Tyler's latest on temporary versus permanent government consumption clarifies what the confusion is over my very simple point. I don't think Tyler understands what I (and everybody else) means by government spending. I don't mean the government handing someone a rebate check; I mean the government actually, you know, buying something -- say, building a bridge.
When Tyler says
The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not,
the only way that makes sense is if he's thinking of a rebate check. If the government builds a bridge, the boost to aggregate demand comes not because people are "tricked" into feeling wealthier but because the government is building a bridge. The question then is how much of that direct increase in government demand is offset by a fall in private consumption because people expect their future taxes to be higher; obviously that offset is smaller if they think the bridge is a one-time expense than if they think there will be a bridge built every year. That's why temporary government spending has a bigger effect.
OK, I guess there's an alternative theory of what Tyler is talking about -- maybe he doesn't consider the wages of the bridge-builders count, that only what they do with those wages matters. But that's not the way either employment numbers or GDP are calculated: bridge construction is part of GDP.
I quake to take on a Nobel-Prize winning economist, so perhaps I should call these my misunderstandings of, rather than my problems with, the post.
As a lowly MBA, I do not think of spending money to build the bridge as a net increase in the country's wealth. We exchanged money for a bridge worth the money we spent (or so we light-heartedly hope). One could argue that the bridge would generate more economic value than it cost in taxes and deadweight loss; one could also argue that it will generate less (and Japan has quite a few bridges of this description). But this is an argument for the bridge, not for bridge-as-stimulus.
The second thing I don't understand is the way that he is doing the discounted cash flow (DCF), which economists know as DPV. Leaving aside the objects acquired with the money and the relative amazingness of the objects versus other possible uses of the money, public or private, as I see it, the cash flows on the single bridge are +$100 billion year zero, and (-$100 billion)(1 + [real rate of interest]) in years 1-10. If I were a single taxpayer (and the various gains and losses should, in my highly theoretical model with no frictions, net out so that it is appropriate to view us as The American Taxpayer), then I should rationally set all the money I gain in bridge-building income aside in order to cover the later taxes that will be required to repay the principal and interest. After all, I will not be earning that money again in the future, so unless I want to take a sizeable hit to my consumption later, I'd better save it.
Assuming that the real interest rate approximates the time preference of said American Taxpayer, and that the bridge is worth exactly what we paid for it, the net economic benefit is zero.
Now, say that I know with perfect certainty that we are going to build an extra bridge every single year. This tells me that my taxes in the future will go up $100 billion a year. But it also tells me that my future income will go up $100 billion a year. The net economic effect is again zero. Perhaps there is some reason to believe that taxpayers pay more attention to future taxes than spending, but I'm not sure I understand this assumption.
Now, in the real world, people are not perfectly forward looking, do not have great certainty about the future path of government spending, the benefits of spending do not fall on people with identical time preference to those from whom the taxes are taken, and so forth. But the efficacy of spending in generating a net economic benefit--a positive shock to Keynes' "animal spirits"--does seem to rest on people not believing that the bridge will cost them as much as it is costing the government, or else failing to act on the belief that it will.
Now as I see it, there are all sorts of different reasons that this might be so. The mere fact that the government is "doing something" may make them more confident in the future; they might believe that the bridge has much greater economic benefits than the costs; or the source of the increased income might not be transparent to secondary recipients, causing them to incorrectly perceive it as a permanent boost without tax cost (Wal-Mart knows pretty clearly when you spend your "rebate" checks, but Amazon probably doesn't know you got a job on a new government-sponsored infrastructure project.) There's also the possibility that they have a strong current time preference that is not compensated by interest rates on savings. Or they are so close to the edge that they cannot do anything except spend the funds. And there are undoubtedly other considerations I am not thinking of.
Thus I am weakly convinced that spending does have more stimulative effects than tax cuts. The fellow in Tyler Cowen's comments who said:
So what Krugman is saying is this: We have two programs. Program one is people receive some money from the government. Call this program 'tax cut'. Program two is people receive some money from the government but before they receive the money they need to dig a whole and fill it back in again. Call this 'infrastructure spending'. Krugman is saying that program one is not stimulative where as program two is. I say I don't see a relevant difference between the two and Krugman has no empirical proof that there is a difference.
. . . was ignoring the strong possibility that most Americans, unlike homo economicus, do put the two into different mental baskets.
But I still want to know the effect that worries about future taxes will have on the multiplier for spending. People are much more forward-looking now than they were a few years ago, and they also have a demonstrably higher propensity to save. Shouldn't this be factored in somewhere?
My third misunderstanding is of Professor Krugman's final paragraph. Is the point of the stimulus really simply to boost measured GDP? I'm sure that Tyler, and any sensible stimulus skeptic, would concede that by borrowing money to increase one component of a measured indicator, you can increase the size of that indicator. But carpet-bombing peoples' homes would increase measured GDP; we should want that figure to go up only insofar as the increase is a genuine proxy for greater prosperity.
As I see it, there are only two good arguments for the spending in the stimulus package. One is that it will provide a positive income shock that will jolt us into a permanently higher level of output--the sort of thing so ably described by Professor Krugman in his famous essay on the Capitol Hill Babysitting Co-Op (which, for some reason, I suddenly can't find online.) That relies on people having very optimistic views about the benefits of the spending relative to the taxes needed to pay for it, which by moving us to a permanently higher AD curve, becomes a self-fulfilling prophecy.
The second is that the projects actually will produce net economic returns, "paying for themselves" from the perspective of the polity, if not necessarily the taxpayers. But those claims have to be justified, and very few people have tried to. It is not enough to argue that the projects are worthy, as, say, covering the healthcare over people aged 55. To go in the stimulus package, it should provide stimulus--that is, either spur real economic growth directly, or at least convince people that it will, improving their animal spirits.
Programs that do not meet these criteria should not be part of the stimulus package. There are better ways to assist the unemployed than to build a bridge we don't need. If a project won't "pay" for itself, then it should be justified on its own terms, not packaged into a stimulus so that politicians don't have to explain their choices to the American people.
What is the economic value of a bridge that's new, shiny, and safe vs. a bridge that's old, obsolete, and dangerous?
Does that new, shiny bridge help spur the psychological confidence needed to get the economy back into "confidence" mode?
I'm just wondering, because here in ME, weather takes a serious toll on transportation infrastructure and there's a direct link between transportation access and economic viability. I'd presume this is true in other places.
Forgive me if I misunderstand, Megan, but while I'm a skeptic of stimulus, I think Krugman's argument (or at least what he's implying) is that while the overall financial DPV to the country of the stimulus in aggregate is 0 (b/c as you point out the "rational" individual will simply horde the cash to pay off future tax increases, assuming my mental discount rate is the interest rate), the argument is that animal spirits respond to immediate GDP -- so even, heaven forbid, if we were to use the stimulus to pay for bridges and then demolish them, the fact that we're boosting some meaningless indicator which the market/businesses assign meaning to is sufficient.
It still doesn't make the stimulus superior to a targeted tax cut, but I think that argument makes some sense (if we take stock in Keyne's animal spirits idea). Your thoughts?
I think we're saying the same thing: stimulus works only if a) the project will actually enhance production or b) consumers as a group incorrectly believe that it will.
But maybe building a bridge is a good idea anyway, even if it does not pay for itself in the short term? It would employ a certain amount of people for a period of time who will spend a portion of those wages and save a portion which will accrue to the banks and rehabilitate their balance sheets.
And I don't think anyone can reasonably argue that the US has been over-investing in infrastructure over the past couple of decades - if you do, I have a bridge in Minnesota to sell ya.
But seeing as 'tax cuts!' is all conservatives can say anymore, the magical solution to absolutely everything, carry on poking the Nobel prize winner.
Lu,
Just to nit-pick - no amount of infrastructure spending will fix a design flaw no one knows about. The I-35 bridge was going to fail, due to it's design, under the load it was experiencing that day.
Megan,
Your instincts are spot on. At the end of every argument in support of government-spending stimulus rather than simple borrow-and-transfer stimulus is the desire to boost the GDP headline number in the first-order spending. One commenter on Tyler's site, studentofeconomics, more or less admits this in a reply to me, though I don't think he realizes it yet.
Infrastructure enhancements/additions should rest on the cost/benefit analysis alone. If we just willy-nilly spend money just to be spending money on something, the likelihood of producing something with negative value goes up. This is why the haste to pass this bill is so alarming to me and others.
most Americans, unlike homo economicus, do put the two into different mental baskets
There's a reason for this, of course. First and foremost, infrastructure spending will put people to work. One can hypothesize that formerly unemployed workers now employed on infrastructure jobs (or seeing this opportunity in the future) are marginally more confident consumers and therefore push up demand. Whether infrastructure spending has a significant effect on unemployment numbers, or works out to be cost-neutrual or cost-beneficial in the future, is something we will see later on.
