Friday, May 28, 2010

Conservatives Don't Understand Stimulus

Via MinnPost, this is Tim Pawlenty's view of how stimulus works, from Meet the Press:

"So If I took a dollar from you, David — this is what government does — I’m extracting a dollar from you, in the form of taxes.  I’m the government. I take it from you, subtract 20 or 30 percent for overhead, because I’m going to manage, squirrel around, do compliance checks, audits, bureaucracy and the like.

Ok, I'll give him the general "government is inefficient" crap for the sake of argument, and because it's often true, though likely not to the extent Pawlenty thinks. Moving on.

"Then I’m going to redeploy your dollar back into the economy at say 70 or 80 cents on the dollar, based on a politicized agenda or a politicized set of priorities. That’s a model of decision-making that’s not efficient. It’s political, plus, it’s not growth. So what I mean by that is: You were gonna spend your dollar anyhow. Your dollar in your pocket was gonna buy you dinner that night. Was gonna pay for your kids’ college. You might’ve bought a car. You might’ve bought an iTunes, who knows? But your  dollar was gonna circulate in the economy.

Suddenly, Pawlenty veers off track. This is not how stimulus works. Not that it's really T-Paw's fault, this is conservative boiler-plate. First, the notion that the government is grabbing money out of your pocket to spend inefficiently is incorrect. We are actually grabbing China's money, and spending it in America. Stimulus is deficit-spending. So the money that is being used is essentially being printed, as far as the American economy is concerned. This is money that wouldn't otherwise be in the economy. The government is not just reallocating money that's already there. It is actively putting money into the economy.

This is one reason that extending unemployment benefits is really effective stimulus. When a person goes from gainful employment to unemployment, their dollars drop out of the economy. Even with unemployment benefits, they're spending less, but they're still spending money. People on unemployment spend a high percentage of that money, because they need to eat and pay their mortgage.

What stimulus is intended to do is boost aggregate demand. The way for the economy to pick up is for demand to go up. As people spend more, businesses need to create more products, hire more workers, invest in new facilities, etc. It all hinges on boosting aggregate demand, and the way you do that is by getting people to spend more.

Pawlenty is right that the stimulus was created in a highly politicized process, but politics are inherent in everything. It's always amusing when a politician (particularly one positioning himself for a presidential run) criticizes something as "political." The Obama administration did manage to accomplish a lot of smaller priorities under the umbrella of stimulus, but that's not necessarily a bad thing. As long as those projects increase aggregate demand, they're a net positive.

What's more, Pawlenty's construction that government stimulus money is used inefficiently is only half-right. According to the CBO, several forms of stimulus act as multipliers. That is to say, the government leverages its money so that its usefulness is more than the dollar amount would normally indicate. The best forms of stimulus, according to the CBO, are direct purchases by the federal government, followed by transfer payments to state and local governments. I already wrote about why giving money to state and local governments is so crucial.

Conservatives always point to tax cuts as the most effective stimulus. The idea being that the consumers will be more able to efficiently spend the money than the government. The CBO says that's just not true. Tax cuts, particularly for the wealthy and corporations, are rated as having the least stimulative effect. Really, going by the numbers, the ARRA should have had fewer tax cuts and more direct spending, which is exactly the opposite of what every conservative has called for.

"The notion that the federal government is gonna take money from you or anybody here, bring that into government and send that back out and declare that to be economic growth is a flawed decision-making. It’s what the economist call substitution or transference effects.

This sounds good in theory, but as I just explained, it's not how stimulus works.

I often grapple with the question of whether conservatives actually believe this stuff, or if it's just elaborately constructed justification for an already-decided-upon policy position, ie lower taxes. I have a dim view of the policy chops of your average politician, but some of these guys must know that they're completely misrepresenting the policies in question.

2 comments:

  1. I'm sorry but I have to defend the bureaucracy. Everyone accepts the premise that the private sector is inherently more efficient that the public sector. A large bureaucracy is a large bureaucracy whether it is federal, state or private. All have the characteristics, good and bad, of a bureaucracy. Ask someone who works at IBM, Lockheed-Martin, Walmart or any big corporation if they have to deal with bureaucratic rules.

    I can only speak for my agency, the Social Security Administration. Our administrative costs are not 30% or 20% or even 10%. They are less than 1%. Beat that Exxon or Apple!

    We can't address any of America's problems unless we deal with facts not urban legends or outright lies. Where are the Myth Busters when we need them?

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  2. True, I suppose it might be better to say that there are administrative costs inherent in any allocation of funds. On the other hand, it can't be denied that because the funding is federal, rather than private, that's a layer of bureaucracy that just wouldn't have existed otherwise. Since now there's a governmental layer as well as a private one, instead of just the private one.

    Putting aside how efficient governments and private industry are in relation to each other, there is going to be some bureaucratic loss.

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