I haven't stopped thinking about fiscal policy, but I'm not so keen to just repeat my previous posts (google "fiscal stimulus" and related phrases into the MR search function if you wish). I am, however, willing to listen to Arnold Kling:
From the Recalculation perspective, the economy needs to shift
resources out of some sectors and into others. The government is either
(a) permanently shifting resources from the private sector to
government or (b) temporarily shifting resources from the private
sector to government. If it is doing (a), then we are not facing mere
temporary deficits but permanent increases in government spending, and
eventually we will have to figure out how to pay for them. If it is
doing (b), then the Recalculation problem isn't really being solved.
Instead, at best the government is redistributing the pain from the
reallocation process out of the present and into the future. People who
otherwise would be unemployed can find temporary work on government
projects, but when those projects expire they will go back to being
unemployed. This is what makes the fiscal exit strategy so problematic.
In my view that is exactly correct. It's also why current gdp measures and projections aren't picking up how well the stimulus is or isn't working. A higher monetary velocity, as induced by fiscal policy, will indeed boost nominal gdp, but we need to see how well these projects stick, or not, with time.
Addendum: Matt Yglesias comments.
I think it would be fair to conclude that a good number of the fiscal stimulus advocates don’t advocate an exit.
And the worst one is spending money to prop up clearly failed businesses. GM and Chrysler were failing long before the crisis hit; it was the final push, but absent it they still would have run out of money in a year. They were burning cash and mortgaging and selling all their assets. (GM was only alive because their finance arm made money in finance, then they sold that off too.)
The same goes for money spent to prop up finance jobs if we have too many of those. If it’s a recalculation, then all we’ll do is spend a lot of money to delay it.
Yes. But. Wait.
1. Was the problem in Detroit really a misallocation of workers? Were we really buying way too many cars? This is a separate issue from whether union benefits were too high. Even if we were buying too many cars a few years ago, aren’t we buying too few now?
2. Why did people lose so many jobs in so many different industries? For instance, why did oil and oil services lay off so many people? Is it really because they had too many workers? Why do I keep reading that the oil industry has too few workers for the future–at the same time they are laying people off?
3. The housing bubble showed that the whole economy was massively misallocated? If this is really true, shouldn’t we consider the housing bubble to have been salutary? I have trouble buying this. Yet is it not Kling’s logic, if you follow it through completely?
This problem goes back to comparing the Austrian approach to the Great Depression as cold turkey withdrawal for an addict. Cold turkey produces enough problems on its own that it’s not going to be palatable.
I’d offer three suggestions. First, one of the generally disingenuous things about government spending in the first place is the practice of building in lots of growth to projections and then screaming “budget cut” if a program grows by 2% instead of the previously requested 10%. Make a real attempt to cut that out as much as possible. Obviously easier said than done.
Second, supposedly Social Security just went into permanent deficit. How about we take the entirely reasonable first step of indexing benefits to prices rather than wage increases.
Third, consider attempting to “buffer” the increase in taxes and reduced spending/reallocation problem by taking a stab at a wide variety of the least beneficial and most dead weight loss inducing of government programs and rules. Realistically, of course, this is also a tough sell, but it seems to me the time would be right to argue for creating a positive supply shock, which would create private sector growth, which would allow us to pay for stuff we need and stuff we can’t politically get rid of. Instead of creating a bubble, create a permanently better economic state of affairs.
Examples:
* Much of the TSA apparatus. Streamline travel, make it cheaper. Will cost some jobs over the longer run, but these can probably be pushed off a bit. Re-assign those guys to something else if you need to.
* An attempt at an economically rational, market oriented health care reform. Health care is a growth industry… maybe we ought not tax it out of business.
* Freer trade.
Non examples: Things that pose significant recalculation/industrial shift problems on their own. Defense spending cuts, etc.
You’re just confirming what Krugman said about isolation of the freshwater economists.
I’m not going to argue here if Krugman’s and governments’s point of view are correct or not, but you’re not even mentioning them, and act as if the real business cycle view was the only true one, and this was definitely without a doubt a problem of resource shifting, as opposed to Keynesian style recession.
Substitute (tech boom, housing boom) for government and you have the same issue, the same shifting, the same redistribution, but presumably no assertions recalculation is not occurring.
There is no exit plan for Obama’s first term. Can you conceive of any scenario in which more GM/Chrysler factories are closed before 2012, regardless of results? Any scenario in which the government decides it is time to stop propping up home prices and let the market clear? Any scenario in which Congress decides that we need less highway spending?
Its sort of obvious that some sectors of the economy need to scale back – we need fewer carpenters in Nevada, for example. And presumably there are places were those resources would be better employed. Its not obvious just where, but that’s exactly as you’d expect.
But isn’t the real question for the effectiveness of fiscal policy whether this is the ONLY thing going on. That seems to be what Arnold Kling is assuming. If there’s any component of people deferring consumption because they don’t have the income to support it while they “recalculate” their future careers, or worse still deferring consumption because they’re uncertain about them, then fiscal stimulus can do something other than prevent necessary adjustment or take over failing sectors of the economy – it can prevent the real fall in effective demand from affecting businesses that are just innocent bystanders until the recalculation in the most severely affected sectors has passed.
