Public choice perspectives on the fiscal stimulus

by on January 28, 2009 at 7:55 am in Political Science | Permalink

If you want to worry less about the stimulus, try this argument.  Government will spend a certain amount of money in any case, but that spending can be of higher or lower quality.  Maybe you don't like the stimulus spending but is it possible that the spending alternatives would be even worse?  Lock Jason Furman and Larry Summers in a room for an hour, with no web connection and equipped only with a single crayon between them.  They still would come up with a better spending plan than would Congress and perhaps we are getting some version of what except they have more than a crayon.

Alternatively, perhaps progressives should be a little worried.  As Matt Yglesias admits, evidence on massive fiscal stimulus is iffy (through nobody's fault, it's simply hard to know).  But if you're a progressive, the opportunity cost of spending that money is a very non-iffy, highly-likely-to-succeed government program of some kind.  Call it public health infrastructure.  Maybe the content of the stimulus bill isn't as progressive as the alternatives.

If you're a libertarian, the government will just waste that money anyway.  Can it be that progressives should be more worried about the stimulus, in net terms, than libertarians?

The underlying fiscal model here is that Obama has more good ideas (good from a progressive point of view, at least) than he is allowed to spend money on but he will spend as much as he can.  These conclusions can be overturned to the extent that the prospect of a stimulus increases the total of what will be spent.

Addendum: Is Jeff Sachs agreeing with me?

E. Barandiaran January 28, 2009 at 8:13 am

David Henderson thought that you had discovered public choice. He was wrong. “The underlying fiscal model” you refer to in the last paragraph is the definition of economics that any student learns in Econ 101.
Regarding Jeff, no surprise. He’s concerned only about his own agenda–as usual.

David Heigham January 28, 2009 at 9:08 am

For us government economists, the (ideal) rule was always that the politicians defined the “bang”, and we tried to sort out the options of which gave most for the buck. These options obviously included tax changes – down and up – as well as spending choices.

One change for Obama & Associates is that they have to think about the effect their choice of options may have on the acceptability of the resulting borrowing requirement. We used to have the luxury of taking the borrowing requirement as independently determined.

A second linked change is that the acceptability of the borrrowing requirement will in part be set by the degree of ‘quantitative easing’ that is contemplated; and the degree that is delivered. The associated expectations game takes one back to fiscal policy in the days of squeezing out chronic inflation; but with a balance to achieve not just a direction of change.

Navigating through this cats’ cradle is likely to place a premium on choices offering minimisation of maximum regret; but even so they will be mini-max hopes, not necessarily solutions.

libfree January 28, 2009 at 9:12 am

I think that both progressives and libertarians should be sweating a good bit. If this huge stimulus is viewed as a massive failure, it could propel small government back into the forefront. If its viewed as a success, say goodbye to small government.

josh January 28, 2009 at 9:40 am

What Rich said.

Superheater January 28, 2009 at 10:06 am

“I think that both progressives and libertarians should be sweating a good bit.
If this huge stimulus is viewed as a massive failure, it could propel small
government back into the forefront. If its viewed as a success, say goodbye to small government.”

And that determination will be subjective and indeterminate. Have you noticed how crazy the left
gets when you suggest FDR’s policies prolonged the depression?

The “New Deal” was profiled on the History Channel the other day-one of the commentaries was by
actor Jerry Stiller. (Yes, George Costantza’s father on “Seinfeld” and
Arthur Spooner on “King of Queens”) He offered a few approving bits on his father getting a
job on the WPA.

Peter G. Klein January 28, 2009 at 10:45 am

“If you’re a libertarian, the government will just waste that money anyway.”

Tyler, you can’t be serious. You don’t believe in the Higgs Effect?

babar January 28, 2009 at 11:19 am

> a significant fall in the dollar will make us considerably poorer as we pay our foreign investors back

nearly all of the US debt with china is dollar-denominated, so we would be paying back in weakened dollars. this would seem to be to our advantage, but it would be poor diplomacy.

from my perspective, the main issue at present is that the combination of persistent debt and moderate deflation could cause a debt-deflationary cycle resulting in a depression. the so called liquidity trap may be the first trip round on that cycle. what needs to happen to avoid this is either inflation or debt destruction.

if the government takes on debt that exists elsewhere in the economy (and pays it back at a lower interest rate if at all) this may be a partial way out of that trap.

ThomasH January 28, 2009 at 12:00 pm

The problem with the tax cuts in the stimulus is that they cut the wrong taxes. Neither the payroll tax, the corporate income tax nor favorable taxation of indexed capital gains have any justification: neither efficiency nor progressivity. And yes, do put in a token down payment on a new carbon tax to eventually fill the gap left by payroll and corporate tax elimination.

Blackadder January 28, 2009 at 2:24 pm

Bob,

I think Tyler is trying to be clear that he’s not making an “absence of evidence equals evidence of absence” argument. The pro-stimulus folks don’t have any evidence not because there’s a lot of evidence against them, but because there just isn’t much evidence on the question.

The image of Krugman shredding GDP data was hilarious though.

Steve Koch January 29, 2009 at 1:58 am

We are talking about a huge amount of money, about .8 trillion dollars. It is all borrowed money. We are talking about some politicians throwing out a half baked plan in an extreme rush. I will stipulate that I have no faith in either political party being able to spend our money wisely in such circumstances. They should spend the least possible money to get the job done properly.

A small percentage of the proposed stimulus money will be spent in 2009. Who knows what the stimulus needs will be in 2010 and beyond (or even in Q2, 2009)? It will depend on how the economy is doing then. It may be that the stimulus is counter productive by that point (who knows?). We do not know the best way to do stimulus in 2009, let alone in 2010 and beyond.

The stimulous package should focus on what we do through April 15th (tax day), 2009. It will be much simpler to define and evaluate. As we see how that package does and how the economy is doing, we can then craft a stimulus package for the next few months or so.

We need to define the goals of the stimulus package. Are we trying to get through this massibe real estate bubble/banking system collapse without further pain or are we just trying to get the banking system working properly again so that the economy can heal itself as the bad banks collapse and the bad loans are foreclosed (and those assets are sold to somebody else who can afford the asset).

Isn’t this crisis primarily the result of the government’s failed policies? Why do we think that the government will do a better job this time of spending such a huge amount of money in such a short time to fix such a complex problem?

Most of the current stimulus package is more properly considered investment and should not be included in the stimulus package at all.

While command economies (such as the USSR, Cuba, Viet Nam, China (before it embraced capitalism), etc.) have done poorly, it is possible to imagine a command economy succeeding some day. But today is not that day.

If we go to a more command oriented economy, we will need leaders that are much more competent than the representatives that we have been electing in my lifetime. China has done a good job with an economy that is partially command oriented but their leadership has a completely different skill set than ours. China’s political leaders tend to be very technically proficient guys (mostly engineers, IIRC). Our political system produces leaders such as Nancy Pelosi and Tom Delay.

Comments on this entry are closed.

Previous post:

Next post: