Stupid Republican Tricks, Economic Stimulus Edition

Over at National Review Online, Heritage Foundation economist Brian Riedl posted a series of questions about the economic stimulus package. Now, I could be wrong about a lot of this, but Riedl’s questions raised some red flags in my mind. Let’s look:

1) President-elect Obama claims that spending approximately $800 billion will create 3.675 million new jobs. That comes to $217,000 per job. This doesn’t sound like a very good value, especially with the national average salary around $40,000. Wouldn’t it be cheaper to just mail each of these workers a $40,000 check?

First, while the package was designed to create new jobs, that doesn’t mean every single penny will be spent on job creation and nothing else, so that $217,000 figure isn’t accurate

Second, Riedl has apparently never heard of “give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” If you give a man a $40,000 check and he’ll use that to pay his living expenses for a year; if you give a man a job and he’ll earn $40,000 per year for as long as that job lasts. Riedl really only has a point if you assume that every job created by this legislation will only last one year, an absurd assumption.

2) Politicians say deficit spending will expand the economy (as if President Bush’s $300 billion budget deficits brought economic nirvana). If that were true, then the current $1.2 trillion deficit — the largest in history — would already be rescuing the economy. It’s obviously not. So why would $800 billion more of the same suddenly end the recession?

Actually, economists say deficit spending expands the economy, including a man named John Maynard Keynes (who I certainly hope Riedl has heard of, being an economist and all).

But that’s also somewhat of a simplification–just spending huge amounts of money won’t expand the economy. How you spend that money and what you spend it on make a difference, necessitating that government spending be somewhat geared to address the economic problems you’re trying to solve.

So, if unemployment is high you direct spending toward programs that will create and maintain jobs. But just throwing billions of dollars around won’t solve much of anything and isn’t economic stimulus.

3) We’re told that government spending will add new spending power to the economy. But Congress doesn’t have a vault of money waiting to be distributed: Every dollar lawmakers “inject” into the economy must first be taxed or borrowed out of the economy. If government borrows the money from American investors, investment spending drops accordingly. If it’s borrowed from foreigners, net exports drop accordingly. How does borrowing $800 billion from one group of people and giving that $800 billion to another group of people make us wealthier?

Nobody’s arguing that huge amounts of deficit spending will “make us wealthier,” they’re arguing that this spending is necessary to prevent further damage to our economy and to begin creating at least some economic growth.

Apparently Riedl has never heard of an emergency loan, but no worries–I’ll let his NRO colleague Jonah Goldberg explain this one:

In other words, when the economy hits a rocky patch, most experts agree that the government should either cut taxes, increase spending or both in order to stimulate the economy. A personal financial consultant wouldn’t object to a truck driver going into temporary debt to get his broken truck fixed, and pretty much all economists, liberals and conservatives alike, don’t object to borrowing in order to restart economic growth.

[Emphasis mine]

4) Some answer the previous question by saying that transferring income from savers to spenders keeps more money circulating through the economy. That made some sense in the 1930s when people hid their savings in mattresses because they didn’t trust the banks. But today, people use their savings to pay down debt, invest, or put it in banks — in each case, making the purchasing power available to others wishing to borrow. Thus, savings circulate through the investment spending side of the economy. How does transferring money out of investment help?

He has about half a point here. It’s true that, these days, most people keep their money in banks, who then use that money to fund loans and credit.

But the current credit market is terrible, making it hard for anyone–particularly struggling businesses and individuals–to get loans.

If a business needs $1 million to keep their doors open but a bank refuses to give them a loan, that company will go out of business and all of their employees suddenly become unemployed.

But if the government funds a program that does $1 million worth of business with the aforementioned company, that company stays open and continues paying it’s employees.

5) Policymakers are basing the “stimulus” bill on economic models that wrongly assume every $1 of government spending increases the economy by approximately $1.60. Is it really that simple? By that logic, debt-ridden, big-government countries like Italy, France, and Germany should be wealthier than America. And why stop at $800 billion? Such logic suggests unlimited prosperity could be guaranteed by the government borrowing and spending $800 trillion. Should America be basing such costly decisions on these types of economic models?

Of course, Riedl doesn’t specify which models he’s talking about, nor does he provide any proof that policymakers are, in fact, basing their stimulus on those models.

But that’s a fine strawman he’s built there–alleging that some people somewhere are relying on flawed information to draw some kind of conclusion he disagrees with.

And, of course, Riedl goes on to assume that the American economy is identical to that of Italy, France, and Germany, which–of course–it isn’t.

America is a unique country with a unique economy and a unique system of governance, so perhaps something that did or didn’t work in a European country might work differently here.

6) Lawmakers tell us every $1 billion in highway “stimulus” can be spent creating 34,779 new construction jobs. But Congress must first borrow that $1 billion out of the private economy. Won’t the private sector then lose the same number of jobs?

Which lawmakers? Where? Come on, Brian, it’s pretty hard to respond to someone who’s basically arguing with himself.

And it’s hard to know what Riedl means by “the private economy” since the federal government can borrow money from a variety of sources. But the premise of his question is ridiculously flawed anyway, because it assumes that $1 billion spent anywhere in “the private economy” for any reason would both create jobs and create exactly the same number of jobs as $1 billion spent on highway construction.

