Stimulus Wars: Krugman vs. Barro


Nobel Prize-winning economist and New York Times columnist Paul Krugman doesn't just accuse people who disagree with him of bad economics but of bad faith: "Any time you hear someone reciting one of these arguments" against various stimulus proposals coming out of the Obama admin, writes Krugman, "write him or her off as a dishonest flack."

Among the lies masquerading as arguments? "That the Obama plan will cost $275,000 per job created." In fact, says Krugman (without bothering to explain why his supposedly more accurate figure is so damn great):

The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000—and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts.

That is incredible savings ($215,000 per job!), even before the first Obama stimulus dollar has been spent! Another bad argument, says Krugman, is the idea that

It's always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here's how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets—and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats.

I do not follow the implication above (or is it an inference?). Beyond the weirdness of talking about air travel in this instance, wouldn't people stop flying if there were no air traffic control system? Hence the airlines would have some incentive to provide an ATC system even if the government weren't doing so (and in fact, that's effectively what other nations such as Canada do, where the ATC system has been corporatized). I think the argument that taxpayers are better at spending their money implies that people are not complete fucktards, while the long list of shovel-ready, job-creating pork projects compiled by the U.S. Conference of Mayors drives home what most of us know from daily experience: That other people spend your money less carefully than you usually do.

Krugman concludes, "It's clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts…because a large fraction of any tax cut will simply be saved." I'm not sure what that means, exactly, either, especially if taxpayers saved the cut in, like, you know, a bank, which might make it available to people with businesses or mortgages or what have you. An odd side note to all this: If massive government spending grows the economy, then we should all be millionaires after eight years of Bush rule, shouldn't we?

Krugman's whole bit is here. Read it and then check out Robert Barro's discussion of the government multiplier effect, which is at the heart of Krugman's argument that public spending produces more benefits than private spending. Under the headline "Government Spending Is No Free Lunch,"

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports—personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses—there was a dampener, rather than a multiplier…

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

Barro does counsel tax cuts, especially broad-based cuts or eliminations in marginal rates and corporate income taxes, under the theory that the money freed up will indeed be spent more wisely than the equivalent in public dollars. And on the spending side, he notes that public-spending programs which do not pass muster from a cost-benefit analysis are a mistake because they take more money out of the economy than they put back in. As he notes, nothing that has been learned in macroeconomics since 1936 suggests that there is such a thing as a free lunch.

Whole thing here.