Lies, Damned Lies, and Stimulus

I agree wholeheartedly with just about one sentence in Doug Bandow’s op-ed in Forbes. The remainder illustrates the gulf that separates the two camps warring over the role, if any, for government spending in reviving our economy, now shambling along with little or no growth. On one side is Mr. Bandow, apparently arguing for “austerity”:

In July the New York Times published an unintentionally hilarious editorial contending that “Mr. Obama’s big mistake was to turn prematurely from the need for stimulus to a focus on cutting the budget.” The Times apparently missed the $1.2 trillion deficit the administration will run this year. Or the president’s future budget submission: the Congressional Budget Office estimated that the president’s program would raise accumulated red ink over the next decade from $3 trillion to an astonishing $6.4 trillion. Where is the radical budget-cutting in Washington.

A similar debate is occurring in Europe, with the contest presented as “austerity” versus “growth.” Yet many of the nations which practiced austerity have grown the fastest. Germany remains the continent’s powerhouse even though its post-2008 stimulus was far less relative to its GDP than in the U.S. and other European states. Both Germany and Sweden enjoyed strong growth as they brought their budgets into closer balance.

The balance of the op-ed consists of presenting the arguments against stimulus spending. The findings are generally summed up here:

Alas, the only thing that government “stimulus” stimulates is government. Valerie Ramey observed: “Increases in government spending do reduce unemployment. For all but one specification, though, it appears that all of the employment increase is from an increase in government employment, not private employment.”

For the counter-argument to Mr. Bandow’s case you can read just about any column or post by Paul Krugman.

I don’t find any general agreement on the meaning of the term “austerity”. In much of the Eurozone it appears to mean tax increases. For its advocates in the United States it appears that it means tax cuts and cutting government spending except military spending which should increase.

Both sides of this question distort, spin, and cherry-pick their findings to support their arguments. So, for example, proponents of stimulus point to the decrease in the number of state and local government employees as prima facie evidence for their case without acknowledging that the reason that these decreases are taking place is that by law their budgets must balance, that tax increases are becoming decreasingly efficient and/or politically possible, and that public employee employment contracts require them to increase employee pay. Their only real recourse is firing people. Additional federal stimulus spending will be used, then, for raises. That’s not an efficient stimulus.

Similarly, proponents of austerity assume that increasing GDP will lead to increasing employment. That has not been the case for years. Why would it become true in 2013?

Here’s the sentence I agree with:

Economic growth requires good spending, not more spending.

It would be nice if there were some agreement on what “good” spending is. That doesn’t seem to be the case. Additionally, I think that prescription applies to the private sector as well as the public. In theory, the private sector is compelled to make more prudent judgments than the public sector or lose their money. As Yogi Berra said, “In theory there’s no difference between theory and practice. In practice there is.”

Is buying a $25 million mansion in the Hamptons “good spending”? I seriously doubt that it does much to stimulate growth in the economy. Most of the money will just go to someone else who’s very wealthy. It’s just trading hats.

6 comments… add one
  • Drew Link

    The only issue I have with your essay, Dave, is the notion of ” trading hats.”. It presupposes that the other wealthy person puts the money in his or her mattress.

    We have capital markets that deal with savings.

  • Ben Wolf Link

    Unfortunate that Mr. Bandow produces such an incomplete analysis in his focus on Germany. He is either unaware or disingenuous in not mentioning The country has run a large trade surplus over the last four years. That IS stimulus, stimulus from the rest of the EMU to the German economy and actually produces the very harm Mr. Bandow and others fear, just to the other nations of Europe and not the Germans.

    The German “miracle” is produced at the expense of everyone else.

  • Ben Wolf Link

    By the way, characterizing our deficits as “stimulus” is nothing more than sleight-of-hand. Our deficits are due to automatic stabilizers, not discretionary stimulus as part of fiscal policy. Both Bandow and Laffer before him make the same mistake: one cannot determine budgetary policies by looking at budgetary outcomes. A student in macro-economics 101 would know better than this.

  • Our deficits are due to automatic stabilizers, not discretionary stimulus as part of fiscal policy.

    Not entirely. A more accurate statement is that our deficits are a result of a drop in revenues due to a decline in economic activity, increased spending, and tax cuts. The first part one could consider “automatic stabilizers” the other two are not. The biggest factor is most likely the drop in revenues.

    To say that this does not have any effect on the economy as a whole is misleading though. While private spending is more responsive to the economic climate, public spending is not. Given that about 20% of GDP is from the federal government (IIRC) that means that 20% of GDP is going to be go down by less than what we’d see in the private sector. You can sort of see this in the name….automatic stabilizer.

  • Ben Wolf Link

    @ Steve Verdon

    In the above link we can see that federal revenues fell by $400 billion from 2008-2009, while outlays increased by $1.4 trillion. By 2011 revenues had nearly returned to their 2008 level while outlays had grown by an additional $100 billion in a static discretionary budget. The remaining deficit is almost exclusively the result of automatic stabilizers which increase spending counter-cyclically in response to falling revenues. It is this that Bandow and Laffer are confusing with expansionary fiscal policy when in actuality our budgetary position is neutral.

  • I am not defending Bandow or Laffer or their arguments. I’m pointing out errors in your comments.

    As for the budget numbers….here is what I see.

    1. There was a significant drop in revenues after 2008. Even by 2011 revenues were still down 9% from 2008 and the previous high in 2007 by 11%. That is still a pretty big revenue shortfall, IMO. If we take $2.5 trillion as a benchmark for revenues then the shortfall for 2009, 2010 and 2011 is almost $930 billion.

    2. Spending took a decided step up in 2009 and remained elevated through 2011. In 2008 spending was just under $3 trillion. That means for 2009, 2010, and 2011 spending was on average about $500 billion above the 2008 level. Or about $1.5 higher.

    Now based on this, I can’t see the $1.5 trillion, or to use your number of $1.4 trillion as being the result of just automatic stabilizers. I imagine a decent chunk of that is due to new spending.

    So I think my comment is reasonable. I don’t think automatic stabilizers are solely to blame for the deficit they are a factor, but so is the additional spending.

Leave a Comment