A very informative interview in The Atlantic has been making the rounds in the bologosphere. Robert Barro, a Harvard economist and former champion of Keynesian economics, has bluntly declared that the spending bill served up by Speaker Pelosi is a historically horrible piece of legislation:
This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.
Barro’s recent article in the Wall Street Journal has stirred up controversy owing to its refreshingly straightforward critique of the Obama spending plan. In short, Barro notes that it is a liberal fiction that that the stimulus plan will result in spending greater than the actual amount of the “stimulus” ( the multiplier effect” or spending that will result in a multiple greater than 1.0):
“The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.”
The Obama team makes the claim that the spending bill will result in a multiplier of around 1.5 and Barro debunks this canard by explaining that:
“I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.
We can consider similarly three other U.S. wartime experiences — World War I, the Korean War, and the Vietnam War — although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 — the same value as before. (These estimates were published last year in my book, “Macroeconomics, a Modern Approach.”)”
Predictably, the extreme Keynesian apologists like Paul Krugman think the one trillion plus spending proposal is not enough and have asserted that the proposal is doomed to failure as a result of the absurd notion that liberal have been too timid in their waste of taxpayer dollars.
A far more effective method to increase private saving and consumption is obviously to lower taxes which would have the effect of putting more money in the taxpayer’s pocket immediately and provide the highest marginal rate taxpayers an incentive to work more and be more productive. This is how recessions are ended and recent history is replete with examples of this policy effectiveness.
Unfortunately, liberal Democrats (and liberal Republicans) won’t divorce themselves from the class warfare mentality that blinds them to the reality that in order to end a recession small business owners (re: the wealthy, in their world view) must keep more of their own money which can be reinvested in their businesses. Instead, the liberal herd rushes off the cliff (carrying with it the domestic economy) in a panic to appease their constituents and cement their hold on power. The Pelosi spending bill is the economic policy equivalent of rabid Jacobinism, the left gone wild in an unprecedented domestic spending frenzy that will have consequences for generations to come. As Barro noted, it’s quite possibly the worst piece of legislation since the 1930’s.