Conversely, most Americans probably do no convceive of tax cuts as directly affecting the issue of job loss...and then there's the whole issue of how tax cuts stimulate demand for goods; people should have more disposable income now than in recent years, taxes have not been raised in some time, so why would cutting taxes makes us buy more stuff??? There must be a real concern amongst tax cut stimulus proponents that, even though tax cuts are the fastest stimulus, they may not address the macroneconomic issues that induce the need for stimulus in the first place.
Savings rates are up. Megan correctly keeps interjecting this fact into the debate. We have to be fully prepared that many of the stimulus measures will have a much less dramatic effect on increasing demand then we are currently projecting, as people are saving money right now.
Skullberg,
Infrastructure spending may have involved more inspections, periodic design reviews, more thorough inspections or maybe more turnover and improvements in current bridge design. Those sorts of expenditures may have uncovered the design flaw before the collapse.
Ideally, the government would be building bridges only where they're actually needed, and where we expect to gain more in utility for the $100 billion than we could have gotten elsewhere. Key word there is "ideally," and expectations can always be wrong.
I would think that building more bridges also has some effects on the labor market. There would be more demand for bridge-builders, architects, and engineers if we spent $100 billion on bridges than if we spent it on (for example) corn subsidies or food stamps. If what we're really looking for is a way to push the PPF out as far as possible, then wouldn't increasing demand for innovative professions (even artificially if necessary) be the way to go?
"But I still want to know the effect that worries about future taxes will have on the multiplier for spending. People are much more forward-looking now than they were a few years ago, and they also have a demonstrably higher propensity to save. Shouldn't this be factored in somewhere?"
Probably not. The people "stimulated" by the bridge do not pay taxes, or at least income taxes, and do not have tons of disposable income. Getting a bridge building job means, for the time they are building, they can and will live a "normal" lower class existence. Their ability to afford the basic lets basics sellers afford a bit more, and even if temporary every one affording a bit more means they will all feel more confident and save a bit less. And saving is the enemy right now.
Its worth
...I do not think of spending money to build the bridge as a net increase in the country's wealth. We exchanged money for a bridge worth the money we spent.
Yes, but what can you do with money? Green, dirty, bacteria-laden paper made by a factory in Massachusetts -- or its electronic equivalent in ones and zeros - by itself is intrinsically worthless, no? It seems to me exchanging intrinsically worthless (or near worthless) bits of paper is a net increase in the country's wealth. Now, while it's true that the government has to pay it back -- and that there is no net improvement in the government's financial position -- at the end of the day something intrinsically worthless -- money -- is being transformed into something valuable -- a bridge. The government takes money that would otherwise be on the sidelines and forces the issue to create a bridge -- something of value. America is now wealthier.
Now, obviously there's an opportunity cost question. Presumably if the government doesn't spend the money on a bridge, eventually the private sector will spend it on machine tools, or factory orders to Guangdong, or seeds to plant next year's crops. But the problem is, in the meanwhile too much money is sitting lying idly, and that hoped-for "eventually" is taking a very long time.
So, doesn't spending money on a bridge now -- instead of potentially waiting until 2011 (or whenever) for the private sector to do create a use for it -- create a real, tangible increase in economic activity (economic activity that otherwise wouldn't occur during the time period in question)?
I guess what I'm saying is that, in normal economic conditions a stimulus package yields little or no net benefit (or actually makes us poorer) because not enough money (and resources and labor) are sitting on the sidelines, so the extra income people and firms would put away to pay for anticipated tax increase combines with crowding out pressures inflicted on the economy's private productive sector and produces a double whammy. But these are decidedly atypical economic times.
I'm sure I'll be told I'm missing something obvious that will bear embarrassing witness to my utter lack of formal training in the dismal science.
One could argue that the bridge would generate more economic value than it cost in taxes and deadweight loss...
Well, Megan, I believe that is what Krugman is implying when he writes (from the quote you provide):
Krugman is surely stating here that he regards Ricardian Equivalence as a theory that does not adequately describe reality. He's saying here that consumption shrinkage to free up savings to pay for future tax hikes in the real world does not fully cancel out the effects of stimulus (it only partially does, and the question is how much or how little).
And, once again, we see the assumption that it is the unemployed that will build bridges, organize concerts and exhibitions for the NEA, or make condoms for the sexually active (I know, this was removed from the bill). Where is the evidence that those unemployed today will suddenly be employed in stimulus projects?
If the government spends money to employ unemployed workers to build a bridge, then the nation's wealth increases by the value of the bridge. The money has not been spent because it is still within this country. And there is no other cost since the workers were sitting at home doing nothing anyway and the materials were not going to be used anyway. I believe that is the general idea.
"Where is the evidence that those unemployed today will suddenly be employed in stimulus projects?"
Does this really need an explanation? Presumably the bridge-building company is currently employing the appropriate number of people for their workload, as they've already laid off those they couldn't afford to pay based on the income they're receiving (or could afford to pay but didn't need based on a lack of contracts). So, with more contracts, they're forced to hire new people to handle the added workload.
The other alternative I guess is that the company has extra employees they're currently paying who don't have enough work to do, so they don't hire anyone extra and just make more profits instead (though profits generally go to hiring extra employees, yes?). But given the economic climate and unemployment numbers I find it hard to believe many such companies are currently overstaffed, when they instead have had the option of layoffs to save money.
There are only two types of workers available for the bridge-building project: the unemployed, and the already-employed. If the unemployed build the bridge, there's the answer. If the already-employed end up building the bridges, then they won't be able to build whatever it is they're currently building. That other project will still need employees to finish it. Somebody was already paying real money to a construction firm to do the job, and they're unlikely to leave a building half-finished until the bridge is built. So they'll hire new workers - hire the unemployed.
From Mark:
And the evidence for this is where? I still don't see how you target specifically the unemployed workers and unemployed resources to build this bridge.
In addition, just because you have a bridge doesn't mean you have added value. You could well be subtracting value if you haven't even made the effort to determine if the bridge adds value over time.
You will not put any money aside to pay the future expected taxes if any of the following hold:
1. You do not expect increased future taxes because you do not understand government finance
2. You do not expect increased future taxes because you do not pay taxes, in turn because you earn very little
3. You literally cannot afford to allocate money to savings
4. You choose not to allocate money to savings
I think that about covers at least the bottom 95% of the American income distribution.
Please just drop Ricardian Equivalence, it does not describe how actual people behave.
All good points. But we can think of it this way. Building a bridge 'creates jobs' in that it 'creates a contract' for experienced construction firm(s) to bid on. The workers are not unemployed, but the contract represents government-funded salary to the workers. As Krugman states, if the government builds a bridge, it adds to the GDP, from the materials to the workers.
I hope job creation from scratch is not our only criteria for government spending. But if we want a good example of actual job creation that potentially includes people who are unemployed, then take a look at public-private partnerships in Europe. From what little I know, it has worked well in places like Germany. Say the government wants the country to become less oil dependent (a good goal), and it knows that former auto workers and other manufacturing workers could be tapped to build something new (like wind turbines). The government partners with one or more venture capitalists, putting up 50% or more of the initial capital costs. Under the terms of the public-private corporation, the government sells its shares of the new corporation once a milestone is met (say the completion of 1 million wind turbines). In a perfect world, the government helps launch a successful new corporation and accelerates its own goal to advance the green economy and get credit for 'creating jobs.' From what I understand, Germany has done this process over and over to the point where 250,000 jobs have been created in the green infrastructure sector, and it is almost ready to close all coal and nuclear plants.
And, once again, we see the assumption that it is the unemployed that will build bridges, organize concerts and exhibitions for the NEA, or make condoms for the sexually active
I believe the idea is that NEA grantees will use the condoms to protest the environmental impact of the bridges.
it is almost ready to close all coal and nuclear plants.
I'll believe that when I see it.
Of course, if they're just buying nuke power from the French, that's cheating.
Where is the evidence that those unemployed today will suddenly be employed in stimulus projects?
