMMENTS (4 to date)
Josh writes:

Bryan - Thanks for the read. Unfortunately, Ben has it wrong - the current bill is $800bn spread over a number of years. So, this isn't an apples/apples comparison to the "average yearly stimulus" in Japan. Additionally, that is before we backout the AMT fix.

The number drops by a good deal if you focus on the CBO expected outlay figures and divided by (best guesses) of GDP.

Dan Weber writes:

Didn't the "let's make fun by saying 'change we can believe in'" ship sail off long ago?

I liked this post and the linked-to article, but that headline... ugh.

twy writes:

But now resources are being drawn into construction not to meet an irrational demand for housing but to make some long-needed improvements in infrastructure. Would that still qualify as a mis-allocation of resources? I suppose it would be if workers are paid to dig and refill holes, but is that really the case here?

Billare writes:

I'm not sure if you alluded to it, but this is horribly depressing because the stimulus package we passed is middling between 3.5% and 8% of the GDPP! I was hoping that maybe all those sneering Democrats were wrong, may be the stimulus could work, but how on Earth can a pork-laden package that doesn't seem to cross the required "threshold" possibly work?

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