Friday, July 08, 2011

Another Inadequate Defense of a Zombie-Idea

Professor Laura Tyson has given us the Nth argument for stimulus spending in her latest commentary at the Financial Times. While more humble economists are scratching their head and wondering where they went wrong, a few like the Professor are still trying to revive dead economic notions.

[Thanks to for the zombie photo.]

Her headline:

"Only more stimulus can fix a jobless recovery."

Wasn't it Keynes who thought that "[t]he short-run challenge is inadequate demand" (Tyson's words)? This is a zombie-idea if there ever was one. A good deal of evidence invalidates it, never mind that it's especially noxious at this time of fiscal over-expansion.

Tyson isn't completely off base: she admits that "the long-run challenge calls for fiscal contraction". However, she insists that "the short-run challenge calls for fiscal support."

Her solution? Promise to do both--and then start with the stimulus first under the wisdom of the old adage: Never do today what you can put off until tomorrow.

Her idea is to "pair fiscal measures targeted at job creation during the next few years with a multiyear deficit reduction plan that kicks in once employment recovers. Pass both now as a package."

But what happens if employment doesn't recover? Isn't her suggestion what every pro-stimulus economist and their politicians have been trying to do since this whole episode began? But the Professor is unfazed by the up-to-now inefficacy of the idea. She continues:

"At the very least, the federal government should introduce additional stimulus measures to offset the substantial fiscal drag that is slated to occur this year and next when current stimulus measures expire. On the spending side, it should invest more in infrastructure maintenance and replacement. Such investment raises demand, creates jobs and increases the growth potential of the economy."

Oh it does, does it? I think what we have here is a person with no fear of the facts.

1. Which fiscal stimulus measures have been proven to increase anything other than temporary job creation or maintenance?

No one can point to evidence that stimulus measures create jobs in a cost-effective and enduring way; and, on the other hand, evidence supports the hypothesis that fiscal stimuli are ineffective and even counterproductive. Who has produced that evidence? Ironically enough, today's version of Professor Tyson's own Council of Economic Advisers has come out with a study concluding that Obama's stimulus measures have produced jobs, but at a cost of $278,000 each.

The study also points to the fact that "the 'stimulus' has been working in reverse over the past six months, causing the economy to shed jobs." (Source; also, download the full CEA report from the same page.)

May I also point out that the latest job figures include a hefty release (see chart part-way down) of government employees, and that this is a good thing? Much of the stimuli went towards the maintenance of useless federal and state jobs. We are finally shedding these, thanks to the stimuli's demise, and we're helping our state and federal budgets in the process.

Lastly, I would like to point out that road maintenance and replacement are not job growth measures; they are simply ordinary expenses, the budget for which the politicians have stolen for other items.

2. Next question: When should the stimuli stop, given that most jobs created (or not lost) are dependent upon continuing stimuli for their survival?

3. Isn't excessive boom-time spending the very stimulus-like activity that got us into this predicament in the first place? Isn't more stimulus spending the same as throwing good money after bad?

4. To finance the stimuli and infrastructure, will Congress prefer that the Treasury go deeper into debt, or will it have the wisdom to cut spending elsewhere to compensate (which would seem counterproductive to her argument)? Our current cost-cutting-minded Congress has enough on its hands just trying to reign in the wasteful, debt-producing spending we are already doing, never mind finding places for even more cuts.

On the revenue side, the Professor thinks "the government should extend some of the targeted tax measures including the payroll tax cut for employees and the capital investment expense deduction. It should go further and cut payroll taxes for employers on all new hires, including hires by new businesses. This cut should be linked to the unemployment rate and should be maintained until it falls to the 5-6 percent range."

This is the only suggestion that makes any sense. Better yet, put a torch to the whole current tax code and instigate a much more fair flat tax. And while you're at it, stop farm subsidies. Oh, and turn back the regulatory clock and cancel some very bad recent legislation. But I suppose these ideas make too much sense.

Hopefully, the stimulus zombie-idea will soon turn to dust and disappear once and for all. (But don't hang around any economic-idea cemeteries long enough to find out.)