China and its Discontents

Voters, business leaders and political leaders do not seem to think that the stimulus was such a smashing success that we should do it again, even with today’s high unemployment… In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

All Brooks seems to be concerned about is the stimulus bill passed last year, and how it’s scaring the living daylights out of the industrious entrepreneurs of America. Pop-psychology aside, this was a small component of counter-cyclical stimulus, and a small reason why the deficit exploded in 2009. First, unemployment skyrocketed and unemployment insurance picked up the slack. I don’t know how to quantify the fear of businessmen, but I do know how to quantify billions of dollars sent to the unemployed, spent on food, shelter, and basic necessities. This sort of stimulus is extremely effective, because it all gets spent. Second, revenues plummeted.

My point is most of the deficit of the last year was not a direct choice of policy-makers in Washington, and cannot possibly indicate “a political system out of control.” Brooks (and most others on the right) are using the stimulus bill as a proxy for all deficit spending, and that’s wrong. We can quibble over how well the stimulus bill did its job. But what about unemployment insurance and other counter-cyclical policy? How can he balance money in the hands of the unemployed with some contrived nonsense about consumer confidence? You can look at numbers, or you can look at public opinion polls.

Tyler Cowen agrees – and he especially loves Brooks in this segment:

large and decisive deficit reduction policies were followed by increases in growth, not recessions.

I think Brooks and Cowen (and the academic researchers Brooks cites) have a problem mistaking correlation with causation. In particular, Brooks cites the US in the 1990’s; so the cw goes, President Clinton pushed through spending cuts, which encouraged business to bring in bountiful times. But this doesn’t quite hold up to inspection. While I can’t easily analyze Brooks’ examples of Ireland and Denmark, I can look at historical US government receipts, outlays, deficits (or surpluses), and GDP, all in inflation-adjusted 2005 dollars. In 1993 as Clinton came to power, $12 billion in spending was cut. But every year after, real spending was on the rise. Meanwhile in that first year, revenues increased $44 billion, $106 billion the year after that, rising every year. The deficit reduction in the 90’s only happened because a massive amount of new revenue came into the Treasury, not because spending was cut.

Besides reducing the deficit, Brooks adds what else he would like the government to pursue:

boosting innovation in areas like energy, and spending more money on growth-enhancing sectors like infrastructure.

Doh! That’s what the stimulus did! So we can’t take any money away from programs in the stimulus bill – they enhance growth. We can’t easily pull the rug under millions of unemployment insurance beneficiaries. Surely money in the pockets of the unemployed that is immediately spent can be agreed to be successful fiscal stimulus. And we can’t magically raise revenues. What does that leave us?

making the welfare state more efficient

I don’t know what this means. Regardless, it seems like Brooks wants all the benefits of Keynesian counter-cyclical fiscal stimulus without all the debt involved.

For a similar, more comprehensible argument, read William Galston and Paul Krugman.