Austerity, Countercyclical Fiscal Policy, crowding out, Fiscal Stimulus, Growth in government, infrastructure, John Cochrane, Mercatus Center, Mises Institute, regulation, Robert Higgs, Scott Sumner, Sequestration, Timely Targeted Temporary
Will more government spending fix a weak economy? That is certainly a common refrain heard from economists and other pundits, including prominent members of the private business community. The historical record suggests otherwise, however, and there are practical reasons to doubt the efficacy of this sort of “fiscal stimulus.” Some of these are explored in “‘Timely, Targeted and Temporary?’ An Analysis of Government Expansions Over the Past Century“, from the Mercatus Center. In particular, countercyclical spending efforts have violated the “three Ts” often said to be required for successful demand-side policies. These efforts have been systematically late, badly targeted, and have resulted in permanent expansions in the resources absorbed by the government sector.
“Fiscal stimulus efforts going back to the 1930s consistently fail to meet the three Ts objective:
- Improper timing. Policymakers have consistently struggled to properly time fiscal stimulus spending. In every postwar recession in the 20th century where stimulus spending was attempted, government spending peaked well after the economy was already in recovery. Policy lags—recognition, decision-making, implementation, and impact—are largely responsible for this fact.
- Inefficient targeting. Going back to the New Deal, policymakers have targeted stimulus funds on the basis of politics rather than what delivers the most bang for the taxpayer buck. Further, individual policymakers cannot possess all the collective knowledge required to allocate and direct economic resources in the most efficient and effective manner, as markets do.
- Permanent expansion of government. Stimulus funding has almost always led to permanent expansion in the size and scope of government. Indeed, the alleged need for immediate stimulus opens the door for expansions in government that might not have occurred under normal circumstances. On the rare occasions that the increased spending has been temporary, the costs have generally outweighed the benefits.“
As for inefficient targeting, I often hear that our nation’s infrastructural needs clinch the argument for stimulus spending. But those needs should be the focus of long-term planning and addressed on a continuing basis, not in bursts dictated by the state of the business cycle. Good projects should not be neglected in good times or bad, and there is no justification for undertaking a project if is not worthwhile on its merits. If increased spending can stabilize a weak economy, government should simply do something it does well: write checks. Who does infrastructure spending help in those bad times? It certainly fails to address the basic human needs left unmet in a weak economic environment; it may or may not add high-paying construction jobs. (An aside: in the last recession, the stimulus program didn’t so much add construction jobs as it did accelerate certain “shovel-ready” projects.)
Proponents of government stimulus always have a culprit in mind for the economy’s ills: weak demand or under-consumption. They say government can lead the way out with more spending. This post on Sacred Cow Chips, “Keynesian Bull Chips“, disputes this point of view and provides some links on the topic, including this post by John Cochrane that is now ungated on his blog. Stimulus efforts are usually billed as temporary but rarely are. The expanded budgets always seem to remain expanded, and government absorbs an increasing share of the nation’s spending. Meanwhile, the value of government’s contribution to output is overstated, since most of the output is not subject to a market test or valuation.
The growth of government increasingly burdens private sector. Apart from tax distortions, the resources available to the private sector are gradually crowded and squeezed by the growth of public spending. Private investment is curtailed as government deficits absorb a growing share of private saving. Increasingly detailed regulation diminishes the private sector’s productivity. Robert Higgs at the Mises Institute asks: “How Much Longer Can the U.S. Economy Bear the Burdens?” That’s a very good question.
The opposite of expansionary fiscal policy is fiscal austerity: lower spending, and lower deficits. The budget sequester, originally passed in 2011, is a good example. Keynesians typically contend that austerity will weaken the economy, but the evidence often suggests the contrary. Here is a Scott Sumner post on that point. For robust economic growth, cut spending broadly, cut taxes, and deregulate.