Tag Archives: Stimulus

Allan Meltzer vs. Keynesians

Allan Meltzer offers four reasons why Keynesian economics via the Obama stimulus has failed:

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later.


Second, most of the government spending programs redistribute income from workers to the unemployed… Permanent tax reduction generates more expansion than increased government spending of the same dollars.


Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs?


Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs?

Meltzer concludes:

Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there:

First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.)

Second, reduce corporate tax rates and expense capital investment by closing loopholes.

Third, announce a five-year moratorium on new regulations.

Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.

Now that the Keynesian euphoria has again faded, perhaps this administration—or more likely the next—will recognize the reasons for the failure and stop asking for more of the same.

I post this for a two reasons. First, Meltzer is an accomplished economist and deserves to be read, just as Krugman or Stiglitz. Second, and more important, since the collapse of the financial sector and the resulting recession, people have taken an interest in the economics of stimuli. Here Keynes is a clear winner. There are no invisible hand economists in recessions. Or at least, there are no invisible hand politicians in recessions. There is always the urge to do something; to not be seen doing nothing. Since Keynesian economics offers a clear idea of what to do – more stimulus to increase aggregate demand in the short term until normal economic activities can return to pre-recession levels – everyone appears to be a Keynesian. But there are those like Meltzer who are not Keynesian. Next time you hear someone – Joe Biden? – say that “all economists agree,” you will know that they all do not. Keynesianism is a theory, and not the final or even most accepted view.

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From Money.CNN.com:

The federal government can’t even give money away to help the unemployed pay their mortgage.

A $1 billion program to assist the jobless will likely end up spending only half the funds, at most, because so few people met the strict criteria.

The Housing Department, which had to approve the applications for the Emergency Homeowners’ Loan Program by Friday, expects that only 10,000 to 15,000 people will qualify. That’s only a small sliver of the roughly 100,000 who applied.

The only way the market will recover is after it hits the bottom. Programs such as this will most likely just prevent the inevitable. So am I to be happy that the government is failing even at giving money away? Do I fear its success more than its failure?


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Low-Hanging Stimulus

The Washington Post reports:

Over the summer, President Obama’s jobs council deemed international travel among the “low-hanging fruit” for stimulating the economy. The Corporation for Travel Promotion, a public-private partnership created by Congress last year, will announce next month the first U.S. advertising campaign to promote the nation as a tourist destination. Rebecca Blank, the acting commerce secretary, called tourism a key component of “America’s exports success story.”

CNN’s GPS had a similar story last Sunday. As of now I know of neither a single representative nor a single interest group (much less an intelligent argument) that does not support increasing tourism. It is win-win for all parties. The problem is not that foreigners are aware of the attractions within the US. The US is second only to France in world tourism. The problem is more likely the difficulty of getting a visa.

Last week, Rep. Joseph J. Heck (R-Nev.) introduced a bill aimed at cutting the time it takes to get a tourist visa to 12 days, citing waits at consulates in key markets that can stretch to more than 100 days.
The State Department has pledged to reduce wait times for appointments to 30 days, and a spokesman said it is adding a “significant” number of staffers in Brazil and China to keep up with demand. The bill is awaiting a committee hearing.
Guo, of Beijing, said he waited nearly two months for an interview for his visa. He said he is also frustrated that the pass is only good for one year, which means he could have to reapply before his next trip. New York, Miami and Orlando are on his list.
“I guess too many people want to go to the U.S.,” Hui said.

The Corporation for Travel Promotion may be unnecessary. The government increasing its productivity to meet demand may be sufficient. Here’s to hoping they are able to do it. That they may truly be unable to grab the low-hanging fruit is troubling.

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Dogs and Jobs

Gary Johnson sure had the hit of the night at last night’s Republican presidential debate in Florida with his Rush Limbaugh’s shovel-ready jobs joke.

This is not news to Obama though. In October, 2010, Obama, interviewed by the NYT’s Peter Baker, in an article entitled, “Education of a President,” confessed one thought of the shovel-ready jobs so touted by his administration: “He realized too late that ‘there’s no such thing as shovel-ready projects’ when it comes to public works.” Too late, indeed.

