Archives For stimulus

Stanford economist Michael Boskin thinks so. He set forth his argument in the WSJ. After observing that President Obama’s budget “more than doubles the national debt held by the public, adding more to the debt than all previous presidents — from George Washington to George W. Bush — combined” and “would raise taxes to historically high levels” relative to GDP, Boskin states:

The pervasive government subsidies and mandates — in health, pharmaceuticals, energy and the like — will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers. …

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president’s budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president’s economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government’s meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.

The post title is stolen from a commenter (Unit) at this post over at Austrian Economists.  Delong’s comment editing practices (the selective editing even more so than the deleting of comments with opposing points of view) are disturbing to say the least.  Here’s an excerpt from the post:

See this post of DeLong’s that is a “reply” to an earlier Bob Murphy post about Hoover and “liquidationism”.  First, DeLong cuts off the part of Murphy’s post where he provides the evidence that Hoover rejected that view and that it did not dominate his administration.  Brutally dishonest.  Bob replies in the comments, and I follow up.  DeLong then truncates the part of MY comment where I point to Larry White’s JMCB paper that demonstrated that even MELLON was not a “liquidationist” and neither were the Austrians.  DeLong can wave his hands all he wants, but it doesn’t make him right on this one.


UPDATE: From the Underbelly comes sensible advice:

Josh Wright and Steve Horowitz (and commentators) are bent out of shape with Brad DeLong for deleting (or editing) comments. I suspect they’ve got a point; I’ve been deleted a few times over the years. Couple of times I figured it was a judgment call, and Brad was probably right. Couple of times, it seemed to me more like outright thought control but I figured it was his blog and not a big deal.

But Josh and Steve and I are not the only ones I’ve heard make this point. And just in general–well, put it this way: DeLong’s is a great blog. it almost always in the top ten in my aggregator Trendline (right now it is third place in number, first in content). Unfailingly interesting, challenging and thought-provoking.

But let’s face it, Brad is a rigid guy. His ferocious attacks on those with whom he disagrees are legend. But also self-defeating. I mean, discretion, baby! It is one thing to expose the bankrupt pretentions of the Washington Post Ombudsperson. And beating up on George Will is always the Lord’d work. But to come out with guns blazing against every ink-stained mediocrity who has a bad day–after a while, it takes on the unmistakable aroma of the Boy Who Cried Wolf.

So, Brad, baby! This is an intervention! This is a friend speaking! Lighten up! You’ve got a perfect right (perhaps an obligation) to delete the vicious, the vulgar and the hollow. But interesting people who disagree with you: look, just stop it! You’ll enhance your street cred and make an already=riveting weblog even more indispensable than it already is.

My colleague JW Verret has an interesting take on the bank bailout at

This deal was intended to bolster public confidence in banks, while at the same time minimizing the cost of the bailout when Treasury sells its shares once markets pick up. The form of equity Treasury has taken, and plans to take in the second round of the bailout, threatens to destroy both goals.  This is because governments have two unique qualities: immunity from insider trading laws and a political interest in using their shareholder power to pander to special interests.

A healthy share price makes for a healthy bank. But healthy share prices require healthy profits. When governments become powerful shareholders in companies, the profit motive is inevitably watered down.

After European governments privatized government-run industries in the 1980s they maintained powerful equity positions in the privatized firms. Those companies were twice as likely to need to subsequently obtain subsidies and bailouts at the public trough.


Another important consequence of the bailout is that Treasury’s access as a regulator to inside information about banks makes it the ultimate inside trader of stocks in financial institutions. Luckily for the federal government, it has sovereign immunity from insider trading laws.

The market will significantly discount the value of banks in which Treasury is a shareholder. Since the dominant player in that market has the opportunity to engage in insider trading, it makes little economic sense for other investors to buy bank shares. Why would anyone want to play the game when they know the game is rigged?

To protect against insider trading liability, corporate executives file “10b-5 plans” that detail future share sales. Treasury should be bound to the same kind of plan to assure investors that it will not use inside information to trade its shares.