Yancy: It's common sense that some of them will be. If, say, 12% of the country's workers are jobless (unemployed + discouraged workers), it stands to reason that a certain percentage of the people eventually finding jobs because of stimulus are people who currently don't have them. Indeed, I think it's common sense that quite a healthy percentage of the jobs created by stimulus will go to people who at the present time are out of work. Why? Because in a recession or in a time if elevated unemployment levels, more folks than usual who are jobless are folks who possess solid employment backgrounds, or decent prospects. This contrasts with say, the height of a business cycle, when I reckon we'd expect the ranks of the unemployed to be dominated by people who always have trouble finding work. All things being equal, a highly employable but currently out of work person is probably more likely to get a job because of a stimulus package than a highly employable person who actually has a job. The former will be highly motivated to find work; the latter already has a job, and will need a stronger incentive to jump ship than the more modest incentive required by a person who's suffered a precipitous drop in income due to job loss.
One could argue that the bridge would generate more economic value than it cost in taxes and deadweight loss; one could also argue that it will generate less (and Japan has quite a few bridges of this description). But this is an argument for the bridge, not for bridge-as-stimulus.
We aren't Japan, are we(Unless you live in Alaska and like Palin support the Bridge to Nowhere)? Most states are smarter about bridge building so they are usually put to good use. If you remember, Japan's economy was in deep crap, so they built bridges as make work kind of projects. They didn't care at the time how much they'd be used. Here in America it is a different story. We have plenty of heavily used bridges that need replacing(or repair).
Megan has a habit of advancing the progress of any argument she gets into. She has taken this one away from the trumpeting of elephantine professors to:
" ... stimulus works only if a) the project will actually enhance production or b) consumers as a group incorrectly believe that it will."
That takes us out of the jungle. maybe some simple economic can take us a bit further.
Ricardian equivalence is a proposition in static economics. Keynes idea of a fiscal stimulus has always seemed to me to be a proposition in dynamic economics. People genuinely would subtract out of their consumption what they thought would be needed in future to pay for government spending now if they lived in a 'static' world where they could count on expectations working out. The only room then for a positive stimulus effect would be because people thought that the "bridge" the government was building was likely to produce a larger economic product and therefore a larger tax base than what they would otherwise have spent on; so keeping down their future tax rates. In that world building a bridge to somewhere could be a stimulus; but building a bridge to nowhere could have the contrary effect of contracting demand.
However, even in that world we could increase overall welfare by transferring some command over resources from the better off to the poor. That follows from the observation that we have more appetite for the first hamburger than for the second - or more formally, we experience a diminishing marginal utility of consumption. The welfare offset from the better off saving to meet the ultimate tax bill is less than the welfare gain.
We actually live in a dynamic world. The only things that are certain about the future are death and taxes. The marginal effect of the bridge on my ultimate taxes is at least as uncertain as when I will actually die, but really does not add significantly to the overall uncertainty about the level of my future taxes.
Overall uncertainty is a major reason for saving. If uncertainty is reduced, I will probably save less and consume more regardless of whether I pay for the stimulus package or benefit from it. So we get the 'confidence multiplier' or 'placebo effect' of the stimulus - the government has done something purposeful (which in itself creates less uncertainty than a government thrashing around) and may have reduced the chances of facing the sort of economic outcome I feared. So I feel less need to save; consume a bit more, and that starts a virtuous circle.
But there is also arguably a real stimulus effect to be expected. This follows from the dynamic property of the economy that people take time to adjust their expectations. The net result of these time lags is that the stimulus spending or tax cuts can boost demand before the netting off into saving cancels them out. And in that interval the increased demand raises expectations so that by the time savings are being increased people see a better prospect for their future incomes and less overall need to save.
Note this is all 'can'. There is no inevitability about a stimulus working. It all depands on the government doing it confidently, speedily and without dropping the ball.
You know what... I might be a proponent of the stimulus idea if the plan was to build the space elevator instead of those bridges (or immortality treatment or something along those lines). Just so the money are spent primarily in science and hi-tech and are relatively hard to gobble by the existing interest groups. Oh, and the result had the potential to make a real CHANGE (your know, that thing that rhymes with HOPE) in our lives, or at least the lives of our grandchildren.
As it is, tollways (and toll bridges) appear to be a far more efficient way of improving the infrastructure than public projects. And if you want it to be public spending, just make the road tolls a tax deductible item.
Americans' saving rate, as a percentage of after tax income, hit 2.9% in the 4th qtr., up from less than 1% a year ago (AP report citing government stats). Look at the carnage this increased savings has caused retailers, entertainment industry, etc. Many economists think the rate will eventually hit 6% (which many used to hope for but many now see as a catastrophe for consumer spending.) How long can Americans preach their new frugality? One reads articles saying this is a new lifestyle that will be embraced by the rich (out of guilt) and the middle class (out of necessity). Stimulus won't work until it restores confidence - that one's own job is safe, that one sees better times for all ahead, that goods are cheaper now than they are likely to be in the near future, that treating one's self to a vacation isn't going to arouse hateful envy in the neighbors, etc. etc.
But if frugality is the new norm, then many of the infrastructure projects are a waste: why build a third lane if there are far fewer commuters, why build another bridge to Clearwater Beach if no one is going to visit the resorts, why raise tunnel heights for stack trains if imports from Asia are going to be way off? Why put up new dorms if fewer kids can afford college?
Being an optimist, of course, I think the "spend like there's no tomorrow" philosophy will return in enough significance to put all this trouble behind us by the 2010 term elections.
Savings rates are up.
I know that the number is up, but people saving more may not be the cause. The official calculation is this, but IMO there is a major flaw
Income - Federal taxes - Expenditures = Savings
Money received from cash-out refi's or credit card spending doesn't show up as income, but shows up as spending. This also artificially reduces the savings rate during a time when Americans were extracting $800B a year with HELOCs and re-fis. If the country as a whole spends more than they make for a period of a few years, once they stop doing that (and they will have to at some point) the savings rate will increase. It also increased from negative to what, 1%-2%? It's not like everyone in the country is putting 30% of their income in a mattress. I need to see something besides the official savings rate, before I'll believe Americans have changed their ways and become a nation of savers.
I just wish the green power people would make up their minds; either it will create vast numbers of jobs, or it will be good for the economy in whole, but it is unlikely to be both.
Let's not confuse jobs, work, and production.
Infrastructure spending may have involved more inspections, periodic design reviews, more thorough inspections or maybe more turnover and improvements in current bridge design. Those sorts of expenditures may have uncovered the design flaw before the collapse.
It might have. Or it might have involved what happened in Louisiana, where local municipalities kept finding all kinds of pet projects for the Army Corps to engage in along the levy routes rather than more levy inspections, design reviews, and improvements. That's the problem with handing a moneypot to politicians and giving it a range of uses: the range has definitional scope somewhere on the order of unset taffy.
Adam and Tel,
How do you know you aren't simply crowding out the construction that would have taken place without the building of the government bridge?Again, the argument is that there are slack resources, but the stimulus seems to be making no effort to determine where they are. Your unemployed workers may be retail people, bankers, and real estate agents, people you can't hire to do immediate construction work. Your underutilized commodities might not be iron and concrete.
"I just wish the green power people would make up their minds; either it will create vast numbers of jobs, or it will be good for the economy in whole, but it is unlikely to be both.
Let's not confuse jobs, work, and production."
I have no idea what you're trying to say here. How is creating vast numbers of jobs not inherently (really) good for the economy in whole? In what possible world is this unlikely? People who go from unemployed to employed do tend to have and spend significantly more money.
Doesn't paying off debt count as savings? If so, anyone who is moving heaven and earth to get rid of credit card debt (either by choice or because Bank of America suddenly says so) would count as a saver.
It's not like there are no infrastructure projects worth funding in this country. We made some real progress in that area over the past 15 years, but a lot of stuff that was built 40+ years ago still needs to be overhauled. If we start getting like Japan and overfunding infrastructure, my views on this will change. But a wave or two of projects won't disturb me.
I don't even mind giving some money to public libraries and parks. People who are trying to save will use those resources heavily, and it might be nice to improve them and expand them to accommodate the added load.
But that's as far as I'll go. After that, it's time for transfer payments to the unemployed and tax cuts to everyone else. No stimulus funding to put the government into entirely new lines of work, beyond things like roads and libraries that it already provides. Do the stimulus clean, and then have a separate debate about any new programs you want to start.
From what I understand, Germany has done this process over and over to the point where 250,000 jobs have been created in the green infrastructure sector, and it is almost ready to close all coal and nuclear plants.
Even ignoring the question of where Germany is really getting all of its baseload generation (only Brazil and a couple of its neighbors have legtimate claims to majority-renewable generation, and they've got the Amazon River system supplying hydropower), how many of those 250,000 jobs eere traded 1-for-1 (or worse) against job eliminations in nuclear and coal-fired power plants plus their supporting industries?
