It seems to me that there is a deep incoherence in the argument that fiscal stimulus won’t work. Nobody — well, very few people — doubts that when demand falls and unemployment starts rising and consumer prices flatten and start going down that it is appropriate for the Federal Reserve to cut interest rates, make households feel wealthier and thus make it easier for businesses to obtain financing on terms that make expansion profitable, and so induce both of these groups to expand their spending.
We have done that. Short-term Treasury interest rates are now at zero. We have done all the interest-rate reduction we can, and we still have rising unemployment and flattened consumer prices that are threaten to start falling. So the question is: Since we can’t cut interest rates to induce households to spend more on consumption and businesses to spend more on expanding capacity, should we simply have the government spend more in the hope that its spending will have similar effects on unemployment and demand to the private spending boosts that we usually trigger with monetary policy?
It seems to me that there are three arguments against stimulus that could be good coin:
- There are no unemployed resources — there are only resources in the process of being shifted from one sector to another — and so more spending would just raise prices and not lower unemployment. But I don’t think Tyler wants to make this argument because it is also an argument against expansionary monetary policy and interest-rate reductions.
- Government spending will crowd out more valuable private spending by raising interest rates and thus reducing private businesses’ incentive to expand and households’ ability to consume. I think the proper response to this is: We wish. If government spending would raise interest rates and start to crowd out more valuable private spending, then the Federal Reserve could lower interest rates again and monetary policy would become effective. So I don’t think Tyler is making this argument either.
- The government spending we get will do relatively little to create utility, relatively little to lower unemployment, and the costs of servicing the added government debt taken on will be heavy and burdensome. We are not doing much good for working Americans today or for households today, and we are heavily burdening taxpayers tomorrow.
This latter point seems to me to be the argument that Tyler ought to be making — and that I would make were I in his shoes rather than my own.
My problem with this argument is that I don’t see the high long-run costs. The U.S. government can, right now, borrow on behalf of taxpayers for five years at a nominal rate of 1.87 percent per year. Assuming 2.5 percent inflation going forward that’s a real rate of -0.63 percent per year. If half of all spending is wasted (and the other half produces stuff of value) and if the multiplier is only 0.5 (that is, half of all those employed as a result of government spending are pulled out of other occupations rather than out of unemployment) then at the margin more fiscal stimulus still passes any conceivable cost-benefit test. And I think that we will in a utilitarian sense get better value for our government spending than if half of it were to be totally wasted. And I believe that right now the multiplier is somewhat north of one.
So I want to see Tyler argue (a) that government spending is so ineffective at producing utility that more than half of it will be totally wasted, and (b) that the multiplier even with accommodating monetary policy to keep interest rates stable is very very low, or (c) that the federal government’s cost of funds is not the right interest rate at which to perform the cost-benefit calculation.
There are hints of this in his post — assertions that “the economy has serious structural problems” rather than just a demand shortfall. But I want to see these hints developed at greater length, because to me it looks very much like an aggregate demand shortfall — and after another three months of -750,000 payroll employment numbers will look much more like an aggregate demand shortfall.
Follow Blog War over the federal stimulus package:
- Monday, April 6, Brad DeLong: The Stimulus Package: Like the Housing Bubble, Only Better
- Monday, April 6, Tyler Cowen: Good Policy, Bad Timing: How the Stimulus Package Could be Smarter
- Tuesday, April 7: Tyler Cowen: Stimulus Won’t Help U.S. Industry Restructure Itself
- Tuesday, April 7: Brad DeLong: Arguments Against Fiscal Stimulus Exhibit a “Deep Incoherence”
- Tuesday, April 7: Tyler Cowen: It’s Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!
- Tuesday, April 7: Brad DeLong: Fiscal Stimulus Beats Doing Nothing — By a Lot
- Wednesday, April 8: Brad DeLong: Why the Geithner Plan is Good Medicine for the Banking System
- Wednesday, April 8: Tyler Cowen: The Geithner Plan: An End Run Around Congress
- Thursday, April 9: Tyler Cowen: Coming to Grips With the End of Debt-Fueled Consumption
- Thursday, April 9: Brad DeLong: Yes to Economic Restructuring; No to Universal Bankruptcy
- Friday, April 10: Brad DeLong: Final Thoughts: What Would Turn Me Against Fiscal Stimulus
- Friday, April 10: Tyler Cowen: The Economy is in Too Much Trouble for Stimulus to Help
