On the Obama Stimulus Plan-Becker

If the government increased its spending on infrastructure when the economy has full employment, its main impact would likely be to draw labor, capital, and raw materials away from various other activities. In effect, increased government spending under these employment conditions would "crowd out" private spending. Measured GDP would not be much affected, if at all. To be sure, the efficiency of the economy would rise if too little had previously been invested in this infrastructure, while efficiency would fall if this government spending were more wasteful than the private spending that was crowded out. This analysis is a useful starting point to consider the effects of stimulus packages, such as the one proposed by soon-to-be President Obama. Of course, the present situation is not one of full employment but of underemployment and excess unemployment, and employment is still falling. How does one adjust the full employment analysis in the first paragraph to account for the presence of unemployed labor and capital? One extreme assumes no crowding out of other private spending when governments increase their spending with significant underemployment in the economy. Increased government spending through a stimulus package under these conditions might even have a "multiplier" effect that would greatly increase, not crowd out, other private spending. The reason is that the recipients of the government spending in turn would increase their spending, and thereby stimulate other activities. Intermediate assumptions assume partial crowding out of other private activities, so a stimulus package would still increase employment and GDP. However, the value, if any, of the increase would depend on how effectively governments spend the stimulus compared to the private spending that is crowded out. Various assumptions about multipliers and crowding out, some implicit, are found in a recent "official" evaluation ("The Job Impact of the American Recovery and Reinvestment Plan") of the effects on GDP and jobs of President Elect Obama's stimulus package. The authors- Christina Romer (incoming Chair of the Council of Economic Advisers) and Jared Bernstein (of the incoming Vice-President's staff)- assume in their calculations a stimulus package that spends a little over $775 billion on energy, infrastructure, health care, tax cuts, and direct payments to the unemployed and other low income individuals. This stimulus is about 7% of the real GDP of about $12 trillion that they estimate for the 4th quarter of 2010 without any stimulus. After working through their analysis, they conclude that this stimulus package will raise real GDP by 3.7 percent in the 4th quarter of 2010 compared to the situation without a stimulus package (Table 1, p.4), so that there is some significant crowding out of private spending. They also assume that this 3.7 % increase in GDP would raise jobs at that time by about 31/2 million. According to their calculations, with the stimulus package, unemployment would be at about 7% in the 4th quarter of 2010 instead of about 9 % without the stimulus. Are these estimates reasonable? Let me first admit that in recent years I have not followed either the academic macroeconomic literature that estimates multipliers of different kinds from various spending and tax programs, or the literature that explicitly estimates crowd out effects of increased government spending. Moreover, Romer and Bernstein claim that they assume basically the same multipliers used in the Federal Reserve's FRB/US model, and by a leading private forecaster. Nevertheless, I believe that they overestimate the effects of this stimulus package on the economy, and that the same techniques would similarly overestimate the employment effects of other types of government spending and tax reduction policies. One strange assumption in the Romer and Bernstein analysis is their assumption that households treat temporary tax cuts as permanent, although they admit that temporary tax cuts are mainly saved and not spent (p.6). However, even without any stimulus from tax cuts to households and from business tax incentives, they still get an increase in 2.7 million jobs from this stimulus package (Table 2, p.6). This is because in their calculations direct spending programs, such as on infrastructure or education, have the biggest effects on jobs per dollar of stimulus. Perhaps their estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive. For one thing, 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. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative. As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a "conversion" is not apparent (although maybe most economists were closet Keynesians all along). This is a serious recession, but Romer and Bernstein project a peak unemployment rate without the stimulus of about 9%. The 1981-82 recession had a peak unemployment rate of about 10.5%, but there was no apparent major "conversion" of economists at that time. What is so different about the present recession compared to that one, and to other recessions since then, that would greatly raise the estimated stimulating effects of government spending on various types of goods and services? It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers. The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed. But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages. Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages. Time will tell whether I am right that a spending and tax package of the type analyzed by Romer and Bernstein may stimulate the economy as measured by GDP and employment, but that the stimulus will be smaller then they estimate, and its value to consumers and taxpayers could be even smaller.

