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?
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12 comments:
The stimulus package is too small??? It's almost in the trillion, and certainly will be when all the frills are added in the future. The problem is that there is no clear evidence that stimulus has worked in the past. I'm not saying that there won't be a temporary increase in jobs and spending. But the long term job creation cannot come from the government alone.
California is a typical example. In the 1950's the government rapidly expanded its budget pushing out small business as an employer. The state experienced 4 recessions in that decade.
The problem with expanding the stimulus more is that it will permanantly expand bureaucratic jobs. Once that happens the economy becomes far less flexible. Yes, layoffs from small business is cruel but it keep the whole economy vibrant because workers can move to the next sector.
Listen, Sandip, Keynes is dead. We all thought that Keynes solved the business cycle because the govt could just pump in money when things slowed down and everything is hunky dory. Bernanke was the biggest proponent of that. "We'll just drop dollars from helicoptors when recessions happen, and it will go away," he stated. Keynes was a gay and didn't have any children so he didn't care about the next generation. He just proposed we print money and pass the debt down to the kids.
I don't want to bash Keynes too much because he was brilliant. But we are misreading him. What he proposed was govt spend during recessions, but during good times we must sock it away. But we don't talk about the second part about socking it away. We only talk about the govt spending part because we're addicted to candy. Keynes was not too different from Joseph in the Bible who saved in the 7 good years for govt spending in the 7 bad years.
Kenrod
Kenrod, as Krugman says the stimulus is too small (and somewhat misdirected) when you consider the size of the projected recessionary hole to be about $2.5 trillion.
Why should we disavow Keynes? No one is saying the stimulus should be a permanent feature. But in this time of crisis it is urgently required in the right size and shape, in addition to other corrective measures.
We should disavow Keynes for the following reasons:
1)He said we should have put away money in the good times to help in the bad. However, we don't have a surplus. In fact, we have massive deficits. YOu cannot solve the deficit problem by adding to deficit. Therefore, you are taking Keynes out of context.
2).Even optimists say the best the stimulus program will do is a trickle effect by 2011 or 2012. By then, other problems have propped up and it's too little too late. Look at the Soviet 5 year planning projects in the 1950's. The bureaucrats were supposed to identify the problems. Then they would spend 5 years to boost that weakness and solve everything.
So look at the 5 year programs now. "We need steel!" said the bureaucrat. So they put up steel plants for the next 5 years. By then, substitutes were found and the problem had passed them by. Now they have steel plants that were obsolete.
In fact, it was govt mandates that got us into this mess anyway. Mandates to raise housing ownership from 60% to 70% stated by Carter and reinforced by Clinton's HUD secretary, Cisneros. Mandates to lend to minorities resulting in sub-prime loans. Yes, Wall street got carried away because they though the govt was behind them with all these mandates.
A good doctor knows when to apply the right medicine. A good economist must know when to apply the right stimulus, and this just smells of PORK to me.
And who says recessions are bad anyway. I think this one is a good one because it gets rid of a lot of excess that has built up in the economy. Besides, it flushes out a lot of scams. Madoff wouldn't have been caught without this recession. Housing prices have come down to affordable levels for the next generation to afford them. I can go to the theatre without them charging an arm and a leg. So what's wrong with a good recession once in a while. It's necessary part of business. And to pull us out prematurely is like waking a sleeping man at 2 am and pouring coffee down his throat. It will only give him a headache in the morning. Artificicially stimulating the economy will only push the housing prices up temporarily just so they collapse later. The market forces have to find an equibrium.
Kenrod
Keynes will turn in his grave if you misquote him. :-) I don't think any recessions is "good" and particularly not something as nasty as the one we're in now. The deflation may of course work well for the people whose incomes are not affected, but we should look at the GDP and "misery index" for the country as a whole.
There are many villains, but I believe the people most to blame for the housing crisis / bubble and it's triggering of the recession are the likes of Greenspan and the Republicans who opposed regulation, and not the Clinton administration.
That said, I like your analogies. :-)
You're right in that Keynes didn't see a recession that he didn't hate, and thought that govt should do everything it could to pull us out of one. But I don't think I am wrong in saying that he advocated spending any surplus to combat unemployment. Unfortunately, we don't have a surplus.
Yes, I think recessions are not necessarily bad depending on the severity. Forest fires look devasting until you realize new trees cannot grow until the flames crack their tough seeds. In the west we tend to look at these events as black-and-white... prosperity is good, recession is bad. But the Hindus worship the gods of creation and destruction. The Chinese have the same root- word for disaster and opportunity.
And if you talk about timing, it's too early to give the sleeping man coffee. It's only 2 am. Maybe at 5 am you think about starting the brew. Definitely, at 7 am you force feed him if you have to. But right now we have so much excess inventory in luxury goods, housing, oil etc to work off.
