Will government spending get the economy going or slow it down? How long will it take to have an impact? How many jobs will it create? Can we afford it?
You would think economists could answer these questions. And yet there is little or no consensus for what we should do right now. Some of the finest economists in the country, including Nobel laureates, are on opposite sides of the current debate.
I think the real divide between economists isn't over different macroeconomic theories but over underlying differences in philosophy and ideology.
Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.
I think most economists would argue that the first program would be a bad use of federal money. Most economists would also agree that the second program would be a bargain.
I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?
I think it will be mostly squandered, so I'm against the stimulus. Plenty of people think it would be money well spent. Many people want a role for government closer to that of Europe's. Most of us against increased government spending want to move in the other direction.
There is an underlying presumption in this debate that if the spending package doesn't stimulate the economy, then tax cuts or monetary policy are better. But maybe we simply don't have the knowledge to repair the economy from Washington. The economy is complex and the interaction between the financial sector and the real economy - between Wall Street and Main Street - is not well understood.
Rather than spending money we don't have, I wish Obama would use his political capital to change the parts of our political system that are dysfunctional - our entitlement programs that are demographically bankrupt, our broken budget system, our Byzantine tax system, our financial system that is in disarray. These changes would be more likely to create the confidence and trust in the future that our economy needs to get healthy again rather than borrowing and spending. Borrowing and spending is how we got into this mess. Let's look in a different direction.
Tuesday, February 3, 2009
Russell Roberts is one of my favorite economists because he is so clear-headed. My first economic mentor, John Rutledge, taught me early on that if you can't explain what is going on in the economy to your grandmother, then you don't really understand it yourself. For me, good economics is all about simple logic and understanding how people respond to changing incentives. I highly recommend reading Roberts' recent article in the Boston Globe titled "Stimulus just digs debt hole deeper." Here are some excerpts:
Posted by Scott Grannis at 10:55 AM