Continued Pondering on Fiscal Stimulus

The classic argument against fiscal stimulus is that it crowds out spending. As I noted on a prior post, Paul Krugman has objected that he’s only proposing that government borrow businesses excess cash reserves, which, he says, won’t crowd out because that money’s not being used anyway. A source I found somewhere recently (and don’t feel like searching for at the moment) suggests those current excess reserves are around $1 trillion, which presumably would be a meaningful amount of stimulus.

Does that suggest Krugman is right? It sounds compelling. Two possible criticism have been rolling around in my head. One is that businesses might be waiting while they search out good investment opportunities, and borrowing that money might make it impossible for us to ever know what they would have done with that money six months or a year from now. I’m not sure how strong that criticism is, though, precisely because borrowing the money would make it impossible for us to ever know what businesses would have done. The other is that it assumes a multiplier of greater than 1 (which Krugman and others believes is the case, while Robert Barro and others dissent). But again I’m not sure about the strength of the argument because I don’t think anyone can state with certainty what the multiplier for government stimulus spending is.

But what about this argument from Steve Sexton at Freakonomics, written in the context of Obama suspending the new EPA rules?

cash reserves are not “idle” for most businesses; they are providing a hedge during uncertain economic times. If owners of such businesses have decided that their current reserve is optimal, then surely they will seek to maintain that hedge even with the requirement of new pollution-abatement expenditures. In that case, they must reduce other expenditures today in order to retain the hedge. The new expenditures and jobs for pollution abatement, then, are partially or fully offset by reduced expenditures and job losses elsewhere.

Would the same logic, if correct, would hold true for borrowing for stimulus? Would businesses would offset their diminished cash reserves by decreasing investments elsewhere? Or is this different because in the case of borrowing they’re voluntarily investing their money with the government, demonstrating by revealed preferences that such a use of their cash is more valuable than keeping it in reserve, whereas the same can’t be said for involuntarily investments in pollution control measures?

And, a technical question, if the government borrows a trillion (or some portion of that), how does it ensure that the borrowing is drawn from those cash reserves, rather than drawing it away from other investments, so that it continues to crowd out? Or does that not matter? I would think it has to, since in that case the net cash reserves would remain the same. Does this argue for a stimulus policy of “drafting” cash reserves involuntarily, rather than selling government securities to voluntary bidders?

My inclination, clearly, is against stimulus, but I remain uncertain. I’m not going to indulge in an ideological stance against it, but while I remain unconvinced by Krugman and company, I’m not yet fully persuaded that their critics have satisfactorily demonstrated anything more than doubts about stimulus.

_________________________________________________________________
Addendum: I’m not persuaded that the short-term effect on the economy is the relevant question in regards to whether Obama should delay pollution controls or not. If the amount of pollution the new requirements would prevent is significant, he’s just perpetuating an externality, so any economic benefit is largely illusory, created by allowing businesses to continue forcing others to involuntarily cover their expenses. I have no doubt that the local factory in my town might add jobs if the government required my neighbors and me to pay their utility bills, but I don’t see how that helps the local economy on net.

Advertisements

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
This entry was posted in Economical Musings. Bookmark the permalink.

33 Responses to Continued Pondering on Fiscal Stimulus

  1. …that businesses might be waiting while they search out good investment opportunities…
    .
    Or, could it possibly be a strategy to bring down the cost of labor to the breaking point so that poverty is pandemic and workers will settle for whatever just to keep the wolf from the door?
    .

  2. I love how our solutions to resolving the recession that we’ve attributed to systemic risk involve taking on more systemic risk.

  3. Matty says:

    Or, could it possibly be a strategy to bring down the cost of labor to the breaking point so that poverty is pandemic and workers will settle for whatever just to keep the wolf from the door?

    So the business owners are saying “I could invest this money back into my business and increase profits this year but instead I’ll sit on it in the hope that the result will be lower wages in five years time and that will increase my profits”. It strikes me as a big gamble that 1. the cost of labour would fall by more than you could have made using the money now and 2. that you wouldn’t reduce those profits by having fewer customers able to afford your products. On the other hand taking risks is an important part of growing a business so maybe they are taking that gamble.

  4. Lance says:

    Pinky,

    Or, could it possibly be a strategy to bring down the cost of labor to the breaking point so that poverty is pandemic and workers will settle for whatever just to keep the wolf from the door?

    First of all how many business owners control a large enough segment of the work force to cause “pandemic poverty”. And as Matty points out reducing the majority of people to poverty is not very good for sales of your product or service.