"Job creation" only exists if it generates a position where nothing existed before. If it obsoletes one or more positions that did exist before, it is perhaps merely an "accellerated conversion".
yancey ward: I am not assuming stimulus is for the unemployed; I assume it's greatest use is in job retention. Creating jobs is important. Maintaining existing jobs, however, is crucial.
I'm not an economist but if I understand the point that Krugman is trying to make in simple terms, a bridge built is a capital investment now, ie the government spends money on something that provides a service or function. This is better than a tax cut because you can't guarantee that the money given (essentially not taken) to private citizens will get spent in the short-term.
In these times of economic depression, people are more likely to save than spend. Hence part of the reason for the reduction in aggregate demand, ie the paradox of thrift.
From what I understand, government spending is better in a depression because it ensure spending, ie demand, in the short-term. And this is regardless, apparently, of the utility of the expenditure.
Now the question here it seems. Is whether short-term government spending is really no better than more disposable private income. The debate about how people will spend in relation to perceived and real conditions seems to me just conjecture. Without real data it's a solvable argument.
Jasper,
Again, you show no connection to the unemployed and the proposed stimulus. You don't get beg the question. What proportion of that 12% get new jobs because of the stimulus? Who loses jobs because the government redirected resources elsewhere through it's buying power? What is the net added value?
oops I should learn to edit more. My last sentence should be
"Without real data it's not a solvable argument.
The bridge is on my mind in a different way. I have worked on seven of them, and I am currently unemployed. Bridge building and other heavy civic projects typically rely on Union labor for the actually physical work and are planned and overseen by a number of engineers employed by the General Contractor, and Department of Transportation, State and Civic authorities, etc. When I got my first job in 1995 building a dam, I had been on a six-month waiting list that was created for this reason: builders were hiring new, inexperienced apprentices instead of older more expensive apprentices to save money. There was a surplus of unemployed apprentices who could not find enough work to complete the program and become Journeyman. My local put a stop to it. The first day I went to work was the day all the others were already employed.
I fear two things about this stimulus package: infrastructure jobs will first go to those newly entering the job market and they will be short term. I worked on those seven bridges in under one year. Granted they are not, as one commenter stated, lower class wages at all. But they are project based, not anything you go back to year after year.
Also, as I look for work it seems most job openings are in engineering. There seems to be a deficit in the number of qualified people to perform the higher level work. A recruiter keeps calling me - not with jobs for me - but to see if I know anyone in engineering. When I started my apprenticeship there was a projected deficit of skilled labor that would begin with the retirement of baby-boomers. These blue-collar fathers had told their kids not be be like him. Likely right now there is a surplus of white-collar, college educated people.
Will this infrastructure stimulus really help out a 40 year old who physically just can't build bridges anymore? Or my friend who got canned from Goldman Sachs? No. Probably not.
The global economy is way too complex to model. Does a $55 million bridge make us $55 million richer? Mmm, I don't think so.
We need education bridges. If I got a grant to complete my architectural studies and licensing, I could put that value back into my community a hundred fold.
From here on out I will always spend less. Bankers? Buzz off. Greatest thing about being a "low-class" carpenter, I'm building my own economy: an off-grid house.
"Adam and Tel,
How do you know you aren't simply crowding out the construction that would have taken place without the building of the government bridge?Again, the argument is that there are slack resources, but the stimulus seems to be making no effort to determine where they are. Your unemployed workers may be retail people, bankers, and real estate agents, people you can't hire to do immediate construction work. Your underutilized commodities might not be iron and concrete." This is all true. However, speaking as a person with family in construction, the workers are usually willing to travel, so the where is not as important as in other industries. And while we may be in a place hypothetically where we do not have excess construction capacity, coming off a massive global and national construction boom it is reasonable to think we do. There have been mass layoffs in the industry. Commercial and home construction has cratered from its highs. There is, objectively, excess capacity.
Now, you might argue that we have excess capacity because of the bubble, and losing it is healthy, which may be true, but the capital pressure we face have an inproportionate effect on the industry, and we are likely to go the other way and lose more than we ought to in this crisis if we do not fund government based construction projects. I think it is a good risk to take.
incidentally I was addressing Yancey.
We could always use the stimulus money for more science then when the projects are done we have new materials, new industries, and new treatments/cures for disease.
In addition we could fund other types of projects where the start up costs are typically prohibitive but the benefits are amazing after that.
Or we could just let people transition into the learned helplessness of the chronically underemployed.
I for one don't know how this will turn out. I can say I'd rather have tried the stimulus than not.
"How do you know you aren't simply crowding out the construction that would have taken place without the building of the government bridge?"
I'm not a professional economist, and my micro and macro days are several years ago, but it doesn't seem to me that there would be any crowding out. There's nothing there to crowd. Bridges aren't things that the private sector typically buys. (Unless we're talking about privately-owned toll bridges, and I assume they account for a relatively small percentage of the total bridges in the US).
The Bureau of Labor Statistics had the total construction sector employment as being down by 101,000 from November to December 2008 (http://www.bls.gov/news.release/empsit.nr0.htm). I don't know if that's within the normal seasonal variance.
Adam:
In that case, I propose abolishing all farm machinery and replacing it with sticks. Offhand, I believe this will create approximately 400 million new jobs as we convert to an economy based on subsistance farming.
The fact that it takes scores of people, vast quantities of steel & concrete, etc. to build/operate windmills (if true) indicates that they are inefficent.
Now, arguably if we really are in some kind of labor/monetary crisis then there could be a place for this kind of makework, but to see "jobs" as the goal is confusing effort with results.
Bridges aren't things that the private sector typically buys.
No, but steel and concrete, and skilled labor to stitch them together, are.
How is creating vast numbers of jobs not inherently (really) good for the economy in whole?
Suppose you were paying people to piss off of skyscrapers. That would do a hell of a number on retail sales downtown, don't you think?
Every dollar given to a government worker must be taken from a non-government worker, either through taxes or inflation. In effect, non-government workers are required to give a part of their effort to the government worker for free. It's as if grocery stores had to give away food, gas stations had to give away gas, lawyers had to do free legal work, doctors free diagnosis, etc.
Now, we don't mind giving away free food and gas and labor when we get something valuable for it like necessary bridges and police protection, but that's precisely the objection being voiced. Mere government job creation without any regard for what those new government workers are actually doing means forcing the rest of us to give away some of our effort without giving us something back.
Tel,
So, if the private sector isn't building bridges, then where are the workers going to come from to build all the new government bridges? I realize you think this question is facetious, but there is a point to it- namely that you still can't target the unemployed contruction workers specifically for bridge building. Even within construction, skills are not readily transferable between different constructions-certainly not as an excuse for a short, temporary "stimulus".
All I am asking is for the infrastructure supporters to abandon the stimulus argument and support their projects on cost/benefit bases. Really, we could just demolish every bridge now standing and replace it with a completely new one over the next 20 years, but would that be net value added? I suspect a good number of people would just blindly say yes while laughing at the idea that it could it possibly be otherwise.
I wonder about the efficiency of all this "stimulus". None of these projects will be chosen purely on technical and economic merits. It'll all be based on whose congressman had enough clout to put that project in the bill. Half of it will leak away into the same systemic black holes as the TARP money did.
There is a huge difference between theory and execution of this kind of government spending. At least with tax cuts we know most of the money won't be going to the many layers of parasites infesting our body politic.
There would be at least some lag time while the people who used to build other things are trained to build bridges. Will it really be that difficult to train someone to do that? I really don't know, since I'm not in the construction sector myself, but I would be really surprised if it's as impossible as you're making it out to be.
I definitely agree that cost/benefit needs to be front and center to determine which building projects are selected. Building $800 billion worth of bridges to nowhere won't benefit anybody.
I don't know what Rob Lyman is thinking: gov't workers also pay their own salaries. In fact, public oversight makes the gov't more scrupulous about gov't workers paying taxes than it is about non-gov't workers. Look at the hearings over Geithner and Daschle. You'd better believe that those tax bills are going to be paid.
The point is this: we are talking about using government money to pay for American problems. The grid, bridges, roads, covering state budget shortfalls, etc.
The big difference between the massive government expenditure of the Bush era and that of the Obama era is which country is being rebuilt: Iraq vs the US.
It's up to the government to be competent and for us to be outraged when they are not.
Mere government job creation without any regard for what those new government workers are actually doing means forcing the rest of us to give away some of our effort without giving us something back.
Who thinks that job creation is being proposed "without any regard for what those new government workers are actually doing?"
Do you honestly think nobody in the White House or at CBO has studied this? I strongly suspect there does exist "regard" for trying to understand how to structure the stimulus package for optimal results. The people running the show (ie, Democrats) possess a pretty powerful incentive to get it at least partly right.
