Friday, March 04, 2011

Politics of the Stimulus Package

There are few issues I've given more blog time than the stimulus package, but I think a trillion dollars is worth my time. And yes, this is the fifth part of my series against self-verification, but no, I'm not a Keynesian now. It's not that I've been wrong about the stimulus, I've just been wrong in my discussion. My main argument has been that we can't know if it works, so why try. Economist Alex Tabarrok gives a much more rigorous argument. Even the most ardent stimulus package supporters agree that the recent package did not stimulate the economy becasue it wasn't big enough. It is very difficult for democratic governments to get the political support required to spend the money supposedly needed to stimulate the economy. Even in the Great Depression, where FDR spent more than 120% of GDP, Paul Krugman admits that wasn't enough. So here's Alex's argument:
Now I will take a large degree of laissez-faire and the chaos of democracy over authoritarian political and economic regimes any day. I assume most Keynesians would as well. Thus, if we can't count on massive increases in government spending during a recession to mop up problems ex-post shouldn't we all, Keynesians and otherwise, be spending more time thinking about ex-ante alternatives to Keynesian politics?
And here are his solutions:
Greater regulation to prevent crises from occurring is a legitimate response, although one that I wouldn't necessarily buy into in all particulars. Along the same lines, increasing wage, price and real flexibilities (e.g. relocation flexibility and public and private savings flexibility) would benefit us in future recessions. Automatic stabilizers such as unemployment insurance are one area that has worked quite well. What other areas can be automatized? Funding for states? How about an automatic payroll tax cut tied to the unemployment rate? (fyi, Keynes favored the latter).
Even if the economics of Keynesianism works, the politics of it doesn't.


  1. Anonymous7:08 AM

    They still have not answered the question of why the specific mathematical predictions failed. The Keynesian models numerical predictions based on the amount given. This is not a matter of nuance, it really is whether Keynesianism is just completely wrong.

  2. Anonymous1:40 PM

    The 120% deficit you cite was not from New Deal spending, but from wartime spending in WWII. The FDR's stimulus was annually about 3% of the GDP (see the Krugman post). Also, Krugman's argument was about how FDR cut back spending in 1938, not about the size of the New Deal in general. Krugman was arguing against austerity measures being considered and introduced in the current economic climate.

    I find the Alex Tabarrok article far too hyperbolic to be considered seriously. It's likely true that Keynesian economics is easier to implement in an authoritarian state; the same would be true with any other economic system dependent on a central power. But this fact does not mean that democratic governments and Keynesian economics are incompatible and that Keynesian economics is politically impossible.

  3. Good points Anonymous. But I think whether the 120% was government stimulus or war spending (aka war stimulus), the effect is the same.

    I'm certainly not suggesting Keynesian policies are impossible, just difficult (and probably not desirealbe).


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