The Obama administration has claimed that virtually all economists support their approach to "stimulus" spending. This is patently untrue. Nobel Laureates Ed Prescott, James Buchanan, and Vernon Smith recently joined 200 other economists signing a letter opposing the legislation. Other notable economists critical of the stimulus package include Nobel Laureate Gary Becker, as well as Robert Barro, Greg Mankiw, Arthur Laffer, and Larry Lindsey. Martin Feldstein, who had been the only notable conservative economist loudly supporting the stimulus, has since changed his mind.Yesterday, Nobel Prize winner Gary Becker and MacArthur Fellow Kevin Murphy took a fair-minded look at the stimulative effect from this package and, while they don't think the effect will be zero, they don't see it having a strongly positive effect on our economy.
More liberal economists such as Alice Rivlin and Alan Blinder have also strongly criticized certain aspects of the spending bill. (See original for all the links.)
In fact, much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses. This type of spending includes adding broadband to rural areas, spending more on health coverage, encouraging scientific innovations, developing renewable energy, as well as many other things.They are skeptical, as are many, that this spending will be temporary. And they remind us that there will be consequences from all this spending that will have a long-term deleterious effect because, as we should know by now, there is no free lunch.
As President Barack Obama recently said, "This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education." Such spending may encourage long-term growth, but it will have little short-term effect on GDP.
So our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.
That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely.
The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.So Obama's claims that no economist disagrees with his approach is just as dishonest as his attempt to portray the Republicans as advocating a do-nothing approach to the economic crunch. Ask yourselves if you want to have the Congress pass the biggest spending bill in our nation's history in this rushed through manner and based on such prevarications.
We believe that it is incumbent on both supporters and opponents of the bill to thoughtfully evaluate each of these four factors. We recognize that how individuals will come out in their own evaluation of these factors will determine their attitude toward the stimulus package, and that there is considerable ground for reasonable differences of opinion.
Our own view is that the short-term stimulus from the legislation before Congress will be smaller per dollar spent than is expected by many others because the package tries to combine short-term stimulus with long-term benefits to the economy. Unfortunately, short-term and long-term gains are in considerable conflict with each other. Moreover, it is very hard to spend wisely large sums in short periods of time. Nor can one ever forget that spending is not free, and ultimately it has to be financed by higher taxes.