Thursday, November 5, 2009

Why More Stimulus Spending Is A Flawed Argument

Despite an improved economic output in the third quarter, decreased consumer spending and a high unemployment appear to be the end outcome of the government's enormous spending. While some economic advisors are calling for more government spending, Moses Kim from Expected Returns explains why this would be a very bad idea.

The 4th Branch of the American Government has spoken. Paul Krugman, in his latest piece of propaganda, demands more stimulus for our economy, which essentially means bigger government. From the New York Times, Too Little of a Good Thing:
The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would. But that’s also the bad news — because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems. Unless something changes drastically, we’re looking at many years of high unemployment.

And the free fall has ended. Last week’s G.D.P. report showed the economy growing again, at a better-than-expected annual rate of 3.5 percent. As Mark Zandi of Moody’s put it in recent testimony, “The stimulus is doing what it was supposed to do: short-circuit the recession and spur recovery.”
Krugman preeemptively calls the program a success even as: unemployment rises; consumer spending and consumer confidence decline; Commercial Real Estate implodes; State and Federal revenues collapse; the dollar gets wacked; and Federal deficits reach Banana Republic-like levels. Interesting. I want to know what data points Krugman is looking at.

In regards to GDP, 1.66% of that "better-than-expected“ GDP number came as a direct result of a disastrous cash-for-clunkers program. Absent government stimulus, you're left with a really ugly GDP print. Nonetheless, the propaganda continues:
What I keep hearing from Washington is one of two arguments: either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus was too little of a good thing — that it helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.

But can we afford to do more? We can’t afford not to.

High unemployment doesn’t just punish the economy today; it punishes the future, too. In the face of a depressed economy, businesses have slashed investment spending — both spending on plant and equipment and “intangible” investments in such things as product development and worker training. This will hurt the economy’s potential for years to come.

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, is only a fraction of the headline number.
What Krugman doesn't understand is that governments since the beginning of time have been proven to be the worst allocators of capital. Krugman fancies himself as an expert of the "lost decade" in Japan and the Great Depression. As such, he should be well aware that these are the two most prominent examples of government intervention reaching extreme levels. Is it a surprise that they also happen to be the most dragged out economic downturns of the 20th century?

Just think back to the Works Progress Administration created during the Great Depression. If the program was such a stunning success- as revisionists will have you believe- then why did the Great Depression drag on for at least another 5 years? The WPA eventually became the biggest single employer in the country, which was good for those employed under the program since they received their wages regardless of the quality of their work. If full employment is the sole goal of any economic plan, then we might as well follow the model of Communist Russia.

If Krugman really thinks we're not paying higher taxes as a result of this reckless spending, I don't know what to say. His theory that government spending will boost economic activity, and thereby tax revenues, works only in theory. In order for that to hold true, the government's programs will always have to be more efficient than those of the private sector. The private sector is keen on risk, and thereby engages in projects that have a high likelihood of profitiablity. The government is just concerned with garnering votes by giving off the appearance of doing something, which leads to wasteful projects that would never have flown in the private sector. There is no doubt in my mind that we will pay the price very soon for the reckless spending of our government.

This post has been republished from Moses Kim's blog, Expected Returns.
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November 5, 2009 at 8:12 AM Brad said...

(1) Short-run stimulus spending such as "cash for clunkers" which puts otherwise idle resources to work, does not equate "bigger government".

(2) If you really consider this an financial/economics blog, then you know very well that employment is a lagging indicator and not a measure of the success of the stimulus. You complain about State and Federal revenues falling -no kidding, its a recession. However, imagine all the police, fire dept personnel, teachers and other state employees who would no longer be employed if not for Federal stimulus money.

3) You argue that the growth in GDP was anemic - but that plays exactly into what Krugman has been saying all along. He predicted anemic GDP growth long ago, and has even expressed concern over a double-dip recession because of folks like you who back off and obsess about the deficit (despite record low rates on gov debt) - you are a part of making 2010, 1936 all over again.

4) Krugman isn't claiming that government is the best at allocating capital in all circumstances. He's saying that in cases of severe recession, with the Fed hard up against the zero bound (traditional forumulas all estimate the Fed should set the rate at around -5%! ... of course, that isn't possible). Government intervention was not the villain in either Japan's lost decade nor the Great Depression. In fact, they are very disparate examples where problems were exacerbated by schizophrenic policy. The Great Depression in particular, was a failure of the Federal Reserve to respond to monetary contraction. The WPA and other programs that put people to work was prudent policy as the economy had acheived equilibrium at low economic output and high unemployment. In fact, such spending should have been even greater and without Roosevelt' attempts to balance the budget. Make no mistake, only the MASSIVE government stimulus in the form of World War II spending brought the US out of the Great Recession. You attack the WPA and similar efforts without acknowledging the FACT that without government intervention those resources would have been entirely IDLE. Government programs don't always have to be more efficient than those of the private sector - in particular, when the private sector is failing to mobilize available resources. THAT is the purpose of government stimulus. Get something out of otherwise idle resources, prop up aggregate demand by putting money in people's hands. Gradually, the private sector rises to meet the demand and the government support is no longer necessary.

You really fail to make a good case against stimulus.

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