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Bruce Bartlett Worries About Haste and Waste, Too

January 30th, 2009 . by economistmom

I can’t help but point to more agreement between me and Bruce Bartlett, as demonstrated in his Forbes column today (emphasis added):

One element that is common to all recessions is a significant decline in aggregate spending in the economy. This would include consumption and investment spending by businesses, households and governments. Countercyclical policy primarily consists of raising any type of spending; all is equally valuable in terms of countering a recession. Nor does it matter for countercyclical purposes whether the spending originates in the private sector or the public sector. Spending is spending and the goal is to raise its total amount.

Since spending drives short-run growth, saving is necessarily bad. This is why federal budget deficits are stimulative. The deficit is essentially negative saving. If the funds raised by federal borrowing are used in a way that stimulates additional consumption or investment, then this will have a positive effect on near-term growth.

But in the long run, saving is critical–it finances investment, which is the wellspring of growth. Ultimately, saving and investment must be equal. Although foreign saving can be imported to finance domestic investment, this only works for a time because the returns to such investment will accrue to foreigners and Americans will not be enriched. It’s better if domestic investment is financed through domestic saving

[I]t’s a fallacy to think that increases in asset values are the same thing as saving. They are, from the point of view of the individual, of course, but not for the economy as a whole, because no additional resources have been created out of which to bring forth new productive capacity. That only happens when there is foregone consumption out of current output.

Saving and deficits aren’t the only economic factor that have different long-run and short-run effects. In a recession, monetary policy needs to be expansive, but in the longer run, it will be inflationary. In the short run, government spending is stimulative, but in the longer run, an increase in the size of government retards growth…

For these reasons, we need to be very careful about enacting measures that are justified only by current economic conditions but are potentially disastrous if maintained for too long. Therefore, it’s critical that all stimulus measures be temporary. It would be a great mistake to use an emergency to justify a permanent expansion of government. Unfortunately, this is inevitable…

It is a certainty that some, perhaps much, of the spending being initiated as stimulus will be just as wasteful. That will be true even if there are no earmarks in the legislation, because when decisions are made in haste without proper vetting, waste is inevitable.

There are also tax cuts contained in the stimulus package. Although these will have an impact on the economy more quickly than increased spending, they are poorly designed for stimulative purposes. The Tax Policy Center found that none of the provisions deserve a grade of A, even with a rather generous grading standard. Overall, the tax cuts get a grade of C+ in terms of stimulus. Economist Steve Entin says they aren’t justified as supply-side measures, either.

Thus we see that evaluating stimulus measures depends critically on the time frame. It’s not a contradiction to support increased government spending today while at the same time holding that an increase in the size of government is ultimately bad for growth…

OK.  Where I think I part ways with Bruce on this, is the presumption that a larger government has to mean a low-growth economy (or a bad government).  I have to think that larger can be consistent with better, because I think it’s inevitable that government as a share of our economy will grow over time.  (With the baby boomers in retirement, I don’t see how spending on Medicare and Social Security as a share of the economy can do anything but rise over time, even if we manage to reform the programs to make them more sustainable.)  I think the federal government could spend more efficiently and less wastefully, for sure–if policymakers have the will to do it.  And I believe the notion of “better” government goes beyond a government that solely promotes the traditional measures of aggregate economic growth–but one that produces a fairer distribution of resources among households, and a more sustainable mix of resources.  There are still many things that government can do that the private sector cannot, even over the longer run–not just right now when the private sector seems paralyzed and unable to do any of the consumption.  To digress into economist lingo, I believe a lot of the “possibilities” for our economy depend on the government doing its (public-goods) part to expand that production possibilities frontier, and on government policy to help steer our economy to the point on the frontier that maximizes social welfare.

4 Responses to “Bruce Bartlett Worries About Haste and Waste, Too”

  1. comment number 1 by: Bruce Bartlett

    My point about bigger government is just an empirical observation based on many cross-country studies that I can cite if you want. At the same time, I certainly don’t believe that bigger government necessarily condemns us to slow growth; only slower growth. Moreover, I don’t deny that it’s theoretically possible to maintain growth even in the face of bigger government if it is financed properly. The main economic cost of bigger government is the higher tax rates needed to pay for it. But if government expansion could be financed with something like a VAT then I think we would minimize the deadweight cost of taxation that will rise as tax rates increase to finance bigger government.

  2. comment number 2 by: Jim Glass

    Countercyclical policy primarily consists of raising any type of spending; all is equally valuable in terms of countering a recession … Spending is spending and the goal is to raise its total amount…

    That sounds like getting perilously close to the Broken Windows Fallacy. If materials are consumed and equipment depreciated building the great bridge from nowhere to noplace for nobody, all that represents a deadweight loss to society (even if the labor on the bridge would have been otherwise fully unemployed). That is a loss of wealth. “Growth” increases in terms of GDP, but that is offset by the loss of wealth for little or no net gain or maybe a net loss. And at the cost of an extra tax bill that lands on the future forever, to service the debt incurred on paying for the loss of wealth. The future is made permanently poorer by both the loss of wasted resources and that tax cost.

