Chris House on stimulus spending

by on March 9, 2014 at 3:43 pm in Economics | Permalink

These points have been far too often forgotten:

Even if the multiplier is substantially above 1, it is not obvious that stimulus spending is a good idea. The reason is that we are not trying to maximize output and employment – we are trying to maximize overall social well-being. At a basic level, the idea behind stimulus spending is that the government will spend money on stuff that it wouldn’t have purchased if we weren’t in a recession. The classic caricature of stimulus spending is the idea of paying a worker to dig a hole and then paying another worker to fill the hole in. This type of stimulus spending will increase employment and GDP but it won’t really enhance social welfare. True, we might get the beneficial effects of the stimulus but we could achieve that by simply giving the workers the money without requiring that they dig the holes. If we simply give out the money, GDP increases by less but social well-being goes up by more since the work effort and time wasn’t required.

Even though the Keynesian hole-digging example is silly, the same argument can be applied to any type of government spending. If a project doesn’t meet the basic cost / benefit test, then it shouldn’t be funded, regardless of the need for stimulus.  Of course, one form of fiscal stimulus used in the ARRA was providing funds to state governments so they could maintain services that they would normally provide. This is perfectly sound policy because it is allowing the government to continue to fund projects that (presumably) do pass the cost / benefit calculation. If the social value of a government project exceeds its social cost then we should continue to fund the project whether we are in a recession or not. If the social value falls short of the social cost then, even if the economy is in “dire need” of stimulus we should not fund it. If we really need stimulus but there are no socially viable projects in the queue then the government should use tax cuts. Tax cuts can be adopted quickly and aggressively and, unlike spending initiatives, apply to virtually all Americans.

There are other “legitimate” reasons for the government to expand spending during a recession. The most obvious is that many things are relatively cheap in recessions. Reductions in manufacturing and construction employment may lower the cost for government projects. But again, this decision can be made on a simple cost / benefit basis. If prices fall because of a recession and this makes some projects socially viable as a result, then it’s perfectly correct for the government to fund those projects.

If it makes people feel better we could re-label tax cuts as spending. I could pay people $200 to look around for better paying jobs. This would be counted as $200 of job searching services purchased by the government but in reality, the money would be essentially the same as a tax cut.

The full post is here.

ed March 9, 2014 at 4:14 pm

In my social welfare function, involuntary unemployment has a very large negative coefficient. Google “effects of unemployment” for some reasons why.

Dan Weber March 9, 2014 at 4:44 pm

Yes, in most professions being involuntarily unemployed for more than a few months is very destructive to your human capital. Even make-work jobs could be enough to offset the worst of those effects.

Dan S. March 9, 2014 at 5:23 pm

For a white-collar worker who is out of work on long-term unemployment, though, is something like an updated Civilian Conservation Corps really a way to preserve their skills? Is there a white collar analog? And would there not be a stigma attached to working for such a program?

ummm March 9, 2014 at 5:37 pm

I dot understand how the left says skills become obsolete in 6 months. Computer programmers are still using the same languages. Not like everyone abandoned php in last six months and you have to learn the latest language. Not like a construction worker has to re-learn how to use a hammer.

Setecq March 9, 2014 at 7:46 pm

This isn’t a “the left says” issue. While skills may not deteriorate, there is proven discrimination against people who have been unemployed: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/15/companies-wont-even-look-at-resumes-of-the-long-term-unemployed/

ummm March 9, 2014 at 7:56 pm

yea all else being equal, employers are generally going to favor a candidate with a smaller gap in their resume. Tough times for the unemployed

Dan Weber March 9, 2014 at 8:52 pm

Software developer is an exception. I’ve been unemployed a few times and I used it to freshen up my skills.

This doesn’t apply to spot welders. Hell, even getting up to go to work each day is a habit that can be unlearned.

There is a reason that employers would rather not hire the long-term unemployed and it’s not because they are sadistic. That’s the real rub, it’s entirely rational to choose the people who have been unemployed for less time.

Marie March 9, 2014 at 9:51 pm

Don’t know if it’s still the case, but for awhile there the only way you could get a job (in the normal market I heard about, superstars always excepted) was to already have one.

I think there’s a real issue with trying to figure out if you are making a bad hire. It’s hard to fire folks after they are on board, and when you are interviewing I don’t think former employers usually feel free to be forthcoming about problem employees. So hiring someone who is already in a job gives you a better chance of not getting someone lazy or unbalanced. And in a recession, you can’t afford to have dead weight, and you have plenty of labor to choose from.

Brett March 9, 2014 at 11:01 pm

The white collar analog would probably be paying a company to hire him as a temp for six months doing office work. There’s always office/accounting/IT/telemarketing work that can be done when you’re not paying for it.

