Via Suitably Flip, an interesting graphic puts the current stimulus debate in one perspective:Now to be fair, I've often criticized use of real dollars as avoiding the scale problem While the comparison between the stimulus bill* and the Iraq War is apt, the economy was much smaller in the earlier periods. So for example, the amount spent on the New Deal compares to an economy that was $865 billion in real GDP (in 2000 dollars). That is much more than the stimulus package under consideration. On the other hand this bill is only the first of several bills according to President Obama, where I would guess the New Deal spending was much more.

Likewise, the purchase of the Louisiana Territory is much larger as a share of GDP. But more to the point, the purchase of Louisiana from France is a different kind of government spending than spending on the New Deal or spending on this stimulus package. Russ Roberts yesterday:

Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.

I think most economists would argue that the first program would be a bad use of federal money at a time when we're already running a growing budget deficit. Yes, it would put money in the hands of workers but the effect on the non-hole-digging part of the economy would be insufficient to justify increasing the future taxes necessary to repay the borrowing that financed the program. Most economists would also agree that the second program would be a bargain that would yield benefits well beyond the money put in the hands of those executing the project.

I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?

Looking at the graphic again, I see interest payments -- if the money is well-invested in infrastructure I could justify the spending of interest to finance it, just as I would not worry about the debt I take on and interest I pay on my HELOC to redo my kitchen to replace old appliances and cabinetry. A HELOC is neither good nor bad save the investment done with the HELOC makes it so; using a HELOC to gamble in Vegas is bad for reasons other than the nature of the debt instrument. How much is given to Wall Street executives isn't good or bad unless you know what you got for the money; no matter the size of the bonus ball, you got little for your investment so it was ex post a bad investment. But ex post isn't the right metric; ex ante is.

Likewise, it's what gets bought with the infrastructure portion of the stimulus package that matters. It's what gets done with the state aid and "human capital" portion. What did you acquire? What could you have gotten instead? The Republicans in the Senate, through their leader Mitch McConnell, want to use money instead to provide new mortgages and mortgage refinancing. Is that a good use of the money, to try to stimulate demand for housing? How else could the money be used instead? These questions are getting buried in focusing on the size of the stimulus bill.

*The amount for the stimulus bill, I should point out, includes interest payments, which I cannot confirm is included so for the other balls on that graphic.

Labels: economics