    Me thinks you have a somewhat unrealistic and negative opinion of most “business owners”.

  5. Dr X says:

    Not only is there the multiplier question in relation to the effectiveness of spending, but I also see some division on the question of whether or not we face an extremely prolonged liquidity trap of the sort that’s been described as Japan’s lost decade,( or is two decades yet?) While the rest of the world economy was hot with investment, as I understand it Japan remained largely on the sidelines with investors wary because of inadequate domestic demand. (and Japan doesn’t enjoy the cheap labor favorable to exports in, say, the Chinese economy, which relied heavily on foreign demand.). So in terms of waiting for businesses while holding la trillion in cash remains optimal, there’s the matter of how long those cash holdings will remain optimal and the matter of whether we’re caught in very prolonged vicious circle of unemployment and high cash reserves.

  6. Lance says:

    James Hanley,

    ?If the amount of pollution the new requirements would prevent is significant, he’s just perpetuating an externality, so any economic benefit is largely illusory, created by allowing businesses to continue forcing others to involuntarily cover their expenses.

    There is no more amorphous “weasel word” in the lexicon of the self-righteous leftist than externality.(I’m proud of Microsoft word that it doesn’t recognize this moralistic phantom.)

    Let’s say I see you piss in my water supply. I feel that you have materially harmed me and I am going to seek redress, To do so I have to prove damages. If the concentration of your piss is not empirically measurable against the background piss or if I am unable to show reasonable harm from the slightly elevated piss parts per million then I should shut the fuck up and drink the goddam water.

    This is essentially the situation with the current EPA administration and many of it’s initiatives.

  7. James K says:

    Pinky:

    Or, could it possibly be a strategy to bring down the cost of labor to the breaking point so that poverty is pandemic and workers will settle for whatever just to keep the wolf from the door?

    But any one employer could expand their market share by breaking ranks and hiring the unemployed workers. What you are proposing would require a conspiracy on a vast scale.

    Lance:
    Externalities are far more than a left-wing shibboleth, but of course the existence of a market failure is not a sufficient condition for government action.

  8. James Hanley says:

    Lance,

    Funny, I didn’t know the whole economics profession was composed of left-wingers.

    OK, so maybe in the vocabulary of the self-righteous leftist it’s a weasel word, but their misuse of it doesn’t destroy the critical validity of the concept.

    To put it another way, how would you respond if I wrote, “There is no more amorphous “weasel word” in the lexicon of the self-righteous post-modernist than relativity”? Would you accept their continued misuse of the term as a meaningful criticism of physicists’ use of the word?

  9. Lance says:

    James Hanley and James K,

    OK, points taken.

    I should have taken a minute to wipe the foam from the corner of my mouth and said that the word externality is one of the most often abused words of those on the environmental left.

  10. James Hanley says:

    More than “social justice?”

    Oh, you mean words that actually have a real meaning…got it.

  11. Lance says:

    I was dating a nice young (spoiled rich) woman that kept using those words. I said to her horror that there was no such thing as “social justice”. That justice was measured one human at a time.

    She became apoplectic but couldn’t muster a coherent argument to back the concept that she held so dear.

    We didn’t go out much after that.

    She called me a racist because I didn’t agree with the idea of affirmative action. Imagine her surprise when she saw me with my Ethiopian wife two years later. She probably just thinks I have resorted to exploiting “black” people one human at a time.

  12. Well if Marx and James C. Scott are right that our society’s distribution of wealth is based heavily on a received primitive accumulation distribution, then “social justice” (i.e. demolishing the structural citadels the ruling elite has created around itself) is consistent with a libertarian equality of opportunity.

  13. Lance says:

    Noticing that certain historical patterns explain some facets of wealth distribution and working to change them is only consistent with libertarian thought if these structure still exist and persist by means of coercive mechanisms.

    And even then the words “social justice” would be non sequiturs, as they would not convey this meaning unless forced to by redefinition.

  14. Matty says:

    if these structure still exist and persist by means of coercive mechanisms.

    How long would you give it?
    If I stole something from you a week ago am I entitled to keep it since I am no longer using coercion right now, what about a year ago, ten years, a hundred? I’m aware that as a practical matter we cannot undo things like the conquest of the Americas but as James argued in another thread unavoidable is not the same thing as justified.

    Is there a certain length of time that leads us to say coercion before this point should be ignored and if so how and on what basis do we decide how long?