Reardon March 9, 2014 at 4:17 pm

So GDP fetishism is an issue; blow me over.

mulp March 9, 2014 at 9:00 pm

To an economist, replacing decaying bridges and rebuilding the railroads to eliminate the conflicts between rail and road traffic that has resulted from housing and business developments built around rail lines laid out with rural road crossings in the 19th century is just all wasted government spending that will only lead to higher taxes and create greater drags on the stock market price inflation that creates wealth that creates borrow and spend wealth creation of vacations, cruises, and new clothes.

Better to cut taxes to create wealth by increased private sector borrow and spend. The Reaganomics revolution ended the evil prejudice of debt being a sign of moral failure!

josieb March 9, 2014 at 11:38 pm

Let’s get real. We spent — what, $800 billion? — on stimulus to get us out of the Great Recession and the money mostly went to preserve public sector jobs. The president admitted several years later that there weren’t any “shovel-ready” jobs in the first place. What was the point of the spending?

During the Irish famine of the mid 19th century, Britain had the same program. It paid workers to dig holes and then fill holes that had been dug. The point was to keep Ireland from developing the the infrastructure to compete with England. It was to keep the Irish poor forever. What was the point of our stimulus?

I’m all for improving our bridges, our electrical grid, the achievements of our children. But I want to see a real plan.

Bitching about the wealthy (and I’m not in that group) and Reagan is not a plan.

Marie March 10, 2014 at 8:24 am

I believe the Irish also got billed for the works projects, went on their pile of debt.

Brian Donohue March 9, 2014 at 4:20 pm

Excellent link. Very well put.

derek March 9, 2014 at 8:41 pm

Yes, but how much dig-a-hole/fill-it-in spending do we think actually occurs as part of stimulus packages?! Something like 60% of ARRA was indeed state funding or tax cuts, and probably a lot of the rest of it was programs that would have passed the cost-benefit analysis. (One easy way to find more positive cost-benefit programs is to move up the pace of investment.) Anyway, I agree that his point about willfully wasting money (or building up the military), but these arguments seem irrelevant to the real world.

Tom West March 9, 2014 at 4:24 pm

The thesis of this post seems almost tautological. Stimulus spending *is* done because the cost/benefit analysis indicates it should be done. However, some of the benefits are very long-term and not necessarily directly related to the item under purchase, and more importantly, are only present under certain conditions in the economy.

It sounds like the author is advocating that certain benefits be excluded from analysis. This would be bad advice for a business, and it’s bad advice for a government.

mulp March 9, 2014 at 9:06 pm

Why invest for the long term when a focus on the short term can create wealth through price inflation as decay makes resources more scarce.

Consider, a bridge failing cuts off the ability to commute to the open land beyond, so the local land becomes much more valuable, and rebuilding the bridge will destroy wealth AND steal money from those homeowners just to destroy their wealth and bankrupt them with underwater mortgages.

Thus a growing economy requires the bridges to decay and fall down.

ummm March 9, 2014 at 4:26 pm

QE and TARP were a huge success even though the left predicted it would fail. The stimulus failed. The bet way to stimulate the economy and end crisis is to get the money where it is needed most which are the banks and upper income folks with tax cuts.

Brian Donohue March 9, 2014 at 5:10 pm

Clearly, you miss JaMRC.

Also, the Republicans were the ones who voted down TARP the first time around. And the only people who think QE is crazy evil are right wing Austrians.

ummm March 9, 2014 at 5:33 pm

tarp was a good free market compromise. It ended the crisis and get things running smoothly again so that the healthier sectors of the economy would no longer sustain the collateral damage of the ailing financial sector. The GOP is the party of wealth creation and as a republican that means I supported TARP due to all the wealth it indirectly created.

TMC March 9, 2014 at 8:12 pm

Plus it was 95% paid back. I’d like to see that out of any of Obama’s deficits.

mulp March 9, 2014 at 9:14 pm

Well, Obama will repay his deficits after Reagan repays his deficits that more than doubled the national debt.

Obama is just trying to be like Reagan who proved that deficits don’t really matter.

And taxes have been lower under Obama than under Reagan, Bush, Clinton, or Bush, not to mention the previous presidents back to Hoover who first signed a 90% income tax rate. Note the income tax was a Republican idea….

Jay March 10, 2014 at 12:10 pm

I generally avoid Mulp’s posts due to their hyper-partisanship independent of facts, this one didn’t disappoint.

From http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History:
In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax.

Do you mean the 16th amendment? First proposed by Republicans (though ratified with a Democratic congress and president), but it was also first OPPOSED by other Republicans. The R’s that proposed it later went on to form the Progressive Party.

Here’s a graph of debt to GDP and will let the reader decide which administration/congress was more reckless between Reagan and Obama:

http://en.wikipedia.org/wiki/File:FederalDebt1940to2012.svg

chuck martel March 9, 2014 at 4:27 pm

“If the social value of a government project exceeds its social cost then we should continue to fund the project whether we are in a recession or not.”

