What to make of the fiscal policy discussion?

Lynne Kiesling

Why has there been very little discussion here at KP of the so-called stimulus debates and legislation proposals? I am not a macroeconomist, so I don’t have any specific expertise in the nuances of monetary or fiscal policy’s effects. I also don’t like the general tone that the online debate has taken; enough of it has been bullying and condescending (yeah, I’m looking at you, Brad DeLong) that I have not wanted to engage in the conversation. My time is scarce enough that I reserve it for civil discourse.

But I do have a combination of philosophical and public choice reasons to be skeptical about the ability of a political collective to spend taxpayer money in way that creates more value in aggregate than if private individuals and firms decided for themselves what to do with those resources. I am deeply, deeply concerned about the loss of individual autonomy and transfer of power to government that accompanies the “stimulus” proposals. Remember that Keynes was an unabashed elitist that believed that if “Cambridge men” made all of the decisions in society, we would have maximum surplus. The fundamental ideas of individual liberty and autonomy that form the foundation of the United States run exactly counter to this elitism, and this elitism is deeply embedded in the current government spending proposals being considered here and now.

More pragmatically, I think the knowledge problem outweighs the collective action problem, even in an economic situation such as this. Moreover, I think that most macroeconomists who argue for the benefits of government spending underestimate the interactions and feedback effects in the complex adaptive system that is the macroeconomy; they tend to think of the economy as a machine instead of an ecosystem, which is incorrect and leads to incorrect policy prescriptions.

Yes, I realize that means that I reject the Keynesian idea of a liquidity trap, and that I am not persuaded by the Keynesian paradox of thrift. But I simply do not see the logic in trying to counter the effects of profligate, over-leveraged spending by engaging in profligate, over-leveraged spending with taxpayer’s money, saddling the next several generations of taxpayers with unprecedented debt. Compounding that lack of logic is the public choice problem, in which X of benefit comes associated with Y of make-work useless pork to pander to the politically powerful. When combined, it’s likely that X+Y leads to the reduction in GDP that Kevin Murphy estimates arises from government spending.

So I’m definitely a “stimulus skeptic”, but will leave the substantive macroeconomic policy analysis to others who are more expert. For example, Arnold Kling’s recent post summarizing his macroeconomic analyses and policy recommendations hits what I think are the right ideas (and with the right tone). This video of John Huizinga, Kevin Murphy, and Robert Lucas discussing federal fiscal policy at a University of Chicago panel is also very informative and illuminating (and has been discussed extensively by others). I agree with Dani Rodrik when he says

… the remaining disagreements are largely philosophical, political, and practical–revolving around the role of government, the extent of rent-seeking and public-choice concerns in government programs, and the right mixture of prudence and boldness that the situation requires.

It wouldn’t be the first time that economists are discussing such questions–for which their PhDs have done little to qualify them–in the guise of discussing economics.

The policy that I think would be most effective, as suggested by Russ Roberts and others, is payroll tax modification. Reducing the payroll tax (remember Rachel from Friends? Who is FICA and why is he taking all of my money?), either the employer portion or both portions, would meet the Larry Summers criteria of “targeted, timely, and temporary”. Such a policy would provide a distributed, decentralized boost to firm profits, reduce labor costs and induce less unemployment, and be less prone to political manipulation and rent-seeking than fiscal policy.

The cynic in me believes that those are precisely the reasons why such a policy won’t be implemented.


4 thoughts on “What to make of the fiscal policy discussion?

  1. It was not so many years ago, after our experiences with failed Keynesian policies during the late 1960’s and 1970’s, that you had to include the term “discredited” in front of Keynesian when ever you used the term. During the 1980’s there was a branch of economic study at the University of Minnesota, named Rational Expectations – or something to that effect. As I remember it showed fiscal stimulus was mostly ineffective becuase the inflation expectations casued by deficit spending modified aggregate behavior.

    I am not convinced that additional spending results in the multiplier effect on GDP that Keyensians claim. If capital is poorly allocated, it seems the multiplier should be less than 1 and we could be worse off in aggregate. It reminds me of Henry George’s example of loading ships with exports and sinking them outside of the harbor so the country can enjoy a high level of exports to keep people employed and industries busy. The GDP multiplier resulting from distributed decision making, with each decision based on local knowledge, and made for personal advantage to maximize each individuals utility should result in a different multiplier than centralized decisions made by Cambridge men (or Harvard or Yale men).

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