Real Economists Shred the "Stimulus"

I began this blog with five simple words: I am not an economist. I went on to discuss how I spend my days determining how much it costs to build construction projects, and I felt I had a good idea of how things should work. I have a very simple approach to my own personal economics, that being if I cannot afford it, I don't buy it. I have a mortgage I can afford and a car loan I can afford, and some small student loans I have incurred in pursuing a graduate degree. The last arose from my own laziness in not pursuing graduate grants or scholarships.

I feel "if you can't afford it, don't buy it" is a good rule of thumb in regards to spending money no matter if it is my own personal spending, or spending on the national level in trillions of dollars of taxpayer money. Since that first entry where I claimed myself "not an economist" it seems I have done almost nothing but rail on and on about the economy, whether it be the propping up of failing public transportation via the stimulus, the fact that the stimulus can never achieve a true payback, how we shouldn't trust our money to a government that can't even tell us where it's going, or how the stimulus will do nothing but grow government while aiding a few specialized companies all without actually stimulating anything.

You can imagine, then, that I've felt like some of my ranting and raving might seem to you, the reader, to be fairly sanctimonious, given that I am indeed not an economist. I have hoped that I have not come off as some schmo trying, but failing, to know what he's talking about. Imagine my relief then, in coming across this piece by David Henderson at the Library of Economics & Liberty (hat-tip to Liberty & Power) where three professional economists from the University of Chicago are making many of the same kinds of arguments that I have been making.

The economists are John Huizinga, Kevin Murphy and Robert Lucas, and they host a panel discussion that lasts an hour that you can find for your own viewing pleasure here. If you're going to watch it, I highly recommend first downloading Huzinga's and Murphy's PDF's of their overhead slides so you'll better follow some of their math.

Huizinga begins the discussion by asserting that we are being told that "the reason we need this stimulus policy is that we're in extraordinary times, so all the rules of regular economics need to be thrown out the window, and things are just inherently different." He goes on to tell us that "being the kind of numbers guy I am, I figured I better look at a few numbers and see just how different things really are.

Huizinga's main point emerges that we are indeed NOT in extraordinary times at all. He urges that we must look at the job losses that are occurring right now from a percentage basis rather than a raw numbers basis. One would think this would automatically be the case given that we have over 100 million more people in the country now than we did in our previous monster recession in the early 1980's, but this has not been the case. Obama and his people have been playing the politics of fear with the economic downturn by ignoring percentages and using only numbers. Huizinga astutely points out that we could even DOUBLE the number of jobs lost so far and this would still not be the worst recession in the post-war era. In short, his assertion is that Obama's people are calling this an "unprecedented" recession based on a very pessimistic forecast.

This pessimistic forecast is made by Christina Romer, who claims that jobs will continue to be lost steadily over the course of the next two years, putting us in a Great Depression-like 36 month continuous fall. Huizinga points out that the previous record for any post-war recession was 17 months. He seems to think that Romer's forecast, more than double that, is dubious. Personally, I think I'd call it top shelf political fear mongering.

Kevin Murphy continues the discussion and briefly discusses the proposed "tax cuts." He quickly points out that the plan does not cut marginal rates, but rather ties benefits to income in a means-tested way. This means that you only get the benefits if your income is below some threshold. When you move up in income level, you no longer receive a benefit. He tells us, which is obvious at this point, that we actually see an implicit INCREASE in rates due to this, essentially eliminating any kind of stimulus that we are aiming for.

Murphy goes on to discuss the actual government spending and gives us a relatively simple equation:

f(1-λ) > α+d

The parts and pieces of this equation are explained in better detail in Murphy's PDF that I referenced earlier, if you're interested. Essentially what he gives us with this equation is a way to evaluate in numbers the effectiveness of direct government spending. The left side represents the value obtained from marketplace output due to government spending, and the right side represents government inefficiency plus deadweight government costs. The equation means that we must achieve a higher output in the market than what we know the government spends to create it.

In this math, f can be assumed to be the ever mystical Keynsian Multiplier which tells us that for every dollar the government spends, the market gives back more than that dollar, while the λ is a fraction signifying the relative value of idle resources. Keynsians in general like to assume that the f is always very high. Obama's people in particular are pegging it at about 1.5, and also then assume that λ is very low, or zero, because it pleases them to believe that every dollar they put in creates a brand new job for somebody that wasn't already working. As I pointed out yesterday in my post about government construction jobs, this simply isn't the case. According to Murphy, Romer's analysis for Obama also simply ignores the d in the equation, further improving her outlook on projected stimulus by eliminating inconvenient parts and pieces.

On a side note, maybe we should put Christina Romer and James Hansen together for a lunch date. I'd bet they'd hit it off, especially if we got them talking about ethics.

Overall, Murphy asserts that because the deadweight value is around 0.8, and that government inefficiency in spending is also very high, the right side of the equation is going to be a large number that cannot be overcome by the output of the economy on the left.

Kind of sounds a lot like "if you can't afford it, don't buy it," huh?

Lucas goes last and doesn't really offer much in the way of detailed analysis, and rather stumbles over much of what he's trying to say, which becomes distracting, but his main point is that he feels rather than stimulating, the government spending will move around already working resources, bolstering Murphy. Therefore, he asserts that the spending is completely moot, and we need to focus instead on monetary policy, meaning actual tax incentives.

This sentiment is backed up by other economists as well. In an article for Forbes, Bruce Bartlett points us to the words of UC-Berkeley (apparently they're not all communists after all) economist Hal Varian:

Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?

Or in my own words from yesterday:

The government bubble has to burst eventually. They can't expect to dig a hole and then fill it back up again forever. At some point they have to stop, lest they bankrupt the country completely.

Here's "hoping" our voices, and the voices of these real economists reach our senators, and can "change" their minds about blindly supporting the ruinous spending policy The One has placed before them.