Thursday, February 17, 2011

An Inconvenient Truth About the Economic Environment

Speaker John Boehner forwarded at three paragraph letter (wow, that must have been pretty comprehensive!) to the White House from 150 economists saying, among other things, "To support real economic growth and support the creation of private-sector jobs, immediate action is needed to rein in federal spending." An interesting and valid claim, but one which does not fail to evoke controversy, especially among the general Washington concensus that the best solution to any economic problem is to throw money on it. The only thing most Rebublicans and Democrats really disagree on concerning this topic is whether they're spending to make their constituents happy, or because they actually believe it's going to solve any problems.

So naturally, this letter has triggered backlash from other economists, claiming that THEY, in fact, are the enlightened ones, and that evidence to support the claim that federal spending hurts job growth is "thin to non-existent" (see "crowding out" section in any Econ 101 textbook to read up on this "non-existent" evidence). I find it somewhat amusing that often times when a person gets a PhD in a particular discipline, they seem to believe that when they offer their take on a given issue, it must be fact. I understand that when one spends 6 years in graduate school, lives off of a steady diet of ramen and saltine crackers, and all the while gives up their social life, they tend to think that they are entitled assert their opinion in some priveledged fashion. Lets be honest though, these are economists we're talking about, they weren't going to have a social life anyway.

What none of these economists from either side seem to want to admit, is that at the end of they day, the real answer to the question of whether federal spending crowds out job growth is : it depends. Very anti-climatic, agreed, and doesn't make for such a sensational letter to the president, but it unfortunately is true. Republicans are shy to admit that one of the best things that happened to our country over the last century was the creation of the interstate highway system for example, which was a MASSIVE federal spending program which worked, and DID spur long term growth... but not so fast here, what Democrats will not admit is that perhaps a federal stimulus which subsidizes butterfly research and blindly gives out checks to every administrative and regulatory body in the country may not actually create jobs (This was not included in the three paragraph letter from the etseemed economists to Mr Obama).

Let's at least agree that this is not a black and white issue... and when the real answer is "it depends," we should admit it, and not pretend our Princeton degree entites us to claim that it only depends if we say so... because when it comes down to it, ramen noodles aren't that bad anyway, so get over yourselves, economists.


  1. Michael SalvadoreApril 12, 2011 at 4:26 PM

    Hi Kurt - Michael Here. I really like this blog post. You set up the argument well and your thesis is spot on. Because you are absolutely right - it does depend. So we should stop viewing in black and white. I do have a few comments that I hope you may agree with:

    I may be wrong on this perception, but what bothers me is the idea that many economists and politicians seem to say that ALL federal spending hurts the private sector or job growth. While Crowding Out is a true and relevant economics concept, I think this view overplays this concept. There is a leap between gov't crowding out private sector investment and "hurting" the private sector. Gov't spending can be very good for the private sector, you mentioned the highway system, which revolutionized transportation and created the multi-billion dollar trucking industry. So it bothers me that some claim that Gov't spending hurts the economy and thus cutting it will "free" it. So rhetoric from John Boehner that we must reign in "job-killing spending" or " government spending only hurts the economy" screams to me that this view does not have an understanding of what is really going on.

    Second, as is always taught in ECO 101, economics is about tradeoffs. I can accept the point that government spending on rocketry can crowd out the private sector investment possibilities in the rocket industry. But if the government uses the money to develop a rocket worthy of space-travel (like the Apollo Program in the 1960s), that seems like a worthy trade off to me. Beyond that limited example, using government funds to build a TVA, or the highway system, or airports also seems like a worthy trade off compared to the marginal benefit of what private sector investment might produce. Now, as for "butterfly research," grants from the gov't keep many universities going, so that money for science research is actually keeping many university science programs alive. I concede that spending money on "butterfly research" is a small drain on the treasury, but the trade off is keeping hundreds of art/science programs alive in our university system. Science students using federal money to educate themselves are keeping us on the forefront of science (Ex: Ventor's synthetic cell that made headlines a few months ago). So to me the gov't is using our money wisely by funding these programs and that they are indeed "stimulus".

  2. Michael SalvadoreApril 12, 2011 at 4:27 PM

    Finally, as for "blindly gives out checks to every administrative and regulatory body" being fiscal stimulus...I would say these aren't fiscal stimulus, but rather necessary for the well being of the economy and society. Regulation is necessary to keep excess practices in check - like mortgage regulations - so that we can avoid soul sucking recessions like this past one. Anti-trust law, environmental regulations (like clean air and water), and restrictions on certain types of financial activity are good things for society, and without government regulations consumers and society at large would fall victims to the excesses of human nature. Just as too much political power in the hands of one man or party is horrible for society (Hitler, Communism, Stalin, etc...), too much economic power in the hands of one firm is also bad. Cases in point today would be the pharmaceutical companies, who make billions in profits yet millions of seniors are forced to chose between food and medicine because the cost of pills are so high, and oil industries, in which Exxon makes 500 billion in profits every year while we pay $3.80 for gas and whose high prices at the pump are "endangering the American recovery (NYT Today)." Federal Regulations need to keep these excesses in check so that we all benefit from economic surplus, prevent deadweight loss causing monopolies and oligopolies, and make sure this planet is still habitable in 50 years. I don't think this is too much to ask from the Federal Treasury and the Private Sector.

    So those are my thoughts for now. Well-written point and we should heed what you say - it depends, and it's never black and white.


  3. I appreciate your response, and thank-you for framing it in such a nice 3 part fashion, it is obvious that your stellar Miami education is already paying its dividends.

    I'll post a (partial) response later today - so look for it at the top.