BUSINESS COLUMN | Rajeshwar: Obama stimulus package lacks sound principles

President Obama’s stimulus package is divisive. He just doesn’t see it.

When a reporter asked President Obama why the Obama-backed legislation had only gotten three Republican votes in the Senate and House combined, Obama responded: “There have been a lot of bad habits built up here in Washington, and it’s going to take time to break down some of those bad habits … I can’t afford to see Congress play the usual political games.” President Obama’s implicit assumption, then, is that opposition to his stimulus package is no more than political gamesmanship. After all, the president has billed himself as a consensus-builder. He’s reiterated time after time that he’s worked hard to build these consensuses. Any disagreement, in his world view, must be disingenuous and partisan. But the consensus-builder-in-chief has begun to see agreement and consensus where none exist.

For instance, Obama believes that there is a broad consensus among economists that the government can spend its way out of this recession. Before being sworn in, he proclaimed, “There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.” But less than three weeks later, a scant eight days after he was sworn into office, the libertarian Cato Institute took out a full-page ad in The New York Times — not to mention the Yale Daily News — assailing the newly inaugurated president’s presumption on all matters stimulus. Over 200 professional economists, including three past Nobel Prize winners, signed on to condemn President Obama’s remarks and state “we, the undersigned, do not believe that more government spending is a way to improve economic performance.”

But Obama earnestly believes in this nonexistent consensus. But there are other ways to stimulate the economy. Less than a year ago, Christina Romer, his newly appointed chair of the Council of Economic Advisors, co-authored a paper which suggested that tax cuts could stimulate the economy more effectively than government spending.

Obama, along with traditional Keynesian economic models, assumes all spending is stimulus. That’s not an exaggeration — these are his own words. At a Democratic gathering a week ago, Obama commented, “You get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is?”

The spending-as-stimulus line that Obama and supporters of the stimulus bill have taken is far from economically sound. John Maynard Keynes himself specified the types of government spending that would smooth out business cycles. Specifically, Keynes argued, the government needs to stimulate private investment and create jobs; the government spending would then be justifiable by virtue of its “multiplier effect” — a modest amount of spending could lead to a great deal of renewed production. Even if traditional Keynesian economics works — and it’s far from clear that it does — the so-called stimulus package is laden with the wrong type of spending.

Wrong-headed spending is precisely what the government excels at. If I give my roommate $5 to clean the bathroom, and he gives me $5 to clean the common room, the GDP has risen by $10, but there has been no “stimulus.” But House Democrats have pushed precisely this type of non-stimulating spending into the stimulus package. Obama let them do it. There’s $198 million to Filipino veterans of World War II, $50 million to the National Endowment of the Arts, $335 million in STD prevention, $400 million for research on global warming and $75 million to help people quit smoking. The Wall Street Journal denounced the bill, stating “about 12 cents of every $1 is for something that can plausibly be considered a growth stimulus.” Indeed, the bill reads more like the DNC’s platform than an emergency stimulus. The bill doubles the education budget, doubles the amount of money going to the National Park Service, and introduces new federal control of private health care. The Journal called it a “40-Year Wish List” for the Democratic Party.

The worst part of this whole messy affair is that Obama — elected in large part due to empathetic qualities — has suddenly gone tone-deaf. He apparently believes there is a broad public consensus behind his stimulus. He is clearly interested in responding swiftly and decisively to the economic turmoil he has inherited. Last week, however, a Rasmussen poll showed that only 37 percent of the public now supports the Obama-backed stimulus. President Obama should recognize honest policy disagreement and hard economic facts for what they are. If he does not, he will squander his reputation as a unifier and foist a monstrous mistake upon millions of unwilling Americans.

Julian Rajeshwar is a junior economics and computer science major in Jonathan Edwards College.

Comments

  • Not an Econ major

    "If I give my roommate $5 to clean the bathroom, and he gives me $5 to clean the common room, the GDP has risen by $10, but there has been no 'stimulus.'”

    I'm going to have to call straw man on this one.

    The government allocates $5 to you for bathroom cleaning. Then, you pay your roomate to clean the common room with that $5. He now has $5, the GDP has risen $10, both of you were employed for the time that it took you to clean, the rooms are clean, and everyone is feeling stimulated.

  • Yale 09

    PERFECT!

