Some questions I'd like answered about the spending multiplier:
1. What is the multiplier when the U.S. borrows 8 billion dollars for high-speed rail, as it has done in this package, and most of the money goes towards buying equipment and engineering services from foreign companies like Siemens or Hitachi or Bombardier? Very few high speed rail suppliers exist in America. As a more general point, if I took a billion dollars of government money and gave it to China for some magic seeds, wouldn't my multiplier be zero?
2. If we are in a 'balance sheet' recession, and therefore helicopter money won't work because people will simply save it (as seems to have happened with Bush's last stimulus), how is infrastructure spending any different? If you employ 3 million people, won't they just save the excess money they just earned? And if THEY don't, won't your multiplier stop the minute they spend their money, and the recipients, who presumably were already employed and had enough money to get buy, save the excess?
3. Have any macroeconomists considered how the multiplier effect is changed when the spending is targeted in ways which may not be able to utilize resources that are currently idle? For example, in the early years, the 20 billion dollar health care IT expenditure will almost certainly have to go to people who are currently employed, since there is not a lot of unemployment among the kind of high-level IT professionals capable of starting up and managing a project of this size. The same can be said for many of the specific items in the stimulus bill. Long gone are the days when you can take an unemployed stock broker and give him a shovel and put him to work building a road.
This last point seems critical to me. The stimulus bill is very specific about what must be built, and much of it is technical. It seems to me that there will be much more 'crowding out' under this kind of central plan than there would have been if, say, the feds has simply apportioned a trillion dollars to the states and allowed them to spend it as they saw fit. Or even better, to leave the trillion dollars in the hands of the people.
Given all this, how can any economist make the claim that the multiplier is X, with any kind of reasonable confidence interval? Historical analysis of past spending seems to be iffy, since the explosion of global trade has changed the game dramatically in the last twenty years. And in any event, study of past spending doesn't seem to support the large multipliers some economists are claiming.
That's from Marginal Revolution here--search for the comment by "Dan H. at Feb 17, 2009 12:45:49 PM." There is more good stuff here. It is really amazing how hard it is to get supporters of this bailout to think seriously about the question of whether the stimulus will stimulate (or if so, what and how). People who take it as loony that supply side taxation will increase income (and btw, it is loony) will swallow the claims of the stimulus like a raw oyster (for some flavor of the confusion, follow this thread at Mark Thoma).
I want the record to show that I'm not speaking as knee-jerk Boehnerite here. I think it's way past time to nationalize the banks, and I'm hospitable to helicopter money, or to digging ditches with a spork (and I think the Bush tax cuts were a sour joke). But it's becoming more and more clear that a good deal of the "stimulus" has been hijacked by a lot of people who have pet projects (so far, Democrats in Congress, but I don't hear of Republican governors turning down the money). In ordinary times, we could get away with this. But it's becoming clearer and clearer that the new president just blew a golden opportunity.
Fun fact: after the 1989 earthquake, it took 12 years to get started on Bay Bridge retrofit. And we aren't done yet.
Update: Greg Clark, channeling DeLong, builds an argument on the model of Pascal's wager. it seems to me pretty flimsy. He says that even if the stimulus works a little, it's better than no stimulus at all. But he overlooks the fact that the taxing/inflating might, on the same language, more than offset all the good effects. And one more time, I'm not opposed to a stimulus. And I'm a bit Pascal fan, but I don't like taking things on faith.
1 comment:
On Dan H's points:
1. Sure, but the point is offset to some extent by the fact that building a high-speed rail system in the US will entail some US activity.
2. Scenario A, stimulus: You get (a) a bridge worth $1 billion, (b) minus whatever else could have been done with the labor and materials that went into the bridge, (c) plus workers $1 billion who are richer. Scenario B, helicopter: You get workers $1 billion who are richer. To me, whether you like stimulus depends on how much you believe that the private economy under-demands in a recession vs. your fear of govt waste (the values of (a) vs. (b)).
The point that "they'll just save the money in a recession" does support govt spending as opposed to tax cuts as the preferred fiscal policy in an Econ 101 Keynesian framework: MPC goes down in a recession so the multiplier effect of tax cuts and spending both go down. The extra "round" of spending you get with government expenditures (the bridge) grows in importance when this happens, though. A dollar of govt spending vs. a dollar of tax cut might generate 3 vs. 2, as opposed to 11 vs. 10 in fizzier times.
3. To me, the case for fiscal stimulus rests on the premise that resources are idle, so to the extent that health care IT money must be spent on bidding up the wages and prices of resources that would be employed anyway, that would weaken the argument that that expenditure stimulates the economy. I am not an expert on health care IT, so I can't evaluate the critical empirical issue presented by here.
***
I assume for the sake of argument that certain elements of the stimulus bill reflect general Democratic spending priorities and not efforts to maximize the immediate increase in aggregate demand. But Democrats won the election and they are entitled to pursue their priorities as opposed to Republican ones. The recession offers a great time to do this because resources are idle so they are less likely *on average* to be diverted from other uses. In effect, we can now buy govt-provided goodies at a discount, so let's do it now rather than later.
Post a Comment