Monday, February 16, 2009

Catching Up, The Stimulus Package

I'm back, refreshed, and ready to hit the ground running. After skimming 704 unread blog posts, I thought it would be best to summarize all we've missed. So here's the first part, the "cream of the cream" on the stimulus package.

The world is not ending. One of George Bush's final failures was his claim that he'd "abandoned free-market principles to save the free-market system." This is just foolish. By the most economic measures this is not even the worst economic crisis since the Great Depression. In fact, the panic of the 1980's was clearly worse than now (chart). Even on a global scale, the world is the best its ever been. For the first time in history, half the population of the world has reached the middle class. This is up from almost 2% 200 years ago. The idea that capitalism has failed us is simply not true. Llewellyn Rockwell, president of the Mises Institute, puts it this way:
To the free market, we owe all material prosperity, all our leisure time, our health and longevity, our huge and growing population, nearly everything we call life itself. Capitalism and capitalism alone has rescued the human race from degrading poverty, rampant sickness, and early death.

Below are a laundry list of problems I've accumulated with the stimulus package. Most of these ideas come from the 200 people smarter than me who signed the below statement:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

One of the points they mention is that Japan's recession, one similar to our current one, was not helped by increased government spending. In the 1980's Japan accumulated a debt twice the size of its economy only to remain stagnant. Many would claim that Japan built too many unneeded and slow spending projects, but that is unavoidable. As of January, in Obama's plan, only $4 of the $30 billion for roads and $3 of the $18 billion for renewable energy will be will be spent in the next two years. But speed is not the only problem. It is historically and geographically universal that governments are not very efficient at spending taxpayer money. Here are three recent examples:

Iraqi reconstruction: The Special Inspector General for Reconstruction, Stuart Bowen,...has found that the effort has been riddled with cost overruns, project delays, fraud, failed projects and wasteful expenditures...even though the first tranche of $19 billion in Iraqi reconstruction money became available in October 2003, the Defense Department did not issue the first requests for proposals for this money until 10 months later...

Hurricane Katrina: ...the US has appropriated, over $100 billion in short and long term reconstruction grants, loan subsidies [etc]...GAO found that FEMA made over $1 billion--or 16% of the total in this particular category--in fraudulent payments...items like professional football tickets and Caribbean vacations.

The Big Dig: ...the largest single infrastructure project in the US...many lessons on how not to run a project...officially launched in 1982, but it did not break ground until 1991, due to environmental impact statements, technical difficulties and jurisdictional squabbles...not "completed" until 2007.

The efficiency of this bill is similar. It will spend $214.5 billion to create/save 330,400 government jobs. This is $646,214 per job. So why is this even on the table? What are the political incentives that make government spending seem like the solution in nations all around the world? I believe its because of bad politicians and bad voters. Bad politicians see this as a chance to pass the pork they've been trying to pass all along. And bad voters refuse to allow for "don't just do something; stand there."

So if government spending isn't the solution (and it surely isn't) then what is? Believe it or not there are some government action I do support. However it's important to note I support these all the time, not just in a recession. Economist Greg Mankiw proposes "an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax." This would not only help strengthen US business (1 year of pay roll tax is roughly equal to the stimulus package), but it would also deal with road congestion, which I have discussed before. Best of all this isn't like "mailing a letter to the fire department to tell them that your house is on fire." This could happen tomorrow, not 2011. Speed aside, here's why tax cuts will always out perform government spending:

Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.
Finally, here's another unexpected solution that I would want even if our economy wasn't slumping: increased immigration. These immigrants would buy up the bubble homes, improve our savings rate, and work overtime increasing productivity. Although open borders will always help a country, the help is needed even more in a recession. This solution stands in stark contrast to the "buy American" death trap that has been floating as a part of the stimulus package. Although protectionism didn't cause the Great Depression, it did make it "Great" (can't claim credit that one). To put it bluntly, buying American will destroy jobs, not create them.

This whole post can be summed up like this: Many wonder how we can fix the economy, but we fail to notice that it is already fixing itself. There were too many houses, people are now building less houses. Banks lent money to risky borrowers, now they're not. Americans weren't saving enough, now people are spending less. I predict we have positive economic growth in 2010.


  1. I wept with joy when I saw your gchat away message today. Godspeed sir, Godspeed.
    Is communism still a viable option?

  2. Thank you sir it's good to be back.

  3. Wow, you nailed so many great points there.

    If you haven't read it yet, you definitely need to check out John Cochrane's essay on fiscal stimulus ( I'm sure you've at least seen it mentioned in other places.

    One thing I would add is that the economy needs long term tax cuts and no more government intervention. Businesses need to be able to plan for the future. Nobody is going to invest or take risks right now if the government keeps changing the rules of the game. Long term tax cuts will give businesses the confidence to move forward.

  4. Great points Nick.

    "if the government keeps changing the rules of the game"

    That is why I think things have gotten so bad. Everyone is standing on the sidelines waiting to figure out what the government is going to do for them (or against them).

  5. Probably my favorite post of yours. Well done.

    Have you ever considered that though this may no be "the worst crisis since the Great Depression," it's only the second year of it? In fact, if you count from November when we saw the stock market plummet, it's not even that long. If things aren't that bad now, are you absolutely sure they're not going to get that bad? Is it fair to say this crisis isn't that bad if we haven't even reached "the end of the beginning?"

  6. Thanks man, and yeah that's a good point. I guess my hope is that the Great Depression was so bad because of government policy (mostly the abrupt end of world trade). So as long as we don't let that happen, it will never get as bad.

    Also, here is some data that suggests 2010 won't be so bad:


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.