The Stimulus Ostriches J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER http://delong.typepad.com/ brad.delong@gmail.com
February 28, 2009
Of all the strange things that have happened this winter, perhaps the strangest has been the emergence of large-scale Republican Party opposition to the Obama administration's effort to keep American unemployment from jumping to 10% or higher. There is no doubt that had John McCain won the presidential election last November, a very similar deficit-spending stimulus package to the Obama plan – perhaps with more tax cuts and fewer spending increases –would have moved through Congress with unanimous Republican support. As N. Gregory Mankiw said of a stimulus package back in 2003, when he was President George W. Bush's chief economic advisor, this is not rocket science. Deficit spending in a recession, he said, “help[s] maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: you can find it in all of the leading textbooks...” I can understand (though I disagree with) opponents of the stimulus plan who believe that the situation is not that dire; that the government spending will be slow and wasteful (whereas properly targeted tax cuts
1
would provide a more effective stimulus); and thus that it would have been better to defeat Obama’s stimulus bill and try again in a couple of months. I can also understand (though I disagree with) opponents who believe that the short-run stimulus effect of the plan will be small, while America’s weak fiscal position implies a large long-run drag on the economy from the costs of servicing the resulting debt. What I do not understand is opposition based on the claim that the stimulus package simply will not work: the government will spend its money, households will receive their tax rebates, and nothing will happen afterwards to boost employment and production. In fact, there is a surprisingly large current of thought that maintains that stimulus packages simply do not work, ever. This opposition is not coming only from politicians who are calculating that opposition to whatever is proposed may yield electoral benefits; indeed, it does not even reflect any coherent right-wing or indeed leftwing political position. Root-and-branch stimulus opponents whose work has crossed my desk recently include efficient-markets fundamentalists like the University of Chicago’s Eugene Fama, Marxists like CUNY’s David Harvey, classical economists like Harvard’s Robert Barro, gold bugs like the Council on Foreign Relation's Benn Steil, and a host of others. I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand. At the start of 1996, the US unemployment rate was 5.6%. Then America’s businesses and investors discovered the Internet. Over the next four years, annual US spending on information technology equipment and software roared upward, from $281 billion to $446 billion, the US unemployment rate dropped from 5.6% to 4%, and the economy grew at a 4.3% real annual rate as the high-tech spending boom pulled extra workers out of unemployment and into jobs. Back at the start of 2004, America’s banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to wall off and strictly control their risks – or so they thought. Over the next two years, annual US spending on residential construction roared upward, 2
from $624 billion to $798 billion, the US unemployment rate dropped from 5.7% to 4.6%, and the economy grew at a 3.1% real annual rate. In both of these cases, large groups of people in America decided to increase their spending. You can argue that neither group should have boosted its spending to such a degree –that both were subject to “irrational exuberance” – and that someone should have taken away the punchbowl earlier. But you cannot argue that these groups did not increase their spending, and that their increased spending did not pull large numbers of Americans – roughly two million in each case – into productive and valued employment. The government’s money is as good as anybody else’s. If businesses’ enthusiasm for spending on high-tech gadgetry and new homeowners’ enthusiasm for spending on three-bedroom houses can boost employment and production, then what argument can Harvey, Fama, Barro, Steil, and company make that government spending will not? I simply do not see it.
3