Sunday, January 11, 2009

A Dose of Skepticism

Required readings today:
Greg Mankiw's column asking "Is Government Spending Too Easy an Answer?" It's useful because it shows what the textbook/theory says and what the data say.

David Brooks makes very similar points in an earlier column. He points out the absurdity of thinking that Congress can, by President's Day (which is Pelosi's stated deadline to pass the stimulus package), determine effective uses for all of that money.

So, when you hear or read (ie: Krugman) that "everyone knows an additional $1 trillion of government spending is the only solution" know that not everyone knows or believes that. Everyone knows it is A solution, but no one knows if it will work as forecast, or what the long-run consequences will look like (although we have a pretty good idea and it's not pretty).

Note that Obama's team released its proposal yesterday. Note the graph on page 5. The recovery plan will simply lower unemployment faster/sooner than doing nothing. But, even doing nothing we end up back at our natural rate of output around 2013. Do the benefits of the stimulus package outweigh the cost of massive deficits, and probable U.S. debt monetization and all that comes with that? That's what Mankiw is saying-- perhaps yes, but only if the money is spent wisely and not on bridges to nowhere.

BTW-- the best way to keep the price tag low on the package is to encourage other countries (ie: the EU and China) to do likewise. But that leads to the Nash equilibrium I mentioned previously.

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