The Costanza-Hoover Principle
The idea of the stimulus plan is that we get some money directly into our pockets ($200-$300 billion of tax breaks without matching government spending reductions) plus about another $550-$600 billion worth of new bridges, unemployment benefits, electronic patient records, and so on (plus all the jobs required to make all this stuff). Even better, the people who do these jobs have to buy food, shelter and digital camcorders, so that creates yet more wealth. This sounds pretty sweet. The catch, of course, is that we would add over $800 billion—or more like $1.2 trillion if you include interest payments—to the national debt.
And, of course, it’s likely to be much, much more than this. Most of the spending is in the form of increased transfer payments, additions to school budgets, spending on health care, and so on. Does anybody really think that when these programs expire the recipients are just going to say “Hey, a deal’s a deal”? This will likely increase the baseline of future expenditures. Further, we will be setting a precedent that states that run huge deficits will be bailed out by taxpayers in the 49 other states, and thereby create a Prisoner’s Dilemma—we should expect lots more state deficits that become federal responsibilities. And it’s not like we don’t have various other “rescue” packages lined up behind this one. And it’s not like we shouldn’t expect a large decrease in government tax collections over the next coupe of years as incomes, profits and capital gains decline. If the experience of other countries after bubbles like the one we’ve just had is any guide, we should expect an increase in national debt of trillions of dollars.
But what does this really mean, in practical terms? When I hear politicians say that “we’re borrowing this money from our kids” or whatever, this can seem abstract. It turns out that it’s not a metaphor.
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In effect, we are asking our children for a loan, and promising that we are good for the money because we will pay them back with interest. Only we get to be both the person asking for the loan and the loan officer at the same time. My guess is the loan officer has a lot of faith in us.
Should he?
Many leading economists believe that the stimulus will create value by driving higher output, and is therefore a good idea. Paul Krugman and Joseph Stiglitz, both Nobel laureates in economics sure think so. In fact, they think the stimulus should be bigger. On the other hand, Nobel laureates in economics James Buchanan, Edward Prescott, Vernon Smith and Gary Becker all think it’s a bad idea. The only thing we can say with high confidence about this is that at least several Nobel laureates in economics are wrong.
The truth is that nobody knows if it will work or not. It would be as if, on the night before the Apollo launch, half of the world’s Nobel laureates in physics were asserting that rockets can’t get as far as the moon, and the other half were saying they can get there in theory, but we need much more fuel. This is a question about which expert opinion isn’t worth much. We are making decisions in a sea of ignorance, and shouldn’t kid ourselves about this.
The strongest argument for the stimulus (and the one that I think, in their heart-of-hearts, most supporters actually hold) is what could be called the Costanza-Hoover Principle: Do the opposite of whatever Herbert Hoover did. In a world of limited knowledge, this isn’t as crazy as it might seem, at least as a starting point. It sure seems like Hoover screwed up; and hopefully we can avoid his mistakes. This pretty much boils down to: Avoid a tariff war; don’t try to balance the budget right now; don’t restrict the money supply (that gold standard thing is right out); and, most importantly, prevent a collapse of the banking system.
This principle would lead to deficits (and as a practical matter, we are going to have large deficits for some time), but would also lead to us trying to feel our way into it, rather than making a huge commitment all at once. So-called boldness in the face of ignorance is simply lack of judgment. What would it mean to “feel our way into it”? That’s the subject of an upcoming post.
MM,
