The Bottom Falls Out

This post originally appeared at Neighborhood Effects. Chart courtesy of The Mercatus Center at George Mason University.

Ezra Klein conjured up a fanciful reason why the stimulus spending hasn’t stimulated… anything. Matt and Eileen broke it down pretty thoroughly. Today, Mercatus Senior Research Fellow Veronique de Rugy has somevisual evidence to rebut Ezra’s Keynsian dreams.

Klein is exactly wrong when he writes:

Uncertain about the future, [consumers] spend less now. The role of the government is to step up and keep the economy moving until consumer confidence returns.

Uncertainty isn’t a side-effect of a downturn, it’s a primary cause. In the recent bust, asset values were drastically skewed. If the government “keep[s] the economy moving,” confidence can’t ever return; everyone knows the old status quo was horribly flawed. Ezra, like Krugman, believes that government spending can drive an economy. Veronique’s chart neatly dispels the illusion that public spending can effectively supplement (or supplant) the private sector.

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3 Responses to The Bottom Falls Out

  1. Thomas Merrill says:

    Nobody serious about economics believes that government stimulus drives an economy — it’s a redistribution tool to help smooth the troughs between the peaks in market cycles. Neither Klein nor Krugman is implying more. How does confidence return if the measure of jobs being lost reflects more closely the pre-ARRA red bar than the post-ARRA blue bar?

  2. Aaron says:

    I agree Krugman and Ezra aren’t being serious about economics. Krugman spends most of his time on political hackery, and Ezra’s anti-stimulus couldn’t be sillier.

    Neither of them have argued the “redistribution” angle that you picked up, their pieces argue that spending can “bridge the gap” until ‘consumer confidence’ returns. From Ezra:

    “If you divide the [stimulus] bill’s spending by the bill’s job creation, it doesn’t look that good. “What is $800 Billion divided by 2.5 Million jobs?” Wrote one reader. “I think it’s $320,000 per job! Is that a good deal for me, the buyer/taxpayer?”

    That would be a very bad deal for you, the buyer/taxpayer. But it’s also not the deal you got. The stimulus was meant to create jobs. But it was not a job-creation bill. . . .

    But you have to blame the administration for this, at least in part: They sold the stimulus in terms of job creation, rather than simple economic growth.”

    Got that? They said it was a jobs bill but it wasn’t. I mean it shouldn’t have been. But it was. We have always been at war with Eastasia.

    Anyway, I think Ezra is explicitly saying that the stimulus will help the economy recover. The data so far suggests it isn’t. A similar dynamic was at work with the New Deal, it lengthened the depression’s duration, although probably didn’t add to the depth. Time-shifting doesn’t really help anyone, except the President and his apologists.

    And I don’t particularly care about “consumer confidence” in isolation. Consumers were confident that housing investments were a can’t miss. Confidence is just a measure of the efficiency of markets, but it’s far, far from the best. Don’t try to imply that I’m rooting for the left half; the graph simply illustrates the uncertainty and bias in intervention. We’ve spent billions of dollars without creating one net private sector job, or one net job at all.

    The asset growth that was wiped out won’t return until the real economy returns, slowly but surely, to productivity. Deficits stunt growth, encourage tightening credit markets, and hoarding capital.

    Further, the uncertainty issue remains. What will happen to these million government jobs when we wake up and actually cut spending? Since the government generally bases pay and rank on seniority, instead of merit, the same few people above the line here will be the first ones cut. Wouldn’t it have been better for them, as well of for us, if they were engaged in productive jobs with long-term futures?

  3. Thomas says:

    If stimulating the economy really is an effective redistribution tool to help smooth the troughs between the peaks in market cycles, then I need to start taking heavier drugs. “Stimulants” by nature intend to smooth out the peaks and valleys of its intended subject (the economy, an industry, your mood) but in fact only make the peaks and valleys more extreme. When you’re addicted to heroine, and you’re at a really low low, then taking more heroine doesn’t really smooth out the lows but make them even lower as you binge to get higher highs.

    A natural market cycle will inevidably have ups and downs as individuals’ priorities change, but I have a feeling those ups and downs are a lot higher and lower then they would be without government interference.

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