Keynesian economics posits that increases in government spending can create or keep jobs by increasing GDP during recessions by compensating for decreased consumption. If the people are not spending and consuming, the government will temporarily pick up the slack. One of the caveats, however, is that such stimulus works only in the short-run. (In the long-run it leads to inflation, which is why governments cannot forever run deficits.)

It comes as a surprise only to a politician who specialized in free lunches that major construction projects take years to design, plan, and build. Even those that are shovel-ready – the design and planning has already been completed – will take years to be finished. If Keynesian economics calls for large injections of cash via government spending now, why spend the money over a number of years? Even if all of the money is given today to a construction company, they will spend that money buying the supplies and paying the wages over the lifespan of the project, not all at one time. Such spending will have a “multiplier” effect if spent quickly. As CBS reported after the NYT interview:

When the president campaigned for the stimulus package at the start of his presidency, he and others in his administration repeatedly insisted the investments would go to “shovel ready” projects — projects that would put people to work right away. As recently as [August, 2010], however, local governments were still facing delays spending the money they were allocated from the stimulus.

As part of his most $447 billion American Jobs Act, President Obama has shown he hasn’t learned the lesson after all. Yesterday he traveled to the Brent Spencer Bridge – which connects the home states of House Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) – to argue for more stimulus funds for such construction projects.

“There’s no reason for Republicans in Congress to stand in the way of more construction projects. There’s no reason to stand in the way of more jobs,” the president said as he stood before the Brent Spence Bridge linking Ohio and Kentucky. “Mr. Boehner, Mr. McConnell, help us rebuild this bridge. Help us rebuild America. Help us put this country back to work. Pass this jobs bill right away!”

McConnell, predictably, dismissed the speech as “political theater.” But the politics – and economics – aside, Obama picked a non-shovel-needing bridge next to a non-shovel-ready project as his backdrop. John Merline of IBD reports:

Although some press accounts have described Brent Spence as “crumbling,” and the White House says it’s an example of “urgently needed” repairs, the bridge isn’t falling apart. In fact, it’s designed to last for decades more.

It is, however, “functionally obsolete,” which in this case means it’s too small to handle the daily traffic load. While designed to handle 85,000 cars and trucks, it now carries more than 150,000, leading to regular backups.

So the plan isn’t to do extensive repairs on the bridge, but to build an entirely new one right next to it and keep the old one in use.

The problem is that construction work on the $2.3 billion bridge isn’t scheduled to start for three or four years, according to the project’s official website.

That would appear to put it outside the “immediate” timetable in Obama’s jobs bill, which requires the Transportation secretary to “obligate” all the highway funds “not later than two years after enactment” of the bill.

The bridge failed to get any money from the previous $830 billion stimulus because it wasn’t a “shovel ready” project.

Some think it’s possible the jobs bill money could still be spent after two years, which nevertheless wouldn’t mean much for job seekers today. The Department of Transportation didn’t respond to requests for comment.


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Economists’ Opinions on Obama’s Jobs Proposal

From the WSJ’s Real Time Economics blog, dated Sept 8 with a follow up on Sept 9.

A few thoughts:

  1. There is a diversity of opinion here: from a lot of “bang for the buck” (Krugman) to “not a lot of bang for the buck” (Porcelli). One thinks it will have minimal impact because it mainly “averts a spending reduction rather than creating new spending” (Resler), while another (Shierholz) thinks it “would boost employment by around 4.3 million jobs (yes, 1.6 million of those jobs would come from continuing temporary policies that are already in place and supporting the economy today, but the new initiatives alone would generate 2.6 million jobs).” Regardless, it shows that there isn’t the consensus amongst economists that either side claims. At least not on this topic.
  2. No one thinks it will be easy to pass. It is just a proposal, and one that needs to survive the legislative process. The final version, if there is one, will be different. If economic improvement is not seen, and it probably won’t be, President Obama will (be able to) argue that had his jobs proposal been passed as is, things would have gotten better.
  3. I am always skeptical when reading the forecasts of economists. I agree with Nassim Nicholas Taleb: forecasters should always be asked what their previous predictions were and how accurate they proved to be. Many of these economists would be humbled if forced to do so, or at least would make less exact and confident predictions.

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