More or Less

Greg Mankiw:

Is Government Spending Too Easy an Answer?, by N. Gregory Mankiw, Commentary, NY Times: When the Obama administration finally unveils its proposal to get the economy on the road to recovery, the centerpiece is likely to be a huge increase in government spending. But there are ample reasons to doubt whether this is what the economy needs. ... When debating increased spending to stimulate the economy, here are a few of the hard questions Congress should consider:

HOW MUCH BANG FOR EACH BUCK? Economics textbooks, including Mr. Samuelson’s and my own more recent contribution, teach that each dollar of government spending can increase the nation’s gross domestic product by more than a dollar. ... This ... is called the multiplier effect.

In practice, however, the multiplier for government spending is not very large. The best evidence ... estimates that each dollar of government spending increases the G.D.P. by ... 1.4 dollars. ...

WILL THE EXTRA SPENDING BE ON THINGS WE NEED? ...People don’t usually spend their money buying things they don’t want or need, so for private transactions,... inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

The way to avoid this problem is a rigorous cost-benefit analysis of each government project. Such analysis is hard to do quickly...

HOW WILL IT ALL END? Over the last century, the largest increase in the size of the government occurred during the Great Depression and World War II. Even after these crises were over, they left a legacy of higher spending and taxes. ...

Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.”

What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary.

MIGHT TAX CUTS BE MORE POTENT? Textbook Keynesian theory says that tax cuts are less potent than spending increases for stimulating an economy. ...

The evidence, however, is hard to square with the theory. A recent study by Christina D. Romer and David H. Romer ... finds that ... the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases. ...

Christina Romer, incidentally, has been chosen as the chairwoman of the Council of Economic Advisers in the new administration. Perhaps this fact helps explain why, according to recent reports, tax cuts will be a larger piece of the Obama recovery plan than was previously expected.

All these questions should give Congress pause as it considers whether to increase spending to stimulate the economy. But don’t expect such qualms to stop the juggernaut. ...

I'm going to assume that Christina Romer is the best judge of her own research and how it applies to the present situation. Here's what she said today on this topic in a paper written with Jared Bernstein:

Appendix 1: Multipliers for Different Types of Spending

For the output effects of the recovery package, we started by averaging the multipliers for increases in government spending and tax cuts from a leading private forecasting firm and the Federal Reserve’s FRB/US model. The two sets of multipliers are similar and are broadly in line with other estimates. We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future.

We applied these multipliers directly to the straightforward elements of the package, but made some adjustments for elements that take the form of transfers to the states and tax-based investment incentives. For transfers to the states, we assumed that 60% is used to prevent spending reductions, 30% is used to avoid tax increases, and the remainder is used to reduce the amount that states dip into rainy day funds. We assumed that these effects occur with a one quarter lag. For tax-based investment incentives, we used the rule of thumb that the output effects correspond to one-fourth of the effects of an increase in government spending with the same immediate revenue effects. This implies a fairly small effect from a given short-term revenue cost of the incentives. But, because much of the lost revenue is recovered in the long run, it implies a fairly substantial short-run impact for a given long-run revenue loss. We confess to considerable uncertainty about our choice of multipliers for this element of the package.

Output effects of a permanent stimulus of 1% of GDP (percent)

Quarter	Gov. Exp	Taxes
1	1.05	0.00
2	1.24	0.49
3	1.35	0.58
4	1.44	0.66
5	1.51	0.75
6	1.53	0.84
7	1.54	0.93
8	1.57	0.99
9	1.57	0.99
10	1.57	0.99
11	1.57	0.99
12	1.57	0.99
13	1.57	0.99
14	1.57	0.99
15	1.57	0.99
16	1.55	0.98

As to qualms about the attempt to increase output and employment with government spending, given the condition the economy is in right now, I think we ought to be more worried about doing too little than about doing too much.

Comments

[Phillip Huggan]

The tax cuts are more likely to be permanent IMO. Rich people form a powerful unified bloc compared to disparate lobbies when voting time rolls around; Republicans will always attract tax-cutters so a position that cuts taxes on things like investment banker CEO salaries is really an endorement for Republicans (though history outside USA 1980-2008 could benefit from some of their platform). You can pick off spending like S.Palin's goodhearted bridge to Santa and Autobailouts, but what of dividends and upper-bracket income taxes?! That's big of you all attacking Sarah out of rifle range, but not all States have employees that believe in Santa and building new rails or new wind turbines are different investments than are bridges.
Who will defend a tax cut on Ratings Agency exec salaries? What damn fool would even suggest such a thing?!