Funding a project means ponying up dollars. Maybe we can calculate “social cost” in dollars but how do we realistically calculate “social value” in monetary terms? Sure, you can say that not providing free contraceptives to teen-age girls means babies that produce societal costs of $262,000 per unplanned child but that’s a fictional number, If the government can simply enpixelate money, however, it might not matter, since the money no longer represents anything tangible anyway.

Max March 9, 2014 at 4:41 pm

Two thirds of ARRA spending fall into categories you’re endorsing (tax cuts and state support). What were you arguing about, again?

ummm March 9, 2014 at 4:44 pm

“If the social value of a government project exceeds its social cost then we should continue to fund the project whether we are in a recession or not.”

The bank bailouts had the best ROI of any govt. program. By 2011 the treasury had already reported a profit on it. http://money.cnn.com/2011/03/30/news/economy/tarp_program/

Freddie Mac and Fannie May are reporting historically high earning and will likely be be taken private. Same for AIG, Bank of America and many other success stories.

Komori March 10, 2014 at 11:29 am

Sounds like classic what is seen and what is unseen. Focusing solely on the dollar amounts misses all the moral hazard issues it created for the long-term. Granted, politics is a realm that strongly favors can-kicking, but solving a short-term problem at the cost of setting up a much larger long-term problem isn’t a good deal.

http://www.usnews.com/opinion/economic-intelligence/2013/09/26/study-shows-bank-bailouts-are-an-incentive-to-be-reckless

Noah Smith March 9, 2014 at 5:13 pm

Slight internal contradiction in House’s post. The increase in the multiplier due to a recession adds to the NPV of a spending project, meaning that if the cost in foregone leisure is not too high, it’s worth it to do the spending project (instead of tax cuts) in recession even if it’s not worth it in boom time.

…that’s accepting the Keynesian assumptions, of course.

Bill March 9, 2014 at 5:23 pm

Why calll something an assumption when the evidence is that there is a higher multiplier during a recession.

Calling something an assumption doesn’t make it so.

TMC March 9, 2014 at 8:15 pm

I’d like to see evidence that the multiplier exists, or at least is non negative.

Bill March 9, 2014 at 9:57 pm

Evidence galore: Here is a NBER paper on the subject:

http://emlab.berkeley.edu/~ygorodni/FiscalMultipliersInRecessionAndExpansion.pdf

TMC, now I would like to see you show the evidence to the contrary>

Jake March 9, 2014 at 5:47 pm

This post is pretty self-evidently ridiculous.

1) Let’s say you weren’t going to complete some project normally because it would only produce 90 cents of benefit for every dollar of investment. Then, you realize you want to inject a dollar into the economy for stimulus purposes. You could just hand this money to people, but you could also for the same price utilize idle resources to complete the original project, which no longer operates under the same ideas about return on investment, because you’re essentially getting it for free, since you would have been willing to just give that money away.

2) So even if a project wouldn’t give us much benefit as it should have with the resources put into it, it can still be a good idea. However, luckily for us, this is a non-issue! Our appropriations system is nowhere near efficient enough that we should assume that the optimal number and variety of projects are being approved, and all the data points to our system creating a major systematic reduction of government investment under what would be economically efficient. Government spending in the form of infrastructure, technological research, and even simple redistrubtion, produces huge positive effects on the economy, and would be profitable to increase even if the economy was significantly less in need of stimulus.

3) The problem with a tax break as a means to get money to people as opposed to stimulus spending is that the benefits of tax breaks are inevitably the people who are already making more money. You can’t help out an unemployed guy with a tax break, since without a job he’s not paying taxes!

ummm March 9, 2014 at 6:12 pm

The unemployed guy already get enough benefits. There is evidence that medicare, foodstamp, disability, and unemployment benefit abuse has contributed to the unusually low labor force participation. But even that isn’t good enough because then the left says the rich don’t deserve tax cuts and the poor don’t get a big enough cut.

Marie March 9, 2014 at 7:26 pm

My recollection is that under Bush every citizen got a check. I think it was linked to taxes. You can give the poor a “tax break” by increasing EITC.

Brett March 9, 2014 at 11:06 pm

It was the 2008 stimulus check. A pretty good idea, but it only ran at about $152 billion total – paltry compared to a $14 trillion economy. A $1 trillion stimulus check program might have done it, in the same way that the Chinese stimulus of $586 billion really helped to push growth back up in 2008.

Dude March 9, 2014 at 10:01 pm

You can “help out an unemployed guy” (or woman) by lowering the cost of employment.

Taxes are one component to the cost of employment.

ThomasH March 10, 2014 at 7:31 am

In his point 1 Jake misses the point of stimulus. The project that fails a cost benefit test at full employment may pass the test once you take account of the fact that the opportunity cost of employing an unemployed person or machine on the project is less than the wage/rental value of the machine. This would be better than just handing money to the unemployed labor or owner of the idle machine..