Every dollar given to a government worker must be taken from a non-government worker, either through taxes or inflation.
Yes, but in theory those non-government workers will have more dollars in a few years than they would otherwise, because per capita GDP will be larger, too, because we wisely decided to inject unused resources into the economy, and therefore made the pie larger than it would be had we continued to allow capital and labor to remain idle.
I found this to describe how I feel about the messed up political culture in Washington. Let's get some transparency!
http://tv1.com/playlists/225
Yancey wrote "And the evidence for this is where? I still don't see how you target specifically the unemployed workers and unemployed resources to build this bridge."
Actually, I agree with you. And also, where is the evidence that the unemployed workers are all doing nothing and that materials used would not have been used for something else.
Some of the stimulus will stimulate and some will crowd out private enterprise. Those on the left are willing to accept more crowding out per stimulus. Those on the left are more concerned about crowding out and want to see less as the price of stimulus.
Jasper:
I was replying to the claim that creating jobs was a guaranteed unalloyed good because employed people have more money, and my point was to demonstrate that it was not. The jobs must be useful. Whether or not the current stimulus package qualifies, I have no opinion.
Newschild: I will leave it to others to explain why the fact that government workers pay taxes does not negate my point.
Jasper,
What unused resources? I have actually read the bill that passed the House, and I just don't see the connection between the spending and the assumed net benefit for most of it. We are literally being asked to buy a pig in a poke, and it is being rushed through as a stimulus. No one seems to want to make the argument for these items as a more beneficial use of resources (nonidle and idle in the real world with an indeterminate distribution between the two) than they would otherwise find. Instead, the entire bill is being railroaded through to passage in a blind panic. This leads me to either conclude the proponents just want to spend resources this way, depression or not, or they just want to be seen doing anything by the public. Neither of which passes muster with me.
I am not saying there aren't some reasonable plans within this monstrosity, but we can surely have those without the crap being fed to us in this rushed bill.
People focus too much on GDP and full employment. Productivity skyrockets, and we can create far more with far fewer people involved. The key considerations should be producing the goods with the most utility (the best bridge possible) and matching the production created with people that can derive utility from the production.
Policy should strive to solve the excess productivity by figuring how people can best work fewer hours, and be able to move on to more needed production, in spite of breaks in employment (retrain, reeducate, retire).
Jasper
"Yes, but what can you do with money? Green, dirty, bacteria-laden paper made by a factory in Massachusetts -- or its electronic equivalent in ones and zeros - by itself is intrinsically worthless, no? It seems to me exchanging intrinsically worthless (or near worthless) bits of paper is a net increase in the country's wealth. Now, while it's true that the government has to pay it back -- and that there is no net improvement in the government's financial position -- at the end of the day something intrinsically worthless -- money -- is being transformed into something valuable -- a bridge. The government takes money that would otherwise be on the sidelines and forces the issue to create a bridge -- something of value. America is now wealthier."
You don't trade something intrinsically worthless (money) for something intrinsically worthwhile (bridge) because money is simply a medium of exchange and you have to look at what was exchanged for the money in the first place. If you buy a new apple picker for your orchard you haven't exchanged money for a picker you have first exchanged excess apples for money which you then exchanged for a picker.
"So, doesn't spending money on a bridge now -- instead of potentially waiting until 2011 (or whenever) for the private sector to do create a use for it -- create a real, tangible increase in economic activity (economic activity that otherwise wouldn't occur during the time period in question)?"
The housing bubble was a real, tangible increase in economic activity. Many houses were bought and sold, realtors made tremendous commissions, there was a flurry of home building. The question is THEN WHAT? Economic activity for the sake of economic activity leads us into tight spots as oversupply sets in. A house may seem to have intrinsic value, so how can building one ever be bad? In the long run we get far to many of our limited resources committed to projects with diminishing value to consumers and in the end those resources must be reallocated. Trying to force the reallocation quickly, and into dubious projects is just begging for another bubble of activity which will pop when all the infrastructure spending is spent and we are left looking for more 'stimuli' to throw money at.
Megan,
Here's a link to a discussion about the babysitting economy, in the first post there is a link to an article about babysitting the economy (not the original though).
http://forumserver.twoplustwo.com/118/economics/krugman-baby-sitting-economy-350865/
You don't trade something intrinsically worthless (money) for something intrinsically worthwhile (bridge) because money is simply a medium of exchange and you have to look at what was exchanged for the money in the first place. If you buy a new apple picker for your orchard you haven't exchanged money for a picker you have first exchanged excess apples for money which you then exchanged for a picker.
Unless you're the government and you can just print it. I'm not super opposed to that, since we've been in a deflationary period for a year or so if you include credit and velocity. But base money can't be destroyed by raising interest rates. There will be a reckoning if they go overboard.
The fact that it takes scores of people, vast quantities of steel & concrete, etc. to build/operate windmills (if true) indicates that they are inefficent.
That doesn't follow. All it indicates is that substantial quantities of labor and resources are required to erect any sort of large commercial or industrial plant (probably not the biggest or most unlikely news you'll hear today).
Whether the plant is capable of providing return on the investment thereafter, and how that return compares to competing options for the same investment and output, is much more indicative of "efficiency" than the magnitude of the inital outlay.
"Unless you're the government and you can just print it."
In this case you are simply appropriating someone's purchasing power.
Megan writes: "As a lowly MBA, I do not think of spending money to build the bridge as a net increase in the country's wealth. We exchanged money for a bridge worth the money we spent (or so we light-heartedly hope)."
But that's not true. The money spent on the bridge didn't disappear, it went to wages, raw materials, etc., which means it just changed hands, but is still part of the "country's wealth." (Ignoring, for the moment, the possibility that some of the labor and raw materials came from abroad.)
So the net effect of the government building a $100 billion bridge is that the government loses $100 billion in cash but gains a $100 billion bridge, and the private section gains $100 billion in cash. The country is $100 billion "wealthier."
That's not the complete analysis, of course: you have to consider the stimulative effect of putting $100 billion into the private sector, weighed against the possible crowding out effect of government spending/borrowing, i.e. the stuff Krugman goes on to talk about.
(Or you can get to the same point by ignoring money on the grounds that it isn't "wealth." But you have to be consistent.)
All government spending is not on bridges. There's a public good that is created in the construction of the bridge, and that comes in the cost of taxes raised to fund it, or borrowing used to fund it. Measuring the efficacy of such public works projects is difficult to measure at best, so when applying a business model to try to determine a net gain is difficult, because there's really no way to value the returns on this Bridge Widget that the government has just built.
In other words, it's hard to easily justify government spending. But I'm really, really sure that profitable businesses don't pay people to dig holes and fill them in again, unless there's a positive cash flow associated with doing so. Business and government do not spend, nor earn, money in the same way, so simple comparisons between the two are inapt.
The fact that it takes scores of people, vast quantities of steel & concrete, etc. to build/operate windmills (if true) indicates that they are inefficent.
Not so. And not even if it takes MORE steel, concrete and overall capital investment to produce a windmill than a coal powered station of equivalent power output.
The inequality of interest is:
Total capital cost of windmill + NPV operating cost of windmill
Because the windmill should have a much lower operating cost, it has a chance of beating the coal power station overall. Only a chance mind you. This requires doing the maths, and is not the sort of thing that can be solved by the bumper-sticker level of analysis that is usually employed. Probably some windmills win, and the majority lose. And this will change over time.
"As a lowly MBA, I do not think of spending money to build the bridge as a net increase in the country's wealth. "
Then some thousands of words later we don't know what Megan thinks the country's wealth is.
Let me hazard a guess. An increase in asset prices. Not income and God forbid not savings. No increasing asset prices is how wealth is understood today. Fixing a bridge or a road or a school or fixing a kids teeth won't increase won't increase the countries "wealth" because it won't inflate, ooops, I mean increase any asset prices.
Now if someone can point me to where Adam Smith talked about increasing asset prices as wealth let me know.
I still want to know the effect that worries about future taxes will have on the multiplier for spending. People are much more forward-looking now than they were a few years ago, and they also have a demonstrably higher propensity to save. Shouldn't this be factored in somewhere? - Megan
1. In an economic environment of colossal uncertainty, where I'm not sure whether the $25,000 I lost on the stock market last year is coming back in 2 years or 10, and where the losses on TARP (which the taxpayer will ultimately recoup) could be anywhere from $50 billion to $500 billion, it seems to me that hypothetical worries about whether my tax bill will rise slightly down the road because the fiscal stimulus is a bit bigger or smaller are not likely to much affect my (currently high) propensity to save.