  15. Dr X says:

    @Matty
    “If I stole something from you a week ago am I entitled to keep it since I am no longer using coercion right now, what about a year ago, ten years, a hundred? ”

    Presumably for example, 400 years of enslavement, followed by a brief period of equality under the law, followed by another 80+ years of theft through the suppression, both legalized and illegal, while law enforcement and courts turned a blind eye the illegal elements. Through all this, there was an active , deliberate process of cultural annihilation, at the same time that an active effort to prevent cultural assimilation that would aid tremendously in the ability to participate on anything remotely like an equal level in the economy. Damage to cultures and psyches is an intergenerational phenomenon. People born in the ghetto, raised in the ghetto, are quite often psychologically annihilated in terms of the kinds of psychological capacities that enable people to thrive. Conservatives like to point to bad parenting to account to current failure to thrive, ignoring an entire 400-500 year framework of cultural disability deliberately inflicted by white people. And if we’re speaking about the typical conservative view, after so much deliberate, disabling, intergenerational damage (my grandparents lived in the American South from the early sixties to about 1970–I saw it with my own eyes and heard with my own ears), the notion that a massive, multi-century, material and psychological theft has taken place is dismissed as irrelevant because the individual controls his or own life and choices. Yet, these same conservative believe that the world will descend into chaos, destruction, and misery if their culture is merely exposed to other cultures and beliefs. Their children will be destroyed and their children’s children will be destroyed. No mention of the vaunted individual choice when the context is exposure to Mexican culture, gays, atheists and the like. Now this isn’t the libertarian view of exposure, I’m merely commenting the conservative denial of deliberately inflicted cultural damage while insisting that culture is fragile and endangered by contaminating exposure to other cultures.

    Now dealing with intergenerational damage is difficult, and no easy answers or solutions exist. But I think there is a great deal of denial out the about the reverberations of centuries of legally protected social and cultural annihilation that created a culture that supported dependency rather than independence. The state of African Americans isn’t just about misguided welfare policies that emerged in the 50s and 60s. It’s about hundreds of years of deliberate, systematic and successful efforts to largely curtail the emerge of anything that might support independence in African-Americans.

    Like Matty, I don’t think you can go back and right every wrong. And just handing out compensation does not build a culture of independence. But let’s not pretend that there wasn’t a culturally and psychologically catastrophic theft that took place over the course of hundreds of years, only ending in my lifetime. Let’s not pretend that people aren’t still suffering from that injustice, and that repairing the damage won’t be easy. Being hardhearted in the recognition of this is, IMO, to be an asshole.

    Sorry for typos, and ineloquence. I’m between patients, I wanted to share some thoughts in relations to Matty’s comment. I can add more later if we have more discussion about this.

  16. Lance says:

    Matty,

    You are conflating two ideas.

    First you say,

    If I stole something from you a week ago am I entitled to keep it since I am no longer using coercion right now, what about a year ago, ten years, a hundred?

    If you stole a material object from methen obviously under the law you are entitled to redress.

    If my grandfather stole that material object from your grandfather you are going to have to demonstrate a direct chain of evidence to be compensated.

    If you are going to claim that a group of my ancestors did some shit to your ancestors that generally advantaged me and generally disadvantaged you and then demand compensation you are SOL.

    See the difference?

  17. Lance says:

    Dr X,

    But let’s not pretend that there wasn’t a culturally and psychologically catastrophic theft that took place over the course of hundreds of years, only ending in my lifetime. Let’s not pretend that people aren’t still suffering from that injustice, and that repairing the damage won’t be easy. Being hardhearted in the recognition of this is, IMO, to be an asshole.

    This last paragraph is classic liberal emotional bullying. First of all what exactly do you mean by “hardhearted”? Also this smacks of imposing sanctions on people for shit their ancestors did.

    My mother is Icelandic, so my ancestors were the Vikings. They raped and pillaged most of Europe for centuries. Am I “hardhearted” because I’m not willing to set up social programs to “redress” this “social injustice”?

    How about the fact that most African Americans are far better off than their relatives in Africa? This was not the intention of the people that enslaved their ancestors but it is a fact none the less. If we’re going to make sure that everyone gets to be ”restored” to their “rightful” status should “redress” be imposed in both directions or do your attempt to “correct” the past only apply to disadvantages?

    For people that have been directly affected by illegal actions there are legal means of redress. The only thing I owe anybody else is working to ensure that our current laws do not impose restrictions based on race.

    Life is unfair. Deal with it.
    I am responsible for my actions and you for yours, period. If you try to put your thumb on the scale to “redress past injustices” done to “groups” you are going to step all over the rights of individuals.

    So you can take your smug indignation and shove it if you think you are going to impose sanctions on the freedom of people because of something done by their great grand parents.

