FEBRUARY 10, 2009http://online.wsj.com/article/SB123423402552366409.html
There's No
Stimulus Free Lunch
It's hard to
spend wise and spend fast.
By GARY
S. BECKER and KEVIN
M. MURPHY
How much will the stimulus package moving in
Congress really stimulate the economy?
The evaluations to date have been
incomplete, so we looked at the likely stimulative effect from the spending
parts of the House and Senate bills -- over $500 billion -- and assessed the
quantitative effects of four basic factors.
1) How
much increase in Gross Domestic Product (GDP) can be expected from the stimulus
package?
In a full-employment situation, increased
government spending would largely replace private spending, so the net stimulus
to GDPwould likely be quite small. In the present
environment, however, with growing unemployment of both labor and capital, the
net stimulus would be larger since the additional government spending would put
some unemployed resources to work.
For example, if the government spent money
to build new homes with unemployed labor, the stimulus to GDPmight be close to,
even larger than, the
amount spent. However, given the present housing glut, that hardly seems to be
a wise policy, although it is a small part of both the House and Senate
stimulus packages.
In fact, much of the proposed spending would
be in sectors and on programs where the government would mainly have to draw
resources away from other uses. This type of spending includes adding broadband
to rural areas, spending more on health coverage, encouraging scientific
innovations, developing renewable energy, as well as many other things.
As President Barack Obama recently said,
"This plan is more than a prescription for short-term spending -- it's a
strategy for America's long-term growth and opportunity in areas
such as renewable energy, health care and education." Such spending may
encourage long-term growth, but it will have little short-term effect on GDP.
So our conclusion is that the net stimulus
to short-term GDPwill not be zero, and will be positive, but
the stimulus is likely to be modest in magnitude. Some economists have assumed
that every $1 billion spent by the government through the stimulus package
would raise short-term GDPby $1.5 billion. Or, in economics jargon,
that the multiplier is 1.5.
That seems too optimistic given the nature
of the spending programs being proposed. We believe a multiplier well below one
seems much more likely.
2) The
increased government spending in the stimulus package is supposed to be only
temporary, until the economy returns to a full employment level, but probably
won't be.
The evidence of past expansions of
government programs is just the opposite. Once created they tend to survive and
grow over time, even when the increases initially were said to be temporary.
The underlying reason for this is that interest groups develop around new and
expanded programs, and they lobby to keep and expand those programs.
This implies that the spending programs in
the stimulus package will continue to some extent after the economy has
returned to full employment. The multiplier at that time will surely be much
closer to zero. Looking several years ahead, then, the average stimulus from
the expansion in government spending will be smaller, perhaps much smaller,
than the short-term stimulus.
3) The
effects on consumers and businesses of the stimulus package depend not only on
the stimulus to short-term GDP, but also on how valuable the spending is.
Whatever the merits of other government
spending, the spending in this package is likely to have less value. A very
large amount of money will be spent quickly over a two-year period: $500
billion amounts to about one-quarter of the total federal government annual
spending
of $2 trillion. It is extremely difficult for any group, private as well as
public, to spend such a large sum wisely in a short period of time.
In addition, although politics play an
important part in determining all government spending, political considerations
are especially important in a spending package adopted quickly while the
economy is reeling, and just after a popular president took office. Many
Democrats saw the stimulus bill as a golden opportunity to enact spending items
they've long desired. For this reason, various components of the package are
unlikely to pass any reasonably stringent cost-benefit test.
4) There
are no free lunches in spending, public or private.
The increased federal debt caused by this
stimulus package has to be paid for eventually by higher taxes on households
and businesses. Higher income and business taxes generally discourage effort
and investments, and result in a larger social burden than the actual level of
the tax revenue needed to finance the greater debt. The burden from higher
taxes down the road has to be deducted both from any short-term stimulus
provided by the spending program, and from its long-run effects on the economy.
We believe that it is incumbent on both
supporters and opponents of the bill to thoughtfully evaluate each of these
four factors. We recognize that how individuals will come out in their own
evaluation of these factors will determine their attitude toward the stimulus
package, and that there is considerable ground for reasonable differences of
opinion.
Our own view is that the short-term stimulus
from the legislation before Congress will be smaller per dollar spent than is
expected by many others because the package tries to combine short-term
stimulus with long-term benefits to the economy. Unfortunately, short-term and
long-term gains are in considerable conflict with each other. Moreover, it is
very hard to spend wisely large sums in short periods of time. Nor can one ever
forget that spending is not free, and ultimately it has to be financed by
higher taxes.
** Mr.
Becker, the 1992 Nobel economics laureate, is professor of economics at the
Universityof Chicagoand
senior fellow at the HooverInstitution. Mr. Murphy, a MacArthur Fellow, is an
economics professor at the Universityof Chicagoand a
senior fellow at the HooverInstitution.
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