“The food is terrible. And in such small portions.”

“How dead is Keynes?” asked economist James Tobin in 1977, when Keynesian economics was starting to lose ground in economics departments to more theoretically elegant alternatives like new classical economics, and when the stagflation of the mid-1970s sapped many people’s confidence in Keynesian policy prescriptions. Tobin said Keynesian economics was still the best macroeconomic theory out there, and that standard Keynesian pump-priming remedies for recessions like deficit spending and monetary expansion still worked. True as those words might have been, however, Keynesian economics was not faring well in the court of public opinion, neither among academic economists nor among policymakers. Paul Volcker’s Federal Reserve invoked monetarism, not Keynesianism, in its draconian anti-inflationary policies of the early ’80s, and President Reagan, of course, sold his tax cuts as “supply side” economic policies designed to restore incentives to work and save.

It’s fair to say that nothing really did come along to supplant Keynesian economics on the policy front.  Even Reagan’s “supply side” tax cuts had most of their impact through traditional Keynesian channels — putting more money in people’s pockets for them to spend — than by influencing people to supply more labor or save more. The estimated impact on labor supply was meager. The personal saving rate actually fell (graph from Calculated Risk). And President Bush 43’s early 2001 tax rebates worked much the same way — though they weren’t enough to prevent the recession of that year, they did mitigate it. But it’s hard to imagine any Republican politician of the last 30 years announcing, as President Nixon once did, “I am now a Keynesian.” Even Democratic politicians seem less than eager to embrace Keynes.

Fast forward to President Obama’s and Congress’s $787 billion, two-year stimulus package. Republicans have been calling it a failure practically ever since the time the ink on the bill was dry, and the American public seems to be getting increasingly impatient with, if not skeptical of, the stimulus. Unemployment keeps creeping up, after all, most recently to 9.5%. Warnings about the country’s long-term debt problems, to which the stimulus makes some contribution (however overblown in some quarters), have become ever more dire. Andrew Leonard of Salon has a nice little update on the politics and economics of the stimulus, titled “Is the Obama economic rescue plan a failure?”

annie_hallLeonard, citing Barry Ritholtz of The Big Picture, says the real problem, contrary to Republican critics who say the stimulus is just worthless “spending” as if government purchases weren’t part of GDP (and as if tax cuts weren’t part of the stimulus, too), is not that the food is so bad but that the portions are too small:

‘But Barry Ritholtz points out that the [Washington] Post includes an interesting chart detailing the stimulus spending so far.

  • February: $2 billion
  • March: $6.6 billion
  • April: $12.3 billion
  • May: $30.6 billion
  • June: $58 billion

‘If that trend line continues through the summer, then we will be seeing significant outlays of government spending in the months ahead. A bit too soon, I think, to call the stimulus a “failure.”‘

Indeed. So far the stimulus has hardly gotten started. But even those “significant” outlays to come will almost surely not be enough. At the time of the bill’s passage, many economists (including myself) thought the stimulus was too smail — less than $400 billion a year, or less than 3% of GDP — to be much more than “a mop to stay the seas” (quote from A.C. Pigou in a different context). Which makes it rather dispiriting that administration officials, including Vice President Biden, are all but taking a second stimulus plan off the table.

A more legitimate criticism of the stimulus is that the administration waited too long to get going, dragging out the approval process for projects longer than necessary. The numbers from the Post are consistent with that charge. A meticulous approval process is good in the sense of avoiding wasteful projects (and the ensuing political embarrassment), but bad in the sense of delaying relief to unemployed and cash-strapped Americans. More money to states and localities, to make up for their losses in tax revenues (and mindful of their constitutional requirements to balance their budgets), could have been distributed a lot sooner.

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3 Responses to ““The food is terrible. And in such small portions.””

  1. democommie Says:

    Ranjit:

    Somebody was telling me the other day that this “correction” is necessary to teach US a lesson. I told him I didn’t need the lesson as I had not been playing games with OPM (Other Peoples’ Money). More to the point; it seems that countering the notion of “trickle down economics” is the fact of trickle down pain, only it increases as it’s cascading down.

  2. Richard Says:

    I laugh at the very concept of unemployment. Labor is scarce; it commands a positive price. There will never be a time in the foreseeable future when additional labor cannot be employed at any price to unravel greater and greater human miseries. Unemployment is always voluntary in a free market. Involuntary unemployment in a pure laissez-faire system? There is no such thing.

    It is true, however, that the laborer in question may command a price below a wage that sustains life. This is a serious issue, and must be dealt with by the laborer in question immediately. If you are in the middle of a desert with nothing, no amount of labor can save you; your labor is essentially useless to you; one may abstract and say it has a price of zero. It is perhaps unfortunate from a moral standpoint that a human vegetable may command a wage unsustainable to any human life even in a modern economy, but that is a fact of reality. Still, purposeful human action will always command a wage of some sort, since that action can be used to neutralize misery.

    It is an obvious fact that all voluntary labor in the United States can be employed if all workers will accept merely $0.01 a year. At such a wage rate, there will be no unemployment. In a free market, therefore, all unemployment is voluntary. One voluntary decides not to work at the current wage rate.

    However, we live with an economy that is nowhere near free. Unemployment may be involuntary. When the State requires a certain wage rate at minimum, such unemployment regulations create involuntary unemployment. When the State creates costly regulations regarding employment, then there is involuntary unemployment due to the added (and involuntary) transaction costs. When the State supports unions through coercive regulation (“Thou shall not fire an employee for joining a union!”) it creates involuntary unemployment through a roundabout manner.

    Conclusively, involuntary unemployment is a state-driven phenomenon. As far as it matters, the industry I presently work for (and of which my family owns a firm in) will gladly hire these “unemployed” people for the minimum legal wage if they’re willing to work hard at cutting and packing vegetables under the hot sun. Unfortunately, these unemployed are more willing to whine to the State in order to receive the money we (the employer and workers, that is) pay in taxes than pick up the cuchillo and work in hard labor. I cannot blame them; but it would be nice if economists realized the blatant error in the mainstream way of thinking about unemployment, and the overuse of unemployment statistics in figuring the state of the economy.

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