To try to make this concrete without making it too indirect – Consider the best building contractor in Las Vegas. He still has work, as do his crew, but because their sector is clearly under threat, their credit is more expensive than it was, because there’s no way for his creditors, who lack complete knowledge of his business, to know he’ll still be in work when the “recalculation” is done. Because their credit is more expensive, his costs are higher than they were, so he no longer buys ice cream for his crew at lunch time. Because of that, the local ice cream vendor he used goes out of business. If the government had either provided credit to the contractor, or bought the ice cream, until the recovery was under way, and then withdrawn the subsidy, the ice cream business could have survived. Its hard to see how the ice cream sector was necessarily affected by a recalculation in the housing sector …
Dr Kling seems to want to assume on the one hand that unemployment in some sectors is caused by rigidities that take time to work out, but then on the other hand draw implications for policy on the assumption that all other markets are clearing instantly based on perfect information. Seems a tad inconsistent.
MikeDC writes: And how’s about we allow some nuclear power plants and new oil refineries to be built. That’d work
The oil industry has shut half the refineries that existed in the 1970s because industry subsidies and regulations related to such as the Texas Railroad Commission had created too many inefficient refineries. (The TRC prevented too much production in the 50s and 60s which would have caused the Texas-Oklahoma fields to peak in 1960 instead of 1970.) It was far cheaper to expand the production of the best and largest refineries.
As for nuclear, the nuclear industry was heavily subsidized until circa 1980, but the Bush administration and the Republicans threw lots of money at power producers to bribe them to build new plants, but the industry is moving slowly because there in no assurance of demand in 40 years.
The biggest added producer of electric power is energy efficiency, turning waste process heat into electricity, or turning electric power waste heat into process and building heat. Cogen has been adding all the power needed for a couple of decades and is now competitive with coal and cleaner, and way below the cost of nuclear.
One must face facts: only government central planners can justify the cost of nuclear power. In the US, the PUC central planners promised utilities they could raise rates as high as needed to pay for nuclear power plants. Until Federal deregulation of power generation killed the central planner’s ability to make nuclear profitable with high rates.
France’s nuclear power was built by a communist minister who nationalize all forms of power in France and then determined nuclear was the way to defend France for having oil cut off.
The nation developing the most advanced nuclear power plant designs are the Chinese central planners using government money.
You won’t find a single successful nuclear industry that isn’t heavily funded by government anywhere in the world.
And as for oil, while private land is 80% of US territory, the calls are always for a government solution, turning public land over to private industry for private profit. Is the need for public land an indication the 80% private land has been pumped dry? Or do the private owners demanding too much in royalties?
But at least you seem happy to have big government solutions to what you see as economic problems.
People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed.
1) Tyler, do you believe it is possible that the raw indicators of economic health (GDP, unemployment, etc.) feed back into public perceptions (venture capital predictions, corporate sales projections, consumer confidence) such that an artificial “shot in the arm” to the economic indicators is likely to increase future non-gov’tally-driven economic activity?
1a) If so, how much of an increase in private economic activity do you suppose will happen?
1b) If we buy this story (artificial priming induces future private expenditure and investment), then Arnold’s story is either not true, or is true only probabilistically, or only to some degree (obviously some percentage of government temporary workers will become unemployed, since people become employed/unemployed all the time)
1c) The related question is whether such postulated increases in private economic activity would be truly beneficial. If the government artificially juices the numbers so the private sector “gets back on the treadmill,” are we just submitting ourselves to amnesia about “the hard decisions that need to be made?”
I dunno. IF the gov’t ramps stimulus spending back down and private industry and consumers have “gotten back on the treadmill,” then some folks want to ruin the party by saying such economic activity is not sustainable, well, maybe. But then you’d be second-guessing private economic activity, not gov’t spending.
At the end of the day while I find Austrian style critiques interesting and psychologically invigorating, I don’t fully buy them. In medicine when the patient is atrophying or suffering from severe inflammation we give the patient steroids. And it helps, even though it’s artificial. As long as interventions are targeted and temporary, it seems like they ought to be potentially helpful.
Of course the devil’s in the details and gov’t often does not reduce its spending, even “temporary” spending. I would be much more sympathetic to this sort of critique of the practical problems of targeted intervention than to a blanket statement that intervention could never help.
The goal is to get some necessary public stuff done until the private sector decides what it wants to do.
I Recommend high science spending, and creating large numbers of business incubators at universities across the U.S. It will pay huge dividends, when some kid makes some nano tech app or solar panel and gets funded and starts the nanotech revolution.
And if people are working, they are going to consume. when they are consuming, at some point something new will come along that demands the attention of the private sector investors, and entrepreneurs will once again flood into that area and make a boatload of money.
You guys who don’t like the public sector just want people to suffer in the interim. You would rather have purity of theory than kindness of outcome.
To the argument that government spending distorts the market, my response is “So?”. The private sector distorts the market as well – and recently to such a degree that we have a huge recession where many millions of people have lost their jobs.
IF you think these people are willingly unemployed, at least get out and talk with someone. If they took that McDonalds job, they would still lose their house at the same rate they are now. Having a former 50K person getting an $8/hr job doesn’t help anyone, because they took that job from someone who could use the $8/hr.
As long as we rely solely on market forces to shape our economy, we will never have long enough time horizons to make recessions less frequent or less severe. This recession (really last decade) is the result of 30 years of deregulation in a variety of fronts across the globe. We are seeing the result – bubbles followed by severe downturns that are slow to return to economic growth. This is very similar to the second half of the 1800′s and early 1900′s. Google “Long Depression” if you have doubts about this.
here is a useful quote from wikipedia:
“n the United States, economists typically refer to the Depression of 1873–79, which followed the Panic of 1873. The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression’s 43 months of contraction.[4] [5] Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.”
Is this what we want?
Once again we need to learn that pure market forces result in economic growth that is more volatile than people demand. If we have big government, it is only because people demand it in response to economic volatility caused by blindly worshiping market forces.
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