Tag: stimulus

Week in Review

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Cato Leads Opposition to Fiscal Stimulus

In reaction to statements from Obama administration officials who say “all economists agree” that the only way to fight the economic recession is to go on a massive government spending spree, the Cato Institute took out a full page ad in the nation’s largest newspapers that showed that those words were not true. Signed by more than 200 economists, including Nobel laureates and other highly respected scholars, the statement was published this week in The New York Times, The Washington Post and many other publications.

On the day the ad ran in The New York Times, Cato executive vice president David Boaz added more names to the list of economists who are skeptical of the spending bill.

Commenting on the principles behind the stimulus, Cato adjunct scholar Lawrence H. White and fellow economist David C. Rose discuss why we can’t spend our way out of this mess:

You can’t solve an excessive spending problem by spending more. We are making the crisis worse.

In The Wall Street Journal, Cato senior fellow Alan Reynolds examines the numbers and discovers that each government job created  will cost taxpayers a staggering $646,214 per hire.

The stimulus package now moving through Congress will spend nearly $1 trillion that the government does not have. With the nation already $1.2 trillion in the hole, Cato director of Tax Policy Studies Chris Edwards discusses the sheer illogic behind pushing for stimulus at a time like this:

If I get up in the morning and drink five cups of coffee and that doesn’t stimulate me, I don’t go and drink another five. I’d recognize my addiction problem and start reforming my bad habits. Federal policymakers should do the same.

For more on the stimulus plan, read Edwards’s Tax and Budget Bulletin, “The Troubling Return of Keynes,” (PDF) co-authored by Ike Brannon, former senior adviser to the U.S. Treasury.

During the House vote on the stimulus bill, just 11 Democrats voted against it, leaving Boaz to ask, “What Happened to the Blue Dog Democrats?

“Blue Dogs supported fiscal responsibility at some vague point in the misty past, and they will strongly support fiscal responsibility at some vague point in the future,” writes Boaz. “But right now they’re going to vote to put their constituents another $825 billion in debt.”

Obama Promises to Close Guantanamo Bay Detention Center

Cato legal policy analyst David H. Rittgers explains why he approves of Obama’s choice to shut down the prison at Guantanamo Bay and offers advice on how to proceed with the plan:

The Founders wrote the Bill of Rights after a violent insurgency brought on by government oppression, and the principles contained therein are no weaker while countering today’s terrorists. Using national security courts to try the detainees in Guantanamo opens the door to closed and classified trials of domestic terror suspects. This degradation of essential liberties is unwise and avoids the social function of trials.

Listen to a Cato Daily Podcast interview with Rittgers to learn more about the future of the Gitmo detainees.

In the forthcoming Cato Handbook for Policymakers, Timothy Lynch, director of Cato’s Project on Criminal Justice, lays out a plan for the future of our government’s strategy for dealing with terrorism. (PDF)

Gore Global Warming Hearing Goes on Despite Snowstorm

Undeterred by a snowstorm that shut down schools and gave federal workers “liberal leave,” the Senate Foreign Relations Committee held a hearing on global warming this week with star witness Al Gore. Gore promoted ways to end climate change through cap-and-trade legislation and investment in renewable energy, reported U.S. News and World Report.

In a Cato Policy Analysis, author Indur Goklany offers his commentary on how government should handle climate change.

Cato senior fellow in environmental studies Patrick J. Michaels offers his analysis on climate change, and how the international community should react.

Appearing on Fox News, Michaels, who is a former Virginia state climatologist, asserts that when it comes to climate change, there is no immediate emergency. For more, don’t miss Michaels’s new book, Climate of Extremes: Global Warming Science They Don’t Want You to Know, co-authored with Robert C. Balling Jr.

Economists against the Stimulus

Cato has just published a full-page ad in the New York Times with the names of some 200 economists, including some Nobel laureates and other highly respected scholars, who “do not believe that more government spending is a way to improve economic performance” – contrary to widespread claims that “Economists from across the political spectrum agree” on a massive fiscal stimulus package. Of course, many economists don’t like to sign joint statements, so this is only a fraction of stimulus opponents in the profession. Greg Mankiw pointed to a few noted skeptics last week:

In a TV interview last month, Vice President Joe Biden said the following:

Every economist, as I’ve said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.

That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto Alesina, Robert Barro, Gary Becker, John Cochrane, Eugene Fama, Robert Lucas, Greg Mankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

And of course Mankiw’s list isn’t comprehensive. There’s also former Treasury economist Bruce Bartlett, former Yale professor Philip Levy, former Ohio State and Federal Reserve economist Alan Viard, Russell Roberts of George Mason, and many more. Under the current circumstances, plenty of economists are endorsing large fiscal stimulus programs. But it’s just not correct to claim that there’s any consensus or that “every economist … from conservative to liberal” supports the kind of massive spending program that the Obama-Biden administration has proposed.

