Spending Stimulus Skeptics: Scraping the Bottom of the Barrel...

Greg Mankiw writes:

More Spending Stimulus Skeptics... Kevin "Dow 36000" Hassett:

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money...

Can anybody tell me what the argument is going to be? Is it that the U.S. government's borrowing of an extra 6% of a year's GDP is going to cause the U.S. government to default on its debt? That is the only way that one could try to make sense of Hassett--and that is an absurd claim.

Shame on Bloomberg for not having dumped Hassett as a columnist before this.

Comments

[Tomas]

Please let Donald Luskin be his next "stimulus skeptic". Please please please.

[Lance]

I think Hassett was arguing in the vein of Ricardian equivalence, businesses will be reluctant to invest due to expectations of future tax hikes.

His argument seems more relevant to stimulus provided by tax cuts however, not government purchases.

[Ken Houghton]

Note that you added the "Dow 36,000" sobriquet; NGM passed it on as if it were manna from Heaven.

And you weren't mean, or fair, enough to note that his other quote in that post is Gary "It's Crowding Out, Because 7-8% Unemployment is Too Low for it not to be" Becker:

"Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending."

This is, of course, Absolutely Right. I would quite my job, if I still had one--give up seniority, benefits, all the other stickiness associated with wage employment in the United States--to join an outfit that is (1) of a defined term, (2) dependent on ongoing government spending, and (3) not yet profitable enough for the private sector.

And, oh, yeah, there is no one who is currently unemployed who could do the job I would be quitting, either.

Serious question: for all his nice, useful Econ 101 Models, has Gary Becker ever been correct about anything? (And, yes, I have been reading and re-reading his mid-1960s papers. So far, the closest to accurate is the aside about wives being addicted to sleeping pills.)

[Lance]

Ken, Becker's piece is a bit more elaborate than what Mankiw quoted. His main point, it seems, is that the multiplier may be exaggerated due to current employment prospects, and that their employment numbers may not be achievable since in part they rely on tax cuts.

As for Becker's point about people being attracted to the jobs being created by the infrastructure projects and investments in certain technologies. This intuitively makes sense.

Some of the jobs that will be created require a higher level of skill (I'm not necessarily talking about level of education here), on average, than those who are currently unemployed have. People currently employed in the government, say the Dept. of Energy, may have an easier time acquiring the jobs that may be created by Obama's proposal.

[Noah]

Shame on Bloomberg? Shame on MANKIW! I thought Mankiw was supposed to be one of the top economists out there...I feel so disillusioned.

[DrDick]

One should never attempt to make sense of Hassett. That way lies madness.

[pgl]

Hassett is guilty of not getting the Paradox of Thrift:

econospeak.blogspot.com/2009/01/hassett-and-paradox-of-thrift.html

[Ken Houghton]

Lance - So it's going to create job openings that no one is currently able to fill? (I can conceive of someone quitting a job to go into a new area--say, engineer at BP to work on the power grid upgrade project--but I can't imagine at 7-8% unemployment and ca. 13.5% U-6 that there isn't an available engineer on the sidelines [say, someone who worked as a quant for one of the IBs].)

So I'm confused whether Becker is arguing that 7-8% is NAIRU or that, on losing an employee, the private sector will celebrate and not replace her with an available, similarly-skilled person?

If he's arguing the latter, he may have a point, but it does not speak well for that person's employment prospects absent the projected stimulus.

[Steve Breeze]

I am not an economist so perhaps my thinking is a little simplistic, but remember the Greenback party. They wanted to print more dollars...i.e. create inflation to make the current dept load of over mortgaged farmers easier to pay back.
I don't remember quite who but I remember that same solution proposed for Japan in the late '90's. It seemed to make sense then too.
Yes the government borrowing too much might lead to inflation but it seems like a lesser evil right now.
I know inflation is a problem too but at least we have some experience fighting that.

[Bill]

A quick argument for why that extra 6% will matter:
1. We're talking about 30% of government revenues
2. This is quite possibly going to be the same for two years
3. Revenues projections are going through the floor (I work at a fiscal analysis think tank, and we're uncertain about how low, and thinking pessimistically)
4. The cost of borrowing is going to go up as our main sovereign bond holders (and recent major treasury financiers) in East Asia are going to face tighter budget constraints, which will force treasury prices to go up.

Hope to hear your response

[Thorstein Veblen]

Thorstein Veblen is blogging!

http://firelarrysummersnow.blogspot.com/

Mankiw is quoting Hassett! ridiculous...

[stewart]

I don't know why you're so mean to Kevin Hassett. After all, he predicted the Dow at 3600, and we're heading there, although some years later than he predicted. I still don't know how he was so prescient that the US stock market was a scam.
(He said 36,000? - Really? How's his coke dealer these days?)

[kharris]

Definitely, Bloomberg should dump Hasset. Make was for newer, hipper pundits. Amity needs another gig.

[Neil B ☺]

And note in particular, the US government can borrow at very low rates now, and also it is using the money in various projects and hopefully not just speculating in financial fiddling ways that aren't ultimately covered by productive capacity somewhere.

[fred]

Does David Brooks, I mean does Greg Mankiw write anything in good faith?

As you put it, Brad:
"The answer is no... The New York Times should have killed Brooks's (Mankiw's) article. The fact that they didn't tells us something about their commitment to ethics in journalism."
http://delong.typepad.com/sdj/2009/01/does-david-brooks-write-anything-in-good-faith.html

[Faith Witryol]

Brad, you Silly. Of course Hasset's argument is that it's all because of municipal zoning. Start building in cities and it will all just go away. I don't think anyone should discuss firing him: he makes many other contributions.

Mankiw in NY Times this weekend decided to use LT non-capital adjusted Romer-Romer 11/2008 paper as a 3% tax cut multiplier.
http://www.nytimes.com/2009/01/11/business/economy/11view.html?scp=1&sq=mankiw&st=cse
That one was a whopper in the context alongside other statistics because Romers only applied it in their work as tax HIKE multiplier. Even as misapplied, it was a bad number because their LT and capital-adjusted tax hike multipliers were 2%. Cuts/hike multipliers are hardly symmetrical... and Mankiw already knows Congress has a bias towards tax cuts. Of course we all understand his point that Congress is bound to make mistakes in implementing recovery plans, but how does teaching them to force a tax-vs.-spend fiscal measure error with some pretense (that Romers actually believe a 3X tax cut multiple to close GDP gap without spend) help anyone?

[MNPundit]

The criticism I find somewhat persuasive is that the stimulus package will create an artificial bubble. The economy NEEDS a correction, a recession to get back to it's true value, and while we need to dull the pain to the citizenry, passing too big a recovery plan will just create an artificial floor to the bubble and make long term problems like trade deficit and savings rate worse (since the goal of a stimulus would be to get consumers to spend again--but they are too deep in debt, they need to return to solvency first).

That is: the point of the legislation should not be to stop our fall, we need to keep falling, but to slow us down to something less than terminal velocity.