George Bittlingmayer (University of Kansas) and my colleague Tom Hazlett look at the market response to the stimulus and find it none too enthusiastic:

President Barack Obama’s “stimulus” plan invokes the 1930s fiscal strategy put forward by British economist John Maynard Keynes, who saw capitalism as pretty much spent. Having exhausted their store of innovative ideas, investors curled up. Workers lost jobs, spent less, and sent still other workers walking. Budget deficits – government spending without taxes to “pay as you go” – would pull unemployed workers off the street and arrest the downward spiral. Investors’ “animal spirits” would be calmed, new capital risked, and economic vitality restored.  So the Obama theory – government spending is stimulus. If so, financial markets should feel the love. The U.S. budget is awash in red ink, and $800 billion more of it should easily move the needle on our economic prospects. Indeed it has – in the wrong direction. Financial markets don’t want more government debt or a scramble for “shovel-ready” spending projects. They want the skeletons in the banking sector’s closet exposed and expunged…

Yet, from Nov. 4, 2008 through Feb. 12, 2009, the DJI overall fell 18% — a larger drop than during the Sept-Oct plunge. In January, when the Obama plan, promising far greater deficits than the two much smaller “emergency stimulus” plans signed by Pres. George W. Bush in 2008, was unveiled, the market tanked – the worst January performance in 113 years.  More pointedly, key political victories for the Team Obama spending plan have not been viewed as buying opportunities on Wall Street. A string of negative market reactions began with the December 18 announcement of a stimulus bill of $700 billion (Dow down 2.5%), continued with the January 7 announcement that the actual plan would be “on the high side” (-2.7%) and continued with last week’s 61-36 Senate vote supporting the Administration’s fiscal plan. The White House victory and the new bank bail-out plan announced the following day by Treasury Secretary Geithner were met with a 5% wipe-out in the DJI, and a decline in Treasury bond yields, indicating a “flight to quality.”

I must begin this post with a clarification: I am not a Republican. Nor am I a Democrat. I really have little interest in defending one party over the other. I agree with the GOP on some matters, with the Democrats on others, and with neither party on a host of matters. In general, I don’t get worked up when academics and commentators criticize one party or the other.

I do, though, expect smart people to be fair and principled in their criticisms of either party. For that reason, I was greatly disappointed when I read this op-ed by Prof. Douglas Kmiec, who I understand is very smart.

The op-ed, entitled “The death of the GOP?,” appeared in today’s Chicago Tribune. I suspect it was written in haste because it’s, well, not very good. I’ve reproduced the entire op-ed below, along with my best guesses as to what its author was thinking. (My guesses are in italics.)


The death of the GOP?

After barely four weeks in office, President Barack Obama signs into law Tuesday a legislative achievement that eclipses entire terms of some contemporary presidents. The stimulus legislation has the real potential of creating more than 3 million jobs, most in the private sector and many rebuilding an aging public infrastructure. The new law assists those most in need of basic health care, job training, and in the near term, unemployment benefits and food.

[I’ve heard that there may be some downsides to the stimulus legislation. People talk about stuff like unprecedented deficit spending, crowding out of private investment, inefficiencies resulting from political misallocation of productive resources, the potential for wasteful rent-seeking (which is distributive rather than productive conduct), etc. In this new political dawn, though, we don’t need to think about costs. If we just focus on the immediate benefits of this legislation, it is undoubtedly “a legislative achievement that eclipses the entire terms of some contemporary presidents.” I mean, it’s really, really big. That’s gotta count for something.]

No one could blame Obama for being a bit chagrined at the GOP’s disengagement from all this, notwithstanding the president’s charm and offers of substantive compromise. [Seriously, why do we pay those people? If they were really “engaged” in this process — you know, doing their jobs — they definitely would’ve gone along with exactly what President Obama wants. I mean, he’s just so charming!] Republican Judd Gregg’s withdrawal as the nominee for the Commerce post was thus true to form. The only reason Gregg gave for withdrawing was that he didn’t want to help. “It just occurred to me that it would be very difficult . . . to serve this Cabinet, or any Cabinet, for that matter, and be part of the team . . .” Confessing that one won’t or doesn’t know how to play with others is not an adult reaction to the urgent needs of the time. [If Gregg weren’t such a baby, he surely would’ve sacrificed his principles to make our immensely popular and goodlooking President happy. That’s what adults do.] Has the GOP been reduced to the sum of its worst parts: namely, a political party with scarcely an original thought that now only remembers how to secure office largely by denigrating the values, hopes and planning of others? [I mean, honestly people. That Nancy Pelosi worked her butt off drafting the stimulus bill. How dare those meany Republicans try to dash her hopes and squander all her hard planning.]

The Republicans need to break free of an economic theory that was drafted on economist Arthur B. Laffer’s napkin. [Opposition to spending $505 billion as detailed here was entirely based on that Laffer Curve thing, right?] Supply-side theory may have sufficed at a different time, but giving the wealthy more reasons not to notice that 90 percent of the wealth is held by 1 percent of the nation takes no account of the present economic reality. Trickle-down tax relief, by definition, trickles, and when you’ve got a nation losing jobs monthly by the hundreds of thousands, trickling is not the answer. [There were, you know, only two options here: the $787 billion bill we got or lots of tax cuts for rich people. Cutting marginal tax rates across-the-board wasn’t an option.]