    In contrast, if the bridge connects someplace to somewhere for lots of people who benefit from it, it can increase not only income but society’s wealth in productive assets, maybe by enough to more than cover its own tax cost in the future.

    If so, then “all spending is equally valuable” doesn’t look true to me. Increasing income by the destruction of wealth is not the way to cure a recession in my book. If it was we could hire the unemployed and give them pickaxes to go and destroy perfectly good entire buildings, not just their windows. That’s spending too, and it is the equivalent of building bridges to nowhere, just a little more visibly heavy-handed.

    Here’s a more real-world example where I live in NYS. Three real places I know of: (1) A factory in the Bronx just closed due to the recession, leaving its workers unemployed, as NYC continues to de-industrialize. (2) “Bullet Hole Road”, a street serving a community in an upstate county with little political influence, that might have been paved once, it’s hard to tell. (3) “Rocky’s Road to Nowhere”, as the locals call it, in influential and rich Westchester County, a four-lane divided highway that connects noplace on one end to, literally, a hospital parking lot’s back entrance on the other. (The road is very popular among the kids for drag racing, and the easy hospital access is a great conveninece!)

    The “ideal” of the imagined govt stimulus spending seems to be: the unemployed workers in the Bronx are hired to work paving Bullet Hole Road, and the world becomes a better place all around. But that’s not going to happen, if only because the Bronx workers aren’t in the right union — and that upstate county doesn’t have political pull to get the money anyhow.

    What I fully expect to see as a result of NYS’s share of the stimulus money is the unemployed in the Bronx remaining unemployed, Bullet Hole Road remaining unpaved, and Rocky’s divided highway into the hospital parking lot getting a nice new repaving and maybe landscaping, at the hands of contractors and workers bid off of other project they would have been employed doing, with the cost landing on our tax bill forever.

    It’s not a contradiction to support increased government spending today while at the same time holding that an increase in the size of government is ultimately bad for growth…

    It’s not an intellectual contradiction, as in theory increased spending today could be offset by reductions tomorrow. But there’s certainly a real-world contra-indication involved, in that no major increase in the size of govt has ever been fully reversed. Say “mohair subsidy”, created post-WWII with the supposed “national security purpose” of assuring that the US Army would have enough goat-hair to weave into uniforms. It survived into the 1990s, was briefly repealed out of Congressional embarrasment when publicized, and has since been reinstated.

    The NY Times yesterday had two major page one stories about how the stimulus spending is being used by Democrats to create new spending programs for their constituents across a range of areas, especially in health and all across the range of education. Once these constituent groups start living off the federal budget, if anyone thinks these programs are going to be cut back just because the stimulus spending is no longer needed, I have a mohair subsidy to discuss with you.

    Therefore, it’s critical that all stimulus measures be temporary. It would be a great mistake to use an emergency to justify a permanent expansion of government. Unfortunately, this is inevitable…

    Does this not say that it is inevitable that we are making a great mistake?

    “I have to think that larger can be consistent with better, because I think it’s inevitable that government as a share of our economy will grow over time.”

    I think that’s called optimism. ;-) I have to think that if I fall off the ferry I’ll be able to swim to shore, because otherwise … but I have rather little evidence to believe it is true.

  3. comment number 3 by: Bruce Bartlett

    I get tired of the “broken window fallacy” being invoked so frequently by right wing economists of the Austrian persuasion. No one is talking about destroying anything. The problem here is that there are productive assets in existence that no one is using at all and have no prospect of being used anytime soon. If they can be employed very cheaply by government then it benefits everyone, at least theoretically. Austrian-types can disagree with this idea, but please make a more substantive argument than trotting out old analogies from “Economics in One Lesson” to make your point.

  4. comment number 4 by: Anandakos

    Madame,

    I moved this from the school grades topic where I mis-posted it.

    Your arguments, those you have referenced, and Jim Glass’ post are from an economist’s point of view exactly correct. We should of course create as little haste and waste with necessary long-term national improvements requiring the public sector.

    The problem is that the Republicans have for the past fifty years reneged on agreements to make those improvements when the economy turns upward. There is always enough money to bail out monopolistic rent-seekers, but when the crisis passes they argue that “the government is taking too much of your money; we have to give it back to you.” There is NEVER a time when it’s appropriate to make needed public improvements in their world-view. That’s why Rahm Emanuel said “never waste a good crisis!” He understands that if the improvements aren’t begun now, with the unfortunate side effects that rushed planning entail, they will never begin.

    Look at what happened with Jimmy Carter. Some of the environmental programs he started were on the bleeding edge of technology at the time. Because they were, they were NOT as efficient as they might have been. But had they been continued the rapid technological advancements of the computer boom would have led to improvements in them, and today we would have healthy wind and solar energy industries, instead of buying Danish turbines and Chinese amorphous panels.