Tuesday, January 27, 2009

bad economic arguments

It’s looking increasingly likely that Republicans in Congress will vote en masse against President Obama’s economic recovery program despite his efforts to win them over, like the inclusion of $275 billion in tax cuts. The logic of the Republican political calculus is hard to argue with: If President Obama is successful, he and Congressional Democrats will get most of the political credit regardless of whether Republicans join in. So best for Republicans to oppose the plan and position themselves to benefit if President Obama fails. (I love typing “President Obama.”) Sure, it is irresponsible (in the literal sense of the term), but that is the advantage of being in the minority – you can reject responsibility. Republicans, as the anti-government party, are better at opposition than at governing, as they decisively demonstrated when they were in control.

All this is playing out pretty much according to form (despite hopes that our current economic crisis might galvanize more bipartisanship). But some of the arguments being put forth in opposition to the economic recovery plan nonetheless drive me nuts.

I just heard a Republican making the case for a stimulus plan consisting of tax cuts over government spending by arguing that, “Government can’t create wealth – only the private sector can create wealth.” I’ve been hearing this a lot lately and it is just ridiculous on its face. How are the efforts of government workers fundamentally different from the efforts of private-sector workers? If you see someone out landscaping some property or sweeping a street, do you need to know who his employer is to figure out whether or not he is contributing to the economy? If a guy shows up at your door with a package does his economic contribution depend on whether he works for the postal service or UPS? By this logic, someone processing medical claims for veterans at the VA is a leech sucking wealth out of the economy while someone performing exactly the same task for Humana or Aetna is a valuable contributor to society. A private university like Stanford is a source of national wealth while a public university like the University of Washington detracts from that wealth. The interstate highway system is a creation of “government spending” and therefore, by definition, can’t be part of our collective wealth, but if you sold off a stretch of highway to foreign investors (as former Bush budget director and now Governor Mitch Daniels
has been doing in Indiana) that new toll road now becomes a valuable asset. I could on. But you get the idea. This argument makes no sense whatsoever.

A variation on this argument is that, “taxpayers can spend their money more efficiently than government can.” That is a more subtle argument but equally bogus. It depends on what you are spending the money on. I defer to Paul Krugman (“
Bad anti-stimulus arguments”):
A number of conservative economists have been arguing against a stimulus plan centered on government spending. Fair enough. But one argument I keep reading bugs me: it’s the claim that spending-based stimulus is bad because economic theory tells us that a marginal dollar of private spending is better than a marginal dollar of government spending.

That’s just wrong; it’s a misreading of basic, Econ 101 level, economics.

Yes, the standard theory of consumer choice says that a consumer gains more utility if he or she gets to freely allocate a dollar of spending than if someone else makes the choices: I’d rather buy myself a $10 meal than have you feed me $10 worth of food that you select.

But that’s not what we’re talking about when we talk about stimulus spending: we’re not talking about the government buying consumption goods for the public at large. Instead, we’re talking about spending more on public goods: goods that the private market won’t supply, or at any rate won’t supply in sufficient quantities. things like roads, communication networks, sewage systems, and so on. And every Econ 101 textbook explains that the provision of public goods is a necessary function of
government.

When we’re asking whether it’s better to have the government stimulate the economy or to try to stimulate private spending, we’re asking among other things whether a marginal dollar spent on public goods is worth more or less than a marginal dollar spent on private consumption. And there’s nothing, even in Econ 101, that clearly favors private spending on private goods over public spending on public goods.

In other words, the attempt to claim the authority of economics for the idea that stimulus in the form of tax cuts is better, at a microeconomic level, than stimulus in the form of infrastructure spending is a case of bait and switch. Don’t fall for it.

More Krugman (“Bad Faith Economics”):
[W]rite off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey,
stuff happens.

Some percentage of any tax cut will be saved. (In the current environment, with taxpayers as over-leveraged as they are, that would probably be a very high percentage.) That’s a good thing under certain circumstances, but not when you are trying to stimulate the economy. And some percentage of whatever spending results from a tax cut will be spent on foreign-made goods – again, not good if you are trying to stimulate the domestic economy. Whereas, 100% of government spending represents … spending. Whether it is spent on something worthwhile is another question. That is where the argument should be focused. But it is not a zero-sum game. When you have high unemployment and productive assets are sitting idle, government spending does not necessarily displace private demand. For example, we have unemployed construction workers and contractors without business. If the private sector isn’t putting them to work, isn’t it better to have them repairing roads and bridges or building new solar or wind power generation facilities?

Bipartisanship is a nice goal. But there are some pretty fundamental differences in the world views of the two parties in this country. If the objective is a massive government stimulus program, it’s hard to find common ground with folks who ideologically despise government and believe it can do no good. At some point you have decide which approach you are going to take and pursue it as effectively as possible.

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