More government spending, more public consumption?
TEXT OF COMMENTARY
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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