UPDATE: Martin Feldstein, whose support last October for a fiscal stimulus is the reed upon which journalists justify their claims about “economists across the political spectrum,” now calls this stimulus bill “an $800 billion mistake.”

Did the New Deal ‘Help’?

While Barack Obama’s economics team hammers out its $800 billion fiscal stimulus plan, the commentariat is battling over the effectiveness of what some consider the prototype stimulus package, the New Deal.* The suppressed (and problematic) conclusion to all this punditry seems to be: Because government spending under the New Deal helped/didn’t help to end the Great Depression, the Obama stimulus plan will/won’t help to end the current recession.

One of the opening salvos was this exchange between George Will (anti-New Deal) and Paul Krugman (pro). More recently, New York Times editorial board member Adam Cohen (pro) wrote this column, responding to an op-ed by former Business Week bureau chief Andrew Wilson (anti) in the Wall Street Journal.

So who’s right? Did New Deal government spending “help,” as Cohen puts it?

To answer that, we first have to define Cohen’s term — what would it mean to say that government spending under the New Deal “helped”? Two possibilities come to mind:

  • New Deal spending boosted consumption, thereby increasing production, reducing unemployment, and ending the Depression.
  • New Deal spending aided people who would have otherwise been destitute during the Depression.

The first sense considers the New Deal as a stimulus program to revive the economy; the second considers it as a welfare program to aid the poor. The two notions are far from equivalent. My reading of the literature suggests that the New Deal did little as an economic stimulus, but it did provide welfare benefits.

The figure below sketches U.S. GDP and government spending (all levels) for the Great Depression era. The wildly fluctuating GDP line clearly marks the Great Contraction of 1929-1932, the Recession within the Depression of 1937–1938, and the return of GDP to pre-crash levels in 1940. In contrast, government spending has only a very mild upward slope over the period (until the 1941 ramping-up for World War II). In 1930, the second year of Herbert Hoover’s administration, government spending totaled $10 billion; at the height of the New Deal spending boom in 1936, government spending reached $13.1 billion. (In comparison, that rate of government spending growth is just below the average for the entire post-WWII era.) This raises the question of whether there was much New Deal fiscal stimulus at all.


We get a somewhat different view if we consider the federal budget surplus/deficit. Much of the benefit of fiscal stimulus is supposed to come from the fact that it’s deficit spending. In essence, government borrowing moves future consumption to the present and hopefully boosts the economy to a permanently higher level. As the figure below shows, the federal government dramatically ramped up deficit spending in the last year of Hoover’s administration, as tax receipts sagged and Hoover enacted his own emergency programs. FDR continued the borrowing to fund components of the New Deal.

However, this borrowing was not dramatic by today’s standards. As a share of GDP, the New Deal deficit peaked at 5.4 percent of GDP ($3.6 billion) in 1934; in dollar terms, it peaked at $5.1 billion (4.3 percent of GDP) in 1936. In contrast, President-elect Obama recently announced that he expects “trillion-dollar deficits for years to come,” even without the $800 billion stimulus package that his administration is preparing. With a U.S. GDP of roughly $13.8 trillion, the Obama-projected deficit (not counting the stimulus package) represents 7.2 percent of GDP.

Does the New Deal experience thus suggest that, when it comes to fiscal stimulus, just a little bit can have large effects? Interestingly, economic research suggests the opposite. Long before she was named chair of Obama’s Council of Economic Advisers, Christina Romer wrote a short paper for the Journal of Economic History titled “What Ended the Great Depression?” The paper provides empirical evidence that FDR’s fiscal policy provided little stimulus during the Great Depression. As shown in the figure below (reproduced from Romer’s article), the results of the New Deal’s fiscal stimulus (solid line) were little different from what she projects would have resulted from “normal fiscal policy” (dotted line). Both the deficit spending and the multiplier effect from that spending were too small to budge GDP.

What did end the Great Depression? Romer argues that another FDR policy — doubling the fixed exchange rate for the dollar relative to gold — did the trick, though the New Dealers seem to have lucked into that result rather than planned it. The rate change worked as a monetary stimulus, inducing large gold flows into the United States, where they could now buy twice as many dollars. That buttressed bank deposits and increased bank willingness to lend, encouraging investment. The lending resulted in a sharp increase in the money supply, pushing against the Depression’s price deflation and encouraging consumption. From the moment the exchange rate changed, the United States began to climb out of the Depression — albeit slowly; more slowly than many other countries.

Romer’s explanation dovetails with Milton Friedman and Anna Schwartz’s work on the root cause of the Depression: the Federal Reserve’s sharp reduction of the money supply in the late 1920s, in order to moderate the stock market boom and return the United States to the pre-WWI dollar-gold exchange rate. It also dovetails with evidence that other nations’ recoveries from the Great Contraction began soon after they abandoned efforts to return their currencies to pre-war gold exchange rates. My reading of the economic literature indicates that the “monetary policy did it” thesis has been generally accepted by economic historians (contra Cohen’s graf 9).

