Posted by: Jeff | June 11, 2010

Judge the Stimulus We Got, Not the One We Needed

Dean Baker, reacting to David Brooks, has a rather depressing rundown of what could realistically have been expected from the stimulus.

The stimulus was scored at $787 billion. However, roughly $80 billion was a fix to the alternative minimum tax. This is done every year. Since no one ever expected to pay this tax, making this fix could not provide any stimulus to the economy. Roughly $100 billion was projected to be spent in 2011 or later, leaving $600 billion for 2009 and 2010, or $300 billion a year.

If we want to see the net stimulus from the government sector we also have to factor in the cutbacks from the state and local governments. These came to around $150 billion a year, leaving a net stimulus from the government sector of about $150 billion annually, or a bit more than 1 percent of GDP.

This boost from the government sector must counteract the impact of a falloff in annual construction spending (residential and non-residential) of more than $500 billion a year and a comparably sized reduction in annual consumption. In the real world, we are not surprised that $150 billion in net government stimulus cannot offset a decline of more than $1 trillion in private sector demand, but in the magical thinking of David Brooks this is a big disappointment.

We sent a stable boy to slay a dragon, and are now surprised and upset that the dragon remains pretty much unscathed.

Now, I don’t think Brooks’ column is all that bad. His point about the need to consolidate government spending intelligently is well taken. Nor do I think it’s crazy to assert that the spectacle of massive government spending has negative psychological effects on confidence, and that means something when it comes to the collective behaviors we rely upon to get an economy back on its feet. But like Ezra Klein, I’m not entirely comfortable with the idea of weighing an abstract like confidence against the concrete benefits of pumping hundreds of billions of dollars into the economy.

There’s also the matter of the broader political debate going on right now. Brooks’ is a reasonable and nuanced guy, and his column reflects that, but the vast majority of folks on the Right making the anti-stimulus argument are not. They’re throwing out crude claims that the stimulus created no jobs — that the entire concept was unsound to begin with — which is pretty much the exact opposite of the lesson we should be taking. And then we also have the perennial problem that most Americans, by viewing the issue of government spending through the metaphorical lens of the “family round the kitchen table,” conclude that government should tighten its fiscal belt during recessions, which is completely backwards.

Most importantly, and back to Baker’s post, if we are going to attempt Brooks’ cost/benefit analysis, we should be weighing the psychological hit to confidence produced by spending against the material benefits of a stimulus package that was actually big enough to work. That wasn’t the stimulus package we got. And even if a bigger package would have freaked out participants in the American economy even more, maybe that effect would’ve been overtaken by a parallel increase in confidence due to the added material gains of a bigger stimulus. And the result for the country would’ve been positive in the wash. As Klein puts it, “A small coffee shop might not like government spending in the abstract, but they really don’t like closing because there are no more construction workers around to buy coffee.”

*UPDATE – It’s worth remembering that when someone like David Brooks (or me, for that matter) speculates about the psychological effects of government spending on the populace, they’re basically just relying on what “common sense” would say about the matter. But, as Einstein put it, common sense is merely the random assortment of prejudices we’ve accumulated by age fourteen. Maybe we’re getting the psychological reactions totally wrong.

More importantly, we don’t actually have to rely on common sense to know how people react to these things. Presumably, there’s social or political science data on the question:

Is it so hard to go to public opinion poll data to try to figure out what people think, or to acknowledge that you don’t know what they think when, like, your only source of information is what you think about the topic? No – it isn’t so hard. This is a particularly annoying pundit trick.


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