Who doesn't like a little stimulation?

I am going to attempt to answer DRH’s questions on the fiscal stimulus. I’m responding in a post rather than a comment because, well, comments are overrated.

Now, I’m no expert; my opinions are really just an aggregate of the blog personalities who I respect (mostly out of GMU) and my limited economic intuition. On the other hand, this blog is semi-anonymous so…f*ck it, I AM an expert!

Starting from the bottom. There are MANY reasons why food stamps are colossally bad policy on both ethical and efficacy grounds. The question posed, though, is: “Why are food stamps—intended to generate increased food purchase—an ineffective way to stimulate the economy?”

The point of long-term growth policy is to increase the productive capacity of the economy. The point of a fiscal stimulus is to increase consumer demand to utilize productive capacity that ALREADY exists, spurring increased output and more jobs. Megan McArdle is making the argument that, in the short-term, the ability to produce more food is limited. This is just the nature of agriculture production. If a food stamp goes to purchase a porkchop or loaf of bread, I can’t manufacture another pig or suddenly whip up a new bushel of wheat. This is what Megan means when she says purchases will just “draw down perishable stocks rather than generating new economic activity.” Of course, the economic activity will not be zero, but it will be lower than if the funds had gone toward some other good. Maybe food stamps are fungible and the spending WILL go toward other goods…but, then why the hell are we handing out food stamps in the first place?

Back to the original question: “Why is a fiscal stimulus bad if it is ineffective and pointless? Shouldn’t the government do SOMETHING?”

This seems like a very dangerous line of reasoning. Why NOT change the oil in my car every 500 miles? Why NOT water my lawn in the winter? The bigger picture answer is that resources are limited and seemingly harmless action can have unintended consequences.

But let’s assume for a minute that there is virtue in action just for sake of action. If that’s true, then why a $146 billion stimulus? Why not a $300 billion stimulus? Why not a $100 million stimulus? Why not do a rain dance and pray for economic recovery? My guess is your objections would be, respectively, (1) We can’t afford that large of a stimulus, (2) That small of a stimulus is the same as doing nothing, (3) You're being stupid.

Well, the first response demonstrates that a fiscal stimulus is not costless. A large deficit, bureaucratic leakage, and misguided distortion of an otherwise generally healthy economy are just a few of the costs. So, if doing SOMETHING is ineffective and costly, wouldn’t it be better to NOT do something?

Response #2 might actually be the best policy. If a stimulus is ineffective and costly, then why not do nothing, but convince the public that you are doing something. Some would argue that this is exactly what is going on--$146 billion just seemed like a convincing number. In fact, an even better policy might be to promise a large stimulus and then never send any checks. Politicians know best and people are stupid, no one will ever notice!

As for #3, well, it is SOMETHING and you asked the question.

This is all very facetious. I assume the real question is, “Isn’t it the job of the government to restore and maintain confidence in the economy.” This, I think, is an excellent point. Unfortunately, incentives in politics and the media guarantee that will never happen in an honest way. The media needs something to talk about during the troughs between celebrity drug overdoses. And politicians can’t lose! If there isn’t a severe recession, they can claim to have helped avoid catastrophe. If there is a recession, they can claim to have done everything they could and that it could have been much worse.

Ideally, politicians, wonks and the media should stop demagoguing the issue. The CBO and prediction markets are now anticipating a year of slow, but not negative growth (around 2%) and a small increase in unemployment (to about 5.1%). If this news made its way to the public, it would accomplish a great deal toward restoring consumer confidence and likely do more to stimulate the economy than any level of government spending. Delivering this news is the SOMETHING that should be done. We are not IN a recession and this economic downturn is likely to be mild.

If this were not an election year, the SOMETHING would be NOTHING. Sad and ridiculous.