I do not believe that Matthew O’Brien, writing about the phlegmatic U. S. economy at the Washington Post knows the difference between “why” and “how”. The title of his post is “This is why the economy has fallen and it can’t get up”. His explanation for our economic doldrums is a shortfall in aggregate demand. His prescription is infrastructure spending:
In other words, the economy can’t recover on its own, and if it doesn’t soon it might never be able to. We need more inflation, more infrastructure spending, and less tut-tutting about the deficit that, unlike our anemic recovery, isn’t an urgent problem. We need to realize that just waiting for catchup growth is the new waiting for Godot—and we can’t afford for it to not show up.
Let me suggest an alternative scenario. No reasonably imaginable level of infrastructure spending will make up for the lack of aggregate demand as long as most of what we spend is on healthcare, housing, and imported goods. Due to globalization and the mobilization of rent-seeking in the modern United States it is the Keynesian multiplier that has fallen and can’t get up. Making up for the shortfall in aggregate demand would require $4.5 trillion in infrastructure spending without an enormous amount of help from the Keynesian multiplier. And that is not reasonably imaginable.
It’s not quite that bad. The IMF’s research division, after four years observing European austerity effects has estimated the fiscal multiplier at an average of 1.5. So to hit the maximum potential estimated by that chart would require initial spending of roughly $2.5 trillion. Infrastructure probably wouldn’t deliver the most bang for our bucks so we could likely improve that multiplier by targeting households directly.
That would work out to about $25,000 per household assuming all of it was spent in such a measure.
I presume you’re referring to Olivier Blanchard’s study? I have two problems with it as a forecast for the effects of fiscal stimulus in the United States. First, it’s a model study and IMO model studies are worthless. You get nothing from them you didn’t put in. They just repeat your assumptions back to you.
Second, they’re not for the U. S. I see no reason to believe that the multiplier is cross-cultural.
Every empirical study of the ARRA I’ ve seen has shown a multiplier between 0 (no effect at all) and 1 (a dollar for dollar effect). I’m giving the ARRA the benefit of the doubt and assuming a multiplier of 1. Consequently, a larger stimulus would be needed.
Even your fiscal stimulus of $2.5 trillion is far-fetched. This is, essentially, the same Congress that re-imposed FICA, taking 7% out of the paychecks of most Americans. That’s $3,500 for a median household income. A Congress that imposed a tax of $3,500 per household is going to give a rebate of $25,000 per household? That’s hard to imagine.
$2.5 trillion for initial spending? That’s about as likely as each family giving up their first born.
The US manufactures credit, and an outcome of that is consumer spending. Consumer spending is to credit manufacturing as gasoline usage is to automobile manufacturing. Increasing gasoline usage will never be able to make up a substantial drop in automobile manufacturing.
The Sorcerer’s Apprentice had somebody to fix the mess. We will just have to ride it out, and when the bad debt is finally cleared out, these idiots will claim victory. The same idiots who claimed this could never happen.
I’m not defending the Recovery Act: half the program was in tax cuts which, due to their disporportionate impact on those with higher incomes have a relatively modest multiplier, while relying on infrastructure spending with its notorious cultire of corruption degraded the spending component. Studies examining programs directed at households (such as food stamps) show multipliers as high as 1.7.