In 1980, Ronald Reagan won many Democrats and independents over to his side by paying special attention to “family, work, neighborhood, peace and freedom.” [Reagan never really talked about cutting tax rates, did he?] In the last eight years, peace gave way to military occupation with a decidedly murky objective. The freedom of Americans and others has been likewise put at risk by the provocation of hatred and suspicion in cultural circumstances we know little about. [Much the way my own outspoken opposition to same sex marriage rights puts the freedom of Americans at risk and provokes suspicion in cultural circumstances I know little about.] And now the GOP is apparently confessing little or no interest in family, work or neighborhood. How else can one explain total disinterest [failure to support = total disinterest, right?] in a stimulus bill that provides $116 billion in direct tax relief for workers, another $70 billion in tax relief for the middle class and that provides economic incentives to buy energy-efficient cars, houses by first-time home buyers and provides $2 billion for health care for the needy and the elderly? [Yes. How else could one explain the failure to support this bill? They must simply loathe families, work, and neighborhoods!]

One of the “irreconcilable differences” Gregg had with the president apparently was over how to get an accurate census count of poor and minority citizens who often take an additional Commerce Department effort to locate given their relocations in pursuit of work and opportunity. The census is an important constitutional determinant of legislative representation as well as the allocation of public money and it should not be manipulated. The GOP is right to resist statistical extrapolation that distorts reality. Yet, a justifiable concern with numerical honesty is not the same as a Machiavellian desire to leave the less fortunate out of the electoral equation because you think (probably correctly) they won’t support you if you have ignored them. [And make no mistake — Gregg’s concerns were of the Machiavellian variety, not the “justifiable concern with numerical honesty” variety. I know because, well… I just know.]

The Republican Party had a noble beginning in 1854, disavowing the pro-slavery inclinations of the 19th Century Whig Party. It would be a national loss if the party of Lincoln were to suffer the same fate for its current unwillingness to responsibly work to find common ground. [As Lincoln realized, unity (finding common ground) is far more important than principle.] So while I am reluctant to recommend that the president give another Republican a chance at joining the Obama team, there is someone who seems ideally suited by personality and preparation: Mitt Romney. Romney’s skill as a capable financial workout artist saved the 2002 Olympics from almost certain failure and successfully restructured innumerable private firms. [And since restructuring private firms is now primarily the responsibility of government, Romney’s perfect!] In the GOP presidential primary, the ultrapartisanship of Mike Huckabee and John McCain [the quintessential partisan] derisively hung the “flip-flop” label on Romney or his intelligent open-mindedness, but in the light of day, that is better understood as a badge of honor. [So Romney sacrificed a professed principle or two to get ahead politically. Big deal. We’ve all done it.]

The GOP needs to abandon its suicidal ways before it’s too late—for them and, more important, for a nation that benefits from the contest of liberal and conservative ideas and the hard work that it takes to meld them into responsible and prudent policy. [And when I say “contest,” I mean “charade of debate in which the popular, unifying President’s preferred policy emerges as the unscathed victor.”]

Yes, actually.  I was going to write a post on this topic, but then Megan McArdle said pretty much what I wanted to say, only snarkier and pithier.  A taste, but read the whole thing:

But this woman is sitting on the House Financial Services Committee.  She is supposed to help craft the bills that govern our financial system.  And she clearly doesn’t have the first shred of an inkling of a clue of how said financial system works.  Her questions had the air of someone who couldn’t quite wrap her mind around the complexities of the E-Z Reader consumer activist pamphlets from which she had presumably cribbed them.

But Paul Krugman is certain she should spend even more, more, more.  So it must be ok–he has a Nobel Prize, you know.

Krugman’s latest opinion piece is here. Like me, Paul is beating the same drum over and over (oh, and by the way, like at DeLong’s place, my comments mysteriously don’t show up on his blog.  Odd.  I swear I am civil and engaged. I’m not sure why I am blacklisted.  Could it be that I disagree vehemently? Nah.)  At any rate, here’s a taste:

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.  It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive.

Now, I think the Republicans are as abominable as the next guy (or at least as abominable as the next Democrat).  But Paul’s desire to score political points at the expense of reality really renders him senseless.  I’d actually like to see what he has to say.  I wish he would engage as an adult in the “deadly serious debate” before us.  And yet all he can muster is blithe dismissal of arguments skeptical of the net value of the massive government spending porkfest before us as “old cliches about wasteful government spending and the wonders of tax cuts.”  Oh, and the Democrats, who have never spouted cliches in their lives, of course, are forced on the defensive–helpless, noble stimulators, brought low by the crass politicking of the Republicans.

