Paul Krugmanp: Bad anti-stimulus arguments

[RedEarth]

A number of conservative economists have been arguing against a stimulus plan centered on government spending. Fair enough. But one argument I keep reading bugs me: it’s the claim that spending-based stimulus is bad because economic theory tells us that a marginal dollar of private spending is better than a marginal dollar of government spending.

That’s just wrong; it’s a misreading of basic, Econ 101 level, economics.

Yes, the standard theory of consumer choice says that a consumer gains more utility if he or she gets to freely allocate a dollar of spending than if someone else makes the choices: I’d rather buy myself a $10 meal than have you feed me $10 worth of food that you select.

But that’s not what we’re talking about when we talk about stimulus spending: we’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. things like roads, communication networks, sewage systems, and so on. And every Econ 101 textbook explains that the provision of public goods is a necessary function of government.

When we’re asking whether it’s better to have the government stimulate the economy or to try to stimulate private spending, we’re asking among other things whether a marginal dollar spent on public goods is worth more or less than a marginal dollar spent on private consumption. And there’s nothing, even in Econ 101, that clearly favors private spending on private goods over public spending on public goods.

In other words, the attempt to claim the authority of economics for the idea that stimulus in the form of tax cuts is better, at a microeconomic level, than stimulus in the form of infrastructure spending is a case of bait and switch. Don’t fall for it.

http://krugman.blogs.nytimes.com/2008/12/22/bad-anti-stimulus-arguments/

[redqueen]

1. I wish his stuff had wider exposure.

Of course I do my part to pass it along... but he should be in more papers IMO.

[NV Whino]

2. It's about to

Obama and crew have been consulting with Krugman... or vice versa.

[Danascot]

3. Similar Sentiments from James Galbraith

Stimulus Is for Suckers

The historical role of a stimulus is to kick things off, to grease the wheels of credit, to get things "moving again." But the effect ends when the stimulus does, when the sugar shock wears off. Compulsive budget balancers who prescribe a "targeted and temporary" policy followed by long-term cuts to entitlements don't understand the patient. This is a chronic illness. Swift action is definitely needed. But we also need recovery policies that will continue for years.

snip

Is this the standard "liberal line"—borrow and spend? No. It is the situation, not the philosophy, that demands this action both grand and sustained. Economic recovery in an existential crisis like this means actually building a new economy. For that, we need investment—to restore our roads, rails, transit, broadband, and water systems, to build parks and museums and libraries, to protect the environment. Right now, states and localities can't borrow for these things. Creating a National Infrastructure Fund, using Uncle Sam's borrowing power to put money where it's needed, is one way forward. Federal capital spending should be bond financed and exempt from budget rules, especially pay-as-you-go. It makes no sense to finance projects whose benefits will last for 50 years solely from tax revenues of today.

http://www.motherjones.com/news/feature/2009/01/stimulus-is-for-suckers.html?welcome=true

[notesdev]

4. Straw arguments

The reason the stimulus plan will be a waste of money is pretty simple. Any eight-year old can understand it.

We got into this problem because we spent too much money.

Spending more money is not the way out of this problem.

Keynesians seem to have an immense amount of trouble coming to grips with this concept. When you're broke, spending more money will not make you unbroke.

[mrreowwr_kittty]

5. Then what do you suggest? nt

[notesdev]

6. There's all sorts of good things that can be done

but will they, no.

If I could make one change to the financial system I would get rid of fractional reserve banking, which is an institutionalized form of financial fraud. If I got a second pick I'd have us return to a sound currency. If I could keep picking I'd keep eliminating the rest of the dishonest things that our economy has been based on, until they were all gone.

[mrreowwr_kittty]

7. How do any of those things create jobs? nt

[notesdev]

8. They prevent jobs from disappearing

Since they lay the foundation for a sustainable economy, not one that is dependent on which party holds power, not one that is a one-shot deal then disappears like a 'stimulus'.

On my if-I-were-king to-do list would also be things like repealing 'free trade' agreements, which would directly create jobs. The only trade agreements we have that are fair to us are ones with similar, first-world economies. Every deal we have with countries outside of the first world undercuts labor, by sending factories and jobs overseas.

[unlawflcombatnt]

11. Good Ideas on Trade

Getting rid of our free trade deals is a great idea.

We could pick up over $400 billion in aggregate demand and GDP by eliminating our non-oil trade deficit. And if we did it through tariffs, that would also provide an increase in Federal revenue, instead of an outlay of revenue going to Corporate Welfare Queens.

