THE PROBLEM WITH KEYNESIAN STIMULUS PROPOSALS / SEEKING ALPHA ( HIGHLY RECOMMENDED READING )

The Problems with Brad DeLong's Keynesian Stimulus Proposals

by: Kimball Corson

October 02, 2009

Brad DeLong in his two-part article on Macroeconomic Policy for a Stronger Recovery (see part 1 and part 2) overlooks too much. He and others of his persuasion focus almost exclusively in their analysis on short run flow variables like GDP, employment gains and the like, and pay no real attention to accumulating stock variables like total trade deficits and our total budget deficits. It is almost as though those two classes of debt are not in any way seriously connected to the macro economy or to the financial system and they do not have any consequences.

Secondly, his two-part article implicitly assumes, especially with the deficit spending he is proposing, that we are going to have a sustainable recovery. I and others think not, for the reasons I have explained. Until we fix our trade deficits problem and economic structural problems we can never really get back to where we were or would have been as a viable manufacturing, strong and exporting country. It simply is not going to happen. Further, we can only squeeze so much out of our service economy, especially when so many are unemployed from manufacturing. We are wastefully beating a dead horse here by proceeding in this fashion.

Third, what we largely observe presently is the continuing and longer-term efforts of our macro economy to adjust to a reduced level of aggregate demand and activity due to our trade deficits, reflecting more expenditure abroad, and our substantially reduced manufacturing and exporting activity at home. The idea here that we can treat this ongoing reduction in economic activity as amenable to remedy by a one time or even multiple stimulus packages, running large deficits, is simply so much folly.

Fourth, the core problems -- some suggested by Brad Delong’s own graphs, are:

That fiscal stimulus efforts only provide a temporary bump up in aggregate demand from which we then lapse back, as the economy sinks back toward where it otherwise would have been;

That those stimulus efforts are very likely to misallocate resources in the process for the longer term; and

That the stimulus efforts are very expensive to taxpayers, sooner or later (even if we monetize the public debt, which is simply a tax on everyone in proportion to their cash holdings).
The budget deficits created by stimulus programs cause the US public debt to rise and threaten the financial integrity and trust of our government in the eyes of the world and the stability of our own financial markets here in the US. These are all points ignored by stimulus proponents.

In short, the stimulus programs too strongly tend to be just pricey band-aids that do not cure, heal or repair anything, a point Keynesians never address. The reason is they assume a sustained recovery will follow along behind any stimulus boost, but they have nothing to support that assumption. A sustainable prosperity in the kind of situation we are in is not just around the corner. The stimulus program proposed will not just cover a transient dip in aggregate demand on our way to economic nirvana.
Fifth, the proposed deficit stimulus spending and the typical Keynesian analysis of it do not really connect or relate to the serious structural problems in our real economy that block a sound recovery, such as our manufacturing decline, the real reasons for our high unemployment, our failure to export enough, the problems of our banking system and of the mal incentives within it, the real problems faced by smaller businesses, with government and otherwise, or anything that is remotely structural in character that is blocking a real economic recovery.

The dots simply are not connected, and the myopic focus is almost entirely on immediate GDP -- itself recognized as a poor measure of well-being -- and immediate employment gains, almost as disembodied stand-alone goals; however, goals that are popular among politicians, afford talking good points and are therefore expedient.
Finally, no consideration is given to the mistakes of timing, attending such fiscal (and monetary) programs. Indeed, timings are typically so far off in terms of measured and distributed impact that they can be destabilizing or worse, sow the seeds for the next boom and bust cycle, and misallocate economic resources in the process of doing so. Car programs, house programs and more generally bits and pieces of the liberal political agenda are slipped in with much too little thought on how and whether they integrate well, whether they are sustainable, what their longer term impacts are on resource allocations and whether they have the desired effect, and not other unintended consequences for the real economy.

Many of the stimulus deficit programs are seriously half baked and we are awash in unintended consequences, as we ignore too much of what really matters economically, and focus instead is on what is most politically expedient, acceptable and viable in the short run. That is a key reason the views of Keynesian economists on the macro economy are not macro enough and they slight badly needed longer-term analyses. Keynesians are then caught by surprise, as just occurred, when the predictable happens because too much needed analysis is simply off their radar screens.