The stimulus debate is summoning the economic demons from the closet. Normally sober, two-handed Ph.D.s are revealing their inner Keynes or inner Hayek, and baring fangs over whether and how to spend the economy back to health. Here, for example, are two takes on the Obama Administration's proposal, now wafting around Capitol Hill:
From Paul Krugman:
This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
From Russ Roberts:
If the government cuts rates or just gives rebates but at the same time increases the size of government, taxes are not lower. They're larger. Government is taking a bigger share of the economic pie leaving less for the private sector to spend. The future burden of taxes is higher. As Milton Friedman used to argue, don't focus on how government is financed, whether it's out of current taxes or future taxes. Focus on the spending. If government grows as a percentage of the economy, then the burden on the private sector is bigger.
Less hyperbolically, our Scott Hoyt weighs in with a closer look at last summer's tax rebates.
Debate is heating up around President-elect Obama's proposed economic stimulus plan, with lawmakers and economists arguing for and against various fiscal tools for combating the recession. One approach—putting money directly into consumers' hands via tax cuts or rebates—has long been considered quick and effective, on the theory that much of the money thus distributed is soon spent.
However, it is now being widely argued that the most recent use of this policy tool was a failure, because last year's tax rebates were mostly saved rather than spent. A similar or expanded tax rebate program this year would produce similarly disappointing results, opponents say.
We do not believe these arguments are correct. Rather, we believe the tax rebates made a significant positive difference in consumer spending last year; without them, spending would have fallen quite sharply in the spring of 2008.
Why are savings rates falling in many developed countries? The increasingly self-interested choices made by older folks, say Loretti I. Dobrescu, Laurence J. Kotlikoff and Alberto F. Motta:
National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17 percent of national income in 1970, but less than 7 percent in 2006. Japan saved 30 percent in 1970, but only 8 percent in 2006. And the U.S. saved 9 percent in 1970, but only 2 percent in 2006. What explains these international and intertemporal differences? Is it demographics, government spending, productivity growth or preferences? Our answer is preferences. Developed societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. This conclusion emerges from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending, productivity, and social preferences. The two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies' spending and labor supply decisions.
On VoxEU today, The Myth of the Riskometer (catchy title), by Jon Danielsson. Interesting througout; excerpt:
In physics, complexity is a virtue. It enables us to create supercomputers and iPods. In finance, complexity used to be a virtue. The more complex the instruments are, the more opaque they are, and the more money you make. So long as the underlying risk assumptions are correct, the complex product is sound. In finance, complexity has become a vice.
We can create the most sophisticated financial models, but immediately when they are put to use, the financial system changes. Outcomes in the financial system aggregate intelligent human behaviour. Therefore attempting to forecast prices or risk using past observations is generally impossible.
Whaddya think -- is he right?
Paul Krugman of Princeton...
Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.
...meet Ed Glaeser of Harvard:
The country needs to invest steadily and wisely on infrastructure, not rush hundreds of billions of dollars out the door. Really expensive projects, like [Boston's] Big Dig, can take many years to plan, permit, and build. Our roads require ongoing maintenance, not a big push. Moreover, fairness and economic efficiency dictate that infrastructure should generally be paid for by users, not general tax revenue. It is appropriate that gas taxes pay for federal highway aid. Using general revenues to build highways means more subsidies for carbon-emitting cars. The country should take infrastructure investment seriously, but infrastructure spending is unlikely to be sound stimulus.
My favorite quote from a very quotable article:
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
An even better variation on this theme goes something like this: Blaming greed for financial crises is akin to blaming gravity for plane crashes.
From Sunday's Meet the Press:
MR. GREGORY: Is this a trillion-dollar stimulus, do you expect?
SEN. REID: It's whatever it takes to bring this country back on a fiscal footing that is decent.
You know, we don't want to do a little bit and say, "Well, we should have done more. Let's come back and do it again." We want to do it right the first time. If we do it right the first time--as, as reported in The New York Times yesterday, a group of economists, blue ribbon they're called, they said, "If they do a very strong stimulus package, the economy will start recovering in July." And that's what Paul Krugman says, who's a Democrat; that's what Mark Zandi, who was one of, one of John McCain's advisers, said. We need to spend some money. And we have to make sure it's spent wisely, that we watch that money, how it's spent, there is oversight, there is transparency. And I hope--and we--I expect that we can do that.
And if that's not enough for you, here's San Francisco Fed president Janet Yellen:
If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.
Yet what passes for consensus on the Sunday talks may be only skin-deep. From MarketWatch:
A pickup sometime after June is still the Federal Reserve's quasi-official forecast. And leading institutional forecasters surveyed by the Blue Chip Economic Indicators are optimistic.
But that forecast seemed woefully out of touch to many experts who spoke at the annual meeting of the American Economics Association...
"We don't know what to do. It's really a throw-the-kitchen-sink-at-the-problem strategy. It is hard to argue with it in the middle of the crisis, but you can bet everyone will 10 years from now," said Kenneth Rogoff, a former chief economist at the International Monetary Fund.
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