Comments

[Mark]

This crowding out analysis couldn't be more appropriate. Also, the piece on the Keynesian converts is spot on.

[Jack]

It's hard to claim a Nobel Prize winning economist is wrong, and especially so a he cites studies by other esteemed economists, but in the midst of this mess, I end up with lots of questions about his theories and conclusions.

First would be the fear of "crowding out" other investment or spending. Every day I see businesses "crowded out" by the lack of demand for their products and services, with what capital is salvaged and labor going to the sidelines. I've also noticed in the relatively stable mid-west projects not going forward "in this environment". In concept what "private spending" would the arrival of government spurring "crowd out?"

Second: A goodly chunk of the "stimulus" is to begin the repair and perhaps upgrading of our long neglected infrastructure, something that is, and has not, been done by the private sector. In addition to the stimulus I'd expect a return on investment from these projects in the capital assets themselves, plus savings from time spent stuck in traffic, better use, and conservation of energy which would keep more dollars flowing in our economy and improve our level of competition by lowering operation costs.

Perhaps the best of Obama's plan will be that of spurring the new energy plan. Is it too optimistic to see American jobs retrofitting energy efficient windows, HVACs and adding insulation to our public and private buildings and residences, along with building windmills, perhaps a natural gas transportation sector, the proposed 52" gas line from Alaska, etc that will be paid for by lowering our energy costs as well as KEEPING far more of our energy dollars on our continent?

The Pork Effect: I too have wondered about projects most ready to go being "the winner" of scarce resources. But, I suppose that those on the shelves at the ready must have gotten that far along somehow. And what of the private sector's choices? A very low, perhaps negative cost of interest (after inflation) tends to draw out poor choices of projects in the private sector too. In this era, I don't assume that a private project is inherently, or even tends, to be "more valuable".

Closet Keynesians? Becker mentions the severe recession of 81-82 when "government" was declared to be the enemy so few were likely to show up with JMK lapel buttons, but even in that era of "fighting inflation" the Reagan/HW era went ahead with deficit spending of a couple hundred billion each year and, presidential adviser Stockman, whose plan was to cut spending to match revenues (Much like the Rubin plan implemented in 1992) was tossed aside plans and all. So "Keynesian spurring" was alive and well, at least until Perot and a few scattered Congressmen made the accumulated debt a public issue.

Study showing tax breaks will be saved:

I've long thought the saving effect to be why the Bush era deficits did not derive the "bang for the buck" expended; that at the income level the tax breaks targeted it's likely true that the tax refund would go into savings or perhaps disappear on a foreign cruise ship, or? be "invested" in a much larger or second home, the mortgage of which would place even further demands on our Treasury. But Obama's plan is to target a much lower income group..... the one that drags our savings rate down into negative territory, in which I'm sure the refund will be spent within days of arrival.

Lastly, while Romer and Jared, now virtually government spokesmen might "project" unemployment of "9%" (or the real rate that's 5% higher) as the worst it can get, it's my guess that we're in a structural situation where it may be a long time or never, that unemployment will be much below 10%.

Soooooooooo... as we've seen with the UAW jobs bank approach being intolerable to most Americans we'll proceed with coverups such as more Keynesian spurring and make work projects.

Perhaps we'll be "saved" by the boomers retiring, but! I'd guess that is going to be delayed by a decade due to the loss of $12 trillion in private wealth.

[steve k.]

The goal of the plan is to put people to work. Create jobs in construction by building roads, bridges and schools. There is no doubt that the roads need help. Just try to drive around Chicago without the fear of breaking an axle.

My fear of the government plan is that it is just "makework". The hope is that the government plan will jump start the economy. But the economy cannot grow of its own accord based on government spending that has a short half-life. President Reagan's Strategic Defense Initiative created demand in the defense industry for years that was also felt back on college campuses.