Brian Donohue March 9, 2014 at 5:56 pm

Maybe if your economic theory leads you to conclude that “Yes, paying someone to dig up a hole and another fellow to fill it back in is better than doing nothing.” you have achieved some kind of proof by contradiction.

Joël March 9, 2014 at 6:07 pm

What Chris House writes is correct, but doesn’t seem to be in such a disagreement with what Keynes himself said, and many other since then: “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

ummm March 9, 2014 at 6:18 pm

that is what FDR did and what left wanted Obama to do, too. Big, unnecessary, low-skill projects where lot of ppl get paid generously to stand around.It’s why the UAW failed because workers were being paid $50/hour + full early retirement to operate an on-off switch

mpowell March 9, 2014 at 11:20 pm

Your ignorance is showing badly. What Keynes was hinting at was the observed fact that major gold discoveries had a tendency to reverse economy crippling deflations. But there is nothing particularly useful about gold except for it’s use as money! He’s saying digging a hole, filling it with money, and then hiring someone to dig it back up again is no different than discovering gold. That this can actually be effective for increasing real GDP in certain situations is a sign that something is wrong with the fiscal or monetary management of that economy.

CPV March 9, 2014 at 6:07 pm

Directly targeting people who aren’t employed for cash benefits is not a tax cut, since they probably aren’t paying taxes. It may well be a good idea. Is borrowing money at near zero interest rates and paying people to look for a job or get training instead of digging holes a good idea? Maybe, but it increases spending and eventually, taxes.

Z March 9, 2014 at 6:10 pm

Maybe I’ve been sniffing too much glue lately, but the post seems a bit convoluted. Assertion: The government should not spend on things that have a value less than the cost. That seems rather obvious, even though it has never happened in the history of man. Government spends money on the friends of government. That has always been so and it was always be so. It is an axiom of government.

Putting that aside, the whole point of “stimulus spending” in recessions is to pull forward revenue through borrowing to boost demand today, through government purchases. The entry reverses out in the future, presumably when times are good and paying down debt (stop laughing) is possible.

ummm March 9, 2014 at 6:24 pm

TARP turned a profit

Virtually all of the biggest financial institutions, from Bank of America (BAC) and Goldman Sachs (GS) to Wells Fargo (WFC), have repaid

Z March 9, 2014 at 6:45 pm

If slavery turned a profit, should we bring it back?

ummm March 9, 2014 at 7:15 pm

Reductio ad absurdum

You said no government program has ever turned a profit and I provided a counter example.

Z March 9, 2014 at 8:26 pm

I never said anything of the sort. You may want to ask the orderlies to adjust your meds. You are hallucinating again.

Boonton March 11, 2014 at 10:06 am

What, then, was your purpose in bringing up slavery?

-1 for you

Marie March 9, 2014 at 7:32 pm

I wonder what the long term effect is on an economy that runs on the presumption that paying people to dig and fill in holes is a good thing, in a pinch.

We might refine it into a whole assembly line, where the second guy fills from a hole he digs himself, and on up the line.

Do you think we might get a nation super bureaucracy-heavy, where the government has to employ large numbers of college graduates doing largely make work because we don’t trust a free market economy to sort it out so that these folks find productive private work to do?

Do you think after 70 years of that, we might have a hard time dialing it back?

ummm March 9, 2014 at 7:40 pm

That’s what FDR did. He even tried to pack the court so that his polices would long outlive him. Humphrey losing to Nixon ended the new deal coalition. What ended the great depression was spending for WW2, which was economically productive, unlike Public Works projects. Govt. programs can be useful (TARP, war on terror) or useless (Obama stimulus). The bureaucracy is growing, but it may not be such a big deal if the bureaucracy performs economically productive talks.

Boonton March 11, 2014 at 8:42 am

It’s pretty absurd to call public works, Obama stimulus ‘useless’ and WW2 and the War on Terror ‘economically productive’. Take resurfacing a highway. A highway serves productive economic transactions. A battleship that you build only to see sunk a few years later (or rust away waiting to be scrapped) has no economic productive value.

John Ballard March 9, 2014 at 7:47 pm

Job search expenses are tax deductible.
That’s not “paying” someone to look for a job, but it’s close. Oddly enough the incentive is going to someone already employed, not the unemployed person in real need of work.
http://www.irs.gov/uac/Job-Search-Expenses-Can-be-Tax-Deductible

byomtov March 9, 2014 at 7:54 pm

If you are going to think in terms of social well-being then you have to define costs, as well as benefits, in social terms. It may cost the government money to, say, rent idle equipment for a construction project, or buy unsold materials. But what is the social cost of doing so? Nothing, or close to it. That crane is just sitting there, doing nothing. There is no cost – well, maybe a little – to putting it to use.