[Phillip Huggan]

"Greg Mankiw: ...People don’t usually spend their money buying things they don’t want or need, so for private transactions,..."

I wasn't for a fully funded plastics surgery hospital unit before I broke my hand. I wasn't for primary school when I was a toddler. Maybe Greg was? How to fund basic research?
What is the market solution to an externality like many years of bad debt being called in at once and subsequent cascading unemployment rates? Earth to corporatism drone...

[RichardfromHB]

What happens when we burn the deficit candle from both ends and no one wants to buy our treasury instruments any more? Check it out here:
http://www.nakedcapitalism.com/2009/01/chinese-central-bank-to-test-program-to.html

says...

If you take goods/services away from people, they are forced to work overtime, or take on a 2nd job to replace the lost items. This increases GDP, but it doesn't necessarily increase the standard of living. Putting unemployed people back to work is a useful goal, but be careful how you attempt to do it. If the confiscated goods/services are wasted, you might wind up lowering the standard of living of the general consumer for no good reason. Especially if some of the resources are extracted regressively from people who can't afford to lose them, or replace them.

Borrowing goods/services from China et al to pay unemployed people to provide useful services might work out, as long as the services result in increased productivity so the loan can eventually be repaid from a progressive income tax. Regressively confiscating goods/services via inflation from helpless retirees et al, and using the resources to pay unemployed people to dig metaphorical ditches/fill them up places a terrible burden on the extractees. It permanently reduces their standard of living, and thus does more harm than good.

[M. Mague]

One of Mr. Mankiw's qualms is:

"Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.”
What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary."

I find it hard to imagine Mr. Emanuel having any interest in "engineering a permanent increase in the size and scope of government" for its own sake. What Mr. Mankiw has in mind isn't entirely clear either, but I suspect it comes to something like "The current emergency might be taken as a justification for greater Federal involvement in health care, which would mean taxing me to finance treatment for *those* people."

To be sure, doing something about Global Warming might also fall into that category, as might other things. The fact that many of these things are desperately needed apparently doesn't count for as much as the need to limit the size of government at any cost.

[Bruce Wilder]

The economy is spiraling downward to a level of activity, which will leave a lot of people unemployed or underemployed, amidst a deflation that makes business finance very expensive.

Does Mankiw have a suggestion about that? No, he doesn't. Instead, he uses his prestige to legitimate the usual right-wing cant about taxcuts and "limited government". This from a loyal supporter and official of an Administration that more than doubled the national debt, for no particular reason.

[Jon Claerbout]

No need for government spending. Let them loan it to tax payers. No distorting the economy. Politically safe.

[Rudy Perpich]

Mankiw: "People don't usually spend money on things they don't want or need, so for private transactions, inefficiency is not much of a problem."

Americans don't spend money on things they don't need or want? So advertising isn't effective. Then why do I have a Hula Hoop?

[Richard H. Serlin]

"HOW WILL IT ALL END? Over the last century, the largest increase in the size of the government occurred during the Great Depression and World War II. Even after these crises were over, they left a legacy of higher spending and taxes. ..."

Yes, it was so terrible that this ushered in one of the greatest eras of growth in history, the birth of the great middle class, the end of senior citizens being by far the largest group in poverty, college being made affordable for everyone for the first time in history tremendously increasing the education level and productivity of the nation,...

James Surowiecki has an excellent article rebuking Mankiw in the New Yorker, "Bigger Government = More Prosperous Country?".

[Gegner]

Most of the jobs proposals are intended to save existing jobs rather than create new jobs.

Building new schools and spending on education is somewhat futile if the tax base isn't robust enough to support teacher's salaries/pensions.

The only thing empty buildings teach you is to not spend money foolishly.

There is already a gaping loophole in the alternative energy proposal, items 'assembled' in the US under current law count as being 'made' here. So how many of the 'inputs' such as solar panels and turbine blades will actually be produced here when cheap imports, assembled here, will receive the same 'Made in the USA' blessing?

Naturally, who will 'police' this program?

Until the trade doors slam shut and we start producing what we can for ourselves, the current 'cash flow' problem will not correct itself.

[mmckinl]

Mankiw is defending the indefensible. Sure in the past tax cuts had great bang for the buck, BUT, that was because in Kennedy's case the top rate went from around 90% to around 75%. In Reagan's case from around 70% to around 50%. Then capital gains being roughly half that. With those kind of drops of course we'd see a bang for the buck. Those gains are gone.

http://findarticles.com/p/articles/mi_m2893/is_1_26/ai_n25335650

As far as bigger government, not so fast. Government expenditures have been getting bigger but so have private contracts. Most to his Republican buddies.