And to your point of tax cuts vs govt spending, I come down on the side of the former. How much more efficient is it to cut payroll taxes for Joe sixpack. He gets to take home $3300 instead of $3000 and will spend it immediately. The govt will spend it on big infrastructure and bureacracy which we can't get rid off. Ever. And worse, this bill has more money for artsy fartsy stuff than it has for jobs. The last time the govt sponsored an artist he created a crucifix in urine. Well, I prefer tax cuts.
Kenrod
What makes you think that Joe sixpack (or Marty multi-millionaire more favored by Repubs) will spend most of his $3300 in tax cuts, instead of (wisely for him) saving it up in these uncertain times? That way all you achieve is a deeper deficit without jumpstarting the economy. As Krugman said, Bush's taxcuts were four times the size of the current stimulus package and look where they got us. Now Repubs are pushing for more of the same.
Sure, some government spending can be foolish and wasteful, and it's even easier picking on outlier examples of this. Repubs recently used this tactic to attack the tiny outlay on birth control plans in the earlier version of the House bill. But well-conceived government plans are certainly possible that can ensure spending that's good in the short as well as the long term.
Joe Sixpack or Mary Multimillion may save that money, and perhaps that's what they should do because savings rates are abymsmally low. In the last few months it has jumped from 2% to 4%. People in Japan and China save 40%.
The problem with gov't spending is that it creates permanancy and those jobs never disappear even though they may not be needed in the future. If you give a corporation a tax cut, they will create jobs. But those will be adjusted as the economy turns. And corporations are far more flexible than gov't. And they do prosper. And they do go bankrupt when their functions get obsoleted.
But govt projects never go bankrupt. Bureaucrats just summon for more money to cover up their mistakes. Corporations have finite amounts of money and when a project sours, then it terminates.
Kenrod
You make good points. But keep in mind that a) savings are not the objective when you're seekin to revive the econommy through a stimulus, and b) there's plenty of crumbling infrastructure in the US that we need to rebuild, and the gov't as in most countries has to oversee and pay for it. Of course a lot of this work can and will be contracted out to private parties.
Kenrod said:
I think it's fair to give the jobs to the private sector. The last time gov't went on a stimulus binge they created Amtrack. Despite it's failure, Congress keeps funding it in an attempt to force the public to go "green". But I'm all for things the gov't should do that the private sector can't. Such as reforming the Air Traffic control system... But Harry Reid wants to build a high speed rail from California to Nevada to funnel in more gamblers into his state. Such pork is being proposed.
And back to the point of Keynes...I say he's dead because Time magazine in the 1950's featured him on the cover with the headline, "The man who conquered the business cycle." In essence, it said that the Keynsian method would just have gov't supply money when the economy slows, and voila, everything is fine.
Well, we know there's been several recessions since, and the business cycle hasn't been revoked.
Instead, the economist we should pay more attention to is Kontratieff, who was Lenin's seer. Barron's this week mentions him as the one who predicts that the Capitalist system is subject to 50 to 70 year cataclysmic downdrafts. And nothing the gov't does can ameliorate it. I think that's because the system is so good at creating wealth and products, that once satisfied, the consumer can eat no more and needs time to digest. Or, maybe Shumpeter is correct in that we need time for "Creative Destruction".
Ron Paul, a libertarian who ran in the last election, subcribed to Kontratieff's views. So do prominent economist like Hayek and Shumpeter. And once again, the Kontradian wave has struck and gov't should just stand aside, and allow supply and demand to find an equilibrium.
I'm all for government sponsored and funded mass transportation which is working well in Japan, Europe, and now even in places like China, India, etc. The private sector doesn't like such long gestation and capital intensive projects, and cannot capture their social and environmental value.
Keynesian measures may not avert recessions but they can mitigate them and reduce their frequency. Labels aside, I'd consider a "do nothing" approach (or just tax cuts) to be far worse.
But following Keynes is like taking anti biotics every time you got a sniffle. The more of it you take the less effective it is for the next round. And when the big one hits you have no defenses. Today, hospitals are full of deadly viruses no regular antibiotic can kill. So sometimes it's best to just rest a mild flu or cold rather than tinker around with Mother Nature.
The same with pain killers. The more you take, the less effective it is the next go around. However, when I watch movies of the Civil war where soldiers infected legs were just sawed off with nothing more than a shot of whiskey to calm their nerves, I'm glad for the invention of anesthesia.
Ron Paul, the libertarian candidate advocated the gov't stop meddling with the business cycle because of unintended consequences. While I don't totally support his views, I can see where too much stimulus has prevented the business cycle from destroying the deadwood, and keeping zombie companies alive. The paradox is Dems love everything green and Nature, and polar bears, but when they see Darwin and Mother Nature actually work they shudder and say that's bad.
You're right - govt and Fed intervention should be sparingly used, and in a way that doesn't make it lose credibility on inflation control, deficit, etc.
So we may be more in agreement than we think. :-)
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