CBO Says Stimulus Will Work, But in the Long Run…
Some good sense from the Congressional Budget Office as they estimate the macroeconomic impact of the recovery act:
We estimate that the legislation will raise gross domestic product (GDP) and increase employment in the short run—by adding to aggregate demand and boosting the utilization of labor and capital. In contrast, we expect that the legislation will reduce output slightly in the long run because the resulting increase in government debt will tend to “crowd out” private investment and thereby reduce the stock of productive private capital. That crowding-out effect will be diminished to the extent that some of the funding in the legislation will go for activities that could add to the nation’s long-term output.
There’s been a stunning renaissance over the past few months of long-discredited arguments to the effect that a short-term increase in deficit spending can’t boost growth amidst a giant recession. One would hope that this kind of analysis from the CBO can help put a stop to that kind of talk. Among other things, you can tell that this is serious analysis and not just propaganda by the fact that the CBO is rightly calling attention to the very real possibility that short-term deficits will have detrimental long-term impacts. This, rather than debates about whether or not stimulus can “work,” is a debate about priorities that’s worth having.
One element to the debate is whether or not the things funded by this bill have the capacity to boost growth over the long-term. I would argue that some of them certainly do have that impact, and that the absence of such a beneficial long-term impact to things like the AMT patch is one of the reasons why its inclusion is problematic. Obviously, though, disagreement about the macroeconomic impact of public sector investments in things like health care, education, and basic infrastructure is one of the fundamental points of ideological disagreement so it’d hardly be surprising to find that many people on the right side of the spectrum disagree with me about that.
Another aspect to this is just disagreement about the relative value of the short- and long- terms here. In the spirit of us all being dead in the long-term, I think that faced with a severe crisis it makes sense to focus on short-term recovery. Really grave economic downturns pose enormous political risks both domestically and internationally that could do far more to harm long-term growth potential than would a higher budget deficit. Standing impassively in the face of these kind of job losses will lead to demands for protectionism, and risk really severe political meltdowns in China and Eastern Europe. And politics aside, if we’re underestimating how bad things will get in the short run there’s a risk that, absent stimulus, we’ll wind up in a serious deflationary trap. Long story short, there are serious short-term downside risks that stimulus helps us avoid. For the long-term, there’s always time to try to adopt counterveiling pro-growth policies—tax reform that broadens the base and lowers rates, congestion pricing for our key transportation infrastructure, schools that better serve the needs of low-income children, etc.
31 Responses to “CBO Says Stimulus Will Work, But in the Long Run…”
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March 4th, 2009 at 12:56 pm
“One would hope that this kind of analysis from the CBO can help put a stop to that kind of talk.”
Hope, but not realistically, given our media’s propensities for ignoring reality in favor of their GOP overlords’ talking points.
March 4th, 2009 at 1:01 pm
It’s kind of amazing that the Republicans who are totally upset about the long-term effects of rational short-term spending to prevent a depression were such huge fans of irrational short-term spending to make rich people richer and turn Iraq into an unstable and pro-Iranian state.
This CBO report basically says duh, deficits aren’t good and they’re only acceptable when the alternative is the great depression part II. And yet Republicans only oppose them when they’re being used to prevent the great depression part II.
How did our discourse become so messed up that this obvious point is being missed?
March 4th, 2009 at 1:04 pm
What a concept: Mass transit and other infrastructure boosting future growth more than, say, private “investment” in millions more dirt bikes and jet skis in our back yards!
March 4th, 2009 at 1:16 pm
Instability in far away places often gets mentioned, but how about in the good ol’ USA? I have never encountered as much real antisemitism as in the last year. I suspect a surprising number of people can tell you exactly how many Jews are on the Federal Reserve board. I have heard assertions of trillion dollar transfers to Israel. Attitudes vs. undocumented workers are increasingly negative as well. This is anecdotal, to be sure, but if the economy gets truly ugly we are not immune to a truly ugly reaction.
March 4th, 2009 at 2:08 pm
One element to the debate is whether or not the things funded by this bill have the capacity to boost growth over the long-term. I would argue that some of them certainly do have that impact
And rightly so! For instance, a road repaving project will require the use of raw materials coming from China, and that will help the Chinese-owned importation companies, some of whom will spend part of that money right here inside the good ol’ USA! But, that’s not all. That “hidden” flow of stimulus money to China will help them build new “educational centers” which will allow them to build ever-cheaper toys – some even without lead coatings – which those Mexican citizens who are repaving the roads will then buy at Megalomart. That will spur innovation across the board, *and* also help out the Mexicangovernment as part of the repaving salaries flows back to Mexico!
As Harvard economist Rube Goldberg says, “it’s a win-win!”
March 4th, 2009 at 2:11 pm
Good point, DTM.
Let me point out that the Fed has stepped in to “cool off” the economy in every recent economic boom, by raising interest rates, and with good reason. Beyond a certain level of growth, you get bubbles, inflation, and labor shortages.
The argument against deficits is that we’ll have to raise taxes to pay them off, crimping economic growth, but if we’re going to purposely cool off the economy the next time it looks like 1998, what actual harm would be done by doing so via fiscal, as opposed to monetary, policy?
March 4th, 2009 at 2:12 pm
Shorter Lone Wacko: hurting American is fine, as long as we hurt China even more. Helping America is wrong, if it helps China too.
You don’t love your country, Wacko; you just hate everyone else.
March 4th, 2009 at 2:22 pm
Harvard economist Rube Goldberg also points out another way that the stimulus will lead to massive economic growth. The projects that major city mayors will dole out will help employ union workers working for companies that have been prior contributors to those mayors. The unions, their workers, and the companies will all then donate a portion of their take back to the same mayor and his friends, helping them stay in office and get even more. And, the mayor and his friends will be able to spend those donations on things that will dramatically help the economy. Specifically, the red-white-and-blue ribbon industry will experience a massive rebound. The party platter industry will bloom like a thousand points of light. Those who run meeting halls will think the glory days are back. And, so on.
March 4th, 2009 at 3:13 pm
The CBO is just restating conventional Keynesian economic theory and postwar economic experience. It is not a problem that the government stimulus will reduce output slightly in the long run. If the stimulus works, then in the long run private investment will increase as actual GDP approaches potential GDP.
There may be a period where the government stimulus depresses output slightly, but that is also the period over which the stimulus spending will end. And then the private investment will no longer be crowded out.
What is the fuss about?
March 4th, 2009 at 3:48 pm
j,
The fuss is about the cost to the economy from the national debt – paying the interest, paying down the principle, and higher interest rates.
March 4th, 2009 at 4:39 pm
Each of those signs should have a prominent, short project ID on it that web users could enter into recovery.gov for more information.
March 4th, 2009 at 4:53 pm
“For the long-term, there’s always time to try to adopt counterveiling pro-growth policies—tax reform that broadens the base and lowers rates”
So why didn’t Obama propose that in his budget, instead of proposing to squeeze the top five percent of earners, and hamstring industry with cap & trade (i.e., higher energy costs)? The promise of pro-growth tax policies in the future might have given some hope to the stock market, which in turn could have ameliorated the negative wealth effects putting downward pressure on demand.
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