Stimulus more psychology than theory

Commentator Will Wilkinson


Steve Chiotakis: The Senate finally approved a new version of the stimulus package, but debate continues about whether it's a good idea in the first place. Commentator Will Wilkinson isn't so sure -- he thinks there's more psychology than theory at work.

Will Wilkinson: The government is about to spend $838 billion in taxpayer dollars on the premise that the economy otherwise risks spinning into a sort of death spiral. So how exactly is this supposed to work? The terrifying fact is that nobody really knows.

The president's idea, in a nutshell, is that American investors and consumers are undergoing a self-perpetuating crisis of confidence, suffering from depressed "animal spirits," to use John Maynard Keynes' famous phrase. Consumers, fearing the worst, cut spending. And that hurts retail sales, which hurts profits, which leads to layoffs, which leads to a new round of anxieties for creditors and consumers. And on and on and on.

A big blast of tax cuts and government spending, a sort of economic shock therapy, is supposed to jolt us out of our self-reinforcing funk and put us on the happy path to recovery. In this Keynes-inspired view, anti-recession macroeconomic policy turns out to be a kind of government mood manipulation.

Sadly, macroeconomists are amateur psychologists at best. They simply don't know which interventions reliably buoy consumer and investor confidence. Indeed, many leading macroeconomists say there's little evidence that slashing taxes and boosting spending works well at all, even in theory.

And the massive stimulus package we're about to get is far from a work of economic science. Harvard's Robert Barro, one of the world's most influential macroeconomists, says the bill's tax cut and spending provisions are both "garbage."

The idea is that stimulus will revive flagging animal spirits by actually priming consumption. But an ill-designed set of initiatives -- a bunch of garbage -- may do little more than run up crushing deficits that we'll pay for in inflation or pass on to our kids.

President Obama did promise to bring us hope. Well, I'm doing my best to hope this works.

Chiotakis: Will Wilkinson is a fellow at the Cato Institute.

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I am glad that I am finally not alone in protesting to Wilkinson's remarkably irrelevant and misguided comments.

Allow me to add to this litany against Will the fact that implicit in his argument are many false and discredited notions. Prominent among them are 1) infrastructure is not material to economic activity, 2) government will never make any difference whether it cuts taxes or spends money on infrastructure, 3) the marketplace is never ever manipulated and it is never wrong, and 4) the real deterioration of the nation's ability to produce goods is nothing but a matter of perception that the stimulus package seeks to appease.

Are libertarians so deluded that they think the Apollo missions landed us on the moon through the magic of a privatized marketplace? Are they so out of touch with reality that they don't see how Eisenhower's building of the interstate system makes businesses like amazon.com viable?

In essence, he is saying there is no cause and no effect. It's all perception. Stuff happens.

Obviously I'm not the only one who is infuriated by the fact that Marketplace is wasting my time with this junk.

Why do you??!!!??

I found his whole commentary worthless. It is no surprise that a Libertarian is against government intervention. But his comment says nothing more than that. There are no facts, just colorful language. The real purpose of the comment is to keep Cato in the news and to carry out their agenda. There was nothing to educate us.

Why is it that big businesses need to cut jobs to improve PROFIT? Is it really that bad to break even? Greedy stock holders need to calm down and relax about profit until things smooth out. It would be nice to hear of companies that are willing to break even for once and not lay off workers who need the income.