The mistake Mankiw, Romer and Obama make is that this is like other recessions and crises. It is not. We have a structural crisis in the economy. We can not return to a 70% consumption, 30% production economy.

Even in the Great Depression all the elements were in place to re-ignite a consumer economy. All FDR had to do after his Bank Holiday was stimulate. Stimulation won't work this time past the stimulus. The consumer economy is not returning to its glory days so those businesses and jobs are gone for good.

We need federal spending to underwrite state and local government spending as well as private sector spending to bridge the gap between the old 70% consumer economy and the 30% production economy which have to fall to new levels and a correct, bringing a more equal balance between the two.

In order that the country doesn't spend beyond the limit of confidence we need vastly greater taxes on the well to do and corporations, above the Reagan levels of 50%. We should also tax all income as ordinary income. Higher taxes on the wealthy will not hurt an economy with so much over capacity.

My suggestion is Medicare for All ... This would spend money in the most efficient, fair and equitable way of all ... paying for people's health care. All the other G7 nations have single payer and cover 100% of their populations for around 10% of GDP. We, the United States spend 17% of GDP and only cover 85% of our population.

Medicare fro All helps takes care of our two biggest problems. The first is off course the economic underwriting. The second is the restructuring of our health system so that it doesn't bankrupt us.

I know, this is not politically possible. Given the gravity of the economy we are about to experience it could be very shortly.

[OhNoNotAgain]

Rudy,

"...People don’t usually spend their money buying things they don’t want or need, so for private transactions,... inefficient spending is not much of a problem."

This passage struck me as odd also. Huh ? Isn't the whole problem that we're having now due to the one of the biggest mis-allocation of resources ever seen in this country ? And all due to people buying things that they don't need, i.e. a bigger house, car, boat, yard, dog, cat, horse....

Of course, when pressed I'm sure that Mankiw will calmly explain that it was governmental interference that caused these people to do these things, and not something simple like too much credit and greed. It was probably those damn zoning laws again. Zooooooning laaaaaawsssssss !!!!!!!!! (you have to read it like: Khaaaannnnnnnn !!!!!!!!)

[Laura Harrison]

Three comments.

1. Is this the same Greg Mankiw who in November 2008 wrote: "IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront." (See NY Times, November 28, 2008.)

2. In his NY Times article today, Greg Mankiw quotes Samuelson on World War 2 emerging from the Great Depression. This captures a really important but generally neglected aspect of Keynes's thinking - that there were important economic causes of war and economic means of promoting peace. (See Markwell's book on Keynes and international relations, and "economic paths to war and peace".)

3. Why isn't more attenton being paid to the need for international coordination of economic stimulus - a global response to the global crisis? Again, this was an important aspect of Keynes's thinking. (Markwell's book covers this also.)

[Chris]

The more Mankiw I read the more I see him as a right wing shill. More prestige than Laffer but similar ideological position that governs his economic approach. Laffer with Harvard prestige, perhaps.

[ken melvin]

Mankiw has no idea where the country is, where he is. I hope Romer has a better grasp of reality now then when she and hers wrote the quoted. I enjoyed seeing Elizabeth Warren shut him up on the new congress forum.

[calmo]

So many good comments and tolerance, way mo than I can muster for Mankiw.
Thank you mmcknl for Maching the baseline: 70% consumptive GDP is on the way down...and owing largely to transnational characteristics, the 30% productive side (could Finance have been included here? time to erase years of inflated GDP values) is not likely to climb up at the same rate, ergo a declining GDP (even if the retiring boomers were not accelerating that) for years, not quarters.
So many established economists weighing in now on the major media outlets and so many illiterates (Stephen Moore comes to mind) trying to influence the general public, a body not used to thinking very hard...so I'm in a welcoming mood for the newcomers here: thank you for joining us.

[Noni Mausa]

In Richard H. Serlin's comment we read: "...the largest increase in the size of the government occurred during the Great Depression and World War II. Even after these crises were over, they left a legacy of higher spending and taxes. ...-- Mankiw"

Yes, it was so terrible that this ushered in one of the greatest eras of growth in history, the birth of the great middle class,...James Surowiecki has an excellent article ..."Bigger Government = More Prosperous Country?".We need to draw a distinction between two sorts of big government: Big Service versus Big Control. High spending on big services of some sorts, leads to a more prosperous nation overall because of efficiency: they make those services cheaper, more accessible and more consistent. Schools, libraries, utilities, health care, Social Security and disability pensions, etc. It sidelines these necessities from the profit driven system.