House suggests that paying people to work, rather than just giving them money has a social cost in terms of disutility of work. Well, yes, but remember that most projects will inject far more money into the economy than just the labor charges, not to mention the point raised above that retention and expansion of skills, work habits, and a work record have value in themselves, so the disutility may not be so great.

ummm March 9, 2014 at 8:11 pm

What the left won’t say is that a double dip recession followed the New Deal in 1937 and lasted until the US involvement in ww2. This is because useless spending has an opportunity cost in that the money can be used on stuff that is productive. The govt. can spend $1 million to build a statue or $1 million to a web 2.0 company. The later has the potential to be a billion dollar company while a statue will always be a statue.

Roy March 9, 2014 at 9:20 pm

Buy considering that a “Web 2.0″ company that the government paid for is probably both a very bad bet and in all likelihood an act of political corruption. Society may be better off with the statue. Which may at least given pigeons a perch and if it not too ugly bring some enjoyment to the public for centuries to come.

byomtov March 9, 2014 at 10:23 pm

That’s terrible history. Get your story straight.

Actually, “the left” is happy to acknowledge that there was a dip in the economy in 1937. Guess why that happened. Clue: it had nothiong to do with the opportunity cost of earlier spending, as yopu seem to think.

In 1937 FDR suddenly became concerned about balancing the budget. Time for austerity. The cutback in spending plunged the economy back into recession.

In other words, if 1937 proves anything it proves that the Keynesians were right.

Brett March 9, 2014 at 11:08 pm

The double-dip recession happened when FDR and the Democrats panicked about the level of spending they’d engaged upon, and responded with cutbacks and tax hikes. It wasn’t because of the New Deal, although some of the New Deal programs weren’t exactly conducive to growth (like jacking up the prices of agricultural products, driving up wages, and so forth).

Boonton March 10, 2014 at 5:15 pm

Yet strangely WWII was as useless as a statue. Once the war was over all those ships and tanks and planes were either destroyed or being sold for scrap metal. Yes we had to fight WWII and it’s great that we won it but it’s something of a stretch to declare things like the Hoover Damm, which gives us power even today and probably will a century from now, ‘useless’ while putting hundreds of men to work builidng a battleship that sails for a year or so before sunk useful.

Jay March 9, 2014 at 9:32 pm

“If we simply give out the money, GDP increases by less but social well-being goes up by more since the work effort and time wasn’t required.”

This is patently false. When the government pays two employees a combined $80k then GDP is increased by $80k. Whether they actually produce anything or not. Read through the NIPA methodologies here…

http://www.bea.gov/methodologies/index.htm#national_meth

Boonton March 10, 2014 at 3:22 pm

They produce whatever the gov’t has hired them to do. Perhaps you think what they are doing isn’t useful. So what? Woody Allan last year got paid to make a movie, Blue Jasimine, let’s say it was a modest $500,000. Some people saw it, most people didin’t. Did he ‘produce something’ worthwhile? Did he make a masterpiece that’s priceless and will be cherished even 10,000 years from now? Beats me, rather than trying to play film critic the accounting works a lot simplier if you just add up what was paid for the movie rather than trying to assign value judgements to every transaction in the economy.

jorod March 9, 2014 at 9:54 pm

Building roads creates no growth unless those roads lead to new factories or offices, or possibly if it facilitates growth in production such as by widening. Otherwise it’s just maintenance that would have to be done to keep up with depreciation.

chuck martel March 10, 2014 at 12:00 am

Actually, building a road precedes a new factory or office. But a road from developed area A to undeveloped area B lowers the value of the property in area A and increases the value of the property in area B. The businesses and residents of area A are subsidizing, through paying for road construction, the devaluation of their own property in favor of raising the value of the property in area B. This is how Henry Clay’s “American System” was supposed to work.

Boonton March 10, 2014 at 3:48 pm

That doesn’t follow. Building a road from developed area A to undeveloped area B increases the value of both A and B.

Consider, would New York suddenly become more valuable if you disconnected all the bridges and made it so it’s airports only connected to airports in rich countries?

brad March 9, 2014 at 11:05 pm

It’s fairly strange to call handing out envelopes of cash to low income households a tax cut. While it’s true that everyone pays some federal taxes and so you can call it an offset, it looks a lot more like spending. And if you wanted the mechanism to actually be a tax cut, you’d be hard pressed to find an appropriate one. While virtually everyone pays some federal tax, there’s no federal tax that virtually everyone pays. Gasoline excise probably the closest.

ThomasH March 9, 2014 at 11:28 pm

The good reason for “stimulus” spending/tax cuts — the gap that opens between the private and social costs of employing resources (not just labor) in a recession — is exactly the reason that the “multiplier” is likely to be greater than one if governments apply proper cost benefit analysis to their projects/activities. Now if you believe that most public decision making is wealth reducing in the best of times, applying those same criteria when the Fed fails to maintain NGDP growth, you will probably not favor “stimulus.”

Anon. March 10, 2014 at 5:44 am

I’m a bit late here, but why do economists talk about “the multiplier” as if there was a single one? Clearly there are projects available with a multiplier >1, so the real issue isn’t the multiplier itself but which projects are chosen and at what time in the business cycle, no?