This plan will create a bump in the GDP and the new White House will be able to take the credit. But what about the long term effects of the plan. Federal funding of highways to the states already exists. Does this plan brings those future funds into the present? If that is the case, then the forward deficit should not be different. But I doubt that there are future cuts
coming.

The plan is the fiscal equivalent of the liquid diet fad of the eighties. Then, people could lose tens of pounds in a very short time if they just drank this liquid. However, once off the diet the pounds quickly came back. The Obama plan provides the potion that will temporarily make us look good. What will we look like down the road? The money will have been spent and in the end will the current unemployed be better trained for the future? Is it really new schools that keeps America's youth from competing internationally or is there some other cause? The
failure of the market to regulate itself created the situation where now we need a pseudo planned economy.

I hope that America doesn't buy a new wardrobe just yet.

[steve k.]

The goal of the plan is to put people to work. Create jobs in construction by building roads, bridges and schools. There is no doubt that the roads need help.

My fear of the government plan is that it is just "makework". The hope is that the government plan will jump start the economy. But the economy cannot grow of its own accord based on government spending that has a short half-life. President Reagan's Strategic Defense Initiative created demand in the defense industry for years that was also felt back on college campuses.

This plan will create a bump in the GDP and the new White House will be able to take the credit. But what about the long term effects of the plan. Federal funding of highways to the states already exists. Does this plan brings those future funds into the present? If that is the case, then the forward deficit should not be different. But I doubt that there are future cuts
coming.

The plan is the fiscal equivalent of the liquid diet fad of the eighties. Then, people could lose tens of pounds in a very short time if they just drank this liquid. However, once off the diet the pounds quickly came back. The Obama plan provides the potion that will temporarily make us look good. What will we look like down the road? The money will have been spent and in the end will the current unemployed be better trained for the future? Is it really new schools that keeps America's youth from competing internationally or is there some other cause? The
failure of the market to regulate itself created the situation where now we need a pseudo planned economy.

I hope that America doesn't buy a new wardrobe just yet.

[DanC]

The stimulus package is about politics not economics. Democrats do not want to face re-election in two years with a weak economy. They now hold dominating positions in the Federal government and want to hold these positions.

Secondly, Obama and many other Democrats are Social Democrats. They think that capitalism is flawed by its nature and that government must control markets.

So much of the call for increased government spending is desired by some groups for its own sake- they are simply taking advantage of widespread fear to implement the large government programs they desire for the long term.

The liquidation and consolidation of crippled financial institutions would do more to help the economy then a trillion in stimulus spending

[Daniel]

I think this whole idea of a massive Keynesian conversion is overblown.

Face it - you two are both classic Chicagoans. There have been lots of Keynesians and neo-Keynesians around for a long time. The difference isn't that more people are becoming Keynesian - it's just that the Keynesians are actually being heard now and you guys feel like idiots because you realized the Chicago School - while it's made important contributions - isn't omniscient.

You guys were wrong, so to make yourselves feel better you're saying "wow - EVERYBODY was a monetarist and now they're changing their tune".

Pathetic.

[Bill]

The treatment of multipliers always seems to me to be one-side. That is, the focus is on successive rounds of spending that might occur when additional government expenditures are made. But no attention is given to the (FOREGONE) successive rounds of spending that do not take place, but presumably would have, had the money used to finance the government expenditures (taxes or borrowing) not been diverted to government.

[Dallas]

The absolute magnitude specific nature of the "stimulus" does impact the "crowding out" effect.

The proposed infrastructure projects will require steel workers and heavy equipment, but not many dry wall installers and carpenters. The high unemployment in the housing construction trades is irrelevant to creating a massive "crowding out" impact on someone trying to build a factory or chemical plant, which also utilizes steel workers and heavy equipment. Massive low skilled infrastructure projects are a thing of the past.

