## Best Anti-Stimulus Argument: from Kevin Murphy

Matthew Yglesias agrees that Kevin Murphy gives the:

Best Anti-Stimulus Argument I’ve Seen: Kevin Murphy’s slides here. I think he overstates the deadweight loss effect and is working with the wrong conception of “efficiency” for these purposes when he claims that government is inefficient, so the odds of a stimulus being successful therefore aren’t as bad as he indicates. And this doesn’t change the fact that I haven’t heard any better ideas than doing a big stimulus. But this is a sobering reminder that a big stimulus doesn’t guarantee success—very hard work needs to be done on making sure that stimulus funds target genuinely idle resources rather than diverting non-idle resources while leaving the idle ones as idle as ever.

Here is Kevin:

### Evaluating the Fiscal Stimulus

Kevin M. Murphy
January 16, 2009

A Framework for Thinking about the Stimulus Package

• Let G = increase in government spending
• 1-α= value of a dollar of government spending (α measures the inefficiency of government)
• Let f equal the fraction of the output produced using “idle” resources
• Let λ be the relative value of “idle” resources
• Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

When Will the Stimulus Add Value?

• The net gain is the value of the output produced less the costs of the inputs and the deadweight loss

• In terms of the previous notation we have: Net Gain = (1-α)G –[(1-f)G + λfG] –dG

• Net gain = (f(1-λ) –α–d)G
• A positive net gain requires that: f(1-λ) > α+d
• Difference of opinion comes from different assumptions about f, λ, α, and d

My View * α likely to be large * Government in general is inefficient * The need to act quickly will make it more inefficient * The desire to spend a lot in a short period of time will make it more inefficient * Trying to be both stimulus and investment will make it even more inefficient * 1-f likely to be positive and may be large * With a large fraction of resources employed (roughly 93%) much will be drawn from other activities rather than “idle” resources * Ricardian equivalence implies that people will save to pay for future taxes reducing private spending * λ is non-zero and likely to be substantial * People place positive value on their time * Unemployed resources produce value through relocation (e.g. mobility & job search) * d is likely to be significant * Wide range of estimates of d * Estimates based on the analysis of taxable income imply d≈0.8 * With these parameters the stimulus package is likely to be a bad idea

As I read it, Kevin thinks α = 1/2, f = 1/2, λ = 1/2, d = 0.8, and gets 0.25 > 1.3. I would say that α = 0 (increasing income inequality and starvation of the non-health non-military public sector over the past generation have left a bunch of low hanging fruit), f = 1.5 (there are multipliers out there, and markets work if there is sufficient demand: as long as there are idle resources people will use them first as long as demand is available), λ = 1/5 (the cyclically unemployed are not having much fun), and d = 1/3. So I get 1.2 > 0.33.

More interesting, I think, is that there is an unemployment rate at which Kevin Murphy's priors would switch and he would become a stimulus advocate. What is it?