Boonton March 10, 2014 at 3:09 pm

I don’t think so. What I think you’re thinking of is the difference between projects that are ‘good’, meaning they have a benefit after the recession is over versus ones that do not. For example, consider the George Washington Bridge. When it was being built, it generated construction jobs thereby pushed up GDP and pushed down unemployment. When it was done those jobs more or less were over as well. But the bridge facilitates millions of transactions every day and has been doing so for decades and probably will for another hundred years or even more. So today our GDP is a bit higher because in the past our ancestors built the GWB (as well as lots of other things like English common law, the interstate highway system, figuring out how to make sliced bread and so on). So it was certainly a ‘good project’.

Now consider the element of the stimulus program that consisted of payroll tax cuts. That expanded everyone’s paychecks a bit which probably expanded their purchases a bit which again increased GDP and held down unemployment. Fine, but 50 years from now you’re not going to find much in the way of major investments from that that are still benefitting the economy.

Bill Reeves March 10, 2014 at 9:16 am

Good post but I must disagree with one of his assertions: “Of course, one form of fiscal stimulus used in the ARRA was providing funds to state governments so they could maintain services that they would normally provide. This is perfectly sound policy because it is allowing the government to continue to fund projects that (presumably) do pass the cost / benefit calculation”. Items that state governments provide that are funded in part by the Federal Government do not get subjected to a proper cost-benefit analysis. The Federal money is treated as ‘found money’ by the states. The Feds use their funding to manipulate the choices that the states make. That’s why the biggest chunk of funding was for the sustaining of states that provided Medicaid to higher income people In essence the Feds bribed many but not all states into undertaking a major new entitlement when their fiscal houses were burning down simply by promising to pay for it for some period of time.

This has nothing to do with cost benefit. It’s manipulative bribery pure and simple.

Nathan W March 10, 2014 at 11:26 am

All else equal (especially without considering learning by doing), I think it’s better to pay people to dig holes and then fill them, as opposed to handing out cash, because when real work comes along they will be more in the habit of working.

However, we should not pay people to dig holes and fill them if the jobs they are likely to obtain in the future are unlikely to require hole-digging skills. For example, paying the unemployed to use social media to build networks and to regularly report on skills-building opporutnities encountered on and offline would probably be more useful than paying them to dig and fill holes.

As far as hole digging/filling is concerned, it also keeps some folks out of mischief. Ever met a monkey? Monkey love mischief. Don’t give us too much time or excuses to cultivate our monkey side. Help us cultivate the curiosity, innovation-oriented and social welfare enhancing inclinations that make us more human than monkey. Help the unemployed stay out of mischief, not by telling them not to be mischievous, but by making it easy to cultivate themselves in ways which are socially constructive.

Nathan W March 10, 2014 at 11:37 am

Leisure provides an important break which allows us to be productive, but I don’t think economic planners should worry about the social value of downtime because a) this is experienced at the personal level and b) it must be recharged so regularly. Don’t get me wrong … I DO think that economists should regularly bear the value of leisure in mind as something very worthwhile when engaging in general theoretical works which aim to account for important moral/philosophical considerations, but I do NOT think it should be a significant factor when considering social gains/losses relating to unemployment for practical policy purposes. It is hard for the couch potato to contribute to my leisure, but if they are willing to work hard enough to “buy” their own leisure then I can benefit from the goods and services they contribute to the production of.

Leave it to workers to get the leisure time they need (including voting or protesting for better working conditions), but do not bring this leisure into formal accounting of economic welfare. We should not explicitly pay people to consume leisure. Their consumption of leisure should be seen as a generally “nice” thing that makes us happy to know it’s going around, and perhaps a cute side effect of many other beneficial practices. But their leisure is unlikely to contribute to my next holiday unless I work in tourism or hospitality, so I’d rather they just get back to work in some activity that other people are willing to pay for.

I.e., I take your leisure seriously. Now get to work so you can afford the downtime. Sorry, I care about you, but not enough to pay you to do nothing unless there’s a good chance that your stint as a couch potato will often lead to something more constructive. If you need a hand up, it’s to get you working again, even if it requires allowing you months of soul searching, and the purpose of that support simply is not to pay for your pleasure of doing nothing “useful”.

B.B. March 10, 2014 at 11:53 am

I suspect some of the alleged benefits from fiscal “stimulus” are statistical illusion.

NIPA methodology calculates real government purchases as the cost of production, not the value of the services, and government employee compensation is part of purchases. Also, BLS counts someone as employed as long as they get a paycheck; it does not ask the value of the services sold.

The government could simply hire all the unemployed and pay them exactly the amount of the unemployment / welfare benefits. Government transfers would drop (which are not part of GDP), but compensation of employees would rise by the same amount (and add to GDP). Also, nonfarm payrolls would rise and unemployment would disappear. Even though the newly “employed” would be told to keep doing whatever it was they were doing.