Like I said before, just spending money doesn’t automatically create jobs; it depends on how you spend the money and where.

Plus, Riedl is assuming that all of the money in “the private economy” is being spent or invested and thus nothing can afford to be loaned out, which is a pretty ridiculous assumption when you consider that banks are holding onto their money instead of lending it:

Although [Treasury Secretary Henry Paulson] was as frustrated as anyone that banks are not lending more, lending is naturally lower in a recession, he said.

Moving on:

7) During the 1930s, New Deal lawmakers doubled federal spending — and unemployment remained above 20 percent until World War II. More recently, Japan responded to a 1990 recession by passing 10 “stimulus” bills over 8 years (building the largest national debt in the industrialized world) — and their economy remained stagnant. Why do lawmakers believe the same failed approach will succeed for the U.S. today?

Well, I’ll let Riedl’s employers at the Heritage Foundation deal with this one–here’s a graph of unemployment rates during the New Deal.

It shows that, when the New Deal begins, unemployment is a little above 35%. It also shows that, when the U.S. enters World War II, unemployment is near 15%. Meaning that the New Deal reduced unemployment by more than 57%, hardly an economic failure–if the current stimulus proposals reduce unemployment by the same percent, we’d be seeing the lowest unemployment rate since the early 1950’s.

(Of course, I’m not arguing that Obama’s plan will reduce current unemployment by 57%, I’m just making a point).

As for Japan, well, plenty of economists (whose relevant work you can find here) claim that Japan’s stimulus was effective, and that it was attempts to return to “conservative” fiscal policies–like balancing the budget–that undercut their effectiveness.

Paul Krugman, who has precisely 1 more Nobel Prize in Economics than Brian Riedl does, claims that Japan’s economic stimulus “probably prevented a weak economy from plunging into an actual depression.”

8) The economy sank because people over-borrowed for houses they couldn’t afford, and financial institutions over-borrowed for investments they badly misjudged. Washington’s solution is to borrow $800 billion that it cannot afford. How will adding $800 billion to the national debt (which will also raise interest rates) solve a recession created by imprudent borrowing? And who will bail out the American taxpayer when the bill comes due?

I wonder how Riedl, an economist, is so unfamiliar with the concept of an emergency loan. The point is that you borrow money to stave off immediate economic crisis and grow the economy; over time, that economic growth produces surpluses that you can use to pay off your debt. Don’t make me quote Johan Goldberg again!

9) Temporary tax rebates were implemented in 1975, 2001, and 2008, and most economists agree they failed to help the economy. Long-term marginal tax rate reductions implemented in 1982 and 2003 both substantially increased economic growth. So why are lawmakers planning another round of temporary tax rebates, followed by an increase in tax rates?

Which economists agree tax rebates failed to help the economy? When?

I mean, if you base the entire premise of your question on the opinions of other people, it helps to know which people you’re relying on. Just because you say “most people agree X” doesn’t make it true–for example, just because I were to say “most economists agree Brian Riedl is a moron” doesn’t make it true.

Now, I’m not saying Riedl is wrong, I’m just saying he’s not giving us any information that proves he’s right. So if you’re not inclined to give him the benefit of the doubt, then this question meaningless.

Riedl is making unsourced assertions about tax rates and then using those assertions to criticize the stimulus package. What his question boils down to is “something happened once, which I say was bad, so why are people repeating that something?” Well, because Brian Riedl’s opinions don’t run the  economy, that’s why–either prove a consensus exists or don’t assume one does.

10) Mayors have pledged to spend stimulus funds on items such as a mob museum in Nevada, a polar bear exhibit in Rhode Island, and curbing prostitution in Dayton, Ohio. As National Review asked, how come one Bridge to Nowhere is a national embarrassment and 1,000 Bridges to Nowhere are a “stimulus?” Given the 11,000 annual earmarks, why should taxpayers trust politicians to spend this money better than they would spend it themselves?

Riedl certainly likes asking the same question over and over, doesn’t he? Like I said twice, just spending huge amounts of money isn’t stimulus–whether or not your stimulate the economy depends, again, on how and where you spend that money.

I mean, in his first question Riedl asserts that the ratio between the money spent to create a job and the value of that job matters. So why can’t he understand that the bridge to nowhere was a bad idea because the amount of economic benefit it would have created was disproportionate to the amount of money it would have cost?

As for Rield’s last sentence, well, that’s where he makes the transition from economist to right-wing ideologue. In a bad economy, people are more likely to save their money than to spend it. And, like I said before, right now banks are holding onto money instead of lending it. Meaning that, it’s not a question of who would spend this money better, it’s a question of who’s more likely to spend it at all.

On the other hand, all the money the federal government spends goes directly into growing GDP. So, instead of giving money to people and then trying to get them to spend it, the government can simply spend the money itself and directly produce economic growth.

But hey, what do I know; I’m a no-name blogger and Brian Riedl has a nice cushy job writing half-baked articles for a right-wing think tank. So I could easily be wrong here.

Advertisements