For Many Economists, Stimulus Falls Flat

An unusual aspect of the recent debate in Washington is the lengths that supporters have gone to marginalize anyone who questions the so-called stimulus plan.

Robert Reich, Bill Clinton's labor secretary and member of President Obama's transition team, claims "almost every economist will tell you the stimulus has to be massive." Nobel laureate and New York Times columnist Paul Krugman accuses skeptics of "making totally non-serious arguments."

Sen. Chuck Schumer, a New York Democrat, says "economists agree" that doling out large sums to state governments is "effective." Vice President Joe Biden says that "every economist that I've spoken to" believes the spending package "has to be big."

Perhaps the vice president should broaden his social circles. The truth is that, instead of being uniformly in favor of the massive spending bill, which is being championed by congressional Democrats with Obama's support, economists remain divided.

You may have heard that respectable economists, including Nobel laureate Joseph Stiglitz, say stimulus spending should be high or higher. But some news organizations have been less than diligent in telling you that other respectable economists are deeply skeptical of the idea, flatly oppose it or favor competing proposals such as additional tax relief.

The University of Chicago's Gary Becker, another Nobel laureate, warns that "the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies." Becker says that in that case, spending could do more harm than good.

Naturally, the process of porkification already is underway. An analysis by taxpayer group Americans for Limited Government shows the $825 billion bill includes $200 million for beautification of the National Mall and millions for new cars for federal bureaucrats. Then there's the flap over contraceptive-related spending. If cars and condoms qualify as emergency "stimulus" spending, what doesn't?

Some of Becker's colleagues are more emphatic. John Cochrane, a finance professor at the University of Chicago's business school, published a detailed paper this week on the topic. He sketches an argument for lower taxes right now - instead of higher spending - while simultaneously whittling down the budget deficit.

Another option, he says, would be for the Federal Reserve and U.S. Treasury to print more money and issue more bonds. Cochrane writes: "Some economists tell me, 'Yes, all our models, data, and analysis for the last 40 years say fiscal stimulus doesn't work, but don't you really believe it anyway?' This is an astonishing attitude. How can a scientist 'believe' something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn't put much weight on such 'beliefs,' since they explicitly don't represent expert scientific inquiry."

New York University's Thomas Sargent says, according to the Chicago Tribune: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

The Cato Institute, a non-partisan think tank that takes broadly free-market views, was frustrated enough by the conventional wisdom in Washington that it took out a full-page ad on page 11 of the New York Times on Wednesday. The ad, which will also appear in Roll Call magazine and Thursday's Washington Post, is signed by scores of economists and says "we do not believe that more government spending is a way to improve economic performance."

Greg Mankiw, a Harvard economics professor who was chairman of George W. Bush's Council of Economics Advisors, is a self-described stimulus skeptic; he recently pointed out the Democratic Congress' own budget office says that only 8 percent of the proposed "stimulus" spending will take place in the 2009 fiscal year.

I could go on, but you get the idea. These statements add up to an important conclusion that has received too little attention: Many of the nation's top economists believe the deficit spending Washington is rushing to enact simply will not work. Instead of proving to be a potent stimulus, the legislation could prove to be a mild depressant.

Remember, the stimulus cash has to come from somewhere. If taxes are raised, people will be poorer. If the money is borrowed, it must be paid back with interest, and anyone lending to the U.S. Treasury has less to spend on other items. As in other parts of life, there's no free lunch.

Don Boudreaux, the chairman of the economics department at George Mason University and contributor to CafeHayek.com, pointed out in an interview this week that economists still agree on many topics, such as the benefits of free trade and the harmful effects of price controls.

"Keynesianism was in fact not a good theory," Boudreaux says, referring to the theories of the late economist John Maynard Keynes that encourage government spending. "In the profession, Keynesianism was almost dead until the past few months. It was never dead in the popular mind. It's a flat Earth kind of theory. People look out and see the Earth looks flat, so it must be flat. By and large, macroeconomists rejected at least the standard Keynesian line. Now it's back and that's a real mystery."

He adds: "I think one of the fears is that the perception of the size of the downturn is so intense that even among professional economists, a lot of prudent, careful thought has gone out of the window: 'Geez, we have to do something...' The problem is not some kind of sudden lack of consumer confidence. The problem is that the bubble burst."

Boudreaux and the other economists who are skeptical of stimulus spending may, as I tend to believe, be right. They may be wrong. But the arguments are not as one-sided, and the truth is more complicated, than stimulus proponents would have you believe.