Tuesday, July 12, 2011

A Keynesian Concession?

Keynesian Paul Krugman, in his bi-weekly column arguing for more fiscal stimulus, gives us a new twist on his argument why we need to double down:
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.

Think about it: Where are the big public works projects? Where are the armies of government workers?
So, not only has the stimulus spent $800B without any more stuff, it doesn't even hire more people! Alan Blinder makes a similar point--we have 500k fewer government workers at all levels--in spite of spending rising 16% over the past 3 years at all levels (from inflated 2008 levels, no less). Keynesians see that data and thinks it implies we need more spending, whereas others have looked and found that is what happens when you waste money on food stamps, Medicaid, and welfare. Private companies don't benefit from wasting money, and neither do governments.

Here in Minneapolis, we spend more on fixing roads, but they get worse:
In the third year of Rybak's five-year $19.25 million acceleration of street repairs, engineers rated the average condition of city streets at 70 on a scale of 100, down from an 82 average in 1995. The rating has slipped by a point in each of the first two years of Rybak's street-spending surge.

How is this possible? Milton Friedman called it Gammon's law: 'In a bureaucratic system, increase in expenditure will be matched by fall in production.'

Consider that the Omaha Public Schools used more than $130,000 in federal stimulus dollars to buy books on diversity.

The book says that teachers should acknowledge historical systemic oppression in schools, including racism, sexism, homophobia and "ableism," defined by the authors as discrimination or prejudice against people with disabilities...

The Omaha school board approved buying 8,000 copies of the book--one for every employee, including members of the custodial staff--in April.

With investments like that I'm not shocked we aren't seeing big increases in public works projects, employees, and especially productivity. The multiplier supposedly works independent of actually producing anything tangible, which is why I can't take this theory seriously. Now even Krugman admits there has been nothing created, which just means we should spend even more money, highlighting that the Keynesians will argue for more continually (like the series of ineffectual Japanese fiscal stimulus packages in the 1990's).


r2d2 said...

I hope I am wrong about this, and would be grateful if somebody showed me where.

I think the sad truth is that there are a lot of folks in the US and other developed countries that the economy can do very well without. Looks like the labor they are qualified to provide can only be competitive economically at a salary that won't cover the expenses of decent living in the US. That would be mainly because of globalization and competition with places like Asia, where better educated people can get by with a lot less. The competitive part of US economy thrives by trading with Asia, and these folks are left out of the economic cricuit, so to speak. To a free economy it makes sense to abandon the uncompetitive, because investing in making them competitive is not profitable. Education is a big long term investment, which brings profit way too late (assuming it is at all possible at a later stage in life).

Now the other question is what would happen to the money if government didn't borrow it and spend it (or waste it) in the US. It would probably be invested where it makes more economical sense, quite likely outside the US. Such investments would benefit the competitive part of US and the competitive parts of other countries, with very little benefit for the ones who are not competitive. You only need so many low qualification work to pe physically performed in the US.

If the above is true, then, in a sense, government spending brings at least some kind of short term benefit for the uncompetitive in the US, at the expense of the competitive in US and elsewhere, as it takes the resources away from investments abroad and diverts them back to the US. Is this going to stimulate the economy? Nope, I think waste can't stimulate any economy. It is just a form of taxing the competitive and giving the money to the uncompetitive (where competitive doesn't necessarily mean rich, and uncompetitive doesn’t necessarily mean poor).

J said...

Modern bureaucracy is unale even to spend the money. When I was a bureaucrat, we had the problem that money can be spent only following strict rules needing many signatures, that took almost forever. Then end of the budget yer was approaching and we had to spend the money because next year's budget was always based on this one. So we spent the money as we could, on pre-approved items, on enlarging former projects.

Anonymous said...

Actually Krugman argued the stimulus was too small from the outset before a dollar was even spent. Also, nearly half of the stimulus wasn't stimulative, at all. GOP wanted hundreds of millions in tax cuts, and Democrats caved and gave it to them. Additionally, millions more went to shore up states for unemplomet extensions and general budget items.

So, please, don't tell half the story.

Mercury said...

So....we wasted the money last time but trust us this time says PK. No thanks!

Even Geithner says Keynesianism has failed to deliver...


Dipper said...

this is just too glib.

In the UK, the last Labour government increased expenditure on health. A lot more operations got done, and waiting lists dropped. They couldn't afford it but that's another story.

Sometimes social perceptions of acceptable risks change. More staff are employed to provide a higher level of bureacratic care, and some reduction in output may occur to do more form-filling, eg in child care, but that's because of changes in the external environment.

So Gammon's Law is just too glib and easy, and Friedman lets himself down by coining it.

Emily said...

Awesome post