Saturday, January 26, 2008

A Better Way to Deal With Downturns

A wise man in Washington once told me that in politics, you can't beat something with nothing. In that spirit, I continue the anti-fiscal-stimulus rant with a Sunday op-ed in The Washington Post, available a day early online. Welcome to Washington Post readers. For those new to the blog, please take a look at some of the other posts categorized in the sidebar on the right side of the page when you are done with this post.

The constructive idea in the op-ed is to consider the backlog of public infrastructure projects needing attention, prioritize them, schedule them in over a multiyear horizon, include their costs in budget projections, and then move them forward in time if the economy weakens and prices go down to make them cheaper to do sooner rather than later. Note well the parts I put in bold.

The imperative to enact a fiscal stimulus bill (the motives for which I discuss in the op-ed) kicked up such an election year hurricane that even the usual watchdogs seemed to get swept up in it. Consider:

1) Fed Chairman Ben Bernanke's testimony to the House Budget Committee on January 17. The last two paragraphs address the topic of fiscal stimulus. He provides the right context and the usual warnings, but the Representatives could have interpreted all of this as a yellow light. The red light would have been if he said, "It would be unwise and imprudent to enact a fiscal stimulus bill until we get some data on whether the large monetary stimulus has had the intended effect." On Capitol Hill, yellow lights mean speed up, not slow down.

2) The Blue Dog Democrats. Here's how it looked on January 15, and then hardly a whimper out of them in the following week.

3) Policy Experts. The buzzwords of "timely, targeted, and temporary" were spoon fed to the policy makers by Doug Elmendorf and Jason Furman earlier this month with this primer from the Hamilton Project. I don't fault them for doing it, either. Once the battle over whether we should "do something" was lost, it was very reassuring to have focused the debate around these three principles. I just hope that policy makers work as hard on the conclusion of that report --Building a Better Long-run Policy--as they did on the short-term recommendations.

4) Think Tanks. Consider this statement from the Committee for a Responsible Federal Budget, released January 22 as the stimulus package was about to be announced. It says:
If a stimulus package were paid for in the out-years, we would certainly be pleased. However, we believe that such a requirement is likely to derail the process of trying to assemble an effective stimulus package.

That's a flashing yellow light. And, unfortunately, this part of the next paragraph is likely to be ignored:
Although the Committee would accept using increased deficits as a tool to spur the economy in the short-run, we urge the President and the Congress to take the next important step: A long-term budget plan that addresses entitlements, tax reform, and spending restraint.

We would all like to see that. We could get it, too, if we made a commitment to hold our elected officials accountable for it.


Scott Davis said...

Spot on - couldn't agree more!

Anonymous said...

Professor, I agree with your overall point that the stimulus is not a good idea. I also agree that infrastructure should be upgraded. However plans for a stimulus and upgrading infrastructure are two separate issues.

Professor Mises has written a critique of ideas to save up in boom years and spend in recession, as well as a critique of spending on public works in order to spur the economy. I highly recommend Human Action, page 793.

Uncle Big Steve said...

Thank you sir, for finally telling people the way government spending should be instead of the way it is. My only wish is that people would actually listen.

Anonymous said...

RE: Wash Post op-ed

You said--
"Doubtless, this will boost economic activity. If you pull levers, you get movement. Personal consumption and business investment will increase relative to what they might otherwise have been."

I say, do not confuse movement with progress.

As one of your colleagues recently observed-
"The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper."