The Know Betters’ Stimulus Plan

Thom Lambert —  26 January 2009

National Economic Council Chairman Larry Summers was on Meet the Press yesterday defending President Obama’s proposed fiscal stimulus plan, which is heavily weighted toward government spending and away from tax cuts (and, to the extent it reduces taxes, does so via tax credits without cutting marginal rates). He started by emphasizing the magnitude of the massive stimulus plan:

David, this is the largest stimulus plan in the country’s history. It’s the largest investment in the backbone of our economy since the interstate—since the interstate highway system. It’s going to double renewable energy. And it is only one phase of the approach that the President is taking. The President has made clear that there will be strong action to address the terrible problems in our housing sector, that he will be using additional funds for a substantial financial recovery plan to get the flow of credit going. This is one component of our strategy to bring about expansion. And the President has also made clear that going forward we’re going to be leaning forward and that he is prepared to do what is necessary.

Host David Gregory then referred to some of the specifics of the spending bill — $4 billion to localities to pay for police, $16 billion in Pell Grants for college students, $2.1 billion for Head Start, $50 million for the National Endowment for the Arts — and he asked Mr. Summers about the possibility of cuts in tax rates. Remember, the Obama tax cuts don’t change tax rates; they’re simply tax credits. (Well, sorta…. They’re available for people who don’t pay income taxes but not for taxpayers earning above certain levels.) Mr. Gregory said: “Specifically, there’s a question about the Bush tax cuts which, of course, expire next year. Does the President want to actually repeal those tax cuts this calendar year?”

Mr. Summers’ answer was odd: “I don’t think there’s any question they have to be repealed. The country can’t afford them for the long run. … [T]hey expire, expire at the end of next year, and they have to be allowed to expire.”

So let me get this straight. We can afford to spend $550 billion on things like Head Start and the National Endowment for the Arts, but we can’t afford to keep current tax rates where they are on our nation’s most productive individuals and the millions of small businesses that get taxed as sole proprietorships? Isn’t it a bit odd, all of a sudden, to start worrying about the bill?

It’s pretty clear what’s going on here. Messrs Summers, Obama, et al. know better than do wealthy people and small business owners — those whose marginal tax rates will rise when the Bush tax cuts expire — how to allocate resources so as to generate societal wealth. Expenditures on more policemen, early childhood education, tuition subsidies, and the arts are good uses of resources, proper allocations of capital. Who knows what all those money-grubbing wealthy people and small business owners would do if they were allowed to keep more of the wealth they create?

If the know betters in the political class get to decide how society’s productive resources get allocated, they can make sure all sorts of desirable ends are achieved. Not only can they ensure that the most economically valuable projects are undertaken, they can also guarantee that resources are divvied up equitably. Consider Obama adviser Robert Reich’s recent comments to Congress on the spending stimulus:

It seems to me that infrastructure spending is a very important and good way to stimulate the economy. The challenge will be to do it quickly, to find projects that can be done that have a high social return, that also can be done with the greatest speed possible. I am concerned, as I’m sure many of you are, that these jobs not simply go to high skilled people who are already professionals or to white male construction workers. … I have nothing against white male construction workers, I’m just saying that there are a lot of other people who have needs as well, and therefore in my remarks I have suggested to you, and I’m certainly happy to talk about it more, ways in which the money can be–criteria can be set so that the money does go to others — the long-term unemployed, minorities, women, people who are not necessarily construction workers or high-skilled professionals.

[NOTE: Mr. Reich made similar comments on his blog. In a recent post entitled The Stimulus: How to Create Jobs Without Them All Going to Skilled Professionals and White Male Construction Workers, Mr. Reich wrote:

I’d suggest that all contracts entered into with stimulus funds require contractors to provide at least 20 percent of jobs to the long-term unemployed and to people with incomes at or below 200 percent of the federal poverty level. And at least 2 percent of project funds should be allocated to such training. In addition, advantage should be taken of buildings trades apprenticeships — wich [sic] must be fully available to women and minorities.]

The know betters’ plan, then, is to take taxpayer dollars and allocate them so that they are most economically fruitful and most equitably distributed.

But there are a couple of problems with this approach.

First, the know betters don’t. As I’ve stressed repeatedly on this blog, no centralized bureaucrat is privy to the time- and space-specific information (particularly information about individual consumer preferences) needed to allocate productive resources to their highest and best ends. As Hayek put it, “the knowledge of the circumstances of which we must make use [in order to allocate productive resources efficiently] never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” If government officials channel productive resources by fiat, they’re highly likely to push them in the wrong direction — i.e., away from the uses to which they could be best applied. Consider, for example, John Huizinga’s speculation about all these massive construction projects the stimulus plan would fund (the quote is at minute 15 of this terrific video):

If you want to have a fiscal stimulus policy and put people back to work, you’re going to put construction workers back to work, because there are a lot of them that are unemployed. My guess is that we had way too many construction workers. We had a residential housing boom that was not sustainable. I don’t think we want to go back to the level of residential construction that we had in the past. And if our job is fiscal stimulus and put[ting] these people back to work, I think we’re working exactly in the opposite way of … allocating our labor in the way that’s really productive.

A second problem with the know betters’ plan is that it’s politically naive to think we can cut back on all this spending once the recession has ended. Perhaps the feds can eventually eliminate the additional $50 million allocated to the National Endowment for the Arts. Middle America has long been (rightly) skeptical of that subsidy to the wealthy. But what about the $2.1 billion for Head Start? That’ll be tougher. The $16 billion for Pell Grants? Tougher still. The $40 billion for local police? Fuhgeddaboudit.

The fact is, targeted expenditures create constituencies. Those constituencies have every incentive to lobby long and hard to keep their government goodies. Taxpayers as a whole, on the other hand, have little incentive to lobby against any individual line item, for each taxpayer’s share of the expenditure at issue is so tiny that the fight’s not worth the effort. We thus end up with the sort of “concentrated benefits/diffuse costs” situation that enables particular expenditures to persist. Anyone who thinks we can shrink our government spending back to pre-stimulus levels following this recession either hasn’t been around much or is on glue.

Let’s hope there are still some folks in Congress who recognize government’s limitations and have the courage to stick to their principles.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

One response to The Know Betters’ Stimulus Plan

  1. 

    The charge that “it’s politically naive to think we can cut back on all this spending once the recession has ended” is wholly false.

    Under President Bill Clinton the Democrats accomplished this, leaving Bush with a surplus, which he promptly wasted with tax cuts.

    If Republicans are ever returned to power, you might be correct, for they believe in Dick Cheney and it was Dick Cheney, and not any Democrat, who said, “Deficits don’t matter.”

    As for the rest of your arguments, they likewise are false. Government expenditures are not poor allocations of capital. Krugman had a simple example, just days ago. If your argument were correct, we should fire policemen, or air traffic controllers, and return the money to taxpayers.

    One doesn’t have to either read, or travel far away from Columbia, Missouri, to realize that we have enormous needs for public capital investments—high speed Internet, rebuilding the electric power grid, and solving our reliance on oil will be trillions of dollars in investments.