[On the Road]

13. Wow --

Eliminate fractional reserve banking right now? You must really want to bring on a catastrophe.

And the argument that since spending too much money caused the recession, spending more money will not get us out seems completely devoid of economic logic.

[anigbrowl]

10. There's a flaw in your thinking.

you become sick and unable to work. Let's assume you get free treatment (via either private or social insurance), but it takes 3 months and you have no income during that time, and not enough savings to cover the expenses. You still need to pay rent and so on. So, you are broke. Should you borrow against your future productivity (after you return to health, which is quite likely), or let yourself get evicted, which will worsen your health and prevent recovery?

In this (simplified) situation, it is better to take on debt, although broke, than exacerbate your state of ill health. Your argument assumes that income is continuous and that much or all spending is discretionary. Sure, in my example you shouldn't use the borrowed money to go to the movies or buy steak dinners every night, but it is sensible to eat, buy medication, pay rent and heat your house.

conversely, you get laid off from your job at an auto factory because it's shutting down. you don't have huge savings and now your income has gone, unemployment won't last that long. Many people are in a similar position. Looking around, you realize most of your neighbors drive the same cars the factory used to make, but that they were in the habit of buying new ones every few years until the factory shut down. You realize that there may be a profit in maintaining these vehicles so they stay on the road longer, and that you happen to have the right skills for this job, and that there isn't a whole lot of competition. Maybe the smart thing to do is borrow (and then spend) the money to open a repair garage; if you do this first, then you'll get most of the work.

[northernlights]

12. well I don't want an 8 year old managing my economy

I'm nearly broke. I can't get a job. My old field is dead, I'm not qualified for any decent jobs out there and I was last rejected for a minimum wage job scrubbing toilets. Cutting my taxes (in the form of a property tax rebate) helped me get through today, but won't help me tomorrow. And no income tax will help me today or tomorrow.

So what am I doing? I'm borrowing and spending money. But I'm not just spending it any ol' way.

I'm investing in myself, retooling where shortages exist and are expected to continue to grow. In my case, my sustained stimulus package will train me in 2 years to be a med lab tech with a decent income to start AND after 2 years work experience I can sit for the 4 year exam and potentially double my income.

That's what a sustained stimulus package can do. Obama isn't planning to hand out money willy-nilly to be spent any ol' way. He's investing in our future.

It's not about building new highways and bridges -- it's about *finally* fixing the ones that are falling apart. Insulating and revamping existing buildings to cut their maintenance costs. Updating and repairing sewage systems so they don't pollute. Investing in green infrastructure to cut the hidden costs of bad technology (as in oil, which depends on war and brings global warming) and to support new business growth.

Those jobs will pay taxes back into the government and they will put at least *some* people back into the black, to help pull along the rest. I know that just one small city in Maine has $250M in backlog public works projects that have been sitting on the back burner and are ready to start in the spring. They're not wasting any time pulling out the plans and dusting them off.

Green energy is ready to go. If solar and wind had 1/10th the investment in it that we've pissed into oil, in the form of wars and tax breaks, we'd have been freed years ago. With paltry support from the gov, thin film solar is of age today and solar-fueled hydrolysis will be here in 10 years or less. Affordable, practicable electric cars will be available within 2 years.

[Jim__]

14. Your "analysis" is way too simplistic.

Particularly: We got into this problem because we spent too much money. Spending more money is not the way out of this problem.


Sounds reasonable. Unless you test it a little bit. It's not spending, per se, that got us into this mess. It was actually bad debt that got salted throughout the economy that got us into this mess. And it did that by freezing the credit markets. No one wants to lend because no one can trust the value of any one else's assets - those assets may be salted with bad debt. The lack of credit is leading to a huge drop in spending. It is this huge drop in both available credit and spending that is actually the problem.

So, your simplistic conclusion that (s)pending more money is not the way out of this problem no longer follows.

[angryfirelord]

9. The problem here

is that the government itself doesn't make any money. It's not a business, it doesn't hold stock and it doesn't produce anything that people can physically buy. Therefore, the only way it gets money is through taxation. In other words, it take money from the left pocket and put it in the right pocket. It doesn't really create jobs, but spreads them around. Of course, what the Fed is doing is far worse: printing money out of thin air. We don't have any money, we have a deficit, so therefore these bailouts and loans aren't backed by anything other than what the government says. As a result, we end up getting hit with inflation due to excess money in circulation.

I agree with notesdev, the first step in growing our economy is stabilizing it first.