Sunday, January 25, 2009

The stimulus battle...

The esoteric world of economists is reveling in the attention the ideas put forth to revive our languishing economy have generated. I have watched with interest as the normally tepid prose of the profession becomes more heated (OK - warmed) as various proposals are offered.

One powerful argument is represented by Greg Mankiw, who offers (to me at least) persuasive reasons why tax cuts at the top and to businesses will give us the biggest bang for the buck.  He has also offered reasoned arguments on the issue of growing inequality over the past few years.

However, this position strikes me as politically tone-deaf, particularly when considering the source. As an architect of tax cut dogma and a proponent of the more valid but likely futile gas tax concept, Prof. Mankiw has perched safely with his status quo supporters on pedantic high ground. And he seems to think the current recession is unconnected with his advice to tax-cutters. His involvement in the mess we are in right now was last semester, apparently.

If he really believed there was the possibility of fiscal control to match the much-advocated tax cuts, it would be a simple mistake.  But you don't scale the lofty heights of academia with naivete of that magnitude. His blessing allowed, even sanctioned, a decade of fiscal foolishness culminating in the belief on the right that any problem could be solved by tax cuts.

More than any other faction, the tax-cuts-pay-for-themselves myth was fueled with his school of thought.  And they seem determined to keep trying this answer despite the empirical evidence or at least until the Harvard Endowment meltdown forces some horrifying staff cuts, anyway.

If a tax cut multiplier is 10% or even 50% better at generating GDP than another choice, is that the crucial metric? Is it possible that multipliers are not the only criteria by which government action should be measured?

The other major alternative is infrastructure spending.  I can follow the reasoning that it yields less immediate economic boost, but if some experts are doubtful of any stimulus power to reverse our slide, this choice at least leaves some assets in place at the end of the stimulus.

Consider we have been merrily cutting taxes, especially on the top rates now for enough to stand back and see what we have to show for it.  Form my angle it looked like several years of brisk income and asset value growth (again primarily at the top) - and then when various bubbles burst: these gains mostly evaporated. Was the economy stimulated? Definitely.  Did it have lasting effect? That's a mixed result at best.

Now compare to stimulus applied to infrastructure.  Perhaps the economy does receive less immediate zing, but twenty years later you still have Hoover Dam or the Interstate System.  My point is I suspect we may be too focused on short term results.

We're going to throw money we don't really have at this problem. That's now clear. Building stuff we really need - even via the sluggish and wasteful government way - at least insures we won't left with little to show for it. Lord knows the budget pressure on the other side of this chasm will make large public works politically dead in the water, so from my perspective the stimulus package is one window to get some stuff fixed around here.

Reading the history of any large public works project from the Brooklyn Bridge [great book here] to the Big Dig is a continuous horror story of waste, graft and delay.  But we're using all of these edifices to great advantage today.  Pointing out that public projects are less efficient than private works conveniently overlooks the issue that many needed components of our infrastructure simply would not exist, if left to private investors. In the same way, the stunningly bloated costs at the time seem almost trivial when viewed decades later.  (And the inflation I expect  on the other side of the recovery could make investing in "things" rather than consumption look brilliant.)

Farmers have long relied upon our superior infrastructure to offset our higher costs when competing with growers in Brazil, for example. We have much at stake in this spending decision (like some local roads and bridges to handle 300 bushel-corn harvests).  And I'm not convinced infrastructure improvements are getting a fair accounting for the decades of benefits they bring. We grossly underestimated the lift from the Interstate System, for example.
When the Interstate Highway System was proposed, its developers did understand and quantify what the system might do in terms of travel time savings, operating cost savings for users, and safety benefits. But, as the task one white paper notes, no one who designed the Interstate Highway System could have predicted exactly what would happen to the overall economy as a result of the investment in the Interstate System. National, multi-state, regional, and local economies were all empowered to reorganize to take advantage of new capabilities in terms of speed, capacity, and safety. Regions that were not part of the nation’s economy became integrated through new opportunities to have longer distance links for goods movement and for personal travel. Urban areas were able to expand and grow, enabling more agglomerations of industries and skills within much larger urban boundaries. Not everyone who was witness to these impacts applauded all of the impacts. The Interstate System was identified as a cause of urban sprawl as well as an enabler of urban growth.  [More]
Furthermore, infrastructure is real and visible. Just like the comfort in owning farmland versus equity shares, right now the physical proof of a public investment might have a hard-to-calculate benefit in the form of an outward and visible sign.

Let me suggest it is far more crucial to our economic health to convince more Americans our system still works for them, not just some. Further, doing more of the same, i.e. cutting top tax rates, does little toward that goal, even if the models suggest it is the best of all possible choices. In contrast, everybody gets to use good roads or new schools.

I get proponents' point about multiplier effects and how tax cuts are the fastest, easiest most powerful way to jump-start the economy.  But it looks a like a economic sugar high to me. And recent tax cuts produced an awful lot of ephemeral wealth, it seems. Surely a mixture of the two should not be dismissed out of hand by the economic community.

Academia's estrangement from the real world by virtue of tenure allows it a curious detachment from such ideas that engage non-tenured minds, at least until sufficient historical data accrues to make it worth studying.  This myopia seems most pronounced the further up the ladder experts ascend.  I have begun to weigh opinions from private sector economists with more respect, since they have much more on the line when they put forth proposals.

Our economy is suffering from a crisis of confidence by a large number of people who don't even know what a multiplier is.  Or particularly care.  And oddly enough, their opinions matter too. Actions that cause them to view the future with less alarm, or make less dysfunctional econiomic decisions are not to be despised.

Unfortunately, the cream of our academic crop seems more intent on scoring historical bragging rights than working with politicians to craft policies that both move our nation in the right direction and relieve the growing anxiety in the people they enjoy experimenting on.

If our economic brain trust would pause from making notes for their upcoming papers to understand the level of primal fear gnawing at the body economic they might produce something of more value to the decision makers. They might also realize they will not have data and time to produce bullet-proof explanations.  In fairness, this may be sinking in.

Most revealing is the current debate over the effect of going to war on ending the Great Depression. I can only imagine the wonderful data sets that might have been had we waged the war by economic rather than military strategy.

This crisis will not produce an attractive or even efficient government response.  It will be smeared with political fingerprints and lamentable human fault. Experts will have a field day exposing the flaws and criticizing the deployment. But like all arm chair generals, they don't have much to lose, and sadly it may be their only contribution until they can summarize at leisure later.

Maybe all the economist jokes hold an element of truth after all.


Anonymous said...

I have to disagree with your opinion that some how infrastructure is possibly a better investment than say tax cuts. I am surprised that somebody with your Libertarian leanings would suggest that the government spending money on something it will ALWAYS own is better than it "spending" money on tax cuts that we can use to buy things that WE all own. I am not saying that tax cuts are always better, but if I get a tax cut it won't necessarily be 'wasted'. Businesses, even small ones, build infrastructure that the private sector will own. In my business infrastructure can be things like land, machinery, houses and IRA accounts. Things that will also have lasting value, just like a state highway.

John Phipps said...


Please see post above. Thanks for your thoughtful remarks.