Wall Street Journal Reports on Stimulus
This Wall Street Journal Article sheds some light on the modern thinking about stimulus spending, and Keynesian fiscal policy in general. There’s some good news.
First, some sense:
“Too many are searching for answers in the discredited economic playbook of borrow-and-spend Keynesian policies,” Rep. Paul Ryan, a Wisconsin Republican who is pushing a long-run deficit cutting plan, said this month. “I reject the false premise that only forceful and sustained government intervention in the economy can secure this country’s renewed prosperity.”
Then, some nonsense:
Richard Trumka, president of the AFL-CIO union alliance, says if the government starts cutting deficits now, “We’ll slip back into recession and possibly depression.”
How is it that a union boss feels that his comments on national economic policy should be given any weight at all? This from someone who believes that price floors for labor actually help laborers. Perhaps more importantly, what does it say about the current state of the party in power when the contra-quote offered in opposition to a fiscal-hawk Republican comes not from, say, a Democratic congressman, but from a union boss?
That said, the best part of this article comes later. First, some solid research on the mythical multiplier:
A study of 91 fiscal stimulus programs in 21 developed economies between 1970 and 2007 by Harvard’s Alberto Alesina found tax cuts were more stimulative than government spending. “I would have done more on the tax side than on the spending side,” he says.
[Christina] Romer argued last year that this “multiplier” for government meant every dollar spent created about $1.50 worth of demand.
Some economists say that’s too high. Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn’t advocate more now. “We just don’t have enough evidence to prove that it’s good.”
Robert Barro, a Harvard economist, found even smaller multipliers: A government dollar spent creates about 80 cents worth of growth, or possibly less, he says. Government spending, he says, crowds out private sector spending that would otherwise be taking place.
And the coup de grace. How’s this for cognitive dissonance? Early in the article:
Keynesians cite deficit spending as the eventual cure for the Great Depression
And several paragraphs later:
Keynesians say other things were happening at the same time as military build-ups that muddy the results. During World War II, for instance, consumer goods were rationed and Americans were exhorted not to spend.
So deficit spending during World War II was the “cure” for the Great Depression, and yet when the actual, solid research shows that deficit spending during World War II actually had a negative multiplier (for whatever reason), it’s simply waved away as irrelevant? Sorry, but you can’t have it both ways.
The fact is, a far more plausible reason that the country came out of the Depression is because Roosevelt died, regime uncertainty ceased, and the government stopped changing the rules arbitrarily from day to day. If you want some perspective on what intricate (and literally day-to-day) meddling went on under the Roosevelt regime, may I recommend reading “The Forgotten Man,” by Amity Shlaes. It’s staggering, really. By way of example, Roosevelt would literally change the price of gold on any given day while lounging in his pajamas in bed.
I think perhaps we should just hire thousands of unemployed workers to dig ditches and then fill them in with Keynesian economists…