[pgl]

If the stimulus plan were targeted towards sectors near full employment, then I'd get your crowding-out argument. My read of Romer and Bernstein, however, is that the projected employment effects will be somewhat broad based. My read of the labor market is that unemployment is also broad based. OK, the stimulus will be more targeted to construction jobs but isn't the construction sector facing high unemployment. Maybe I'm not reading the match of the stimulus effects to the areas of unemployment perfectly but your argument for crowding-out needs a little more fleshing out on this score if you really want to make the case for crowding-out as strongly as you argue.

[gdgeiss]

Don't we, in fact, have two things going on, not one? We have: (a) a credit/liquidity crisis and (b) a global economic slowdown. It is the combination of the two which have led to a significant recession, perhaps even (time will tell) depression.

So far the Fed and Treasury have (somewhat clumsily at least at Treasury) tried to, in the first place (if those knowledgeable in such things are to be believed), prevent the complete collapse of the entire global financial structure. In this endeavor they seem, at least for the moment, to have succeeded. At what cost we will eventually see. Hopefully, less than the collapse's would have been (assuming it's still not pending).

Thereafter, they turned their attention to trying to ameliorate the ongoing credit strictures in hopes of quickening the slowing economy overall. In this they appear to have been largely unsuccessful.

To me, the question of why that is will determine whether or not the Obama stimulus package will have any significant impact. In my view the reason why monetary policy stimulus stategies have failed is that they did not reach the core of the issue, interbank lending. That (primarilly at the big national banks), is still essentially frozen.

All of these institutions have the same two issues. First, they have a trust issue and second, a reserves issue. The two things are part and parcel of the same scenario.

They all have so many hundreds of billions of dollars of "toxic instruments" both on and off their books (in SIV's, etc) that they all realize that each one is as basically insolvent (with mark to market accounting) as the next. Not only can't they value these things, but there's essentially no buyer for them at any value. As they are required to pull progressively more of these "worthless" items onto their books and write them off, their assets decrease and cash capital requirements go up. Also, it seems plausible to me to think that reserve requirements are skyrocketing at least in part since regulators have tied capital reserve requirements to internal VaR numbers generated by the banks themselves and those VaR's must (if they're still using last 500 day models) look extraordinarilly awful about now.

In the end, I believe that until the CDS's weighing down financial intitutions' books (and pseudo books) are addressed we'll not see much thawing of the interbank lending freeze up that remains at the heart of the financial crisis. If they won't lend to each other, they pretty much won't lend to anybody (except at ruinous rates).

Solution? That'll take somebody smarter than me to figure out. I'm sure there are plently who think I'm not smart enough to have got the issue right, let alone draft a sensible solution. But certainly some mechanism must be found to begin the orderly "working through" of these CDS's. I've been advocating discounted income stream accounting, standardization of terms, discharging uninterested counterparties (i.e. if you bought the CDS as a naked short substitute, you're toast), and the creation of a regulated open market, but who knows? And while they're at it, the new administration ought to look at absolutely prohibiting these off book holdings by publicly traded corporations. Markets need to be transparent if they are to work. SIV's are inherently opaque as are OTC one off CDS's.

Since I don't believe the root causes of our financial illness have yet been addressed, I would be willing to bet that (except for isolated instances in the stock market) no "stimulus package", whether primarilly monetarist or primarilly Keynesian, is going to have much purchase on the ugly downturn we're in. Against the hundred trillion dollar CDS frozen waste, a trillion dollar stimulus is like spitting on the Antartic ice shelf in hopes of thawing it.

[Tom]

So, what were the experiences of the Bush stimulus about a year ago?

