Andrew Samwick on Stimulus Packages
Stupidest Man Alive Winner: John N. Gray

Washington Post Death Spiral Watch

Why oh why can't we have a better press corps?

Jared Bernstein points us to what I think is the stupidest thing published by the Washington Post so far this year: Steven Landsburg arguing:

  • The government cannot stimulate the economy because Say's Law guarantees that aggregate demand is determined by aggregate supply and not by government policies: "The idea, we're told, is to stave off an all-out recession by stimulating both investment... and consumption.... But hold it right there. Investment and consumption are natural rivals... more of one means less of the other.... The idea... is to give people tax cuts so they'll feel richer and spend more. But government can't make people richer on average; all it can do is shuffle wealth around.... Now maybe you can time things so Peter goes on a spending spree today but Paul doesn't tighten his belt until next month. (Then again, maybe you can't...). [E]ven if you manage to pull this trick off, sooner or later you must tax Paul. So today's fiscal stimulus comes at the expense of tomorrow's fiscal drag..."

  • If the government could boost aggregate demand, it could only boost aggregate demand in Asia: "[Y]ou'll put Asians to work producing goods for the U.S. market.... [O]nly marginal tax cuts put people to work. Non-marginal tax cuts... [that make] people feel richer... [make them] less eager to work. An unemployed laborer with a tax rebate in his pocket might well feel less urgency about getting retrained or finding a new job..."

  • A recession is a healthy thing that should be encouraged--not prevented: "To say it again: The more I consume, the poorer your grandchildren will be; the resources I use won't be available to build machines that make your grandchildren more productive. It's all well and good to worry about the people who are struggling today, but let's also remember the people who will be struggling in the future.... [I]t's no more painful to be unemployed for five weeks in the middle of a recession than it is to be unemployed for five weeks at the height of a boom. In fact, it's arguably less painful: Isn't it better to be unemployed at a time when unemployment carries less stigma and when you've got unemployed friends to hang around with?... [T]he only solution to unemployment is for displaced workers to get retrained and find their way back into the workforce. The new stimulus package only delays that process by propping up dying industries for a while and postponing the day of reckoning..."

From a historian of economic thought's perspective, the piece is a confused and incoherent mishmash of Say's Law, Hayekian over-investment theory--plus a strange and rarely seen doctrine going back to Nassau Senior on the handloom weavers about how only the spur of immediate poverty and privation could get the lower classes to move to new industries--that they needed to be pushed out of declining because (for some reason neither Senior nor Landsburg ever explained) they could not be pulled into expanding industries.

But let me turn the mike over to James K. Galbraith:

Landsburg is incoherent on so many fronts it's hard to know which to cover, but I'll rest on two points. First, the idea that the stimulus will be totally offset by increased private saving is nutty, but it's high nuttiness....

Second, the idea that my consumption benefits only me, while my saving benefits everyone, implies an obvious market failure which Landsburg cannot quite get his head around. If markets worked perfectly, the entire return to my saving would come to me, and there would be no benefit to anyone else. (They understood this in the 19th century, it was called the Iron Law of Wages.)

High academic conservatives routinely assert that saving is a public good, without thinking about the consequences. If it is, then of course government should provide it directly, to make up the difference between the marginal public and the marginal private benefit.

In other words, Landsburg should be arguing for the Edwards/EPI/Galbraith growth package. But he's not...

And to Mark Thoma:

Economist's View: [T]he idea that deficit spending now means we will have to raise taxes and lower GDP in the future is exactly right - that's [not an argument against but instead] the point of stabilization policy, to shave the peaks and fill the troughs. When the economy is having trouble, we deficit spend to bring up GDP, then when things are so good that the economy is beginning to overheat we run a surplus (raise taxes) to bring GDP down closer to trend. Since deviations from the long-run trend rate of growth are costly whether you are above or below trend, this type of stabilization raises economic welfare...


Yeah, I'm pretty sure giving people a few hundred extra bucks is going to stop them from looking for a job, they can live for months on that. Never mind that most of the people receiving the benefit are already employed. Now if we had extended the length of time for unemployment compensation, we'd have something to talk about - there is evidence on this point, lots and lots of it, but we didn't. Republicans would not allow one of the best means of stimulating the economy (e.g. see the rankings of programs at the CBO) to be part of the bill...


[I]t takes longer to get a job in a recession... extending the time period covered by unemployment benefits, increasing the resources available to programs that help to reemploy workers, hiring some of the excess workers into temporary government employment, using tax rebates to stimulate the economy and employment, and so on to compensate for the lowered probability of finding a job during a recession--i.e. implementing policies that make it equally likely that unemployed workers in recessions and unemployed workers during boom times will find a job--is not preferential treatment...