    Thank you for this Julian

  • Matt

    The worst part is that we have a president that insists on congress coming to a fillibuster proof consensus on this stimulus plan and he can't personally decide on the remaining $350 billion of the TARP. He really only needs one vote for that. As expected, the guy can't make a decision. He's waiting for others to do it for him.

    He thinks that the way to recovery is making it easier to be unemployed. It's completely illogical.

    We are 4 weeks away from a lame duck.

  • Spherical Cow

    A few comments:

    1. Yes, the spending could be better allocated. But, it was Republicans who cut direct aid to states and local governments, and to school construction — a combined $56 billion in the Senate bill, as opposed to your examples of tens to hundreds of millions. I'll make you a deal: we can but back the funds to the NEA, and we get back the $56 billion.

    2. This bill is funded by debt, so your $5 + $5 GDP argument doesn't hold water. We are selling Treasury bonds now to add money to the economy, a mortgage on our future, but one which many economists feel is necessary. That $10 will be spent by consumers, which should increase revenue to businesses. Matt, #3, is completely off-base that spending directed at low-income people, and those without jobs, is a waste. Unlike upper-middle class and wealthy people who might save a stimulus, these people who are getting the funds will most certainly spend it immediately — at the grocery store, the hardware store, whereever.

    3. If Rajeshwar is going to cite Christina Romer, he might want to add that Romer's paper discussed tax cuts during normal economic conditions — and explicitly said that tax cuts do not work the same in recession times. This should be fairly obvious: during boom times, money can easily be invested with a high probability of good returns, so tax cuts promote private industry. During down times, tax cuts will ususally be saves as insurance — except by low-income people, who are precisely the people Obama wanted to give tax breaks to, but which provision was gutten by Republicans who dispise giving money to people who don't pay taxes already, i.e., Republican support of giving taxes/cash back to people is ideologically (libertarian) driven rather than an honest desire for "stimulus."

  • Yale 09

    @Not an econ major:

    Are you retarded? Seriously, is your brain damaged?

    Where did the government get the $5 to allocate for cleaning???

    1- They taxed it away from productive people

    2- They borrowed it from foreign creditors

    3- They printed more money, inflating the currency

    The stimulus is the government taking $1 trillion from its left pocket (the American taxpayers) and giving $1 trillion to its right pocket (the American tax payers). Unfortunately, this transfer has TRANSACTION COSTS- lost time value of money, misallocated funds, wasteful collection costs, errors/omissions, political kickbacks/corruption, etc.

    The supposed Keynesian multiplier, is actually negative!

    You should try microeconomics once.

  • Jeremy

    I hate to say I told you so but Barry and his band of Robin Hooders are clueless and will push us into a depression. Congrats Alinsky….err Soetoro

  • Hiero II

    @#1:

    But someone needs to give the government $5. ie: those $5 were originally someone else's.

  • Julian Rajeshwar

    Spherical Cow,

    Regarding Christina Romer's work, you are referring to the fact that she only dealt with exogenous tax cuts. Nate Silver made this same claim. It is wrong. Exogeneity is used because it is a control measure.

    Here is Prof. Greg Mankiw's explanation:
    http://gregmankiw.blogspot.com/2009/01/importance-of-being-exogenous.html

  • Spherical Cow

    Heiro II and Yale 09 :

    "1- They taxed it away from productive people"

    Do you realize how idologically simplistic this is? Really?

    Yes, taxes come from people who are working. And they support an infrastructure that has a) made all this economic growth possible (see: highways, electrical distribution, water, dams, sewage …), and b) they support the redistribution of wealth (YES, I said it!) in order to create a more equitable society, and to correct for the negative externalities of capitalism's tendency to concentrate wealth in monopolies. Creating a society might have something to do with protecting people when they are most vulnerable and in need, and environment where everyone, regardless of birth circumstance, actually has opportunities for advancement (from New Haven to Appalachia to the Gulf Coast, we still fail in this regard); and when circumstances prevent it, we pitch in — some call it community.

    It was taxes and government regulation that made the middle class in this country — although it's now slipping away.

    I've taken econ, so I don't need your pious, albeit specious and simplistic, lectures that are more ideology than economics. I am willing to argue ideology, even if it's tiring — but to pretend that anyone who isn't a Freidmanite doesn't know what they are talking about is tedious and absurdly wrong.

    Please go argue with Stieglitz and Krugman; I'm sooo sure you are up to it.

