But the Short Run Is Happening Now!
Gary Becker and Kevin Murphy, two conservative economists at U Chicago have one of the better sensible, economically grounded attacks on the stimulus plan in the Wall Street Journal. They make a bunch of points, but their main one is that due to the nature of the specific spending, which they contend is likely to be permanent (with the obvious exception of the state funding stopgap, this seems pretty true) the expected multiplier will be lower over time. The other long term concern is that, eventually, taxes will have to go up to pay for the permanent new spending, which will have negative effects on growth, and, in their estimation, should be counted against any immediate, stimulus related GDP gains:
The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.
We believe that it is incumbent on both supporters and opponents of the bill to thoughtfully evaluate each of these four factors. We recognize that how individuals will come out in their own evaluation of these factors will determine their attitude toward the stimulus package, and that there is considerable ground for reasonable differences of opinion.
Our own view is that the short-term stimulus from the legislation before Congress will be smaller per dollar spent than is expected by many others because the package tries to combine short-term stimulus with long-term benefits to the economy. Unfortunately, short-term and long-term gains are in considerable conflict with each other. Moreover, it is very hard to spend wisely large sums in short periods of time. Nor can one ever forget that spending is not free, and ultimately it has to be financed by higher taxes.
Look, these are reasonable concerns, and while I’d argue with them over their specific estimation of the value of the spending programs and the likely multiplier, they’re at least making sense. But the one thing that counts against their analysis is a big underestimation of just how big the crisis we’re in is. I’m sure you’ve all seen the super scary unemployment graphs and, just anecdotally, we’ve generally underestimated just how bad it’s been and with all the uncertainty in the financial markets, things could certainly get worse. I guess what I’m trying to say is that Becker and Murphy don’t seem to be grappling with the weird paradoxes of what Krugman calls Depression Economics.
As Krugman puts it (and let me note that he came to all these conclusions when he was just an universally respected mainstream economist), depression economics are weird, and overwhelming, radical and quick action is what called for. The possibility of ending up with a lost decade of high unemployment and low growth is just too devastating and so policy makers should do just about everything to avoid it.
So, sure, we should keep in mind that our stimulus spending should be as well targeted as possible and that we’re gonna have to pay it all back eventually, but this kind of dithering has the serious possibility of preventing the type of massive actions required to prop up consumption, demand and employment.