High spending on Big Control is the opposite, yielding less benefit and more waste the more there is of it. State police and domestic spies, big prisons, big military, glacial, arbitrary and opaque bureaucracies are all hallmarks of a big control government.

It seems to me that since the 70s, the right wing has gutted the Big Services of government by stigmatizing it as a Big Control -- the USSR-type government we boomers were taught to despise when we were kids.

Meanwhile they have built the Big Control structures while misrepresenting them as Big Services. As an example, under the Big Service banner of Law & Order, America imprisons 6 times as many citizens as the average of other advanced countries (700 versus ~120 per 100,000) Are we to believe that Americans are 6 times as wicked as Germans, Brits and Swedes?

Meanwhile for the past generation US productivity has risen while prosperity for the great majority has not kept pace, but has stayed flat.

It seems counterintuitive that openhanded generosity works better than obsessive control, but this seems to be the case. Sadly, a control and fear-based system tends to grow and ossify, while a generosity based system is continuously under attack by the miserly, the envious and those who benefit from a Big Control government.

Noni

[Rusty]

Did anyone take a look at the job creation list from the Obama camp yesterday?

Seems to be very specific, for an estimate.

Overconfidence or wild guess? Don't know. Hope it works though.

[Michael Cain]

Will the extra spending be on things we need?

In many cases not, but not in the sense that Mankiw probably means. The current requirement that projects be "shovel ready" means that the metro area where I live will get lots of lane-miles of road-widening construction, because those are ready to go. The rail transit projects that we, in my opinion, desperately need to finish, are mostly still in the process of environmental impact statement and land acquisition. Similarly, GM/Ford/Chrysler are prepared to build cars, so the loans will prop up car-building, rather than retooling for the electric rail that we need.

[ken melvin]

Bon dit - Noni. Part of the southern mien, methinks, this objection to investing in the people. In Chattanooga, in the late seventies, whilst doing a plant, walking around one evening I wandered into the black area of town where there were no sidewalks and the streets were dirt. Seems that in order to get sidewalks and pavement, the residents had to put up the money, though, I bet, the roads to the 'county judge's' house in the country were paved with taxpayer money. This is what they're saying in re recovery plan and the need to save our way out of this, etc.; they don't/won't get the investment thing.

[Bruce Wilder]

Greg Ip: "Once the recession is over, getting our debt burdens down will hinge on Obama's and Congress's willingness to confront the looming cost of Social Security and Medicare benefits for the aging U.S. population.

The chances of default remain pretty remote. But remote does not mean impossible. The best way to keep those chances remote is for policymakers to vow to get the deficit down once the recession is over -- and mean it."

Actually taxing the rich people, who did so much to destroy this country's wealth and honor, of course, would be utterly unthinkable. Better to destroy old people.

[calmo]

Thanks for tapping back at Greg Ip, Bruce...now there's a die hard: there is no problem now, but later...who knows...but Greg Ip who knows it could happen...better prepare rightnow! He deserves early onset incontinence.

And thanks for drawing that distinction Noni. Little attention paid to the growing military/para military side of Big Gov (Big Brother...and didn't we see a fresh taste of that with bushCo wiretapping) and tons paid to dissin Health/education which on a per capita basis is prolly declining.
Interesting where these 2 overlap: the veterans returning to appalling health services...revealing an even more appalling lack of services: the media's incapacity to serve the public.

[ddt]

how many new lows does Mankiw have to make before people finally realize that he is a morally disgusting shill? He is like Art Laffer but WORSE.

The guy was the head of George Bush's CEA and was probably a big part of the push to destroy social security. Why do Krugman & co. regard the Bush economic policies as pure evil, but somehow Mankiw is dissociated from his role in the Bush administration? It makes no sense. He's the Alberto Gonzales of economics. Funny, I don't see many law journals eager to publish Gonzales, but somehow Mankiw helps destroy the economy, lies constantly, and incessantly advocates policies that increase inequality, and yet is still taken seriously.

[DW]

"People don’t usually spend their money buying things they don’t want or need.."

Hah ha! Mankiw is always good for a laugh...

[calmo]

Actually ddt, it's that we don't want to look at Stephen Moore @ WSJ promoting Rand.
..so compared to that we are delighted to muse over Mankiw. The Stink variation on that always popular theme: crowding out.