2. The models suggest unemployment in the next two years will rise to 9 per cent with the President's stimulus plan and to 12 per cent without it. A rise to 12 per cent unemployment, with all the extra layoffs of friends and colleagues it entails, would substantially increase my propensity to save, due to fear. I am sure such an effect would be larger than the effect of the stimulus bill in increasing my propensity to save. Of course, if I myself am laid off, my propensity to save will probably decrease since I will have too little income to save any of it.
I think the key here is in the phrase Megan uses: "they also have a demonstrably higher propensity to save." That is, people ALREADY have a higher propensity to save right now. I do not think that people are capable of rationally fine-tuning their responses enough such that the effect of the stimulus bill will factor in substantially. People are saving what they can right now. I don't think they're going to save (what they can)*1.3 because of the stimulus bill. This ascribes too much ability to average folks to make accurate assessment about the economic impact of large-scale monetary flows -- something which the existence of the GFC shows people are not very good at doing.
And finally: Megan seems to me to be wrong about who here has something to prove. We know that a government fiscal boost will boost GDP. And we all accept that in the long run we will have to pay for it in terms of higher debt. But what Megan is hypothesizing is that there may be some kind of automatic psychological compensation in terms of an increase in people's propensity to save due to calculations of higher future taxes.
This hypothesis seems very speculative to me, and I would imagine that it is Megan who needs to provide some evidence for it. (The hypothesis is especially speculative because Megan herself admits to not knowing whether in fact the stimulus will result in a permanent long-term boost of GDP relative to baseline, which would mean a LOWER tax burden; so people expecting their taxes to RISE to pay for the stimulus are as likely to be wrong as right, which plays havoc with their "expectations".) It is not incumbent on people who are proposing a regular old Keynesian fiscal stimulus to provide evidence against every speculative hypothesis anyone might come up with about why the stimulus might not work.
I"m sure I'm oversimplifying, but I think the "added value" of the bridge is: if there is no bridge, the unemployed worker is an idle resource. If there is a bridge, and the worker is building it, then in a sense, his labor is "added value" to society, simply because he's doing something productive, as opposed to sitting at home being unemployed. Beyond this, of course, is that there are public works that I believe are genuinely needed: for example, imroving the energy grid, rebuilding some of our old infrastructure. But I guess what I think needs to be looked at is the "cost" of people who are looking for work, perfectly able to work, but have no jobs. If the government can create some jobs, and if these jobs produce ANYTHING of actual value, then I would say it's "added value".
Then some thousands of words later we don't know what Megan thinks the country's wealth is. Let me hazard a guess. An increase in asset prices.
That would be a really dumb guess.
So the net effect of the government building a $100 billion bridge is that the government loses $100 billion in cash but gains a $100 billion bridge, and the private section gains $100 billion in cash. The country is $100 billion "wealthier."
The $100 billion came *from* the private sector, so the fact that the $100 billion ends up back in the private sector is a wash in that regard.
The government gains a bridge, and the private sector loses the labor, time, and materials it took to build the bridge. That's the tradeoff. This is only good for the private sector if the bridge is worth, to the private sector, the labor, time, and materials that went into building it. It probably isn't, especially since a chunk of the $100 billion goes to pay government employees instead of building a bridge.
"The $100 billion came *from* the private sector, so the fact that the $100 billion ends up back in the private sector is a wash in that regard."
Says who? You're either assuming that the government immediately raises taxes by $100 billion to pay for the bridge (which is a silly assumption, as it would defeat the whole purpose of a stimulus program), or you're assuming that Ricardian equivalence is strictly true and taxpayers immediately adjust their spending in preparation for the future tax increases that will be necessary to pay off the increased government debt. But that's the empirical question that Krugman was discussing and that the economic literature attempts to explore. If you have evidence to support that, then bring it. Otherwise you're simply assuming the conclusion you want to reach.
We know that a government fiscal boost will boost GDP.
Is that because there's actually more growth, or because of the way GDP is measured? That money has to come from somewhere.
ming,
Dan wrote my answer for me. If the bridge doesn't provide a positive return for the labor and materials, then it is a loss. It is actually better to simply pay the "unemployed workers" to sit on their asses than to build a net losing bridge, at least that way you haven't wasted the materials and the labor building it.
Dunstan,
The money spent by the government procures resources from the private sector, by taxing, borrowing, or stealing through inflation. There are no other sources. You are simply wrong.
>I do not think of spending money to build the bridge as a net increase in the country's wealth.
Are you being intentionally obtuse?
PK didn't say it caused an increase in wealth. He said it increases GDP.
If you want to argue with how GDP is calculated, or its correlation to prosperity and well-being, get in line.
And while we're about it, does spending money to build a factory increase the country's wealth?
And Steinglass brings us full circle in demonstrating once again that the ultimate goal is to raise the headline GDP number by any means possible, even if it means throwing money everywhere and calling it economic activity. I suggest we simply redefine "government spending" so that this number is raised by transferring to every citizen $25,000 and letting them collectively decide how to spend it. Hell, we could even give them the option to give it back for bridges and whatnot.
"Unless you're the government and you can just print it."
In this case you are simply appropriating someone's purchasing power.
What do you think happens when someone takes out a loan in a fractional reserve system?
Keeping the money supply stable is a good unto itself. We've had a pretty large bout of deflation in the last year or so, and I don't think it's in anybody's best interest to have that continue. That's how you end up with a great depression.
Like I said, the danger is on the back end. With so much more base money, interest rates and reserve ratios are going to have to be managed carefully when the economy starts to grow again.
DUSTAN: So the net effect of the government building a $100 billion bridge is that the government loses $100 billion in cash but gains a $100 billion bridge, and the private section gains $100 billion in cash. The country is $100 billion "wealthier."
You are really double counting here Dustan. The government doesn't have $100 billion to loose. Besides money has no intrinsic value, it is only a medium of exchange.
The government must take or borrow that $100 billion from individuals you have it by virtue of contributing the equivalent in goods and services to the economy. That money is then given to workers in exchange for building the bridge. The workers now have a claim on $100 billion of goods and services in exchange for the bridge. The economy as a whole only gains wealth if the goods and services that the workers consume are worth less than the value of the bridge to the economy.
MING If there is a bridge, and the worker is building it, then in a sense, his labor is "added value" to society, simply because he's doing something productive, as opposed to sitting at home being unemployed.
This is only true if the worker is willing to work for nothing. If she insists on being paid, then her labor is added value only if what she is paid is less than what the bridge is worth to the economy.
In the extreme example, if she digs a hole in the ground and then filled it up again and gets paid for doing it, she would be a better off sitting at home working on her hobbies.
Dan of
"That would be a really dumb guess."
Please explain
why you think it's a dumb guess.
What you think "nations wealth" means.
I'll not hold my breath for Megan's reply because it's a little off in the weeds of the thread. Maybe she could revisit Wealth of Nations and do some thinking about what a nations wealth is.
Boy, I wish there was some of this concern over spending when the Iraq War got under way or when those tax cuts early in the decade were being passed. Don't you think we can say without much argument that those Bush tax cuts were a failure?
Regardless, people are terrified about this economy and for as expensive as this stimulus is, it's only money. If this doesn't work, we're about a couple of months away from voodoo and human sacrifices because no one knows where the bottom is and where the ladder out of this well is.
I say screw it - give it a try. Maybe it will work. With the Iraq War and Bush's disastrous tax policies, the national debt was already out of control and that was before the bank bailouts. If we can 'afford' to bail out banks that deserved to fail, we can 'afford' to build a couple of bridges we didn't really need. And Republicans, it's too soon to act like the last eight years are ancient history. You're still in the doghouse.
We have tons of evidence that NPV+ projects add value to the economy. We have zero evidence (or, at the least, highly contradictory studies) that "animal spirits" can be raised by such spending, or if raised will add value.
Yet, as Megan points out, Krugman, DeLong and the rest of the ivory tower left are saying the burden of proof is on those who oppose this spending. The end of their argument is ultimately faith. Faith in a plausible theory, perhaps, but still faith.
Why not simply redefine GDP to equal the old equation times 1.05? That is really all Washington cares about - the Bloomberg headlines.
It seems so elementary to me that choosing to build a bridge by borrowing will either reduce the pool of available capital today by 100 billion, thus, merely transferring resources from 100 billion worth of other activities, or the 100 billion comes from a mix of now and future periods. In either case, the bridge is either a more productive resources than those resources it eliminates or it isn't.
My guess is that if the bridge was a good investment in the first place, someone would already be building it.
