Stimulus? Yet Again?


Mises Daily:

In all due respect to Mr. Obama and his sycophants in the Pelosi misguided 111th Congress; they have no opportunity to come up with a credible plan to create wealth. As socialists/progressives they believe wealth is evil, accept their own. While norm people were getting snowed at the University on  economics, these folks by Obama’s admission were Marxists, and studied the Communist manifesto and Saul Alinski’s Rules for Radicals.

Head up Obama, Profits employ, taxes destroy.  You will cave on the Bush tax cuts to save your bony ass. In doing so you repudiate that raising taxes is good for the country, no it’s good for creating government jobs and more democrat voters.


Well don’t think evil of me Mr. Obama, of course you will kill the tax cuts for the “rich” and amazingly you haven’t figured out that they already pay 90% of the taxes. Again since you have missed the concept your entire life, Profits Employ, Taxes Destroy, no need to look back in history, your 18 months of mismanagement Mr. Obama has proven that you are an ignorant fool or this has been you plan all along, I suspect the latter.

You will forgive me at Thanksgiving if I stick two forks in my Turkey? One to see that it’s done and one in memory of you Mr. Obama because by Thanksgiving you and your progressives will be completely done. You have overstayed your welcome and it’s time for you to go.

This week the Obama administration lays out its plans to further “stimulate” the economy. In particular, the president unveiled his proposals for $50 billion more in infrastructure spending, and a $100 billion extension to a tax credit on research and development.


Unfortunately these ideas range from misguided to downright harmful. If the federal government really wants to promote economic recovery, it should cut spending and taxes in general, and basically get out of the way.

Government Spending and Job Creation

As explained in this CNN story, in his Labor Day speech in Milwaukee, “Obama unveiled a $50 billion infrastructure plan to try and create jobs over the long-term by rebuilding 150,000 miles of roads, 4,000 miles of rail, and 150 miles of airport runways.” The rationale behind the plan is the simple Keynesian notion that government spending can “fill the gap” in aggregate demand when private businesses and individuals are unwilling to spend enough to keep everyone employed.

There are several problems with this common approach. In the first place, it confuses a low unemployment rate with “a healthy economy.” Now, it’s true that a high unemployment rate goes hand in hand with a sick economy. But the unemployment rate is a symptom of the underlying structural problem. Government efforts to “reduce unemployment” are, at best, like putting ice cubes on a thermometer to treat a fever.

For example, most pundits accept the claim that “World War II got us out of the Depression.” And it’s true that the official unemployment rate dropped like a stone with US entry into the war. But as economic historian Bob Higgs points out, FDR had hardly “fixed” the economy: all he did was force millions of American men to leave the conventional workforce and jump into a slaughterhouse. By the same token, if President Obama made it mandatory for five million Americans to cross the ocean and paint the Great Wall of China, it’s possible that the official unemployment rate would drop.

Beyond this fundamental confusion, there is another problem with government “stimulus” spending. Simply put, the money has to come from somewhere, and it’s not at all obvious that the net result leads to job creation, even if we accept jobs as indicators of a healthy economy.

I have written from an Austrian perspective on the problems with government efforts to “create jobs.” But even mainstream economists have challenged the Keynesians on their own turf. Using standard econometric techniques, many prominent economists have found little evidence that government spending boosts economic output, even if we accept the standard government figures at face value.

Some readers may be surprised to see this, because self-described progressive pundits often claim that only a Neanderthal could possibly doubt the scientific case for government stimulus spending. Yet, as Jim Manzi explained when The New Republic‘s Jonathan Chait made such a claim,

Robert Barro, Professor of Economics at Harvard, John Cochrane, Professor of Finance at the University of Chicago, and Casey Mulligan, Professor of Economics at the University of Chicago, have each separately argued that it is somewhere between plausible and likely that the multiplier for stimulus spending under relevant conditions is indistinguishable from zero (i.e., that stimulative spending will not materially increase economic output). According to surveys of professional economists reported by Greg Mankiw, about 10 percent of economists do not agree with the statement that “Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy.” Both the Wall Street Journal and the Financial Times have run opinion columns expressing the view that a multiplier of zero is a plausible to likely theory.

I have not been afraid to call out influential conservative activists when I believe they are engaging in crank refusal to accept a scientific finding. But in a genuinely scientific field which has accepted a predictive rule as valid to the point that there is a true consensus — such that the only reason for refusal to accept it is crankery or, in Chait’s terms, “politics” — you don’t usually see: several full professors at the top two departments in the subject, when speaking directly in their area of research expertise, challenge it; 10 percent of all practitioners in the field refuse to accept it; and the two leading global general circulation publications in field running op-eds questioning it.

The context for Manzi’s argument with Chait was the embarrassing predicament that Keynesians had gotten themselves into after the first Obama stimulus package. The Obama team had famously predicted that, with the package, unemployment would not break 8 percent — a projection that of course turned out to be rather optimistic.

The Keynesian response, of course, has been that the economy was worse than people realized at the start of the Obama presidency. And it’s true that we can’t prove that the original $800 billion stimulus package made things worse. But my point is, there are plenty of theoretical arguments — both Austrian and mainstream — questioning the Keynesian claims, and recent history suggests a prima facie confirmation of these doubts.

To sum up, if the $800 billion stimulus didn’t work out as planned, why should we raise the stakes by putting up another $50 billion?

Tax-Credit Plan Still a Form of Government Control

Even Obama’s call for the tax-credit extension leaves much to be desired. I am always for a tax cut, period. It returns resources to the private sector, which I favor for reasons of both ethics and efficiency.

Mises Academy: Robert Murphy teaches Principles of Economics

However, not all tax cuts are created equal. By giving a tax credit for “research and development” — as opposed to an across-the-board reduction in tax rates — the government is still dictating how businesses use the money that the government refrains from explicitly taking. The difference is analogous to getting $100 in cash versus a nontransferable $100 gift certificate to the Broccoli Warehouse. Most teenagers would opt for the former as a birthday present.

Conclusion

The Obama administration’s newly unveiled plans for “helping” the economy merely attack the symptoms rather than the cause. Yet even on their own terms, the plans are ill-designed to reduce the unemployment rate. The best remedy would be for the government to stop interfering and let the market process work.

Robert Murphy is an adjunct scholar of the Mises Institute, where he will be teaching “Principles of Economics” at the Mises Academy this fall. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy’s article archives.

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One response to “Stimulus? Yet Again?

  1. A wise person will watch a child fail, and then smile and teach them what should have been done to prevent the failure.
    However, the child’s ego could prevent them from realizing the error of their ways. Time is the master of all mistakes.
    Jim, the brown text up there is right on.

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