[wogie]

The Romer's (2007?) study of tax cuts did indeed find that a 1% cut in tax drove a 3% increase in GDP. HOWEVER, they note that effect was in a growing economy. For counter cyclical (recession) cuts they concluded very little effect on spurring growth.

[David Heigham]

All the commentators who attack Mankiw the man make asses of themselves. He is among the world's best and solidest economists. He is widely admired and liked by people he disagrees with.

Attacking his opinions is another matter. Mankiw makes a case in this article. The case is as shaky as some of the Op-Ed pieces Paul Krugman (to take an example of another great economist with a different bent) has published in the same newspaper.

Mark Thoma points to a great big hole in Mankiw's presentation of his case. I would point to another: Mankiw says nothing about the likelihood that tax cuts to businesses and to consumers are likely to be used, in the first instance, to rebuild their balance sheets rather than contribute much to demand.

There is a much smaller hole in the part of the Romers' argument which Thoma quotes. The 'lags' quoted appearc to be from the implementation of a spending increase and from the announcement of a tax cut. Some tax cuts can be implemented without a one quarter lag between announcement and spending by the taxpayer. On the other hand, large spending increases take time to set in motion. A major increase may deliver nothing in the first quarter or two. Mankiw is right that Congress should be looking hard for the particular measures that deliver the biggest, quickest bang for the buck. It is not enough to say that 'spending is better than tax cuts', nor vice versa. We need to look at which particlar spending proposal will deliver more bang than which tax cuts; and vice versa.

[OhNoNotAgain]

Laura,

"This captures a really important but generally neglected aspect of Keynes's thinking - that there were important economic causes of war and economic means of promoting peace."

Very good points. That is an often-overlooked aspect of the Great Depression in general. Global economic instability literally brought down entire nations and introduced us to the unspeakable horrors of fascism as it rushed in to fill the vacuum left by the weakened governments in Europe. It is an absolute must that we make economic stability the priority right now, and that we do so in a coordinated, global fashion.

[Karl]

There is a way of avoiding that. It is to, once again:

JAIL the fraudsters, including those in Congress, Treasury and on Wall Street. Bluntly - if we can find a predicate felony to nail you with in this mess, off you go.
REMOVE all of the overseers. This includes The Fed. Set up a new agency that is charged with enforcing all of the laws related to the financial system including The Federal Reserve Act, and empower them with subpoenas. Direct that they must act and operate "in the sunshine", with everything published on The Web. You do an evil thing, the public sees it. They try to hide it, the public sees it.
DEFAULT all the bad debt. Yes, this "booms" a lot of banks. Tough.
SET UP new banks. Take the remaining $350 billion and capitalize ten banks with $35 billion each. IPO them to the public. By law no officer, current or former, of an existing public bank may serve on these firm's boards. Now we've got the means to replace the credit creation the boomed banks can't do any more.
This clears the system and requires no stimulus spending.

Yes, it results in plenty of pain and bankruptcies. Those are coming whether we like it or not. We can either choose to take a small amount of pain now or a huge amount of it in the VERY near future.

There is no solution to this problem that does not involve clearing the excess debt from the system.

Walker is right in that we must fix entitlements. Where he's wrong is that he, like all of the other pigmen, refuses to admit in public that the math is clear - we cannot recover in the economy until the debt to GDP ratio is reduced, and there is only ONE way to make that happen as we have reached the point where the exponentially-increasing debt load is constraining GDP faster than we can grow it through technology and other productivity improvements. This process can ONLY be halted by defaulting the excessive debt.

This debt will default. Our choice is to do it now and have it suck badly, or to try to avoid it and have it suck catastrophically.

Oh by the way, if you're wondering how far off that "catastrophically" is, the answer might be right about now. How come? Treasury today ran a T-bill auction that had only 18% indirect participation.

"Indirects" are foreign central banks and investors, mostly.

18% eh? Is that "screw you" I hear echoing around the Treasury Department - in Mandarin?

Or is it the rumor flying around that one or more FHLB system banks may be at risk of imminent seizure by The Fed? My guess would be Atlanta, which is likely choking on all the bad Countrywide Financial advances they wrote last year - an act that caused public alarm from Congress (and with good cause!) but which has not been corrected as near as I am able to determine.

A disorderly event of this sort, as opposed to "lock 'em up Danno and be prepared with newly-capitalized banks to replace the boomed ones" will almost certainly result in a Treasury Market dislocation that immediately translates into the short-term corporate market.