  18. Lance says:

    Matty,

    I said,

    “If you stole a material object from me then obviously under the law you are entitled to redress.”

    That should of course read,

    “If I stole an object from you.”

    But, you probably already figured that out.

  19. Matty says:

    I was actually thinking of the history of land theft aka right of conquest or terra nullis around the world rather than the race argument that has come up (funnily enough I understand Iceland is one of the few places this hasn’t happened) and I think this would fall under Lance’s second example.

    That said I do have a question, you both allude to policies that are meant to redress America’s history of racial injustice. Can you give examples? I’m assuming that we aren’t discussing things like voting rights or desegregating schools so what?

    I’m foreign so I really do ask because I don’t know, I tried to think of a current US government policy that is targeted on the basis of race and couldn’t.

  20. James Hanley says:

    Without attempting to take a position on this debate, I had a thought about intergenerational effects the other day. Assume three things: One, that current negative treatment (whether by specified individuals or more vaguely/broadly, “social structures”) adversely affects a person’s emotional, psychological and cognitive development; two, that diminished emotional, psychological and cognitive development negatively affects parenting skills; and three, that poor parenting skills negatively affects a child’s emotional, psychological, and cognitive development.

    If that’s the case–and it seems more likely than not–then there can be a vicious inter-generational cycle that’s extremely hard to break out of. And then events that happened 3 or 4 generations ago plausibly are still having an impact today.

  21. Lance says:

    Matty,

    I think a valid argument can be made that land should not be “owned” but only the improvements and only those improvements that the owner built or purchased. This is the argument of “geo-libertarians” and I find it to be a compelling one. Of course getting all the people that “own” land to go along with this idea would be a monumental challenge.

    As far as race-based government policies in America there are many. State sponsored universities have various policies that attempt to favor applicants of certain “races”. Government funded grants and scholarships use race as a factor. There are preferences for “minority businesses” by various US government agencies in awarding contracts. The list goes on.

    All of Dr X’s emotional arguments go out the window when you look at individual cases. My wife is technically an “African American” but she came here from Ethiopia less than ten years ago. Ethiopia was never colonized and except for a brief occupation by Italian forces just before and during WWII it has never been “exploited” by evil white people.

    Ironically my wife’s ancestral tribe, the Amhara, are viewed as exploiters by many of the less fortunate tribes in Ethiopia and have been accused of discrimination by these also “black” people. In fact the Oromo tribe is the majority in the country but has been historically discriminated against by the “highland” tribes, which are predominately represented by the Amhara tribe and the Tigre tribe. The Oromo are seeking affirmative action-like policies in Ethiopia.

    Why the hell should my wife, who’s ancestors not only were never discriminated against by white folks and may have actually discriminated against “black” people in her ancestral homeland, be favored over a “white” person by the government here in the USA?

    To the credit of the current Ethiopian government tribal differences are being downplayed and most Ethiopians view their tribal ancestry the way many Italian and Irish Americans view theirs, as a point of pride but not a divisive cudgel to make others feel guilty or appeal for special government treatment.

  22. Lance says:

    James Hanley,

    If that’s the case–and it seems more likely than not–then there can be a vicious inter-generational cycle that’s extremely hard to break out of. And then events that happened 3 or 4 generations ago plausibly are still having an impact today.

    One needn’t argue against any of that to dismiss race based policies as unfair and even counter-productive.

    If you’re going to institute policies to help the “disadvantaged” this can be done by assessing the objective circumstances of individuals while completely ignoring their ancestry or physical characteristics.

  23. Lance says:

    I often hear people bemoan the fact that we don’t live in a “post racial” society. Most of the people making this complaint are more than happy to put people in “racial” categories.

    This drives me insane.

    I am not ignoring the history of racial discrimination and it’s deleterious affects here in the US and indeed through out the recorded history of our species. I am just pointing out what should be obvious to everyone. Until people start acting like they don’t care about race and visiting opprobrium on those that continue to deal in this unscientific and corrosive currency this shit is never going to end.

    I spend long periods in Africa when I am the only “white” person and it honestly never occurs to me that I am “white” and the people around me are “black” once I get into social situations that require people to deal with each other one on one. It becomes about as important as being tall or having a certain hair color or texture

    I am not asking that we pretend that there aren’t inequities caused by racism that have disadvantaged large numbers of people but I see no practical or moral reason to use the metric of race as a means to remedy the results of this contagion.

    You can’t end racial discrimination with more racial discrimination.

