“Hurry Up and Waste”

Jon Chait on the charge that the stimulus plan is wasteful:

Hurry Up and Waste, by Jonathan Chait, TNR: Republicans like to accuse Democrats of wasting taxpayer dollars… But if President Obama’s economic stimulus fails to prevent a depression … it will be because he didn’t waste enough money…

The stimulus bill is based on Keynesian theory… When we’re in a severe recession, good productive capacity goes to waste. Autoworkers sit home unemployed because nobody has money to buy cars, and cooks sit home unemployed because nobody has money to go out to dinner. The first thing for government to try is to reduce interest rates, to encourage businesses to borrow money to hire more workers and buy equipment. But, if interest rates hit bottom, then the government has to shock the system back to life by spending money directly. Say, Washington hires construction workers to build something, and those workers start buying cars and going to restaurants, and, after a while, the economy is running again.

So Obama decided to spend a lot of money. The Republicans’ hoary opposition technique is to boil any legislation down to one or two silly-sounding expenditures… Midnight basketball! A bear DNA study! Obama anticipated this critique and tried to eliminate all waste from the bill. He kept earmarks out and focused the spending on public investments like energy efficiency and education. The logic went beyond just politics. If you’re going to spend a lot of money, you might as well get something useful for it.

Yet a few downsides to this clever tactic have emerged. First, a stimulus can shock the economy back to life if it happens quickly, but there are only so many useful projects you can spend money on really fast. … So the stimulus is less than half the size of the projected drop in output. It might be enough to stave off disaster, but then again, it might not.

Second, by emphasizing the worthiness of his spending proposals, Obama has allowed the debate to revolve around the merits of each project. Normal spending is judged on those terms–whether the goods or services justify their cost. The point of stimulus spending, by contrast, is simply to spend money–on something useful if possible, wasteful if necessary. Keynes proposed burying money in mineshafts, so that workers would be hired to dig it out. (Imagine what the GOP could do with material like that.) World War II was an effective stimulus that, economically speaking, consisted of 100 percent waste. If war hadn’t broken out, we could have enjoyed the same economic benefit by building all those tanks and planes and dumping them into the ocean.

Third, Republicans have simply carried on as if the stimulus were filled with pork anyway. In fact, the bill contains either zero pork or a vanishingly tiny amount, depending on how you define the term. … Congressional Republicans have continued to churn out lists of “wasteful” spending in the stimulus bill, highlighting such outrages as funding for Amtrak, making federal buildings more energy-efficient, flood-reduction projects on the Mississippi River, and the like. …

The mass ignorance on display was best exemplified by the contretemps over a provision to help undergird hemorrhaging state budgets…, the notion of giving federal money to the states was probably the single most defensible provision in the whole bill. Naturally, it became a particular target of conservative ire. A Weekly Standard editorial declared:

It’s hard to argue that the $248 billion in transfers to the states will stimulate the economy. The money is being taken from one pot and put in another so that the states can balance their books and ensure the proper treatment of beneficiaries. It doesn’t prime the pump. It just keeps the pump from falling apart.

It’s a breathtaking passage. It begins by insisting that helping state budgets won’t stimulate the economy, then proceeds to methodically undercut its own assertion by pointing out that the stimulus will help states avoid cutting spending or raising taxes, and concludes with a metaphor that clinches the case: After all, keeping the pump from falling apart is a good idea, isn’t it?

Part of the problem here is that Obama never explained the theoretical basis for his plan. Even moderate journalists and members of Congress don’t understand it. …

What people miss, I think, is that if enhanced macroeconomic stability makes people better off, i.e. if the increased stability from countercyclical government spending has value, then it’s possible for government spending to be worthwhile even if the spending is on wasteful goods. When the government spends money there are two effects, there is the benefit derived directly from the spending on things like roads and water treatment plants, and there is a second benefit from the increased employment and output (the enhanced stability) that results from the extra spending. If this stabilizing effect is large enough, then there can be overall benefits even if the direct effects from the spending are small. It’s best to maximize benefits, of course, and the stimulus plan does very well relative to standard government operations like this, but the the lack of direct benefits does not, in and of itself, mean the net benefits are necessarily negative. When unemployment is high and there is slack in the economy, the benefits from enhanced stability can be large.


Originally published at the Economist’s View and reproduced here with the author’s permission.

4 Responses to "“Hurry Up and Waste”"

  1. Guest   February 16, 2009 at 3:08 pm

    Much of the WWII stimulus were actual purchases from Europe and Asia. The US supplied both sides and geared up the ecomony and war making machine before entering WWII as a combatant. That’s a big difference than dumping the goods into the sea without any real paying customers.Transfering money to state govt will only be a temporary fix. In California the spending is out of control with some excessive pay to city and country govt. which also adds to the pension overload. CA can no longer afford to pay over $300,000 for city administrators, $120,000 to $250,000 for firemen and police.