The multiplier of the change of government purchases on the change in real GDP would be 1.0. But nothing in the economy would be different, and human welfare would not be different. It would be statistical illusion.

Boonton March 10, 2014 at 2:15 pm

The problem with your example is that if the gov’t did this it would be viewed as ‘buying a good or service’ from the unemployed hence the unemployment checks would no longer be transfer payments but gov’t purchases (G in the good old GDP=C+G+I+Ex-Im)

Boonton March 10, 2014 at 3:03 pm

GDP here trumps employment. Consider this, suppose the unemployment rate doubles but GDP doesn’t go down a bit. This would actually be an increase in well being since we are able to have the same amount of goods and services but with fewer people working to produce them. I’d rather see unemployment go up 5 points with no drop in GDP than see GDP go down 5% but with unemployment eliminated.

As you point out, relabeling those collecting unemployment as being employed ‘collecting checks’ would alter the employment numbers dramatically but wouldn’t have any impact on GDP.

Boonton March 10, 2014 at 1:52 pm

If we simply give out the money, GDP increases by less but social well-being goes up by more since the work effort and time wasn’t required.

Errr, that would then just be called stimulus. And in fact that was over half of what the stimulus bill was. Either extended unemployment, food stamps or a cut in payroll taxes it was essentially putting cash in the hands of individuals to spend as they saw fit. ‘Digging holes’ was a minority of it and little of that was ‘dig a hole then fill it up again’.

Boonton March 10, 2014 at 2:10 pm

I’m a bit confused by his first paragraph, let’s work with the mythical ‘dig a hole then fill it’ story in a world where the multiplier is greater than 1. Since we don’t have slave labor, anyone who ends up digging the hole does so because they would rather have the pay than the lesiure. Ditto for the guy who takes the job filling the hole. So in terms of ‘social welfare’ being the sum of all individual welfares, those two chaps count as positives. Ditto for when they take their pay and go buy things. They are by definition increasing the social welfare of those they make purchases from.

So you can’t find any negatives here to social welfare. You only get a negative if you’re talking about a full-employment economy where the hole digger and hole filler must be paid either by the gov’t borrowing money (crowding out the financial markets for savings thereby increasing interest rates thereby taxing those seeking to borrow funds for either investment or spending), by taxing, or by printing money (inflation as tax). But these are off the table since the author assumes a higher multiplier, he assumes a non-full employment economy and likewise rejects the classical view that recessions are essentially illusions.

We then move to a rather unoriginal point:

The reason is that we are not trying to maximize output and employment – we are trying to maximize overall social well-being.

1. This does not support his assertion that “it is not obvious that stimulus spending is a good idea”. To make this assertion hold he must show how stimulus spending can lower social welfare. Instead he points out that some types of stimulus spending may increase social well-being more than other types. Why yes, we’d all like to maximize good things, but a policy that moves us towards more of a good thing is preferrable to a policy of not. It clearly would be better to do a stimulus that cured cancer and AIDS than one that simply dug a useless hole and filled it up again. But was that the choice being presented? Between the perfect stimulus plan and the less perfect one? No! Between an imperfect stimulus and no-stimulus the author’s own arguments seem to indicate stimulus increases social well-being hence should be done.

2. Keynes covered over half a century ago:

(digging holes and filling them would get us to full employment but)…It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

In other words, between the perfect stimulus and the less than perfect stimulus, go with the perfect. But in a world where you can’t get the perfect then choose the better of the less better. Is the author really adding anything more to that?

Brian Donohue March 10, 2014 at 2:37 pm

I appreciate the honesty with which you and other Keynesians in this thread endorse the idea that “Paying one person to dig a hole and a second person to fill up the hole is better than doing nothing.”

For the rest of you, must we say anything more about this strand of Keynesian economics?

Boonton March 10, 2014 at 3:00 pm

Here’s a very simple test for you, who is hurt? The guy who takes the job digging the hole wants the paycheck so clearly for him it’s better than not having the policy. There, I’m ahead by 1. I’m actually ahead more since every time he takes his pay and spends it on something in a voluntary market transaction those people are better off as well.

Now all you have to do is show how that good is offset by a harm of equal or greater value. This is easy to do in a non-depressed, fully employed economy. The hypothetical presented, though, was of a non-full employed economy. Good luck.

Brian Donohue March 10, 2014 at 3:07 pm

So…money DOES grow on trees? As a taxpayer, I thought I would be on the hook for this. Thanks for clearing that up.

Boonton March 10, 2014 at 3:11 pm

Actually it grows in the ground, I understand our currency is made more from cotton than trees. Your harm as taxpayer only holds if the hole digger is paid by a tax increase on you, the taxpayer, equal to the amount he is paid. Yet no such tax increase has happened nor is required to happen ever.