  24. Matty says:

    I looked up the argument of the geolibertarians and it is attractive, that said it doesn’t really address my concerns. Land currently is treated as property and much of that ‘property’ at some point in history changed hands by someone using force to prevent those who had been using the land from continuing to do so.

    I also wonder what you would say to the following scenario. Jack ‘owns’ an area of woodland that he uses for hunting, he has chosen not to build or farm on that land and thus under the improvement argument owns nothing there. Does Jack have a legitimate objection if Jill wants to convert the woodland into a factory for solar pannels?

    You could say he owns the game, but that right is only enforceable if it comes with a right to control the land to keep it suitable which brings us back to control over land as the equivalent to a property right.

  25. Matty says:

    You can’t end racial discrimination with more racial discrimination.

    Now this I agree with absolutely, in fact I have long refused to fill in the ethnic origin forms that much of the British government and many private companies use on the grounds that my race should be irrelevant. I’m always tempted to write Homo sapiens but have so far resisted.

  26. Dr X says:

    @Lance,

    This last paragraph is classic liberal emotional bullying. First of all what exactly do you mean by “hardhearted”? Also this smacks of imposing sanctions on people for shit their ancestors did.

    Perhaps my fault rushing that out, but I think you misunderstand me. I’m talking about people who sneer at the notion that cultures and psyches experience intergenerational damage. That’s what I mean by hardhearted. One can acknowledge this without it implying any particular policy, and certainly without imposing sanctions on anyone. My concern here is more about a kind of social contempt, absent any larger perspective.

    I would have hoped that people here can understand that I can refer to a situation in reality without that automatically implying liberal boilerplate as policy recommendations. I’m not pushing white guilt. I’m pushing against conservative contempt. I wouldn’t pin that on anyone here. I thought by mentioning conservatives, that would have been understand.

    And, as a philosophical matter, how do we deal with large scale past theft still exerting effects, without penalizing the innocent, but pushing toward restoration. Hard questions.

    I do think there is lot to the idea that further discrimination doesn’t end discrimination, however, that part–something I believed wholeheartedly at one time–is theoretical and unproven, but it’s often said as if it’s absolute fact. I think can make some decent arguments that that viewpoint may not be entirely correct. But not now.

    I’m pondering a post on some of this at my blog. If i can get to it, I’ll return with a link. But I hope you don’t further offense, because neither my intentions nor my feelings would be about disparagement of you. I’ve heard enough of your views to know about your decency and good faith.

  27. Lance says:

    Dr X,

    I didn’t mean to sound confrontational towards you. I realize most of your animus was meant for people that object to racial preferences because of a fear that it will disadvantage them and force them to examine their narrow minded view of society.

    I respect your opinions and humanity greatly.

    I was reacting to a hypothetical argument for racial preferences.

  28. Lance says:

    Dr X,

    Upon further review I see that I almost completely missed the point of your post and launched into a retaliatory strike for an attack that never occurred. (A sort of Gulf of Tonkin over-reaction to what I expected your argument to be. Hopefully a protracted military exchange can be avoided.)

    My apologies.

    Your point is interesting. I suppose it is the sort of thing that has kept generations of people at each other’s throats for eons. We are complex critters and it can be difficult to predict the behavior of individuals let alone understand or predict the psycho-social behavior of large segments of the population.

    As is often the case people are talking past each other on many of these issues. I am hopeful that the many technologies that make it possible for a former kid from the mid-west to keep in touch with his African in-laws and friends will lead to people around the world from all social strata and backgrounds to understand each other and see each other as just what we are ,,, people.

  29. James Hanley says:

    A sort of Gulf of Tonkin over-reaction

    I never thought I’d see Lance identifying with LBJ!

  30. Lance says:

    James Hanley,

    I never thought I’d see Lance identifying with LBJ!

    Next I’ll be showing Dr X the scar from my gallbladder surgery.

  31. Dr. X says:

    Lance,
    I don’t mind the scar, just don’t talk to me while your on the crapper ;)
    James,
    This post and thread has generated at least a half dozen post ideas for me. I just put one up. If it interests you, I’d enjoy a critique/alternate version post over here. Obviously, I’m offering a Romer/Krugman type argument, but I made a nifty graph and they didn’t.

    http://drx.typepad.com/psychotherapyblog/2011/09/great-depression.html

    It’s nothing you don’t know, but I like my graph.

  32. Dr. X says:

    I’ll update my post and, link to you, if you post something further over here.

  33. Dr. X says:

    Or I’d be happy to cross post.

    Okay, I’m done. I’ve to work again.

Comments are closed.