  • HGW

    @Yale 09
    Tone down your language, he's obviously not retarded. And don't be so self righteous, econ is a soft science anyway, right? Nobody is ever right or wrong in an absolute sense, even when they are!

    Part of the stimulus is tax cuts, that's counted as a cost, they're only using strategies 2 and 3 to pay for it. Foreigners will simply be repaid in depreciated currency, and we still preserve the value of the dollar for open market operations. And printing dollars for shovel-ready projects creates money as VALUE, not as debt.. there's a big difference, it IS a stimulus. The national debt is obviously irrelevant… just look at the correlation between real GDP growth and the growth of national debt over the last 50 years, case in point.. printing money doesn't work for Zimbabwe, but it works for the US, we have the global reserve currency, so I wouldn't expect hyperinflation to ever happen

  • lindi

    Good article Mr. Rajeshwar.
    To spherical cow, the NEA is not doing their job with the current amount they are given, why should they get more?
    I'm glad you at least admit to arguing "ideology", I would hate to think you actually believe your comments as fact.
    Start learning the history of this country. Check out government economic history from the 1920's and 30's.

  • Spherical Cow

    Julian,

    Thanks for your response, and I appreciate the link. Unfortunately, as someone in science, I am terribly offended by Mankiw's peversion of the scientific method. To quote Mankiw's main point:

    "Why did the Romers focus on exogenous policy changes? The reason is that these are the only changes that can be used to reliability identify the effects of tax policy. If a tax change is made in response to some event, call it X, that influences the economy, it is hard to disentangle the effects of the tax change from the the direct effects of X."

    Obviously, unraveling the complexity of a real system is difficult. But just because they had to simplify their models does not mean they will apply to a recession. To explain my point, I will quote Mankiw again:

    "The Romers focus on exogenous tax changes for the same reason doctors conduct randomized drugs trials--not because they are interested in randomization as a prescriptive tool, but because randomization solves a statistical identification problem."

    Actually, if this were true, Romer would have looked at a random selection of tax increases. The appropriate analogy is more disturbing.

    A drug company manufactures a steroid. Everyone agrees it has some effect, but they disagree as to how much. So they decide to test the steroid — BUT ONLY ON HEALTHY PATIENTS. The steroid boosts muscle growth, increases etabolism, and enhances performance.

    Unfortunately, this says nothing about whether the steroid is an effective treatment. A patient suffering from muscle atrophy may have complicating factors that prevent its use — that's the whole point of the argument that exogenous tax cuts will not necessarily work in a recession.

    But, as Mankiw says, testing the drug on the sick patient would make the analysis too difficult.

    However, why believe me. To quote from the actual Romer & Romer paper:

    "The estimated maximum effect of a tax increase of one percent of GDP is -1.3
    percent (t = -2.4), as opposed to -3.0 percent using exogenous tax changes and -1.1 percent using the change in cyclically adjusted revenues."

    "This first look at the data suggests two conclusions. First, changes in the level of taxes have large effects on economic activity: following tax changes undertaken for reasons largely unrelated to other influences on output, there are large and significant output movements in the opposite direction. Second,
    how one measures tax changes matters: using broader measures substantially obscures the impact of tax changes on the economy."

    "Nonetheless, the fact that the point estimates differ only moderately from those for exogenous changes
    suggests that countercyclical fiscal policy [i.e. tax cuts during a recession] is not achieving its intended purpose."

  • A

    'hard economic facts' - calling something a fact doesn't make it so. Economics is not a hard science, so let's not pretend it is. Economic theories are not like the laws of gravity and thermodynamics. These are hard facts. Economics is conjecture, sometimes well founded, sometimes not so. Any amount of evidence you compile in favor of tax cuts can be matched by others who disagree. Microeconomics is not a hard science, so let's not pretend it is. The models economists put forth are just as often incorrect as they are correct. You say so yourself when you imply Keynes is incorrect.

    As for tax cuts vs. spending. What's the difference? They both are based off of money the American government doesn't have. Republicans have imagined a world where we can keep cutting taxes, while maintaining public services and massive defense spending, and magically our deficit will dissolve….but wait, the economy will be stimulated because I have an extra $600 in my bank, which will not be invested and will promptly pay off: 1. student loans 2. rising medical costs 3. Rising transit prices to offset state budget deficits!

    A serious investment is needed in education and infrastructure. If you don't want to call that a stimulus package, fine.

