Princeton economist Alan Blinder has published a strongly worded op-ed in The Washington Post on the president’s stimulus package.
Apparently not bothered by facts, some congressional Republicans are already claiming that President Obama’s $787 billion stimulus package has failed and are even advocating that some of the remaining scheduled steps in the legislation be canceled.
In medicine, that would be malpractice. In politics, it’s demagoguery. In reality, we need to stay the course.
It’s worth noting that a number of economists have also called for the stimulus should be scrapped, most prominently Casey Mulligan of the University of Chicago, who argued in Sunday’s New York Post that the stimulus is an expensive and counterproductive overreaction.
Stimulus spending is doomed by the fact that most of our job losses are concentrated in a few sectors, and in regions of the country that had the larger housing boom and bust. Construction workers as a group lost more than 1 million jobs, especially in places like Florida, California and Nevada. The government could put close to a million people back to work by hiring them to build more houses, but then it would be rightly criticized for adding further to the excess supply of homes.
Government could hire teachers and nurses — education and health are not in such excess supply — but then it would create few jobs because, while some teachers and nurses are unemployed, their numbers are far fewer than those in construction and manufacturing who were put out of work. And even if you could quickly transform former construction workers into effective teachers and nurses, that would require moving people from where many of the jobs were lost (California, Florida, etc.) to where the health care and education are needed (all over America).
The stimulus won’t do this. But the free market will — people will move in pursuit of jobs, will train in new industries.
I wouldn’t go as far as Mulligan, who opposes assistance to state and local governments. Mulligan argues:
State governments have seen their tax revenues drop, and some economists are concerned that they’ve become “50 little Herbert Hoovers” who raise tax rates and cut spending in order to balance their budgets. But transforming Hoovers into FDRs is not the way the stimulus bill could achieve its employment goals, because few of the job losses have been in the government sector. Even as the stimulus law was being passed, state and local government employment had been higher than it was when the recession began.
Yet I think the concern is that closing budget gaps would require massive layoffs. Though a strong case can be made that many of the 50 states need to shave the size of their public sector workforce, now might not be the best time to move precipitously. Mulligan’s broader point, however, makes sense: given that the stimulus goes far beyond providing fiscal relief for state and local governments, it’s not clear that we’re getting the best value for money.
Moreover, there are real questions regarding the long-term sustainability of our fiscal policies. Jeffrey Sachs, known for his ferocious criticisms of the political right and his strong advocacy for a massive program of overseas development assistance, made the most persuasive case against a fiscal stimulus in a column for Scientific American published in March.
We need to avoid reckless short-term swings in policy. Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment. Deficit spending in a recession makes sense, but the deficits should remain limited (less than 5 percent of GNP) and our interest rates should be kept far enough above zero to avoid wild future swings.
Sachs goes on to argue against tax cuts as well.
We should also avoid further gutting the government’s revenues with more rounds of tax cuts. Tax revenues are already too low to cover the government’s bills, especially when we take into account the unmet and growing needs for outlays on health, education, state and local government, clean energy and infrastructure. We will in fact need a trajectory of rising tax revenues to balance the budget within a few years.
There’s not much comfort here for mainstream congressional Republicans, who continue to believe that tax cuts are an economic cure-all. All the same, Sachs makes a convincing case for a long-term focus.
Interestingly, Blinder spends no time on the fiscal impact of the stimulus. His basic argument is that spending hundreds of billions of dollars has and will continue to perk up the economy, which doesn’t seem terribly controversial. I’m sure Mulligan would happily acknowledge that heavily subsidizing the purchase of new automobiles, as in the cash-for-clunkers policy, will prompt consumers to buy new automobiles. The deeper question is whether the stimulus is contributing to long-term prosperity.
I’m not opposed to sustainable investments in infrastructure and education and I’m not opposed to consumption smoothing. I am, however, strongly opposed to the free-lunch economics of some stimulus advocates. If the $787 billion came in the form of no-strings-attached donations from beneficent Chinese industrialists, I’d have no objection to ARRA. Indeed, I’d be happy to spend far more of their money. Unfortunately, we will all have to pay for it through our tax dollars. So I don’t think it’s unreasonable to ask that stimulus funds be spent with an eye on cost-effectiveness.
Even if the Obama Administration were right that the stimulus law would “create or save” three to four million jobs, that means each job costs the Treasury $215,000! The best case scenario for the stimulus law gives us results that are miniscule compared with the costs. In the worst case scenario, we actually pay money to further harm an already struggling economy.
One wonders if we’d be better served by using stimulus funds to finance a larger program of low-wage employment subsidies.