Economics

When "Stimulative" Spending Isn't or, Don't Put Lipstick on a Pork-Barrel Project

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Bruce Bartlett in Forbes:

If the public works are genuine public goods that add to the nation's capital stock, then it doesn't matter too much if they aren't completed until the economic emergency is past. Ideally, all public works should meet objective criteria. But as we know too well from the experience of the Republican Congress, a lot of public works spending is just pork—the famous "bridge to nowhere" in Alaska being the best example. It is a certainty that some, perhaps much, of the spending being initiated as stimulus will be just as wasteful. That will be true even if there are no earmarks in the legislation, because when decisions are made in haste without proper vetting, waste is inevitable….

The trick [to boosting the short-run economy] is to make sure that stimulus measures really stimulate, which means that they must affect the economy very quickly, over the next 18 months. Anything that would come online after that must be justified on its merits and not on the looser criteria of being stimulative. One way of ensuring this is the case would be to put in place long-term deficit reduction measures now, which would reassure financial markets that the federal government will not be crowding out private borrowers when the economy turns the corner. (See the testimony of Alice Rivlin and Robert Reischauer, both prominent Democratic economists, before the Senate Budget Committee Jan. 21.)

Whole thing here.

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  1. The trick [to boosting the short-run economy] is to make sure that stimulus measures really stimulate, which means that they must affect the economy very quickly

    The federal government should give me an Abrams tank, and plenty of ammo; I shall then rampage through southwestern Montana, blowing up bridges and buildings, flattening cars, and generally terrorizing the populace. This will have an immediate stimulative effect on several sectors of the economy.

    I expect there will be a statue erected to commemorate my selfless heroism.

  2. Stimulating for the sake of stimulation = economic masturbation?

  3. I’m sorry, wise guys, but stimulus for the sake of stimulus does work. We didn’t attack ourselves in WWII, but we sent millions of men thousands of miles from home and spent billions of dollars trying, not very successfully, to keep them alive while blowing other people to bits. It worked!

    Martin Feldstein suggests giving big rebates to people to buy cars they don’t need to stimulate the economy. This is a bad idea, because I don’t own a car and wouldn’t buy one just to get a rebate. But you get the idea. Maybe the government should give me a rebate to ride the Acela.* Fun!

    More seriously, the part about “long-term deficit reduction measures now, which would reassure financial markets that the federal government will not be crowding out private borrowers when the economy turns the corner,” an utterly fantastic idea, won’t be happening soon.

    *Plus $7 billion to smooth out the ride and cut the time from 2 hours 20 minutes to 2 hours. Of course, I could take the plane in about 25 minutes, but still. We could eliminate security for those little turbo-prop jobs on the grounds that you can’t kill enough people with them to make it worth a terrorist’s while. (I actually think this is a good argument, but of course people won’t buy it.)

  4. I’m sorry, wise guys, but stimulus for the sake of stimulus does work. We didn’t attack ourselves in WWII, but we sent millions of men thousands of miles from home and spent billions of dollars trying, not very successfully, to keep them alive while blowing other people to bits. It worked!

    *sigh*

    Alan, which industrialized countries had an intact manufacturing infrastructure post-WWII?

  5. Martin Feldstein suggests giving big rebates to people to buy cars they don’t need to stimulate the economy.

    I saw him say that on Newshour last night too, and it was pretty hard to watch. The professor from UT was significantly worse, though. I practically had to mute it, or turn on the garbage disposal, while he was talking.

    The problem with giving people “tax” rebates to buy cars is that the rebate is simply a subsidy per car purchased. The subsidy goes to the supplier, not the buyer. Also, MOST (like 99%) of people need to go into debt to buy a new car, and the government discouraging people from being more responsible with their money is.. well.. counterproductive.

    If they’re really interested in restructuring the economy, now is the time to do it. But if you’re going to use money we don’t have to influence people’s behavior, I don’t see why they’re protecting the auto industry and planning highway construction projects instead of trying to make it easier for individuals to go without this (in most cases) humongous personal capital expenditure.

    If what they want is to get people spending, simply set up a tax that taxes non-invested savings. Got $20,000 in the bank? Sorry, but it’s subject to a 3% tax.

    What? That’s not a good idea either?

    WHAT EVER CAN WE DO!?!?!

  6. Martin Feldstein suggests giving big rebates to people to buy cars they don’t need to stimulate the economy. This is a bad idea, because I don’t own a car and wouldn’t buy one just to get a rebate.

    If the standard is that any “stimulus” program that doesn’t benefit me personally is a bad idea, then the whole package is bad.

    If they’re really interested in restructuring the economy, now is the time to do it.

    Hence, Rahm Emannuel’s “a crisis is a terrible thing to waste.”

    More seriously, the part about “long-term deficit reduction measures now, which would reassure financial markets that the federal government will not be crowding out private borrowers when the economy turns the corner,” an utterly fantastic idea, won’t be happening soon.

    Quite the opposite. Big chunks of this stimulus spending will set new baselines, and will never go away. Case in point: the package includes massive increases in Medicaid spending.

  7. Got $20,000 in the bank? Sorry, but it’s subject to a 3% tax.

    C’mon, man- think BIG. The government should just confiscate all cash (and cash equivalent) accounts. You obviously don’t have any good use for it, and your country needs it.

  8. Alan Vanneman | January 30, 2009, 10:35am | #
    I’m sorry, wise guys, but stimulus for the sake of stimulus does work. We didn’t attack ourselves in WWII, but we sent millions of men thousands of miles from home and spent billions of dollars trying, not very successfully, to keep them alive while blowing other people to bits. It worked!

    Only, that is not the case. I doubt if you missed this, from Robert Barro:

    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.

  9. P Brooks,

    Didn’t someone already do this? Link.

  10. Martin Feldstein suggests giving big rebates to people to buy cars they don’t need to stimulate the economy. This is a bad idea, because I don’t own a car and wouldn’t buy one just to get a rebate. But you get the idea. Maybe the government should give me a rebate to ride the Acela.* Fun!

    I did catch Feldstein on the NewsHour last night. On balance he was much more sane than the hippie opposite him that prescribed even more action, who actually stated the stimulus was only a quarter of what was needed. If the current plan is going to generate 340+ billion in interest for us to have the great luxary of trying to pay off, imagine x4 that to see how looney tunes the ideas floating around can get.
    I can imagine bondsmen in Hong Kong scribbling on a lunch break napkin muttering, ‘wtf’.

  11. That is,

    ‘I can imagine bondsmen in Hong Kong scribbling the figures on a lunch break napkin muttering, ‘wtf’.

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