  • Hiero II

    If we're going to start throwing around names of economists, please go argue with Greg Mankiw - I'm sooo sure you are up to it.

    Also, the absurdity of your claim that "taxes and government regulation made the middle class in this country" is breathtaking. The middle class made themselves in this country through hard work, not government handouts.

  • Yale 09

    The only authentic economics is Austrian.

    Hayek, Mises, et al. predicted this disaster years ago:

    Manipulate the money supply, create moral hazards, build the bubble, watch it pop, then repeat.

    Friedman was naive because he trusted Congress to stay away from the Fed.

    FDR and Obama are wrong because they see the economy as a function of aggregate growth.

    The recession is the CURE, not the disease.

  • HGW

    @ Yale 09
    Manipulating the money supply is a good thing, IF the money is created as value rather than as debt (as in fractional reserve banking). Using the money to purchase things and hire people has no more of an inflationary affect than real GDP growth. If the increase in M3 is slow enough, it's beneficial, it can be used to finance infrastructure projects without taxing productive people. Passing on artificially high real estate prices is the same as passing on debt, it can be papered over with depreciated dollars in the future. We get income from it today. And which country in the world has NOT practiced inflation as a monetary policy? None.. it's because it works! Especially when your currency is the dollar, which is backed by oil amongst other things. Mises theories are so generic, he doesn't seem to think there is any difference between Zimbabwe dollars and US dollars.

  • Yale 09

    That's all fine and great- until the US Dollar loses reserve currency status- which could happen within the half-century.

    Real market based currency exchange would slow down the currency bubbles and bursts that wreck economies.

    US citizens should also have the right to transact business with gold and silver (including business with the US gov't)

    Inflation as monetary policy works as a political tool. Politicians get to run amok with our money.

    Fractional reserve banking is the biggest Ponzi scheme of them all!

    Our national GDP is a house of cards- driven up by credit-based consumption.

    The "wealth" Americans built up over the past 20 years is almost entirely artificial.

    Once the world stops buying our gov't securities (as the Chinese do to protect the value of their current US holdings) the dollar will crash.

    The 2008 dollar rally was a short term irrationality in the market (largely based on the US' reserve status).

    If I have dollars, I am moving them to Switzerland and Singapore, or at least Canada.

  • Anonymous

    Um… you guys realize that when the "rich" save money, that money doesn't just get locked in a box, right? The money gets lent out many times increasing the money supply by a multiplier.

    Even if the whole process of wealth distribution was perfect, it still wouldn't solve the problem. You can call me racist, classist, or whatever you like but there is generally a reason why some people have more than others. True sometimes these people have advantages, but life's about what you make of it.

    Think about it this way, if we didn't screw with the system so often, the irresponsible morons who have wasted billions would be experiencing some serious downward mobility. Instead, we are bailing out irresponsible businesses and individuals by taking money from those who were responsible. This provides no incentive for citizens to learn to manage their resources properly and punishes who were responsible. Brilliant. You can't babysit everyone. Obama wants to try though,… it's going to be fun to watch that fail.

  • moderate

    Great, another outspoken conservative with all of his friends commenting online. IT'S BEEN THREE WEEKS. Let's wait to see some results before we pass judgements.

  • Anonymous

    To the last poster: trust me, it's not going to be fun to watch Obama fail. It's going to be terrible for us all. This package will fail because in trying to please two opposing sides of an argument, he's helped nobody. The bill isn't big enough for some, and government spending is a waste of time for others. In other words, nobody is happy and nobody will benefit.

    I do have some issues with Rajeshwar's article: 1. You cannot cite economic "facts" without noting that these facts have been disputed about as often as they have been supported.
    2. Citing one poll as proof of the stimulus packages' popularity is either laziness or dishonesty. Rasmussen's poll seems to be an outlier when compared to other polls. Gallup's poll has shown that 59% were in favor of the stimulus bill; CBS news reported that 51% of the population supported passing of a (not necessarily Obama's)800 billion dollar stimulus package; a Pew poll asked respondents directly about the Obama's plan, and a slight majority (51%) favored Obama's plan. Lastly, CNN's poll asked respondents about the Senate's version of the bill and found 54% of the respondents favored the bill.

    Given this data, one could be timid and conclude that the polling data is, at the very least, inconclusive. However, it appears to me that Obama has created a package that a slight majority favors.