Except there is a strong economic case–not mere political cliches, whether Paul agrees with it or not– that suggests that tax cuts might work better (and more quickly).  There is evidence (in the very text of the bill) that this has turned into an embarrassing and ineffectual wish list of Democratic shibboleths instead of a “targeted, temporary and timely” stimulus package.  There is evidence that the long-term (and we’re not talking that long-term–I plan to be alive in 2019, you?) effect of the current plan is net negative.  But never mind all of that–it’s just Republicans playing politics (this part is true of the elected officials, I assume, but Krugman would thusly tar the ideas of Barro, Mankiw, Murphy, Lucas, Becker, Cochrane, Zingales, etc., etc.) and Democrats trying to save the world (this part is patently false, of course).

Why of why can’t we have a better Paul Krugman?

Those lame Super Bowl commercials have nothing on this one.

(HT: Don Boudreaux)

Dick Armey has a nice op-ed in today’s Wall Street Journal. The piece, titled Washington Could Use Less Keynes and More Hayek, echoes points I made recently in criticizing the stimulus and advising President Obama on good stuff to read. Armey writes:

Sound money policy, [Hayek argued], allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy — spending that takes resources away from those who are productive and redistributes it to politically favored interests — is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families’ best interest.

“The real question,” according to Hayek, “is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which he can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole.”

Armey also reminds us to heed the insights of public choice:

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

Good stuff.

Hey, what a shock: Brad DeLong cites to a cursory and useless critique of the Efficient Market Hypothesis and declares it, with the author,  “refuted.”  Here’s Brad’s cite; here’s the original “refutation.”  The complete list is absurd (there are five purportedly refuted doctrines, including “the case for privatization” and “individual retirement accounts.” Seriously? Yep.). Perhaps Brad is merely citing and not approving, although the title of his own post, “Refuted Economic Doctrines #1-5,” suggests otherwise. At any rate, here’s the crux of the argument:

More important than asset markets themselves is their role in the allocation of investment. As Keynes said in his General Theory of Employment Interest and Money, this job is unlikely to be well done when it is a by-product of the activities of a casino. So, if the superficial resemblance of asset markets to gigantic casinos reflects reality, we would expect to see distortions in patterns of savings and investment. The dotcom bubble provides a good example, with around a trillion dollars of investment capital being poured into speculative investments. Some of this was totally dissipated, while much of the remainder was used in a massive, and premature, expansion of the capacity of optical fibre networks (the fraudulent claims of Worldcom played a big role here). Eventually, most of this “dark fibre” bandwidth was taken up, but in investment allocation timing is just as important as project selection.

Hey-I’ve seen this movie before.  1. Mention Keynes. 2. ? 3. Profit!

Leave aside the earlier paragraph where the author points out, in describing how the dotcom bubble was a clear refutation of the ECMH, that George Soros lost a ton of money by trying to beat the market but getting the timing wrong. Leave aside that no form of the ECMH says that markets = Nirvana and are, at all times, perfect. No, the larger problem is one that seems to creep up over and over and over and over again in the claims of Keynsian supremacy arising from the current crisis: An utter failure to consider THE OTHER SIDE OF THE F*ING INEQUALITY.

Here’s a simple equation. A > B where A is the value of market allocation of resources and B is the value of government allocation of resources. Suppose a large literature shows that A = 100 and B = 5.  Is the inequality “refuted” by claiming (not showing, mind you-but, you know, hand-waving) that A < 100? Um, no. No, it’s not, in fact.

For government to be better than markets at allocating resources it is not enough to explain that markets allocate resources imperfectly; it is required that one explain that governments do it better. It might be the case. There’s a huge literature, a couple of imperfect natural experiments, and an enormous amount of basic intuition that says it’s not, but it could be.  But it does not constitute a “refutation” of that literature even to demonstrate beyond dispute that A is lower than we thought. That’s not sufficient.

Likewise, for Keynsian “stimulus” to be a worthwhile endeavor, it is not enough that one explain that government spending could force resources to be reallocated to “stimulating” uses in the short term, it is required that one show the (short-run and long-run) cost of such “stimulus” is worth the benefit. I thought economists were supposed to understand opportunity costs.

I have yet to see DeLong, Krugman, et al. treat the arguments on the cost side of the equation with anything other than contempt and derision. Until they do, they have not made their case as an economic matter. Now, as a political matter, they have made their case and then some. Which is why it is so embarrassing that Krugman has a Nobel Prize and Gene Fama doesn’t.