It seems to me that the Krugman/Keynes theory is simply that you can mislead people into taking more risk than they otherwise would by initiating a slew of Potemkin type projects. The hope is that there is some sort of network effect that turns the NPV of the bridge from negative (the DCF value of the bridge) to NPV. This seems pretty silly in that all that seems to be accomplished, even in that case, is some sort of intertemporal transfer of now-existing capital from the future to now en masse.
I suppose that would make for a marginally better 2009 but if the capital is largely squandered in a lemmings-like flurry of negative NPV projects then it is nothing more than the Detroit strategy of losing money on cars today by cannibalizing future sales. It works until there is no more financing.
Who bails out the gov't? As a libertarian, maybe this is better than waiting for Medicare and Social Security to BK the nation. Those really seem to be the only alternatives. If we don't spend the money, where is it going to go? The private sector for 1.5 extra years before the government will have to appropriate it anyway? At least I get something out of this, given that I'm under 40.
The best part of the "Stimulus" is that the silly Keynesian notions are getting debated again, after 70 years of simply being assumed as true.
That said, I don't really see any upside of putting off insolvency any longer than necessary. Spend away! How about a student-loan forgiveness program? I guarantee that if I were relieved of my debt that I'd spend 25,000 dollars more a year.
re: "As a lowly MBA, I do not think of spending money to build the bridge as a net increase in the country's wealth. We exchanged money for a bridge worth the money we spent (or so we light-heartedly hope)."
I'm no economist but this seems to have already gone wrong somewhere. It makes sense for a business to treat cash as an asset, but it doesn't make sense to measure the wealth of the nation as a whole by the size of the money supply. When the government creates money and uses it to buy something, that looks more like issuing debt to me. But it's a peculiar kind of debt that's interest free and doesn't need to be paid off (by collecting taxes) until there's a risk of inflation. Since inflation usually goes up when the economy is near full capacity, presumably we can better afford the taxes then.
"That money has to come from somewhere." - Eric
That money is sitting around doing nothing in bank vaults. It is waiting despairingly for someone to ask it to dance. If you have been following the national discussions, or the ones here, on the GFC, TARP, fiscal stimulus, etc., you really ought by now to be familiar with the concept of credit, and how it acts to increase productivity by increasing the velocity of money -- sending idle money to the places where someone wants to spend it, and then bringing it back in time for its original owner when he needs it, plus interest. This is how a bank works. It is also how the government stimulus plan works. There is massive idle money sitting around in the US economy doing nothing; that is the DEFINITION of the credit crisis. The proposal is to take that idle money, which is doing nothing, and soak it up into government bonds. Then you put some of it to work buying lots of things the US government needs to buy anyway; put some of it to work funding relief for people who need it, and then pay it back with taxes when the economy is healthy again; and put the rest of it to work staving off the collapse of the banking system. Part 3 is the part we're already doing.
If we don't do the stimulus, we will quite likely be facing a deflationary spiral due to massive unemployment, crashing equities prices, and a halt to business investment. In that case one measure of last resort to stave off deflation might be for the government to take a Friedmanite monetary approach and just start printing money to inflate the money supply. In that case the money would quite literally not have to come from anywhere. But the long-term consequences of creating deliberate pure inflation would surely be much worse than those of running a higher government deficit, as I'm sure Megan would agree.
It seems so elementary to me that choosing to build a bridge by borrowing will either reduce the pool of available capital today by 100 billion, thus, merely transferring resources from 100 billion worth of other activities - jdd
What activities would those be? Name a major business investment in the past 3 months. If you'll recall, the economy is losing 500,000 jobs per month. Another way of saying that is that companies are not investing and not hiring. Money is sitting in bank vaults, unloaned, because companies feel it is too risky to invest it, because consumer confidence is nonexistent so nobody will buy anything, so it would be stupid to invest.
And so the government must step in to create demand. The government does this by buying a whole lot of things which would be unnecessary in a normal economy, like more longer unemployment insurance; a lot of other things which the government should have been doing anyway but lacked the political capital to do, like expanding SCHIP and repairing a lot of bridges; and some other things which might have been not worth doing on the margin in an economy at full employment, but which are DEFINITELY worth doing when the alternative is TO SPEND THE SAME AMOUNT OF MONEY ON UNEMPLOYMENT CHECKS rather than on employing workers. We will be sending checks to the roadworkers of Maine this year, one way or the other. The question is whether we will be sending them checks to repair Maine's roads, or to sit at home drinking beer.
I think you are confusing short term and long term concerns, Matt. If the government borrows the excess capital that exists today and does massive spending on marginally useful projects, that capital will not be available for more productive uses in future years.
Now, it may be necessary to cripple the future economy to some extent to halt some doomsday spiral into world wide depression. I am certainly not convinced of that.
Matt--frankly, I'm kind of amazed that you're really saying that when a group of people want to spend nearly a trillion dollars, more than 7% of GDP, on the basis of economic models that are highly dependent on favorable initial assumptions and for whose results there is little empirical support, the burden of proof is on the people who wonder whether the benefits will outweigh the costs.
Megan, you are making a specific argument here regarding one reason why the multipliers used by stimulus proponents might be wrong. The argument is that people will factor in expected future tax increases due to the stimulus spending, reducing their propensity to spend. But you don't present any evidence for that hypothesis. Given any course of action, I can make up a zillion vaguely plausible stories about why it won't work. But before taking those particular objections seriously, I need some reason to believe they're worth addressing. You have presented no reason to believe this concern is worth addressing.
As it happens I think this objection is very weak, for at least two reasons. The first is that average taxpayers are nowhere near as good at forecasting the details of their future financial expectations as they would have to be for this hypothesis to work. If average folks were so good at accurately forecasting their future need for savings, we wouldn't be in the GFC in the first place. Anyone who started off the '90s with a high propensity to save because of anxieties over government debt found by 2000 they'd been foolish as the government expected to pay off its debt within 15 years, and then once again had to reverse expectations as the government proceeded to blow that money on wars and tax cuts for the rich. Right now people have a huge propensity to save due to massive anxiety, but the government stimulus isn't DRIVING that anxiety; it's just about the only thing ALLEVIATING it. All you have to do is look at the polls.
Second, there's an epistemological problem: people who think that the stimulus will raise their tax burden in the long run are probably, in my view, or at least quite possibly, in your (Megan's) view, wrong. It is quite likely that not engaging in government fiscal stimulus will lead this severe recession to turn into a depression, because we have run out of other tools to fight it. If we go into a depression, with anemic or nonexistent growth over the next 10 years, then the tax burden needed to pay off existing government debt will be much higher. Deflation, of course, makes the government's debt even harder to pay off. So in other words, what you are arguing is not that taxpayers will have a greater propensity to save because they are accurately forecasting future needs, but rather because they are ARBITRARILY deciding that the stimulus is more likely to cost them than to help them.
Are they doing this? Again: look at the polls. Most people support the stimulus. They are not afraid of the government passing a stimulus plan; what they are afraid of is being unemployed. If the stimulus passes, that will happen to about 3.7 million fewer of them. I'm kind of amazed that you think that how people forecast their income tax percentage five years or more out into the future will have a greater impact on their spending today than whether or not they have a job; and I'm also amazed that you expect me to prove to you that it won't, rather than the other way around.
Matt, you're simply writing off the possibility that we will engage in this stimulus, and then end up in the same depression we would have landed in any way, except with $875 billion more debt. At what probability of failure do you want to continue rolling the dice? It seems to me that it's worth assessing the probability of failure, because we have no empirical evidence that we can provide a permanent output shock, and we probably can't continue to spend a trillion extra dollars indefinitely.
On infrastructure, I'm not against infrastructure spending--I'm against rolling infrastructure spending into the stimulus as a way of avoiding debate over infrastructure spending. If you have to tell people that 30% of them will lose their jobs unless we build this bridge, in order to get them to agree to build the bridge, there's probably something wrong with the bridge. Or maybe there's something wrong with the voters, but I'm really not comfortable going to the "Elites must lie to the masses for their own good!" model of government.
I scanned the comment thread, and it appears that no one else has brough attention to this point:
Assuming that "the bridge is worth exactly what we paid for it" is WRONG. The bridge is not a market traded commodity, therefore you cannot deduce its value from the price you paid. The bridge has a real, fixed construction cost. It also has a real economic value. The two are not at all related. For example, building the Brooklyn bridge in New York had real economic value. Building the "bridge to nowhere" in Alaska had minimal economic value. In neither case was economic value tied to the cost of construction.
"Are they doing this? Again: look at the polls. Most people support the stimulus."
I like it when people always say look at the polls. Well, according to Rasmussen Reports:
"Forty-three percent (43%) of Americans would support an economic recovery plan that included only tax cuts and no new government spending. Just 15% would support a plan with only new government spending and no tax cuts."
