Arnold Kling  

Thoughts on a Second Stimulus

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Greg Mankiw recommends reading Emil M. Sunley on the Carter era job creation tax credit. Sunley wrote,


No student of public fınance, if left alone, would design a tax incentive as complicated as the jobs credit. Surely the arbitrary distortions inherent in the credit, many of which are discussed below, could have been minimized.

The same might be said of the stimulus, the health care bill, or any piece of major legislation. When you propose something, you might want to take into account the slippage between the concept and the implementation. That is yet another advantage of cutting the payroll tax--it is not a concept that needs to be "designed" by Congress.

Tyler Cowen writes,


Let's say a real estate agent is laid off and, at some point, needs to start working elsewhere in the economy.

He makes the point that it may take the agent a year to move into the "right" job. Meanwhile, if the agent spends two years in a job artificially created by the stimulus, this merely postpones the year of retraining/searching for two years.

I think that our actual policies are worse than that. It reminds me of Japan. Just as Japan tried to protect its weakest firms (small retailers), we are trying to protect our weakest firms (Citigroup, General Motors). That impedes growth and efficiency according to just about any economic model you can come up with.

Right now, the ideas being batted around for a second stimulus are more money for the states and extension of the new home buyer tax credit. We have already had one stimulus with components chosen on the basis of their appeal to favored constituencies rather than on economic merit. Any chance it can be done differently this time?


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CATEGORIES: Fiscal Policy



COMMENTS (6 to date)
Anderson writes:

"Any chance it can be done differently this time?" Not a prayer. Politicians don't get paid for "economic merit" unless you start handing out Nobel's in economics to Pelosi and Reid for stopping the depression.

Billy writes:
That is yet another advantage of cutting the payroll tax--it is not a concept that needs to be "designed" by Congress.

I guarantee you they would find some way to "design" it a totally screw it up in the process.

8 writes:

Third stimulus. Bush & Dems passed a $168 B stimulus in 2008.

fundamentalist writes:

Here is some empirical evidence against Sumners obsession with nominal gdp:

I must add that the German experiences do not support the theory according to which in the last phases of the expansion, because of the increase of production due to the extension and improvement of productive apparatus, prices fall; and, it is argueq), it is this fall in prices which causes the end of the expansion
and the beginning of the depression. In Germany, in 1928, prices were kept at a high level, and in many cases were increased; and according to many authoritative views, among which is that of the Reichsbank,+ it was precisely these high prices which had an unfavourable influence on the expansion and hastened its end. These high prices showed that, owing to mistakes, the transformation of the productive apparatus had not brought about the anticipated fall in production costs. A fall in prices, if it had been the result of that fall in costs which was the principal object of rationalization, would not have created financial difficulties for industry.

“The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany” by Constantino Bresciani-Turroni pw 427.

In Germany, prices were rising, so ngdp had to have been rising as well, yet the depression happened anyway. Why? Because the rise in prices consumption goods did not keep up with the rise in wages, so profits fell and businesses failed or quit investing. This is classic Hayek.

Deanna writes:

In my opinion, another stimulus would do more harm than good within the economy. If the government continues to spend money that it does not have trying to keep "the weakest firms" that Mr. King pointed out, then the debt that will be incurred will be nearly impossible to absolve ourselves of.

Our economy is based on capitalism, which in a sense is simply an economic version of the "survival of the fittest" theory. If a firm cannot support itself within the economy then it must either reevaluate its way of conducting business or make way for a firm more suited to be successful in the market.

If unemployment is the main reason for supporting failing firms, I think that it would be reasonable to assume that a new firm would come into being to replace the failed firm, thereby creating new jobs without the need of government stimulus. As it is these firms continually have to cut jobs, so it might even be more efficient to just let the firm die out and let a new one replace it, bringing new and similar jobs along with it.

James Street writes:

"Survival of the fittest" is a literary metaphor which has no objective biological or socio-economic meaning. The dinosaurs became extinct, according to most evolutionary biologists, because of an accidental occurrence which had nothing to do with "God's will" or "biological fitness" or any other human valuation. They were cold blooded and could not survive the "nuclear" winter that followed a massive strike on earth by a random meteorite.

The concept "Social Darwinism" is a euphemism which consecrates the world as it is. According to social Darwinism, if Hitler had won the war and exterminated most of the Jews and Slavs, that would have been a good thing, simply because it happened or "succeeded."

When the Roman Empire was in the process of collapsing, during the fifth century, a Christian philosopher-theologian, called Saint Augustine, helped to lay the foundation for a new way of life which was not based on slavery and war (Rome) but was based on ethics and religious values (Medieval Europe.)

My guess is that socialism will produce its own Saint Augustine and Saint Thomas Aquinas who will lay the foundation for a new society based on human values similar to those of the Medieval Catholic Church. These new philosophers will use the terminology of economics, and all of the social sciences, just as Augustine and Aquinas used the philosophical terminology of Plato and Aristotle.

We can only hope that societies based on science and philosophy will not fall into another Dark Ages that followed the Christian attempt to build a society based on Greco-Roman thought.

Whatever the case, it is folly to announce that we live in "the best of all possible worlds" as Voltaire demonstrated 250 years ago in Candide. Lisbon earthquakes will occur on a daily basis and the best will be destroyed along with the worst.

"Survival of the fittest" is just another cheer leading call. It makes some people feel better but it is only a hollow tautology: what survives survives. Rah, rah, rah. Lisbon earthquake, cis boom bah.

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