Laura Tyson’s op-ed in Sunday’s New York Times calling for another stimulus package is typical of the brashness and professional arrogance of stimulus supporters. She claims boldly that the previous stimulus has worked, disparages the attempts by households and businesses to rebuild their balance sheets through savings, and trivializes the negative impact of the rampant growth of government these policies have engendered. The Great Recession was caused by the collapse of aggregate demand, she says. In other words, we failed to spend. So, if we spend again, and government does the spending, we’ll come out of these economic doldrums.
Apparently, the Great Recession had nothing to do with severe investment dislocations brought about by the housing bubble (or policies at Fannie Mae or Freddie Mac), spending beyond our means by extending consumer credit to unsustainable levels, or the financial-market debacle coming from overly used exotic financial instruments such as esoteric forms of mortgage-backed securities that hid the risks of default for certain types of investments. (While the residential market appears to have stabilized, many in the financial industry are waiting for the next shoe to drop in commercial real estate, where they’ve just begun to revalue their balance sheets.)
Moreover, stimulus advocates like Tyson and Krugman still believe that spending, any spending, even if it’s poorly targeted and wasted on worthless projects, creates jobs and economic growth. They are wrong. These projects further distort investment and spending in the economy and set us up for prolonged economic stagnation, if not a double-dip recession. Investments have to be productive to have long-term economic viability and create wealth.
Tyson’s op-ed shows that many of the Keynesians among mainstream economics professionals still haven’t learned the lessons of this recession. They continue to put faith above reason in their macroeconomic models even in though their models have been patently inept at diagnosing, let alone predicting the turns in the economy.
— Samuel R. Staley is director of urban and land-use policy at the Reason Foundation.