[Anonymous]

@DanC, you're exactly right. Just look at the provisions in Obama's stimulus package - it may as well be an extension of a campaign platform and we all know campaign speeches are great in Iowa and New Hampshire, but they rarely mean anything in DC. For instance, he's promising to have electronic medical records fully implemented by 2011, when GWB's ten-year timeline lagged behind within the first six months and it had the entire healthcare sector behind it. With EMR adoption at 25%, there are a lot more skeptics on this issue than 4-5 years ago, yet Obama still is promising two years to do the practically impossible? This is perfect evidence that his Administration is already just catering to what people want to hear, rather than realistic, sound policies. Everyone thinks they want/need a stimulus, yet many don't see the crowding out effect, and they won't until both crowding out and Ricardian Equivalence (which we haven't talked about yet, but I think it's also a major concern on this issue) hammer the last nail into the coffins that were people's jobs, homes and overall value. However, he will find that you can only be take the "please everybody" approach for so long; there comes a point where people just want you to stand up for something, even if it's not what you support. President-elect Obama will likely be the one humbled most by all of this, because there is no way anyone can be POTUS in this time without taking the brunt of responsibility for what's happening. At first, I thought he would be positioned to take all the credit for any actions taken in the last six months, but now we know there will likely be very little of that, and it's only going to get worse.

@Tom, the experiences were that last year's stimulus is the latest evidence that fiscal stabilization rarely does any good for the economy, and in many cases, it can contribute to making things worse, a la people taking their last stimulus checks and buying more stuff they couldn't afford.

[Mark]

@DanC, you're exactly right. Just look at the provisions in Obama's stimulus package - it may as well be an extension of a campaign platform and we all know campaign speeches are great in Iowa and New Hampshire, but they rarely mean anything in DC. For instance, he's promising to have electronic medical records fully implemented by 2011, when GWB's ten-year timeline lagged behind within the first six months and it had the entire healthcare sector behind it. With EMR adoption at 25%, there are a lot more skeptics on this issue than 4-5 years ago, yet Obama still is promising two years to do the practically impossible? This is perfect evidence that his Administration is already just catering to what people want to hear, rather than realistic, sound policies. Everyone thinks they want/need a stimulus, yet many don't see the crowding out effect, and they won't until both crowding out and Ricardian Equivalence (which we haven't talked about yet, but I think it's also a major concern on this issue) hammer the last nail into the coffins that were people's jobs, homes and overall value. However, he will find that you can only be take the "please everybody" approach for so long; there comes a point where people just want you to stand up for something, even if it's not what you support. President-elect Obama will likely be the one humbled most by all of this, because there is no way anyone can be POTUS in this time without taking the brunt of responsibility for what's happening. At first, I thought he would be positioned to take all the credit for any actions taken in the last six months, but now we know there will likely be very little of that, and it's only going to get worse.

@Tom, the experiences were that last year's stimulus is the latest evidence that fiscal stabilization rarely does any good for the economy, and in many cases, it can contribute to making things worse, a la people taking their last stimulus checks and buying more stuff they couldn't afford.

[RPB]

Anonymous,

I felt too very strongly for a long time that the government bailouts would be creating a sort of crowd out effect. But counterparty fear and deflationary fear is so rampant that people are placing a MASSIVE premium on the safety of US treasuries. Crowd out is not so much happening in this environment as is investor fear of deflation. As indicative of this look at the AAA 10 yr corp bond vs the 10 yr US Treasury note! It is at a nearly 230bps spread!

Arguably, either corporate bond yields are too high or treasuries are too low. Either way, crowd out effect, as I learned it from Tolley, occurs when the government finances itself by using a competitve market rate. Investors are not willing to incur corp debt risk in this atmosphere, as indicated by the spread. For this rate to be so currently out of wack investors must have built the expectation that the risk involved in corporate bonds is too much to bar. This is not a typical crowd out effect occuring, its a panic flight to safety (trite though it sounds).

