Monday, January 2, 2012

Final Response to the Stimulus Debate

Round One (John)
Round Two (Pablo)
Round Three (John)
Round Four (Pablo)
Round Five (John)

Ok, so this is my final response to the stimulus debate. There is a lot more both I and John could say, but, alas, there is other fish to fry. I think John wanted to debate tax policy next. I want to make sure that it is clear in the minds of everyone that I am not excited about government spending as a tool for stimulating the economy. The problems with those kinds of stimulus packages are that they often lead toward a more entrenched government. In normal times, I would advocate other tools (monetary policy, tax cuts, and deregulation). However, we are not in normal times. John asserts that the recession ended. Yes indeed. However, I think that most economists worry that we are dangerously close to double dipping backing into recession. Europe is even closer to the edge and as John rightfully says – our ailments are global and are related to the Euro crisis. I want to leave this debate stating one way in which I think John is right and one way in which I think I am right.

John is right to worry that government leaders are incapable of fulfilling promises to cut spending at a later date. A current and sustained stimulus project MUST come with a detailed plan for balancing the budget post 2014. The problem with Keynesian economics is that politicians only follow half of Keynes’ advice. They gladly spend during the bad times, but never cut spending during the good times. And this is precisely why we have such a large debt. I approach the subject from an idealistic and policy-oriented vantage point. However, it would be reckless to consider a stimulus program without considering the fact that politicians will try their best to wiggle out of any spending cuts in the future.

Where do I think I am right? On the actual policy. For example John states,
I believe we should cut some wasteful spending, let's say 400 billion the first year, and then increase spending on transportation by let's say 100 billion. The positive short-term effect from the transportation spending will help outweigh some of the possible negative short-term effects that come from cutting the other spending. 
Notice that John believes that spending on transportation would be “positive” in the short term and that there would be “possible negative” effects of spending cuts. I agree wholeheartedly. John is more worried about scaring off investors in the future and seeing interest rates rise. That is a legitimate concern. However, I gather from the previous paragraph that John does recognize the stimulating effect of infrastructure spending and the negative effect of cuts. I wonder if John could be convinced that if politicians could work out a long term deficit reducing plan, that he would be more ready to accept the need for a little Keynesian injection in the near term?

Anyway, I hope that this debate will help conservatives to seriously think about economic policy. It’s not just academic. The livelihood of thousands of Americans (and Europeans) is at stake.

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