The Corner

Is That the Most They Can Say in Stimulus Spending’s Defense?

It seems that, in the face of high unemployment and failed job-creation promises, the only thing advocates of more government spending can point to in support of the claim that stimulus spending has been a success is the following:

Private forecasters unanimously believe that fiscal stimulus can temporarily boost growth. They give no credence whatsoever to the various right-wing alternative models in which fiscal stimulus does not boost growth. Moreover, in 2001, when the objective case for fiscal stimulus was much weaker, there was no real debate about the efficacy of fiscal stimulus. The fact that Republicans are fiercely contesting the merits of fiscal stimulus now, while almost nobody was doing so when the case was much weaker in 2001, suggests that the right’s skepticism is a political phenomenon.

That’s Jonathan Chait a few days ago. He is correct that Republicans protested much less about the expansion of government when they were in power, but that’s hardly an argument in favor of a massive stimulus bill. As for the fact that “private forecasters unanimously believe” that it works, the Atlantic’s Megan McArdle writes the following:

I find this pretty underwhelming, since private forecasters also unanimously think they can make forecasts, a belief which turns out to be not very well supported.

More than one analysis of these sorts of forecasts has found them not much better than random chance, and especially prone to miss major structural changes in the economy.   Just because toggling a given variable in their model means that you produce a given outcome, does not mean you can assume that these results will be replicated in the real world.  The poor history of forecasting definitionally means that these models are missing a lot of information, and poorly understood feedback effects.Now, you can argue that these guys are some pretty smart economists, and often that’s true.  But then you have to stack them up against other economists, including some very smart ones who are dubious about the benefits of the stimulus.  Their roles as forecasters do not boost their credibility on this topic.

Well said, Megan.

Of all the conversations going on right now about the effectiveness of stimulus spending, one of the most interesting is over the question of what it means if the spending multiplier (the boost in GDP that we get when the government spends one dollar) is between zero and one. You would think that if the government spends $1 and the outcome is less than $1 in GDP growth, then it’s a pretty bad deal (and only in part because you still have to pay for that $1 of government spending). However, some economists — not all of them Keynesians — disagree. They argue that even if you get less than a dollar of GDP boost, it’s still better than doing nothing, as long as you get some GDP boost, the idea being that an increase in aggregate demand is what we’re after.

If you’re interested in these issues, I recommend this post by Tyler Cowen from a few weeks ago. My colleague Matt Mitchell and I had been pressing him on this question. (The comments are interesting, too.)

I don’t quite agree with Tyler, but that’s probably because, ultimately, macroeconomics doesn’t make much sense to me. For me, the issue is simple: Government spending might create a boost in GDP in the short run (I don’t see how it couldn’t, considering that, given how GDP is measured, it’s assumed that a dollar of government spending creates a dollar in GDP), but that doesn’t mean it was a good idea — this original dollar had to come from somewhere, first of all, and it also matters what the dollar gets spent on. More importantly, it’s not the way to create sustainable jobs. If a job exists only because of the existence of government dollars, then the job will go away when the government dollars go away.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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