It's nice to see that there are honest journalists in the world who don't retreat to "he said, she said."
Thank you very much, M.S. It is enormously appreciated:
The stimulus and jobs bills: Tax cuts can in fact create jobs: SEE what you think of this argument: it's impossible for tax cuts to create jobs. When the government cuts taxes, it simply has to borrow more money to cover its spending. This sucks money out of capital markets, which means financial institutions have less money to lend to businesses. That means businesses can't start up or expand. Whatever jobs are created by tax cuts, an equal number will be destroyed by increased borrowing; all the government is doing when it cuts taxes is taking money from one place and giving it to another.
Most people would agree that this is a silly argument. But it is nearly the same argument that the Heritage Foundation's Brian Riedl and University of Chicago economist John Cochrane are currently making against the effectiveness of last year's American Recovery and Reinvestment Act (the stimulus). The CBO thinks the ARRA, which included $288 billion of tax cuts and $499 billion of spending, added between 1m and 2.1m jobs to the American economy by the end of 2009. Moody's, IHS Global Insight, and Macroeconomic Advisers think it added between 1.6m and 1.8m jobs. Mr Riedl and Mr Cochrane don't just argue that this figure is too high. They argue that the ARRA has created no jobs whatsoever, and that, moreover, it is theoretically impossible for the government to reduce unemployment. Deficit spending, they say, simply soaks up capital which would otherwise have been spent by the private sector....
No economists apart from Eugene Fama appear to agree with Messrs Riedl and Cochrane. Martin Feldstein obviously disagrees, though it has been mainly liberal economists like Paul Krugman and Brad DeLong who have objected vocally. Stan Collender has also done his bit. The conservative National Review's Reihan Salam went so far as to deny last week that any conservatives actually hold such views. It's simply a very strange stance. Taking money from one place and giving it to another, otherwise known as "borrowing" and "spending", is a well-established part of post-medieval economic activity. Whether or not increased government spending creates net jobs depends on underlying conditions in the capital markets and the real economy, and on whether government spends the money in ways that generate more employment than the private economy is generating at that time. The crucial question is whether the increased borrowing needed to finance deficit spending is crowding out private investment. This is an empirical question; the best way to resolve it is to look at what is happening to interest rates and bond yields, as Menzie Chinn does here.
You can make all kinds of potentially valid arguments against stimulus spending. You can argue that government is exceptionally unwise in its spending decisions. You can argue that private actors will spend the money in ways that generate more employment than government can. It's pretty hard to make this argument at a time when banks are not lending and are instead buying government bonds and securities because they see few promising opportunities due to drastically reduced overall demand for goods and services, but it's an argument that can be made. You can argue that government programmes generally take years to get underway, and by the time the spending gets going, the economy will already be in recovery, so the result will simply be a tight labour market and rising inflation. Again, this argument looks much weaker now than it did a year ago: the recession has been far deeper than expected, we seem to be having a jobless recovery, and unemployment looks set to stay above the 5% "full employment" level for many years into the future. But it's a valid argument, if you can back it up....
What you can't really do is make a serious, extended argument that it is theoretically impossible for the government to create jobs. Yet that is what Messrs Cochrane and Riedl have been doing. It sounds vaguely logical, in a common-sense sort of way, and it might be convincing to many voters who lack a solid background understanding of how the economy works. It is, in other words, a politically useful argument. But it's hard to see how it can be made sincerely by people who do have a solid background understanding of how the economy works.
The problem... such arguments... won't influence serious economists, because they don't make sense. But they can influence the political sphere, because they can gain currency among partisan voters. It's the responsibility of serious people to stay away from such arguments. If conservatives start running around saying that it's impossible for government spending to create jobs, liberals will find they have to start claiming that it's impossible for tax cuts to create jobs, and fairly soon, where once there was American democratic political discourse, you will have two mutually unintelligible camps of errant zealots flinging garbage at each other.
As it is, we have one camp of cynical and ethics-free zealots flinging garbage at all of us.
You know--back in 1979, Martin Feldstein assigned us pieces from Milton Friedman's Monetary Framework in which Friedman argued that the effects of expansionary fiscal policy were "certain to be temporary and likely to be minor" (except in those odd situations in which the interest elasticity of money demand is very high, like it is now)--but Friedman said that those effects were definitely there. Who are these guys who think that they are better right-wing economists than Milton Friedman, and why do they think so?
How do I order a lifetime subscription to the Economist? All of John Micklethwaite's many sins are now washed white as snow...