I just took the following from my blog it is not so much a criticism of Mr. Wilkinson's editorial as the piece Barro that he draws so heavily on: Will Wilkinson (of the Cato Institute) in an editorial on Marketplace Morning Report points to Harvard's Robert Barro's opposition to the stimulus package. In an opinion piece published in the Wall Street Journal on 1/22/09, Barro explains why he views "Team Obama's" stimulus package as misguided. I have two comments to make about his piece . (1) What Barro characterizes as the flaw in Obama's stimulus package. "The theory (the simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system". We may indeed appreciate the real opportunities there are in picking up dirt cheap shares of stock or in starting up a business when rents are so low and equipment can be had for a song (and finding workers who are willing to work for peanuts as well ). However as rational self-interested individuals we tend to fall back on the old adage "fools rush in ...." Individual consumers, creditors, and businesses will of course be happy to join the crowd but only once such a crowd forms. This is the problem. It is at the very least arguably the case that since Arrow and Hahn that significant advances in macroeconomics have come as we have worked on the implications of models with incomplete markets and where the agents in our models act strategically. The conclusion that emerges from this work is that, as Keynes argued, there is something wrong with the price system. Barro seems to suggest that it is preposterous to suggest that our friend the marketplace can have any faults. However, to say that she has weaknesses does not imply that we do not respect her and do not think that, with help, she is better suited to the task than others would be. (2) Basic statistics. A sample of size one is a pretty slender thread to hand one's argument on. I took a look at the same numbers (in 2000 dollars rather than 1996) that Barro uses on government spending and changes in real GDP. Using the increase not just in federal defense spending but the increase in real federal spending overall and the same crude calculations Barro does I get a rough and ready expenditure multipliers of .56, .68, and 1.02 for 1941-42, 1942-1943, and 1943-1944. The point here is not to quibble about the numbers but to note four things. First, as federal government spending was growing over this period, state and local government spending was falling. Between 1939 and 1944 the overall level of state and local government spending fell by almost 40 billion dollars (on a base of real income much much smaller both in absolute and per capita terms than what America generates today). Just as it is hard to assess the impact of the medication a patient is taking for high blood pressure when the patient continues to work in a stressful job and smokes a pack of cigarettes a day, these changes in the level of state and local government spending almost certainly dampened the stimulative impact of increased government spending at the federal level. Second, using the same basic approach that Barro uses but simply averaging the ratio of changes in real income to real federal government spending from 1929 to this last year I get an average of over $7. In short, I could make the outlandish claim that over the last 79 years the evidence suggests that, on average, a dollar increase in federal governemt spending generates not just a free lunch but a veritable banquet of $7 increases in spending and earnings. To suggest this would be irresponsible in the extreme. Often, the increases and the drops in real income have had very little to do with the changes in government spending at the federal level of government. For example, in the 1990s we saw federal government spending fall as real income rose in the wake of the tech boom and expansionary monetary policy . And, of course, we saw real income fall sharply in the period 1929 to 1933 despite growth in real federal government spending. My third point is that if using the same method to calculate an expenditure multiplier for 1983-1984 as Barro has done for 1943-1944 we get an expenditure multiplier of nearly 24! The fact is that in an era in which the genius of free enterprise was being freed from the shackles of government regulation (the Reagan years) federal government spending adjusted for inflation increased at a rate that was 3.5 times faster than it had grown during the Eisenhower to Carter adminstrations (just as it has grown, rhetoric aside, at a rate 2.67 times faster 2000-2008 than it had 1952-1980 ). Finally what Barro argues in the final paragraph of his piece is that in the face of what is going on now that the solution is to be found in cuts in marginal tax rates, eliminating the federal corporate income tax, and such. Entirely rational self-interested financiers, entrepreneurs, and consumers are playing the socially destructive game of waiting to see things improve. Whatever the merits of tax cuts in general might be what Barro recommends it akin to advising a poor farmer to pour fertilizer on dry and relatively barren soil. What is so foolhardy in suggesting that he break new ground and with a bit of manure, fertilizer, and irrigation added to this mix see what is capable of ? Once moved to a better position to take advantage of opportunities, he is again on his own.

NPR and Marketplace have fallen in love with the Cato Institute, a far-right libertarian think tank that opposes anything governmental. Why are you giving those extremists time on the radio - they're nuts!

Will Wilkenson again shows us how little he knows about economics. His comments today sniping at the stimulus plan demonstrate that he read the Cliffs Notes version of Keynes and ignores both solid economic theory and history. Instead we get a typical sophomoric argument that the stimulus is all about psychology and nothing about the fundamentals of our financial system. This level of analysis isn't even good enough for Macro-econ 101 at my community college, and I think Marketplace can do better. I'm was kind of insulted by Wilkinson's commentary this morning -- NPR listeners deserve better than him.

Just what was needed - another confusing slab of tripe from a group that condoned, and was largely responsible for, the current mess.

I expect more from NPR!

NPR needs to stop catering to the whining Right, and start presenting useful information.

I felt like I was listening to Rush, the drug addict, Limburger. Take a little truth, maybe some marginal facts, then twist in some BS and you've got - useless garbage. Slap CATO in as a 'source', and hope someone believes it.

There a plenty or reputable, knowledgeable sources that can present something supportable and credible, why not actually go to one of those.

