Thursday, January 29, 2009

Keynes Cometh (Sort of)/What Are We Stimulating ?

The so-called "stimulus package" has passed the House of Representatives. All Republicans and 11 Democrats voted "nay." The package consists of over $800 Billion in new spending over the next two years. The result will be a budget deficit in the neighborhood over $1 trillion for 2009. That's around 8 percent of our GDP, more than twice that of Italy. By contrast, the much-maligned deficits during the Reagan administration peaked at 6 percent of GDP and fell to 3 percent by the end of his Presidency. All at a time when we were winning the Cold War.
Why did fiscally-conservative Democrats and all Republicans vote against this stimulus package and thus defy a President with a 68 percent approval rating ? One need look no further than an article in today's Wall Street Journal, containing details of some of the spending in the package passed today. According to the WSJ, the package includes $1 billion for Amtrak, $2 Billion for childcare subsidies, $150 million for the Smithsonian, $7 Billion for modernizing Federal building and facilities, and $6 Billion for Mass Transit programs, to name only some of the programs least likely to serve as engines of job creation and long run economic growth. The WSJ also points out that the bill provides only $30 billion for much-ballyhooed maintenance of roads and bridges. Here is the WSJ article, which makes for depressing reading.

There is, of course, the dictum of Lord Keynes (whose photo appears above) to the effect that Government can stimulate the economy (and "create jobs") by borrowing unused private savings and paying individuals to dig large holes in the ground one day and to fill them up the next. If you accept the Keynesian framework, then you might "hold your nose" and support the package, on the ground that it's better than nothing and will stabilize an economy that is contracting.
However, even if one accepts the Keynesian framework, there are at least two powerful objections to these portions of the package just passed by the House. First, some such spending may simply displace debt-based spending that would otherwise have occurred anyway. For instance, individual states are perfectly free to issue debt to support mass transit projects but may choose not to do so if this package passes. Second, and perhaps more fundamentally, the House of Representatives and the President have missed a golden opportunity to include spending that will BOTH stimulate the economy in the short run AND enhance the nation's long run productivity at the same time. When economic historians write the history of this past couple of decades, they will likely conclude that Americans lived high on the hog, consuming far more than we produced, with the gap financed by borrowing from China, Japan and the Middle East, who purchased government securities and bonds backed by mortgages and credit card receivables. The only way to reverse this trend is to reduce our consumption significantly (an unlikely scenario) or increase our productivity significantly. Theoretically, government can help increase our productivity by making real and smart investments in things like research and development, infrastructure, and education. (Government can also help by simply enforcing rights of property and contract and limiting its regulation to combating externalities.) Subsidies for Amtrak, refurbishing federal buildings, more money for childcare, or additional expenditures on failing educational systems likely won't do the trick.