Thursday, June 24, 2010

Brad DeLong Has Questions

Paul Krugman has answers:

Brad DeLong wonders how the proponents of tight budgets and tight money are prevailing in the midst of mass unemployment, low interest rates, and incipient deflation.

It’s actually not all that surprising. Horrifying, but not surprising.

The case for expansionary policies in the face of a slump is intellectually difficult; Keynes described the writing of the General Theory as a painful process of discovery, and so it is. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias.

But as I argued yesterday at Fox, maybe there is another reason for stimulus skepticism: The government simply doesn't have a very good track record when it comes to spending money wisely. (I'll note that, unlike Krugman, I made my argument without calling anyone asinine.)

But wait you say, that's not a theory that's just anecdote. To which I can only respond with an emphatic you're right. I wouldn't dream of taking on Lord Keynes' General Theory, much less Krugman. I wasn't arguing that tough times call for tough measures. I was just making an empirical observation.

The federal government is the only entity with the authority to carry out the deficit spending called for by some on the left. If we are going to embark on a program of additional stimulus spending, we ought to take a look at the government's track record on spending. I'm just not convinced that this is sufficient to inspire anyone's confidence in further stimulus, no matter how many economists agree that it's a good idea.

I don't think I'm too far out on a limb with this. Here's Matthew Yglesias, a supporter of further stimulus, sounding a note of caution:
To throw a little bit of water on this idea, it seems to me that it matters what the money is spent on. We don’t have a huge quantity of unemployed doctors, so targeted spending aimed at increasing consumption of medical care would be inflationary. But by the same token, we have tons of unemployment associated with the housing/construction sector and printing money to employ those people on infrastructure projects should have no ill effects.
To those on the left that still think it doesn't matter what we spend government money on, please direct your attention to the new $100 million CIA contract with Blackwater (now Xe) for "protective services."

1 comment:

J. Strupp said...

You'll get no argument from me on this blog post or your post on Foxpolitics.

The government can maximize it's bang for the buck by effectively distributing stimulus dollars to the areas of the U.S. economy that could most benefit from these funds immediately and in the future. Many people (myself included) have been rather vocal about the way in which the government has chosen to distribute stimulus dollars.

Tax cuts, for example, which made up a huge chunk of stimulus dollars simply don't have the same multiplier that, for example, direct infrastructure spending does. Why not use the money to fund a new-aged CCC program directed towards, say, increasing energy effeciency, building nuke plants, power grid upgrades, etc.? Obviously, this is just one small example, but I think we've lost a real opportunity to use this period of undercapacity, high unemployment and low long-term interest rates to invest in areas that would give us an outstanding ROI as a country.

Some would say that government is incapable of this. Nonsense. Roosevelt managed to do a pretty good job of it 70+ years ago. This kind of thing takes leadership. But leadership is something we lack at present.