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Portable fiscal policy question multi-pak
When assessing any proposed fiscal stimulus, ask yourself the following questions:
1. Will more debt ruin my country and cause its economy to crumble or explode?
2. Is this project worth doing in its own right?
3. Will more than 53 percent or more of the expenditures come on-line in the next nine months?
4. Will the program actually target unemployed resources?
5. Has fiscal policy already acted to protect previously planned levels of state and local expenditure?
If the answer to #1 is no, proceed if you can either answer "yes" to #2 or if you can answer "yes" to #3-5 together. On related issues, here is a very good piece by Hall and Woodward.
Posted by Tyler Cowen on December 8, 2008 at 07:06 AM in Economics | Permalink
Comments
Testing...
Posted by: Tyler Cowen at Dec 8, 2008 7:13:47 AM
I think you have a numbering issue, as you mention #1 twice (in contradiction to itself) and don't mention #5 at all.
Posted by: Grant Gould at Dec 8, 2008 7:28:06 AM
Thanks Grant, I have corrected...
Posted by: Tyler Cowen at Dec 8, 2008 7:41:11 AM
I think #3 should be thrown out. Fiscal stimulus isn't very likely to turn into economic stimulus. Fiscal stimulus shouldn't be persued for it's own sake but because it will lead to economic stimulus, which will likely take years to accelerate. Real economic growth takes time. We need to focus on buiding infrastructure and increasing productivity/improving efficiency. Lowering the cost of doing business.
Posted by: aaron at Dec 8, 2008 8:24:14 AM
I haven't heard this one, but considering I thought of 30 seconds ago maybe it's not great.
How 'bout building homes in New Orleans, using Hurriquake nails and many, many concrete pillars of course.
Posted by: Andrew at Dec 8, 2008 9:05:06 AM
Thought we already had too many homes, Andrew.
Posted by: Tom at Dec 8, 2008 9:37:36 AM
That's an excellent check list.
Hall and Woodward are well worth reading. They are very smart and we could do worse than simply following their advice to the letter.
Posted by: a student of economics at Dec 8, 2008 10:06:32 AM
"Fiscal stimulus isn't very likely to turn into economic stimulus."
I don't quite understand why the current discussions of long-term fiscal stimulus usually do not take expectations into account. If I am a backhoe operator who knows my gov't will soon be spending billions on construction, even if not yet fully employed or otherwise benefitting from those projects, I think I would be more likely to consume than save. It is the secure expectations resulting from something like the Interstate Highways that can be economic stimulus, someething private enterprise cannot guarantee to the same degree, especially recently.
Even a person with a job may save. The person who knows she will have a job borrows and spends.
So, to a degree, I think there is too much concern about the delays of fiscal stimulus. I would have thought that the followers of Friedman's lifetime earnings hypothesis would take expectations into account.
Posted by: bob mcmanus at Dec 8, 2008 10:24:08 AM
Of course, a corollary of my 10:24 point, if it is one, is that temporary sunsetted fiscal stimulus will not have as large a stimulus effect as relatively permanent committments.
Posted by: bob mcmanus at Dec 8, 2008 10:28:10 AM
Re:item #2
http://knzn.blogspot.com/2008/11/are-useful-projects-better-than-useless.html
Knzn discusses useless versus useful projects in a deflationary economy. Increasing output or productivity is not necessarily the more stimulative option.
Posted by: bob mcmanus at Dec 8, 2008 10:39:24 AM
Why does Keynes think that the assumptions of classical economics fail to apply under conditions of less-than-full employment when they apply under conditions of full employment? I don't understand the argument.
I think the thought is this: (1) The economy gets into a state of uncertainty (not risk), (2) this causes people with a high propensity to save to hoard/save rather than consume or spend, (3) this causes the level of interest necessary to attract investment high, (4) the higher level of interest requires that capital make more profits, (5) but under the conditions they have to cut back production to make returns to a smaller number of investors and this involves laying workers off, (6) which in turn creates involuntary unemployment (sticky nominal wages, efficiency wage theory, etc. all help to create the conditions in step 6, right?).
So it's not the following: IF more than full unemployment, THEN the assumptions of classical economics don't apply - as if this were a CAUSAL explanation. It's just a correlation. The assumptions of classical economics stop applying because conditions of UNCERTAINTY somehow suspend them. Is this the idea? That classical economic assumptions only apply when people can take rational risks, i.e. they have some idea of the probabilities of certain outcomes?
Posted by: Selfreferencing at Dec 8, 2008 11:48:06 AM
"Thought we already had too many home"
True, but we we have too many idle construction resources, too.
And since home prices are already falling, building homes in NO probably wouldn't make prices drop much, except in NO, which may not be bad. If it siphons enough of the building resources from other states it might be a positive.
I hate the idea, but we are talking about the government finding ways to waste money that are either bad or worse.
It passes most of Prof Cowen's checks. It would be hard even for the Feds to muck up. There would be diverse quality feedback auditors (homeowners) unlike other projects that only have the guy taking the cash to keep the government honest (picture Darth Vader telling Lando Calrissian "I have altered the deal, pray I don't alter it further.")
Getting more sophisticated and controversial, make NO the incubation zone for formerly illegal immigrants.
Posted by: Andrew at Dec 8, 2008 11:53:38 AM
The plan could work... precisely because so few projects are "shovel ready."
What we're seeing is a service sector recessiion, led by the financial sector. Lots of people with financial analysis skills out of work, along with their support staff. Let's put the financial whizzes to work figuring out whether or not the projects are actually worthwile. Hopefully, these geniuses will do a better job than they did with mortgage securities. Whether they do or no, it will keep them and the rest of the service sector busy for a year.
By then, either the recession will be over, or it won't matter.
Posted by: Bob Knaus at Dec 8, 2008 12:39:01 PM
After so many years of experience with central banking, its kind of ridiculous that we find ourselves in a position of having to rely on fiscal policy.
The last two recessions have brought us very close to the zero bound. Is anybody out there proposing higher trend inflation as a structural reform to the US economy? If trend inflation were 3.5% or 4% instead of 2.5%, we wouldn't have to worry about the zero bound so much, which would save us the money we're squandering on these stimulus packages and allow us to be less aggressive in using monetary policy to counteract recessions. If we hadn't raced to cut rates so low in 2002, we might not be in this mess right now. If inflation were 4%, we'd be able to respond to recessions with appropriate levels of monetary ease rather than racing to get nominal interest rates to zero before the economy goes into deflation. Plus, the process of going from 2.5% to 4% would be fun and allow us to enjoy the "good times" associated with sweet, sweet money illusion.
Posted by: steve at Dec 8, 2008 12:42:29 PM
Real economic growth takes time. We need to focus on buiding infrastructure and increasing productivity/improving efficiency. Lowering the cost of doing business.
You're not lowering the cost of doing business. You're shifting it to the taxpayer. Worse yet, the taxpayers will either pay interest on it forever or suffer inflation for it. TANSTAAFL, man.
Posted by: Joshua Holmes at Dec 8, 2008 11:11:12 PM
So, fixing the electric grid?
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