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Davis, California

Sunday, June 16, 2024

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Let no one claim that economists are boring; for after attending the Stimulus SmackDown here at UC Davis on Wednesday night, I can certifiably say that while economics may make Rachael Ray look interesting by comparison, economists make Rachael Ray look, well, like Rachael Ray.

For those of you who missed it, the Stimulus SmackDown was a loosely moderated intellectual brawl between economists Brad DeLong of UC Berkeley and Michele Boldrin of Washington University of St. Louis. Boldrin is known most recently for being a signatory on the Cato Institute’s (Read: Republican Party’s [Further read: Corporations]) full page advertisement in The New York Times notifying the president that the stimulus won’t work and that tax cuts will solve all our problems. DeLong is known most recently for saying that Boldrin is an idiot. Literally.

So it was a fun talk. What’s interesting though is that reasoning behind the stimulus underlies much of Obama’s budget proposal and, equally important, the very same neo-Hooverites like Boldrin who got their feelings hurt over the stimulus are pushing hard against that proposal.

So if for no other reason than an intellectual exercise in beating a dead horse, let’s take a look at what went down at the smackdown.

The argument advanced by Boldrin after much backtracking from his Cato ad eventually amounted to the claim that he wasn’t against a stimulus per se; he was just against this stimulus. The usual talking points ensued: the tax cuts are too small, the spending too slow, the tax cuts aren’t for businesses or capital gains, the spending projects don’t target the sectors in need of stimulus, etc.

Naturally, I firmly disagree, as did DeLong. Here’s why.

On the tax cut argument, economist Mark Zandi’s widely used research shows that for each dollar the government forfeits by cutting the capital gains tax, corporate tax and keeping Bush’s tax cuts in place just 37 cents, 30 cents and 29 cents of economic activity are generated, respectively. This is paltry.

Tax rebates, as we saw in the spring of 2008, and tax cuts, as we saw for the past eight years, are terrible at generating long-term demand. I will say this, and I will only say this once: Milton Friedman had a good idea; people don’t act based on what’s in their pockets now, they act based on what they think will be in their pockets in the future. If you give them jobs they can count on, they’ll spend that first paycheck like they expect another one. But if you just throw Benjamins at them or cut their taxes, they’ll sit on Ben’s face with the knowledge that it might be the last cash they’ll get in a long while (unless they’re really poor: Food stamps have a $1.73 boost for every $1 spent).

Contrast that with government spending. Again according to Zandi, $1.59 of economic activity gets generated for every dollar the government spends on infrastructure and $1.36 for every dollar you give to states. That’s why you spend instead of cutting taxes.

The notion that government spending doesn’t work is garbage; it does work, and if you put that money in the right places it will keep working for generations. We know this empirically; spending by firms using borrowed money to meet demand is basically how the economy grows. As DeLong put it in the debate,Why should the government’s money be any different than anyone else’s?”

The Great Depression also played a central roll in the D-Town SmackDown. But those who appeal to the 1930s to knock government spending totally miss the point.

Groups like Cato and people like Boldrin basically make the following argument:The New Deal only cut unemployment from 25 percent in 1933 to 19 percent in 1938, and World War II was the only thing that got us out of the depression. Therefore, New Deal spending was a failure.

Well, yes and no.

Back in 1937 FDR stopped his spending programs in the name of a balanced budget, and, OMFG, the more than 10 percent improvement in unemployment from 1933 to 1937 regressed.

So yes, it took WWII to get us out of the Depression; by 1948 unemployment was just 3.8 percent. But what was World War II but a giant, deficit-driven stimulus package? The national debt went from 50 percent of GDP in 1942 to 123 percent in 1945, but it’s important to note that if the debts were created to fund investment. They were paid off thanks to the increased revenue generated by high employment, a large middle class and high taxes on the rich (88 percent on the highest bracket until 1963 when Kennedy lowered it to 70 percent; currently it’s 35 percent and capital gains are just 15 percent), and the decades that followed were the most broadly prosperous in our history.

So, what about this time around? Obama thinks he can create or save 3 to 4 million jobs, but lets look at the figures.

We’ve lost 3.6 million jobs since the start of the recession and by Obama’s numbers we would lose another 5 million jobs in 2009 without the stimulus. Now, 8.6 million jobs is a big number, but it gets bigger. We need over 100,000 new jobs each month just to keep up with population growth, so really we’re down at least 5 million jobs right now and would be down by 11.2 million without the stimulus.

This is reflected in the employment to population ratio, which currently stands at a 22-year low.

So Obama’s 3 to 4 million figure is pretty weak, but it gets weaker; it was based on the original stimulus, and the actual law is expected to generate just 2.2 million jobs from now through December 2009. So really this plan will at best cover one quarter of the 2008-2009 hole. And with commercial real estate starting to implode, threatening to bring hundreds of regional banks down with it, plus the $750 billion of adjustable rate mortgages getting ready to recast, that hole could get even deeper.

That said, I’d rather see some of that hole get filled than none of it. As DeLong pointed out, the success of this package and of this budget will be evident not by what happens, but by what doesnt happen. It’s not a matter ofdropping the unemployment level two-tenths of a percentage point over the next two years, as my coworker James Noonan stated a while back, it’s a matter of keeping it from going up another five.

Furthermore, it completely misses the point to claim that the stimulus is an attempt toclaw our way out of debt. The national debt is a problem, but it’s not the problem and it’s certainly not this problem.

Finally, I’m trying to understand how things like the electric grid, public transit, schools and Medicaid arefailed entitlement programs. It seems to me that having teachers, subways, a healthy population and electricity have been pretty successful.

Even Boldrin was in support of these sorts of provisions; he just didn’t seem to think that they’re in the stimulus. To be fair to Boldrin, there are aspects of this bill that aren’t at all simulative; the $8,000 housing tax credit and the AMT patch among them. But that doesn’t detract from the genuine benefits, however inadequate, the stimulus will have.

Given the neglect of the past 30 years, rebuilding this country won’t be accomplished by the stimulus alone, and even what’s in the budget isn’t going to cover the $2.2 trillion in infrastructure spending the American Society of Civil Engineers says we need to fix our shit.

But it’s a start, and it’s a start that’s long overdue.


K.C. CODY thought the best part of the debate was theSwedish model comment. That or the holocaust joke. He told you economists aren’t boring. Ask for details at kccody@ucdavis.edu.


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