Roads, bridges, and condoms

Discussions regarding the efficacy of a fiscal stimulus among macro economists have been interesting. One disagreement is whether a tax cut stimulus is more potent than a spending stimulus. The current proposal has both. Everyone recognizes the problem of lags associated with increased government spending. There is always a recognition lag - we've been in a recession since December 2007, however that was only determined this past quarter. The fiscal stimulus package will be voted on in February and the vast majority of projects won't start for months after that. Will we be emerging from the recession just when the fiscal stimulus kicks in? Does fiscal policy exacerbate the business cycle? Read John Maynard Keynes, the father of active fiscal policy, in 1942...

“Overall, only $26 billion out of $274 billion in infrastructure spending
would be delivered into the economy by the Sept. 30 end of the budget year, just
7 percent. Just one in seven dollars of a huge $18.5 billion investment in
energy efficiency and renewable energy programs would be spent within a year and
a half.”

“Organized public works, at home and abroad, may be the right
cure for a chronic tendency to a deficiency of effective demand. But they are
not capable of sufficiently rapid organisation (and above all cannot be reversed
or undone at a later date), to be the most serviceable instrument for the
prevention of the trade cycle.”

Another disagreement centers on the size of the multiplier. How much does a dollar of government spending increase GDP? Team Obama is using 1.8, a dollar of spending will boost GDP by $1.80. Others say that the multiplier is less than 1, a situation where a boost in government spending crowds out investment and consumption spending.

All recognize, but some downplay, that the government is not very good with respect to allocating resources efficiently - prioritizing projects based on return. Ideally projects should be addressed that make us more productive. Spending for the sake of spending isn't the idea, paying some to dig ditches while others to fill in the ditches. That's re-distribution and can't be expected to boost GDP long term. Put another way, all expect pork to be part of any new spending. A colleague joked recently that everything is becoming infrastructure. The question is how bad will it be. Well thanks to Speaker Pelosi we are beginning to see. She argued to George Stephanopoulos that spending on birth control would stimulate the economy.

Now one might argue that reducing the birth rate is good for economic growth (see especially Thomas Malthus), though those who make toys, diapers, baby food, and baby clothes might disagree. No, this is social policy, part of what Rahm Emmanuel was talking about when saying that a crisis should not be "wasted."