Yesterday in the Wall Street Journal I saw a full page ad by the conservative Cato Institute slamming the whole concept of Obama's economic recovery plan. This (apparently repeat) ad is signed by hundreds of economists and financial academics.
Denying the need for the "right" government stimulus plan seems so preposterous that I expected the signatories to be clueless economists from lightweight institutions. Or charlatans and political hacks who are selling debunked ideology for their narrow ends.
But I see Nobel laureates and prominent figures from top universities like "my" University of Chicago in this list. They include two renowned professors who were on my Ph.D. dissertation committee, and one of these professor's son-in-law who is a top academic in his own right. Why they have signed on is beyond me, as I totally subscribe to Paul Krugman's rationale of the need for massive governmental intervention to get us out of this economic crisis. Krugman actually argues that the current economic stimulus plan is too small and misdirected towards Republican causes to do the job.
On the Cato website there is more of this criticism of Obama and the Democratic efforts. On the lower right of this web page there is a YouTube presentation with sleazily deceptive arguments against the Obama / Democratic approach. Reagan's virtues are extolled while Obama's approach is likened (of all people) to that of George W. Bush whose overspending drove the economy to ruin.
I can't address all of the Cato fallacies here. But some comments:
(a) Heavy spending (and ill-conceived at that) in GWB's time could not counteract bad governance and lack of oversight that landed us in this mess.
(b) Japan's "lost decade" of stagnant growth in the 1990's is widely ascribed to its failure to quickly overhaul its ailing banks and credit infrastructure. That was a necessary condition that didn't happen, for other measures (like public spending on infrastructure) to work. Keep this in mind the next time you hear a Republican mouthing off on Japan's lost decade in spite of spending 6 trillion yen on infrastructure.
(c) We therefore need better governance and more regulation to complement a heavy fiscal stimulus.
(d) I'd heed Krugman and drop this nostalgia for Reagan. Even the "supply side" linkage that Republicans like to make between tax cuts and revenue increases in the Reagan era is misconceived.
(e) Reagan's nearer term focus and budget deficits created cumulative problems that haunted his successor.
(f) In the debate on stimulus options tax cuts have the value of immediacy as they get more money across to the consumer quickly. But the recession-wary consumer may save rather than spend most of it (a personal virtue but it defeats the objective of a stimulus.) Government projects and continuing grants to cash-strapped state and local governments on the other hand will spend the allocations dollar for dollar.
(g) To my knowledge none of the Cato signatories warned against the consequences of insufficient regulation of mortgage lenders, or deplored Alan Greenspan's role in opposing such regulation. Nor did they see the housing crisis and the bursting of the bubble coming. Krugman did all three and years ago, way before it happened. So to me he deserves his 2008 Nobel prize (officially given for unrelated research done decades earlier) as well as greater credibility than the Cato crowd.
While our University of Chicago is synonymous with the ideas of free markets and deregulation we had plenty of faculty teaching and researching the concepts of necessary government oversight and intervention, public goods and anti-trust responsibilities. I'm perplexed to see so many respected economists including some of my U. of C. professors having signed on to the Cato ad. I hope they have better arguments than the YouTube presentation on the Cato website.
Meanwhile, today's (Feb. 10) issue of The Journal has the more nuanced views of two other U. of C. economists, Nobel laureate Gary Becker and Prof. Kevin Murphy. In "There's No Stimulus Free Lunch" they concede that government stimulus measures can create net jobs and expand GDP, especially during a recession. At the same time they warn that such benefits will dissipate once the economy recovers and works closer to full capacity, and that such measures carry a price.
No one is arguing against that, or we'd have a permanent stimulus budget for every past, present and future year. The stimulus package is being worked now to fix our present recession and job losses. And that part about it not being absolutely "free", the question is, do we want to starve by forsaking a substantial lunch just because it carries a small price, or to go for it since the benefits far exceed the costs?