Which Way to Stimulate

Bruce Bartlett’s summary of the past 80 years of stimulus debate is well worth a few minutes of your time. He concludes thus:

The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year. But if much of the stimulus doesn’t come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. According to the Congressional Budget Office, only a fraction of proposed infrastructure spending can be spent before October of next year; the bulk would come long after. …
… I think there is a better case for stimulating the economy through tax policy than has been made. Congress can change incentives instantly by, for example, saying that new investments in machinery and equipment made after today would qualify for a 10% Investment Tax Credit, and this measure would be in effect only for investments largely completed this year. Businesses will start placing orders tomorrow. By contrast, it will take many months before spending on public works begins to flow through the economy, and it is very hard to stop it when the economy turns around.
Stimulus based on private investment also has the added virtue of establishing a foundation for future growth, whereas consumption spending does not. As economist Hal Varian of the University of California at Berkeley recently put it, “Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn’t increase, where will the extra consumption come from in the future?”

It’s important to note, especially given his right-leaning conclusion, that Bartlett treats the discussion from a purely academic point of view, while much of the debate between supply-siders and Keynesians has actually been political. Readers are free to disagree, but I’d place the bulk of the blame for that with the latter group, which tends to see government spending as a means of reshaping society in a way that they believe to be better. They’re less concerned, that is, with comprehension of economic reality than with implementing a social program.
In the current debate, that observation brings us around to the prognostications of Dick Morris that have gotten so much play over the past few days:

2009-2010 will rank with 1913-14, 1933-36, 1964-65 and 1981-82 as years that will permanently change our government, politics and lives. Just as the stars were aligned for Wilson, Roosevelt, Johnson and Reagan, they are aligned for Obama. Simply put, we enter his administration as free-enterprise, market-dominated, laissez-faire America. We will shortly become like Germany, France, the United Kingdom, or Sweden — a socialist democracy in which the government dominates the economy, determines private-sector priorities and offers a vastly expanded range of services to many more people at much higher taxes.
Obama will accomplish his agenda of “reform” under the rubric of “recovery.” Using the electoral mandate bestowed on a Democratic Congress by restless voters and the economic power given his administration by terrified Americans, he will change our country fundamentally in the name of lifting the depression. His stimulus packages won’t do much to shorten the downturn — although they will make it less painful — but they will do a great deal to change our nation.

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Mike
Mike
12 years ago

“Germany, France, the United Kingdom, or Sweden”
Hmmm. 3 of those 4 are under right-wing anti-immigrant (legal or not) governments and the UK is rapidly headed that way as the Tory’s are up by 15% in the polls and just, incredibly, won the London mayoralty for the first time n a century.. Don’t forget the UK had a 20 year straight run of Thathcherism.
Having spent e in each of those countries I can assure you that in NONE of them does the “government dominate the economy” any more than here.

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