President Barack Obama wants us to put away out “childish” disagreements. But there is nothing childish about the very real concerns many economist have about his $800 billion soon to be over $1 trillion stimulus package. Those with very adult doubts about how borrowing another dollars can save our economy when we already have a trillion dollar deficit include:
John Bates Clark Medal recipient, Nobel laureate, and University of Chicago economics professor Gary Becker:
Perhaps their estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive. For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.
Mercatus Center Financial Markets Working Group member Arnold Kling:
[T]he risks of a large stimulus, compared with a small stimulus are:
1. It is harder to spend larger amounts quickly and cost-effectively.
2. There is a greater risk that we will run into a “sudden stop,” in which foreign investors are no longer willing to fund our deficits (this is Buiter’s main worry).
3. There is a risk that the intergenerational transfer imposed by the stimulus (from our children to ourselves) is excessive, particularly in the context of other intergenerational transfers of the same sort.
4. There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure.
5. There is a risk that much of the spending will kick in after a recovery is underway.
6. The government’s capacity to deal with an emergency, such as a major natural disaster or a foreign attack, will be limited, because its credit worthiness will be damaged.
7. There is a risk that government will absorb a permanently higher share of GDP. Policymakers will be reluctant to cut public spending for fear of causing a downturn. Moreover, it will be difficult politically to cut public sending.
New York University economics professor Thomas Sargent:
The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research.
Harvard University economics professor Greg Mankiw:
My advice to Team Obama: Do not be intellectually bound by the textbook Keynesian model. Be prepared to recognize that the world is vastly more complicated than the one we describe in econ 101. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.
University of Chicago School of Business finance professor Eugene Fama:
Government bailouts and stimulus plans seem attractive when there are idle resources – unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another. And bailouts and stimulus plans only enhance future incomes when the activities they favor are more productive than the activities they displace. I come back to these fundamental points several times below.
George Mason University economics professor Russ Roberts:
Obama’s economic team, for all its brain power and good intentions, is in uncharted territory. There’s no recipe or manual or roadmap for getting the economy back on track. No one is quite sure how to correct imbalances in financial markets and the housing market. And no one knows how to create confidence, the biggest element lacking in the current economic climate.
No man or woman runs the economy. No man or woman or team of people can possibly plan the evolution of the economy in the coming months. America will come out of the recession but the time and pace are unknown. Obama can help. But he can just as easily slow down any recovery. Some part of the current mess we’re in is the result of erratic government policy that has added to the uncertainty facing consumer, investors, and entrepreneurs.”
Naval Postgraduate School, economics associate professor David Henderson:
The big thing missing is any cost-benefit analysis, even a crude one, of the “Reinvestment” Plan. We have a fairly good idea of the short-run cost of the new spending–it’s the amount that the government spends times (one plus the incremental deadweight loss per dollar spent). This is probably an understatement of the cost because many of the expenditures, although touted as temporary, may well be permanent.
U.S. Court of Appeals for the Seventh Circuit judge Richard Posner:
One thing that must give one pause, however, is the question of substitutability across construction projects. Building a house and building a highway are not interchangeable construction activities. Unemployment in the construction industry may be concentrated in residential construction, and residential construction workers may not have the right skills for highway or bridge construction, let alone for flood control. (What use is a plumber or a carpenter in building a highway?) The more specialized the American workforce has become, the less effect Keynesian public-works projects are likely to have on employment. And if they do not reduce unemployment but instead compete with private employers for workers, the only effect may be to increase the national debt and engender inflation (though inflation is one way of combating deflation).
Stanford University economics professor John Taylor:
Some who promoted the first stimulus package have reacted to its failure by saying that we must now switch to large increases in government spending to stimulate demand. But government spending does not address the causes of the weak economy, which has been pulled down by a housing slump, a financial crisis and a bout of high energy prices, and where expectations of future income and employment growth are low.
The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.