[Mark]

@Jack, Btw, I am "Anonymous" - I forgot to enter my info before submitting the first time, so I reposted under my name above. The implementation of EMR has nothing to do with having (or not having) the technological capabilities to make it happen. As you describe, there are so many opportunities to implement technology within our healthcare system. But the problem lies with general hurdles that the healthcare industry has to confront where other sectors do not, i.e., regulatory constraints, patient privacy concerns, no boundaries for failure (no getting it right in 2nd or 3rd generation), and general barriers to adoption by end users. This is where P-E Obama has missed the point - we can throw money at the problem all day long and develop great plans, but when they get held up in the political process or when the implementers have failed to consider some basic factors about the industry, then it will all be for naught.

@RPB, you bring up some good points, but I would disagree just a little. For instance, I don't think the premium on Treasuries is there yet, or at least not as much as we might think. We're still too deep in the uncertainty/volatility to really determine efficient valuations in Treasuries. Not sure those spreads are indicative of reality yet. But, that's admittedly my viewpoint on it, so I could be wrong. On the deflationary threat, I think the threat is real and monetary policymakers are starting to grow concerned, but I'm not sure the financial markets at large have gotten to that point. The markets are still just trying to figure out where the waves are coming from and keep their heads above water. Again, just my theory.

[Bill]

Jack, I'm not understanding your point. If the government borrows $1 million to pay for the construction of a bridge, that $1 million is not available for another use, i.e., there is an opportunity foregone. While there may be a multiplier effect associated with the expenditure of the $1 million for the bridge construction, seems to me there would have been a multiplier effect if the $1 million had been used for something else as well, i.e., the foregone opportunity. The fact that future income will be needed to service the additional $1 million government debt doesn't change any of this as far as I'm able to reason.

[Tom]

Keynesians? I think I’m becoming one….
Let’s have the U.S. Government buy, oh say $300M worth of automobiles from all manufactures with US manufacturing plants, according to their ratio of total US production. These cars should be used to replace the current government fleet with the older fleet cars given to each state government.
Next, let’s repair the US highway system by giving, oh say $300M in funds to the states to manage the road repairs, much like the state of Minnesota did over the past few years.
Now what to do about all those state budget problems in all those blue states. Hmmm, let’s make all the state government employees (while we are at it all public school teachers too) federal employees.

[Abeer]

I wonder whether the 'conversion' of many macroeconomists to Keynesians is similar to the herd behaviour mentioned in the earlier post regarding the Madoff Ponzi scheme. Contrary to the idea of 'rational expectations', are we just seeing that even well-known 'rational thinkers' are openly and readily subject to herd behavior and like to follow / support the opinions of even better-known 'rational thinkers'?

What other options would we have now, if not becoming Keynesians? Academia is an amazingly protected place where 'there is no answer -- and here's my proof for that' is a valid response. In the fields of consultancy, or policy-making, incentives are harsh towards 'producing' results, even if out of thin air! Are we seeing the sheer pressure to 'do something' result in Keynesian practices?

Is it not the same 'pressure to produce' that has seen so many subprime loans as well as ponzi schemes? If a banker's pay structure depends completely on the number of loans s/he brings in, then the viability of those loans are less and less challenged. Similarly, if you have too much money and you ABSOLUTELY NEED to put it somewhere then Ponzi schemes would do just fine thank you.

How much of our 'efficiency ideas' are being 'thrust upon' the world? I see every single Union, however small, do the chicken game of strike vs lockout every time they are undergoing collective bargaining. Is this really necessary, or have our ideas about game theory, etc. have MADE them the only 'prescribed solution'. We all know that an eye for an eye makes the world blind, yet we keep prescribing threats and means for retaliation as the only way to avoid conflict.

I think the exigence on efficiency has made economists prescribe incentive structures that are too skewed for humanity's longer term sustenance.

[Jack]

Mark, thanks, I'm sure these are and have been impediments to EMR

"But the problem lies with general hurdles that the healthcare industry has to confront where other sectors do not, i.e., regulatory constraints, patient privacy concerns, no boundaries for failure (no getting it right in 2nd or 3rd generation), and general barriers to adoption by end users."