So it was FDR’s monetary policy that ended the Great Depression, not such New Deal initiatives as the WPA, the CCC, NIRA, and the rest of the alphabet soup. This follows the findings of a later paper that Romer co-authored with husband David Romer on U.S. recessions in the post-WWII era, which found that monetary stimulus proved superior to discretionary fiscal stimulus in restoring the economy.

What, then, to make of our warring pundits? In the fight between Krugman and Will over the stimulatory effects of the New Deal, it seems that opposing sides can both be wrong. Will was incorrect to argue that economic conditions grew worse during the New Deal era — conditions did improve, albeit slowly, and were temporarily reversed by the Recession within the Depression. Krugman, on the other hand, was wrong to argue that FDR’s fiscal stimulus helped to remedy the Depression and that only the large fiscal stimulus of WWII ended the Depression — in fact, GDP had returned to pre-Crash trend (as calculated by Romer) by 1940. And both mischaracterize the 1937–1938 Recession in the Depression. Although federal deficit spending did decrease along with the economy, the recession appears to have been largely the product of onerous new banking regulations that weakened the monetary stimulus (a point that today’s eager-to-regulate Congress should bear in mind).

Concerning Wilson and Cohen, Wilson goes too far in claiming that FDR (and Hoover) “were jointly responsible for turning a panic into the worst depression of modern times.” If anyone merits that distinction, it is the Federal Reserve for its pre-Crash contractionary monetary policy. Cohen is wrong to claim that “as a matter of economics … F.D.R’s spending programs did help the economy.” However, he does have a point that the various New Deal jobs programs provided income for many people who would have otherwise been destitute. As indicated in the figure below, at their height, the programs provided “emergency jobs” to just over 40 percent of laborers who likely would have otherwise been jobless. As state unemployment insurance and federal safety net programs largely did not exist at the time of the Crash, the New Deal jobs programs were likely a godsend for those who got the jobs (though they did little for the millions more who didn’t). Today, however, several government programs provide income and other benefits to the jobless and the poor, so the welfare benefits of the New Deal do not need to be replicated.

Where does all of this leave us in evaluating policy responses to the current recession?

First, the economic history of the New Deal and the rest of the 20th century raises serious doubts about the effectiveness of discretionary fiscal stimulus packages in reversing an economic downturn. Monetary stimulus has a far better track record (which is not to say that we shouldn’t have concerns about such policy — but that is a discussion for another blog post). And though there is no longer a fixed gold exchange rate for the dollar and the Fed has dropped nominal short-term interest rates to near zero, the Fed has other monetary weapons that it can use to fight this recession. Second, the helpful welfare benefits of the New Deal are now carried out automatically by other government programs.

This leaves us with an important question that has so far gone unasked by the commentariat: Given the above, is $800 billion in new government deficit spending worthwhile?

* As Tyler Cowen points out, it’s wrong to think of the New Deal as a comprehensive, unified set of fiscal initiatives; FDR tried many different policies, and sometimes changed approaches, to fight the Depression.

What Is It Good For? Centralizing Power.

The Politico reports that Vice President-elect Joe Biden has been comparing our current economic troubles to the 9/11 attacks.

“We’re at war,” Biden told congressional leaders of both parties during their sit-down with Barack Obama in the Capitol, according to two sources familiar with the exchange.

Libertarians and conservatives who fear that Obama’s inauguration heralds the coming of a new New Deal have new cause for discomfort, then.  FDR’s embrace of the war metaphor was central to building support for the New Deal:

Franklin Delano Roosevelt, elected in a landslide in 1932, wasn’t the only political figure to analogize America’s economic collapse to an attack by a hostile power; his predecessor Hoover had made the comparison regularly. F.D.R. employed the war metaphor far more effectively, however. Roosevelt’s first inaugural address tends to be remembered as an attempt to calm the public, a warning against “fear itself.” The martial metaphors that appear throughout the speech make clear, though, that F.D.R. wanted fear replaced by collectivist ardor. Americans were to move forward as “a trained and loyal army,” with “a unity of duty hitherto evoked only in time of armed strife.” Should the normal balance of legislative and executive powers prove insufficient, Roosevelt concluded, “I shall ask the Congress for the one remaining instrument to meet the crisis–broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.

Two days after his inauguration, Roosevelt used the Trading with the Enemy Act to order the closure of all American banks. Passed during World War I, the act was designed to restrict trade with hostile foreign powers “during the time of war.” Ignoring that limitation, Roosevelt wielded it in peacetime against Americans. It would not be the last time his administration would invoke powers forged in the Great War to battle the Depression. “Progressives turned instinctively to the war mobilization as a design for recovery,” wrote historian William Leuchtenburg in his essay “The New Deal and the Analogue of War,” “There was scarcely a New Deal act or agency that did not owe something to the experience of World War I.”

Of course, viewing anything Joe Biden says as an example of calculated rhetoric may be a mistake.  As the character Hesh Rabkin once noted of the Sopranos matriarch Livia, “Between brain and mouth there is no interlocutor.”