First I would like to state to all those who feel this problem came about from the last administration, this is not last minute politics. Historically we have been on this path for 20 years at least. From the repeal of the Glass-Segal act which essentially broke up securities and banks to the hiring of Alan Greenspan by Regan who said the economy and businesses are self correcting (per say). So, this is not a Bush-Obama problem, this didn't even start with Clinton and more than that, presidents don't pass laws especially concerning the economy, congress does. Businesses don't lobby the president they lobby congress and we have had a republican, democrat and bi-pratisian congressional sessions in the past 20 years so. This is not new politics. Spending money on infastructure goes only so far and, who do you think contractors will follow. If our economy is based on sucking money from indiviuals and lacking innovation then surely the contractors who get these loans will hire illegal immigrants to maxamize there dollar, just as they we're doing before. Which means the government not only has to govern banks but now businesses as well. To the young lady who mentioned universal health care, I have took a contractor job in Germany. Taxes won't go up a little bit, they will go up a lot. Germany has the population of about 7 U.S states (87 million and declining). They are tax between %30 and %40 from the start (hence why they don't have to file taxes). The U.S is the third most populus country with 304 million people, imagine what it would take us to get pay for universal health care, plus, most European countries don't have total universal health care. Most of it is but, operations, major surgery isn't. For a solution try this, lend directly to comapanies. It may be illegal for the government to lend directly to companies to keep from showing personal interest but one, we've already helped certain banks just to see them go bust any way (actually we gave money away, we didn't lend) and two, this isn't a socialist country, this isn't Europe, so how are we going to make a bank give someone money and, let's be totally honest, if banks do have to loan money how many of us trust banks enough to apply for a loan. Most of us are holding onto what we have and will hold on to any extra. The only extra spending may be at the local Barnes and Noble or bar but it certainly won't be at Best Buy. If WalMart is suffering how will other big retailors deal with this. Give to the companies, small businesses in particular. If we must give to banks give to regional, community and national banks, not these huge mammoths we see, let them crash. Alternative enegry, is a good one. Give to small businesses who will come up with new technologies. The government should become a giant venture captiolist if you will. Lastly, yes I'm going to sware, raise taxes. Raise taxes on everyone, let the Bush tax cuts run out and raise taxes on everyone from inidiviuals to businesses. Cut back military spending, overhaul social reform programs, streamline them and cut back those that don't work. Don't build more schools, hire more teachers and tax them. Also, there's that beast called Social Security. Most of us don't depend on trust it anyway so, privatize it, cut money from it. Lets start paying our national debt. Our, my, children should not have to pay for the mistakes of a generation (essentially they're great grand parents). Privatizing social security was a bad plan because it was Bush plan but, like Bush or not it would definitly work now. This isn't about Obama or Bush or any other political figure, as I've read stories that Mr. Wilkson wrote that denounced some things Bush has done, matter fact he welcomed Obama and hoped he would do better so, lets not get into bashing the right or left, those people in D.C do a good enough job of that for all of us. Let's start partitioning our government to make real solutions. The truth is all sides are to blame, now it's time to clear house and get some new people on both sides because the same people in congress now like the people before them, had a hand in this as well after all McCain and Obama both signed the first $830 billion dollar bailout package.

While, I do not always agree with any of the commentators on marketplace all the time. I do always respect their right to have an opinion. What is so wrong with having people with different backgrounds (political views) expressing their views? Why would you want to read opinion from commentators that are always the exact same as your own?

I could agree with Will here on the use of tax cuts being more about psychology, but not spending when it comes to money for much needed infrastructure, schools, and especially health care reform. The jobs created and money circulated through needed physical construction and renovation are not about psychology at all. There is definite progress, given these infrastructure focused jobs, which is not going to dissipate without a trace, as shock treatment often does. And in my opinion, there's one single thing, when it comes to reviving our economy, that would make a world of difference for just about everyone: universal heath care. Imagine what it would be like to not have to cover those health insurance payments or uninsured health care costs. For businesses, imagine not having to struggle to keep the business going just because of employee health care needs. My family has to go without insurance because we can't afford to insure my husband's employees and us at the same time. Paying even a significantly higher percentage in taxes would be infinitely more affordable and reasonable than continuing to pump money into this mess of our current health care system. Looking at health care as a thriving *industry* is going to sink us all. If England, France, Canada, and Holland can manage to do just fine employing universal health care, then I think Barak Obama can find a way to free America from the stranglehold of our current health care dilemma as well. Unfortunately, insistence on the same mindsets that have marched us right into the current economic downfall are lingering now in Congress as Republicans dig their heals in against any real movement forward.


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