........... but I hope and expect that we're finally at the point of a chassis up restoration of our still powerful but worn and increasingly wasteful muscle car of health care. The tear down and rebuild will be especially troublesome since the aging beast is still used as a daily driver.

I don't have all the answers but let's consider the privacy issue. For most of us I suppose the fear is that of being discriminated against in employment, or perhaps by today's "insurance companies".

I'd hope that the rebuild would relieve employers of much of their concerns (which I'm SURE manifests itself today as blanket discrimination against older workers who are more likely to have "existing" or have higher health costs in general than the young) which would relieve some of the privacy concerns. Once we are ALL in the pool we're then relieved of "insurance company" cherry-picking. That would leave privacy concerns mostly in the social sphere of has so and so contracted HIV, but I doubt that EMR would be more leaky than the humans knowing the "secret" today.

As for getting H/C pros to adopt (Ha! I'm recalling working in the early days of IT when the "client" liked the new computer report, but wanted to cling to the old one as well......... weaning was part of the task!) there's probably no better time. Boomers are leaving in droves while the younger ones, as Obama, will have their I-phones "pried from their cold dead hands". Today's 20-somethings learned to "keyboard" at amazing speeds in 4th grade and it's a little bit odd to see them pen or pencil in hand.

Lastly? The hole card is a guy who campaigned on change and reforming H/C, giving them not only political capital but the obligation to live up to campaign promises. Hang on!

[Jack]

Bill sez: "Jack, I'm not understanding your point. If the government borrows $1 million to pay for the construction of a bridge, that $1 million is not available for another use, i.e., there is an opportunity foregone. While there may be a multiplier effect associated with the expenditure of the $1 million for the bridge construction, seems to me there would have been a multiplier effect if the $1 million had been used for something else as well......"

............. A good and fair question and especially so were we not in an era of lowered demand and surplus labor that includes underutilized capital equipment from equipment that already exists to factory output.

As for the "million" I really don't know. A year ago the world was AWASH in hot capital looking for a safe home or a project with a ROI, and largely not finding worthy projects, thus causing mischief by inflating the DOW, corrupting the financial world and running up oil futures.

Today? the private sector "interest rate" seems to be something between zero or even a negative percentage and "you can't get it at any price". I assume much of the private capital is still out there but "scared" as RPB's comments on T-bill, C-bond spreads would indicate. Thus public pump priming? And the risk of a bridge rebuild "crowding out" what? a new factory, here? another shopping mall?

But more perhaps. How is it that in a world awash in capital that our public infrastructure fell a trillion or two behind in maintenance and needed upgrades? Obviously "the invisible hand" has not been giving public infrastructure a fair shake, leaving, I guess, that task to our common sense and political will. So the projects would be justified in any economy and better yet in one facing 10% unemployment?

[Jack]

Interesting "bang for the government buck" chart

http://www.ourfuture.org/files/images/Economic-benefits-of-stimul.jpg

Zandi's a bright guy who has been testifying before Congress and a founder of http://www.economy.com/default.asp

[anon]

Both the esteemed professor & the judge make a compelling argument for why the stimulus won't work as expected. However, neither of them propose an alternate solution. It would be interesting to know what they think would really work in the current situation. What would they recommend the president-elect if he polled them for their opinions ?

[Bill]

Jack, your point about the current level of unemployed resources implying a smaller opportunity cost of government projects is well taken. Professor Becker addressed this issue in his remarks, but also noted that it would be difficult for government projects to target only the use of those resources that are currently unemployed. If that is the case, then I believe my point about an offsetting multiplier effect still holds.

[Thorstein Veblen]

Here's a sharp analysis of the Fama critique of the Obama stimulus: http://firelarrysummersnow.blogspot.com/

Feel free to check it out and debate...

[Thorstein Veblen]

Here's a sharp analysis of the Fama critique of the Obama stimulus: http://firelarrysummersnow.blogspot.com/

Feel free to check it out and debate...