ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Wednesday, January 28, 2009

The Non-stimulating "Stimulus"

Pretty good post by Megan McArdle over at The Atlantic on the stimulus package. I'll interrupt with my comments throughout.

Jan 27 2009, 3:30 pm by Megan McArdle
Good. Fast. Expensive. Pick Two.
But in the context of stimulus, eighteen months is a long damn time. Eighteen months is, in fact, about how long it takes a stimulus to work through the system. If for no other reason, that ought to be a little worrisome for progressives because that means the stimulus won't have even 2/3 of its full effect until after midterms.
18 months in the 21st century might accurately be compared to 5-10 years in previous decades. The pace of business (and of the decisions that are made) has significantly increased over the years thanks to technological innovations. Even if federal government spending on condoms, sod for the national mall, etc were truly stimulating, the stimulus won't come in time to change anything in the economy.
It is simply not "even truer" that conservative intransigence is causing worse delays than the focus on spending the money on massive new projects. It's not even as true. It's not true at all. No matter how you assess the relative benefits of spending to tax cuts, tax cuts could be 95% out the door in April. So could many other kinds of rapid government spending--preventing fare cuts on transit systems, sure, but also repainting all the faded yellow lines on highways, or repairing park benches, redecorating government offices, etc.

Not sure of the stimulative effects of repairing park benches (what's the "multiplier effect" there???), but it is true that tax cuts would have an immediate stimulative effect.

And why is it that Dems previously framed tax cuts as "spending," yet when they call for stimulus spending, they forget this framing?

And the benefit of cutting taxes at all income levels? In addition to being quick, it's intelligent. 300 million individuals making individual decisions in the aggregate will be more efficiently spent than spending decisions made by 100 bureaucrats. (Could you make effective decisions on how to wisely spend $10,000,000,000 that had been assigned to you?)
Why does speed matter so much? Because the primary argument for fiscal stimulus right now is not that we need to alleviate the pain of a temporary economic contraction--that's what things like beefier unemployment insurance, food stamps, and housing assistance are for (the first and the last are very good ideas, by the way.) The argument is that we're in danger of a liquidity trap--that we could end up at a permanently lower level of output, as described by Keynes and popularized by Paul Krugman in the story of the Capitol Hill Baby Sitting Collective. (Though it's worth noting that the ultimate solution was to double the money supply...)
The basic idea is that if everyone is afraid to spend money because they might be laid off, and sits at home in the dark, all the people who made money selling the things they used to buy will get laid off--and so will they, because they're part of "everyone". The government basically shocks us into a higher level of output by spending the money we're afraid to.

And this is the Catch-22 we're facing. No one is willing to spend because of the implied risk of the economy and their personal economic future. The driving factors for this uncertaintly are numerious, but here are a few of the main issues:
  • New Obama administration which answered very few questions during the campaign, resulting in very few people understanding the man's core principles and how he'll lead the agenda.
  • The Democratic congress, which has very few guard rails from keeping it from implementing its most radical, anti-capitalist agenda.
  • The lack of free market proponents in either party, but especially the GOP. The fact that McCain was the nominee of the GOP - and would likely have a similar approach to "finding a solution" - does not increase people's confidence in our economic future.
  • The uncertainty infused by the Bush Administration and Hank Paulson - the first stimulus and the actions by the Feds in the fall of 2008 had disastrous long-term effects on the market, although they may have avoided severe pain in the short-term. Right now, no one knows what the rules of the game are (and the only thing I know is that I am not too big to fail).
Sorry... back to Megan
Though you wouldn't think it from the really quite shocking incivility emanating from the pro-stimulus side, the empirical evidence that this works in a large industrial economy like ours is basically nonexistant. The problem is, we have very, very few examples to test on: America during the Great Depression, and Japan in the 1990s. And neither America nor Japan managed to stimulate their way out of their troubles. You can argue--and many do--that this is because we, and they, didn't stimulate enough.
e.g. Paul "Krazy Eyes" Krugman)
That may be true. But unless you can forward test your theory, it's a just so story. . . as we just painfully found out about the "It was all the Fed's fault" narrative of the 1930s banking collapse. There is no excuse for calling people who question your highly theoretical model fools and charlatans.

I would point out to Megan here that we do have empirical evidence that shows the stimulative effects of tax cuts, both historical and recent.
What we've got, since Japan really never did emerge from its lost decade, is basically one fact: America entered World War II in a depression, and emerged from World War II without one. Hopefully, the relevant variable was the massive, massive amount of spending, rather than any of the other explanations one can plausibly build about the effect of Total War on depressions--like the slaughter of some of your excess labor force, or the substitution of more immediate fears of being killed for panic about the financial future.
So if we're going to do stimulus, judging from our not-very-good best example, what we want to do is pack a massive wallop as quickly as possible, to shock those "animal spirits" back into a more normal economic rhythm. I am skeptical that this will work even if tried, for reasons I have outlined elsewhere. But if we are going to try it, we should be focusing less on the Democratic wish list and more on figuring out where money can be most quickly and effectively spent.

Unfortunately for this country, the Dems in Congress don't really understand economics, capitalism, free markets, or American entrepreneurship.

All they know is how to win in the game of political influence.

Your Co-Conspirator,
ARC: St Wendeler