More government spending, more public consumption?

Commentator David Frum.


Kai Ryssdal: It's going to be a day or two before the Senate actually votes on extending unemployment benefits. Senate rules say the minority party can delay legislation for up to 30 hours after a filibuster's broken. So that's what's happening.

But the underlying question of how effective government stimulus policies are took commentator David Frum back to an earlier White House economic debate.

David Frum: In 1981, the new Reagan administration inherited an economic crisis almost as severe as that inherited by President Obama. And like Obama, the Reagan team offered a bold solution: A slowdown in government spending plus big tax cuts.

A question arose, would this plan intolerably expand the budget deficit? The answer depended on the inflation rate going forward. I'll spare you the technicalities. But basically, if the rate of inflation were higher, the deficit would be smaller; if lower, bigger.

Reagan had recruited a team of highly respected economists. They went to work on their models and forecasts, and of course, could not agree. The final word belonged to Murray Weidenbaum, then-chairman of the Council of Economic Advisors. Weidenbaum is a very eminent business economist from Washington University in St. Louis.

He studied the contrasting projections and told the team, "Let me consult my computer." He then stroked his stomach a couple of times and pronounced an answer. In the end, Weidenbaum's "computer" was totally wrong. But then, so were almost all the other answers.

I recalled this story as I read some of the recent debate over how to compute the "multiplier effect" from government stimulus spending. Almost everyone agrees there probably is one, at least during a recession. Almost everyone -- but not quite everyone. But how much? Today's Council of Economic Advisers uses the figure 1.5. It's hard to avoid the suspicion that this nice round number has been chosen first because it yields a flattering answer, and second because it makes the math easier.

Equally hard to avoid the suspicion that even after 30 years of incredible improvements in digital processing, our most important economic calculations are still being made on Murray Weidenbaum's "computer".

Ryssdal: David Frum used to be a speechwriter for President George W. Bush. Nowadays he's the editor of FrumForum. Next week in this slot, Robert Reich. In the meanwhile, send us your thoughts. Marketplace.org. Click on the link that says "Contact."

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Let's see, In the first six months of Reagan's term, employment increased from 91,031,000 in January to 91,558,000 in August when Reagan signed the 1981 tax cut. (CES00001 data). In the next 16 months, employment fell to 88,981,000 in January 1983. Reagan had already signed cancellation of about half the 1981 tax cuts in September 1982 (yet to go in effect) and was on the verge of signing multiple tax hikes in 1983, a gas tax hike and Social Security tax hikes.

The Fed was struggling to control inflation, and and do so without monetizing the increased deficit; the increased deficits resulting from both reduced tax revenue from tax cuts and increased unemployment which reduced revenue and increased government spending resulted in Treasury borrowing driving up interest rates and starving the mortgage market (businesses simply borrowed short term at higher interest rates).

So the first two Reagan years took a weakly growing economy, that was creating new jobs, into a sharply contracting economy, with major job losses.

In 2009, the month Obama took office saw almost a three-quarter million jobs lost in a single month; that was more jobs lost in one month than were lost from January 2001 to July after President Bush took office. And that one month of job losses when Obama took office was the same fraction of the work force as the jobs created from the time Reagan took office and when he signed his 1981 tax cut.

(As an aside: Sandi Campbell: The economic crisis that Reagan inherited was as severe if not more so than that Obama inherited, and caused by the same sorts of policies. But it was an utterly different *kind* of crisis; inflation wasn't the danger. Ever hear the word "stagflation"?)

In the Reagan era, disputes between competing economic models may have been decided based on gut instinct. Today, on the evidence, such conflicts are decided based on liberal dogma.

Frum said:In 1981, the new Reagan administration inherited an economic crisis almost as severe as that inherited by President Obama.
Oh, REALLY! I remember those years, and they were no where near where we are today and the recession and inflation weren't threatening to implode the entire world's financial systems. What a bunch of hype.

The central point, not mentioned by the commentator or the Comments below, is that a multiplier effect does exist, but private sector multipliers, especially for manufacturing industries, are almost always higher than for government.

That looks like David Frum to me, not Robert Reich. Typo in your into graf

Frum says "In the end, Weidenbaum's "computer" was totally wrong. But then, so were almost all the other answers." Very glib, but the fact is that the Reagan deficit grew to historic highs and the nation suffered for it. Frum is sitll and always an apoligist for those who would continue to concentrate wealth.

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