It Matters How The Money Is Spent
Brad Delong wonders why we are against government “stimulus”, when “spending” produces good outcomes:
I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand.
At the start of 1996, the US unemployment rate was 5.6%. Then America’s businesses and investors discovered the Internet. Over the next four years, annual US spending on information technology equipment and software roared upward, from $281 billion to $446 billion, the US unemployment rate dropped from 5.6% to 4%, and the economy grew at a 4.3% real annual rate…
Back at the start of 2004, America’s banks discovered that they could borrow money cheaply from Asia… or so they thought. Over the next two years, annual US spending on residential construction roared upward, from $624 billion to $798 billion, the US unemployment rate dropped from 5.7% to 4.6%, and the economy grew at a 3.1% real annual rate.
…[Y]ou cannot argue that these groups did not increase their spending, and that their increased spending did not pull large numbers of Americans – roughly two million in each case – into productive and valued employment.
The government’s money is as good as anybody else’s. If businesses’ enthusiasm for spending on high-tech gadgetry and new homeowners’ enthusiasm for spending on three-bedroom houses can boost employment and production, then what argument can Harvey, Fama, Barro, Steil, and company make that government spending will not? I simply do not see it.
His logic is pretty simple: spend money and you’ll stimulate the economy.
In response, Bryan Caplan over at Econlog fires back with some Bastiat:
If all we’re trying to do is raise nominal GDP, then I agree that “the government’s money is as good as anybody else’s.” Unfortunately, nobody’s money is very good. To see why, we need to ask a question inspired by Bastiat: If X had not spent money on Y, what would have happened instead? We can pose this question to both the private sector and the government.
Suppose X is the private sector, and Y is the Internet. Brad seems to think that if the private sector hadn’t poured money into the Internet, that spending would simply never have existed. This doesn’t make sense to me. If the Internet boom never happened, I say that the private sector would have spent on something else, or lent it out to someone else to spend on something else.
OK, suppose X is the government, and Y is the bail-out. Again, Brad seems to think that if the government doesn’t spend Y, no one will. This doesn’t make sense to me either, and for the same reasons: The money has to come from somewhere.
This, of course, is a very important point. The money has to come from somewhere, and government spending is not “new” spending into the economy. Even if it’s newly-printed money, it only increases nominal, not real, GDP.
There’s a big question missing from Caplan’s response. I posted the below as a comment @ Econlog, and it’s best to let it speak for itself:
“There’s another question to be answered here…
Is the goal increased GDP & employment or is it a more productive economy?
I’d say that the internet boom was a productivity boom. The improvement in computing and communication technologies will have long-lasting effects in increasing the standard of living globally. Yes, there was certainly overinvestment and a boom, but after the correction the world was a changed (and more productive) place.
The real estate boom? Not so much. Yes, it boosted employment and production, but it was fake (i.e. unsustainably-leveraged) money and the long term productivity of our economy was not improved. We spent the money, and people were employed for a while, but at the end of the day we didn’t really make any big changes. Then the fake money dried up, and all those people were out of work.
So can government money improve the productivity of our economy? Maybe. If the money is spent on make-work programs, not so much. If it’s spent in the hopes of getting temporary spending increases, not so much. In short, if it’s just intended to get people buying “things” so that they put people to work, the actual gains of the spent money will not be long-term improvements to our economy.
Could government spend it on productivity improvements? Yes, but they probably won’t. So it’s better — as Bryan points out — to keep that money in private hands where it at least has SOME hope of being spent wisely.”
The goal is not simply to increase GDP and employment. Any spending can do that. The goal is to increase wealth and standard of living, and as the difference between the internet boom in the late 90’s and the recent housing boom shows, it depends how you spend the money.
Government can, quite easily, throw money at AIG to continue insane lending practices or throw money at GM to continue building gas-guzzling cars of questionable reliability. Throwing that money around will certainly ensure some people remain in their jobs. But it doesn’t actually improve the economy!
I’d rather that money stay in the private sector. That money will be withheld from GM until they demonstrate that they have a plan to learn to build cars more efficiently and satisfy their customers in a profitable way. Unless they can figure out how to do that, they don’t deserve the money and the American consumer is not getting the car they want.
Brad Delong is certainly correct that government spending can put people to work, and can even show an increase in GDP numbers — for a time. But much like GM has not proven that they can build the cars people want to buy, the United States Government has not proven that they can spend money wisely enough to be trusted with it. Government spending, like the easy credit of the housing bubble, might induce temporary employment and production. But it won’t improve our economy over the long term.