Brian Donohue March 10, 2014 at 3:29 pm

Got it- it’s more of a straightforward kick the can down the road Ponzi deal. Which should work just fine so long as we preserve our historical demographic pyramid and feel no responsibility to pay our own way, generationally speaking.

byomtov March 10, 2014 at 6:07 pm

Notice what House says here (my bolding):

The classic caricature of stimulus spending is the idea of paying a worker to dig a hole and then paying another worker to fill the hole in. This type of stimulus spending will increase employment and GDP but it won’t really enhance social welfare. True, we might get the beneficial effects of the stimulus but we could achieve that by simply giving the workers the money without requiring that they dig the holes. If we simply give out the money, GDP increases by less but social well-being goes up by more since the work effort and time wasn’t required.

He is not saying hole-digging is worse than doing nothing. Rather he says it’s worse than just handing out money. He admits that there may be stimulus, but claims, with no support, that the social benefits of the stimulus will not outweigh the unpleasantness of hole-digging.

Boonton March 10, 2014 at 8:36 pm

Yet his first sentence is:

Even if the multiplier is substantially above 1, it is not obvious that stimulus spending is a good idea. -

College writing 101 here. If this is your thesis what comes next should support it. His statements in fact cut totally against it. He is saying, essentially, ‘do stimulus…do smarter stimulus if you can but do stimulus”. Fine but he opens with “don’t do stimulus if you can’t do it smart”

chuck martel March 10, 2014 at 6:59 pm

We do what Keynes recommended. http://www.gadling.com/2009/04/26/john-murtha-airport-the-150-million-facility-for-20-passenger/ In the case of Murtha’s airport, it meant digging a hole and then filling it in with concrete and asphalt. Unfortunately, the siting of this activity was determined not by market forces but by cronyism and political logrolling. The project could just as well have been a Murtha Pyramid or a big statue of Murtha, like those of Lenin, Stalin or Saddam Hussein.

Boonton March 10, 2014 at 8:33 pm

According to wikipedia this is a 2 runway airport that handles about 50,000 flights per year. Not JFK or Heathrow but hardly .not utilized.

Boonton March 10, 2014 at 3:43 pm

So let me get this straight. In year 1 let’s say we have an economy that could produce GDP of $1,000B (based on the # of people who could work, the amount of capital etc.) but only produces $800B leaving 20% unemployed. In year 10 let’s say the economy will again be back at $1,000B regardless.

So your position is leaving $200B of potential GDP on the table in year 1 is somehow helping people in year 10? How exactly does that happen? Are we today reaping the benefits of all those unemployed people in 1933 whose unemployment is somehow ‘paying’ us today?

Boonton March 10, 2014 at 3:48 pm

That was for Brian Donohue’s 3/10/14 3:29 PM post….sometimes I hate threaded comments.

Brian Donohue March 10, 2014 at 3:52 pm

While we could be enjoying the stream of income generated by all those holes that were dug up and refilled in 1933, for the low, low price of the debt incurred in the process.

Talk to me about cost/benefit analysis on real infrastructure projects, as the article suggests.

The hole digging and filling thought experiment exposes something rotten in the Keynesian worldview. If only life were so easy.

Boonton March 10, 2014 at 4:10 pm

Actually we had a lot of hole digging at the end of the Great Depression, it was called WWII. Now clearly it was a good thing we won WWII, but even so it has a price. In terms of people, that price is very clear. We just have to go to the casualities to see all the lives we lost in WWII. But what about the ‘hole digging’. For example, digging metal out of the ground, making it into a battleship, then letting it sink to the bottom of the pacific ocean.

Today how much would my taxes go down if we could eliminate WWII’s debt? Would it even be noticeable?

If it wouldn’t, then explain to me how stimulus that ran to the tune of over 40% of GDP in the 1940’s can magically become non-noticeable today? You have to demonstrate that someone was harmed by all this here to carry your case, so far you’re losing.

Boonton March 10, 2014 at 5:11 pm

Here is the concept I think that gets missed.

In year 1 the economy could make $1,000B but only makes $800B.

In year 10 the economy can make $1,000B and does.

To keep things simple assume zero growth in things like population, capital, productivity, amazing inventions and so on that could cloud this picture.

If a stimulus moves the economy from $800B to $1000B then there is no cost unless you can show me how, in year 10, the economy produces anything less than $1,000B. Waving your hand around saying ‘taxpayers’ doesn’t cut it. Even if in year 10 they vote a $200B tax increase to pay off stimulus from year 1 it doesn’t alter GDP. It alters who can consume GDP. We can’t ‘take from the next generation’. Taxpayers in year 10 pay to bond holders in year 10, they are all ‘next generation’ people.

Again in a full employment economy the demonstration of harm becomes easier. In year 1 the economy is already at $1,000B. It is producing a mix of things people want. The gov’t can’t spend $200B unless it forces that mix of spend to change. The mechanics of how that happen are secondary (tax increases change consumption by taking away people’s money, borrowing effecitvely taxes borrowng by raising interest rates and chocking off private sector borrowing) really to the discussion.

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