That was a drop from when Obama initially proposed the plan a after his inauguration, when support for the plan was at 80%. Yes, that's just one poll, but Scott Rasmussen was also the only pollster to accurately call the election within the margin of error. Bottom line, most people DON'T support the stimulus plan in its current form.
"Are they doing this? Again: look at the polls. Most people support the stimulus."
I like it when people always say look at the polls. Well, according to Rasmussen Reports:
"Forty-three percent (43%) of Americans would support an economic recovery plan that included only tax cuts and no new government spending. Just 15% would support a plan with only new government spending and no tax cuts."
That was a drop from when Obama initially proposed the plan a after his inauguration, when support for the plan was at 80%. Yes, that's just one poll, but Scott Rasmussen was also the only pollster to accurately call the election within the margin of error. Bottom line, most people DON'T support the stimulus plan in its current form.
Peter:
Over time, you'd expect government infrastructure spending to at least try to find the places where a $X bridge would do more than $X worth of good. That's a messy process on all kinds of levels, and I don't know how well government does at it, but since we're not really an impoverished country unable to finance roads and bridges, and since there are a fair number of roads and bridges that honestly look like they're worth a lot less than they cost, I doubt that there are huge numbers of places where we could build a bridge for $X and get much more than $X value from it. I think that's what Megan's getting at.
In other words, why is it easier to find those places where an $X bridge would do >>$X good now, when we've got a stimulus bill burning a hole in our pockets, than it was in the last 30 years when we could also have built it? If you assume that we'll do a worse job spending that stimulus money than we do with ordinary budget money (that seems likely, since we're explicitly trying to spend it in a hurry for its stimulus effect), then we'll probably build a lot of bridges that cost $X and do less than $X of benefit, or at least less benefit than the existing stock of $X bridges did.
Out of curiousity, is there any data on the impact on private investment of the government providing a massive default-risk-free pool of investments? That is, might our massive and growing debt be fueling part of the credit problem, as it gives investors who don't know what the default probability is when lending to Apple or Berkshire Hathaway an alternative where they can lend with essentially zero default risk?
albatross: Once lobyists and traditional interest group insert their fat hand in the process, you are probably correct. But there's a very strong case to be made for infrastructure spending on projects like high speed rail that tend to promote increased commerce.
The stimulous argument for the various entitlement projects, of course, is much weaker.
albatross: This is indeed the only argument against large borrowing that Krugman acknolwedges -- basically that excessive public debt crowds out private lending. In response to your argument I'd simply note that in return for their "zero default risk" investment, investors are getting a 0% (or less) real rate of return.
Furthermore, since this massive borrowing has yet to occur, it's hard to say that the real corporate borrowing is so shot is because everyone is sitting on their money and letting it devalue while they eagerly anticipate the issue of 0% government bonds.
That money is sitting around doing nothing in bank vaults. It is waiting despairingly for someone to ask it to dance. If you have been following the national discussions, or the ones here, on the GFC, TARP, fiscal stimulus, etc., you really ought by now to be familiar with the concept of credit, and how it acts to increase productivity by increasing the velocity of money...
No. This is wrong. Money is created when someone goes into debt, and destroyed when the debt is paid off or written off. The deflationary environment we're experiencing isn't occurring because there's a whole bunch of money sitting in bank accounts. The problem is as people and companies pay down their debt (or the debt gets written off) the money is actually gone, back into the ether from whence it flowed when the debt was initiated.
It's probably true velocity is a consideration, but it's not the basic driver of the problem we're having. The problem is trillions of dollars that existed a year ago are now gone.
I keep harping on this, and I don't understand why people don't see the parallel: We are Japan circa 1990. They stimulated the hell out of their economy and it didn't work, even with the advantages of a booming US economy they could export goods to and a high savings rate. Why does anyone think it will work here?
Dear Megan,
I think I can claim that I'm a stimulus skeptic, but you have it all wrong (and many other people too) in part of because you are not familiar with the language used in macro. Notice the sentence used by Tyler (like we know each other)...
The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not.
Read it. Does it say output or aggregate demand? Krugman and other economists in favor of the stimulus package talk about aggregate demand, and in that case YES an increase in G increases the AD and a temporary one increases the AD by more than a permanent one (by increase in the AD I mean an outward shift of the AD). Tyler, you and many economists are thinking about output (and in some cases welfare which is not the same thing as measured GDP). Now to go from the shift in the AD curve to an increase in output you have to assume that the AS curve is either flat or upward slopping (at least in the short run). If you think that the AS is vertical then no change in output will come out from the increase in G (but that does not imply that the AD was unchanged). Hope this helps.
AR
Money is created when someone goes into debt - Eric
This is a fine way of putting it, but then why do you say "that money had to come from somewhere" -- which you obviously do not believe to be true? If you think that "trillions of dollars that existed a year ago are now gone," then it is a problem of the utmost urgency to re-create those dollars, or we risk a deflationary spiral.
By the time the marketing manager learns how to build a steel bridge, the bridge building boom will be over.
But since we want to boost consumption, not just demand for consumption, we're ultimately targeting output at the intersection with AS, no?
Megan:
Look at the people who have been awarded the Nobel and the only reason to be afraid of taking one of them on would be that one didn't want to be close enough for some of the slime to get on you.
Megan: But since we want to boost consumption, not just demand for consumption, we're ultimately targeting output at the intersection with AS, no?
What "we want" I don't know. Probably you want something and Krugman wants something else. But my point is that you have to be specific of what you are talking about. If you think that the stimulus package will not be effective why is it? Is it because it will not shift the AD curve by much? Or is it because the AS is steep? I'm pretty sure that Krugman thinks the AD will shift by DG/(1-MPC) (since he is probably assuming that the LM curve in his model is flat, i.e. liquidity trap and also Ricardian Eq will have no effect). But again this is only the effect on the AD. To have an effect on output you have to consider what the AS looks like. Again I think Krugman is going for the optimistic case in which the AS is flat. About whether out is determined by the intersection of the AD and the AS curves I tend to think of it in that framework, but we can think of other frameworks in which the economy does not reach an equilibrium by either adjusting quantities or prices (something like output is equal to the min of the AD or AS for a given fixed price). Also we should note that some things are not so straight forward, this is an aggregate model with only one type of output and if we think that government spending can take many forms, like building bridges or hiring Doctors then we would have to make some extra assumptions. Like the AS for bridges is flat but the AS supply curve for Doctors is vertical but this distinctions do not really matter when we are talking about the effects of the plan on the AD curve.
AR
All we ever do is exchange "money for a ______ worth the money we spent (or so we light-heartedly hope)." You wrote bridge, you can swap anything in there. That's market exchange. And there really isn't dead-weight loss from building a bridge (unless it's a bad one), just like there isn't really a 'dead-weight loss' from buying a comb.
You're letting your 'government can only muck things up; it can't do good' blinders get in the way of thinking. Try this: think of it as a private bridge and re-think.
uh, me again. Sure, we can argue that the money spent now should be 'discounted' out of our future earnings stream. And you know what - that's great! Ask an unemployed family if they'd be willing to take a little bit of their income from the next ten years so that they have some this year. Care to guess what their answer might be? Or would you trade a tenth of a percent of growth over the next decade to have, say, an additional point of growth this year? The entire point is to fill the hole in the current economy - with whatever you've got. And the future is one of the best assets / fillers out there.
If you go about this by spending - i.e. buying actual things - then the money is forced into circulation and transaction (thus the multiplier discussions). If you go about this by giving people cash, nothing forces the spending (other than our certainty that we properly target cash grants at people who can only spend it all; dubious given the rhetoric about some rebates being welfare) -- it's hope instead of a plan.
JMO but I feel the obsession over short term benefits without a consideration to the long term effects is a point being missed. Spending money by increasing the deficit doesn't make us wealthier. It increases our assets and at the same time increases our liabilities. Megan makes an excellent point on this and is one of the only people I've seen point at it.
Instead of arguing about the best method of distributing the money, maybe we should spend more time evaluating the assets we are supposedly investing in. Building infrastructure is a great idea if the long term economic benefit is greater than the long term cost. Building a bridge to no-where may be a stimulus but it is a faulty solution to a long term problem.
Many of our economic are based upon short term solutions to long term problems. The current argument shows the focus is directed in the wrong direction.
One point I've read is that under the current stimulus package, the Milwaukee school district will receive money to build a group of buildings they have not asked for, do not need and actually will add to their cost structure problem of excess building inventory. This is how our government routinely fails us. Building more solved one problem and developed a much larger problem.