Those who think this leads to a hyperinflationary "poom" are wrong - it leads directly to a deflationary collapse, as all private debt is indexed off Treasuries but the private market is much larger. As a consequence the spike in coupon that the dislocation causes renders hundreds of very large companies immediately unable to roll their short-term debt or re-issue further out the curve and they suck all the dollars out of the system trying, with most of them imploding into bankruptcy and throwing their employees out of work. We're talking GM going "boom" times ten - at least.

This is precisely how you get a Depression folks and we're running out of time to stop it.

Obama and the rest of these clowns need to stop the crap and come clean with Congress (who clearly doesn't get it) and The American People.

[Phillip Huggan]

There is a long-term floor as to how low the USA manufacturing sector will go. China is only a wage double and a couple years growth away from being a more expensive place to manufacture than USA.
There are regional fed banks. If one is failing, like the Atlanta region's, and this is a result of mismanagement, delegate resources to the remaining healthy regional banks.

Whatever consultancy sectors in government and private service sectors, are responsible for independant oversight of Keynesian-project funding; make sure these companies and Crown offices and training schools don't go bankrupt in the meantime. No more Big Digs.

[Fred]

As I see it, the fundamental problem is household animal spirits, and I fail to see how government spending is going to fix that. Households are worried about the future because of collapsing house prices, layoffs, rising cost of medical care, widespread perception that Social Security/Medicare are unsustainable, fear of jobs being outsourced to China, etc. Government spending that is perceived to be wasteful (and remember, these perceptions by the common people are received second-hand via Fox news and the like) will likely add to the insecurity, and thus increase household savings and collapse aggregate demand still further. This needs to be taken into account whether to spend or cut taxes and how to spend, if the spending option is chosen.

In order to placate the simple-minded Austrian types, there is much to be said for promoting a bonfire of bankruptcies, which would likely improve household animal spirits: "justice done at last" sort of thinking, which seems to perk the Austrians' spirits up. Bankrutpcies generally amount to a net transfer of wealth from rich to poor, so nothing unprogressive about them.

[Noni Mausa]

Fred said: As I see it, the fundamental problem is household animal spirits, and I fail to see how government spending is going to fix that. Households are worried about the future because of collapsing house prices, layoffs, rising cost of medical care, widespread perception that Social Security/Medicare are unsustainable, fear of jobs being outsourced...

"Animal spirits," I like that. And I have seen a constant pressure on many fronts to depress household animal spirits over the past generation. Disappearing jobs and pensions, stagnant wages, disruption in the workplace, and disingenuous consultants preaching "quality" and "change," plus the war on the labor movement -- and then business acts surprised and complains of disloyal workers. Well, duh.

But Fred also says, "...I fail to see how government spending is going to fix that.."

Depends on how it's targeted. Bush has been spending like a drunken president sailor and no-one I meet on the street is the happier for that. But imagine what would happen if even 1/10 of the Iraq war budget was diverted into Medicare for Everyone -- that alone would "lift all boats" in a way that no stimulus cheques could possibly do.

And not just personal households -- business also. All the small businesses that currently suffer either from expensive health policies, or else the constant risk of illness in their people, would lift like balloons with that burden removed.

Hmm, maybe not "balloons." That word has a bit of a stigma at the moment. :-)

Noni

[howard]

david heigham, greg mankiw, willingly, worked for the bush administration in a key economic policy-making position. he should have the simple decency to stfu forever, not continue to pollute our discourse.

maybe he's a credit to his family and a helluva nice nieghbor: i don't care. he has forfeited his right to our attention and to any intellectual respect, and those of us who don't give him any are exactly, 100% in the right.

unless you can demonstrate (as gates can) that you were in some way not party to the bush administration's core policy-making, you should be shunned for the remainder of your existence, and i hope (against hope) that this will happen to mankiw.

[Julio]

I too picked up on

"WILL THE EXTRA SPENDING BE ON THINGS WE NEED? ...People don’t usually spend their money buying things they don’t want or need, so for private transactions,... inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being. "

It ignores the situations (doesn't game theory show them routimely?) where individual decisions do not result in increased well-being.
It seems to define "efficiency" as "what people want or need" (atomically) and then meaure the results of spending by some other measure.

And of course, implicit in the argument is that, since we're in a mess, money must have been spent on things that people neither want nor need. Care to explain who did that?

Of course, following his argument to the logical conclusion, we should spend the money on bridges to nowhere and advertisement for them so people would want them.

All I got from the piece is some insight into the writer's underlying assumptions.