Category Archives: Stimulus

CEI Podcast for September 20, 2012: The Economic Development Administration

Have a listen here.

CEI Policy Analyst David Bier is author of the new study “The Case for Abolishing the Economic Development Administration.” The agency’s impact goes well beyond its modest $286 million budget. On average, the EDA only pays for about one seventh of its projects. The rest of the burden falls on state and local governments and the private sector. Those projects include $2 million for a wine-tasting room, $35 million for a convention center that is projected to lose money, and other boondoggles.

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Bill Clinton’s Economic Nationalism

Over at RealClearPolicy, I recently reviewed Bill Clinton’s latest book, Back to Work: Why We Need Smart Government for a Strong Economy. You can read the review here. It’s a thought-provoking book, so there’s plenty I didn’t have room to say. Hence this post. Where the review focused mainly on Clinton’s philosophy and rhetoric, this post is mainly about Clinton’s economic policy proposals. I’ll still take him over Bush or Obama, but some of his policy ideas make an economist’s head shake.

Two things are worth pointing out before we dig into the weeds of policy. One is that Clinton seems to believe that you are for something if you want to increase government spending on it, and against it if you want to cut government spending on it. The logic does not necessarily follow. Many people think the federal government should not be involved in the automobile industry. Therefore, they are against American-made cars. Yes, the logic is that weak. This bit of tunnel vision is not unique to Clinton, but it weakens many of his arguments.

The other point is a surprising one. Nationalism pervades the book; this is the belief that one person matters more than another if they are a citizen of one country instead of another. One expects this from Republicans. But it’s surprising to hear from a Democrat, let alone the man who passed NAFTA. It’s as though after decades of stump speeches telling voters that they’re better than everyone else, he started to truly believe it. Many of Clinton’s policy proposals leave no possibility but to believe that he is an American nationalist; let us explore.

Trade as a Battle

Clinton repeatedly refers to other countries as “the competition.” We have to beat them, or they’ll beat us. It’s as though he believes that for China and India to have more, America must have less. This simply isn’t true, according to global GDP data. Besides falling for the zero-sum fallacy, this reveals an ugly mindset.

Suppose we beat our competitors in Clinton’s zero-sum world. Rich Americans would be redistributing wealth away from the global poor and giving it to themselves. This kind of reverse redistribution is hardly progressive.

Outsourcing

Clinton’s economic nationalism also expresses itself in his calls for factories to “insource” jobs they currently outsource overseas. Americans deserve a job more than others. In so doing, he ignores basic economic principles. One of them is that giving someone a job doesn’t therefore mean one less job for everyone else; the zero-sum fallacy strike again. Another is the division of labor.

The finer the division of labor, the greater the wealth workers can create; Robinson Crusoe lived in poverty for all his cleverness. If the U.S. were to become self-sufficient, its division of labor would be limited to about 310 million people. But it could be more than 7 billion people if the world was fully open to trade. Imagine what 7 billion people could accomplish together, if they were all able to pursue their specialized comparative advantage.

Renewable Energy

Continuing his nationalist rhetoric, Clinton calls for the U.S. to ramp up its renewable energy production, with the eventual goal of complete energy independence. To do this, we would have to divert resources from other, more productive sectors of the economy. The price of energy independence is less wealth, and a less specialized division of labor. We’d have to stop doing things we’re good at just to get the same amount of energy we already had before.

One also questions Clinton’s method of achieving energy independence. He would transfer billions of dollars from taxpayers to private businesses. He argues that this would create jobs, wealth, and would make America more energy-independent. He does not mention the opportunity costs involved — taxpayers would have have spent their money on other things they valued more if they had been allowed to keep it.

Assume that the economics of renewable energy are as bright as Clinton claims. Then there is also no need to subsidize it. Profits are deadly effective at luring entrepreneurs. If it’s economically viable, it doesn’t need a subsidy. And if it isn’t economically viable, no amount of subsidy will make it so.

Clinton also ignores public choice concerns. Taxpayer dollars tend not to be transferred to private businesses on the merits. Political connections play a large role. It is possible that subsidies given to the right companies would produce the results Clinton is after. But the possibility of that actually happening is vanishingly small. He does not address this problem in his book.

Exports

Clinton wants the U.S. to double its exports. Germany’s exports are roughly 40 percent of its GDP; the U.S. exports 11 percent. Clinton believes that increasing exports without raising imports would create jobs and wealth. While it would put people to work, it wouldn’t make them any wealthier if all the value they work so hard to create is shipped overseas.

Increasing exports would increase the amount of currency in the U.S., true. But currency is not wealth. Dollars cannot be eaten, driven, or otherwise consumed. Wealth is stuff. Goods and services. Dollars only have value because they can be exchanged for wealth. Given the choice between a car and a bunch of green pieces of paper, most people would take the car. Millions of people make that choice every year, and millions more are saving up to do just that.

Exports are the price we pay for imports. They are neither a good thing nor a bad thing in and of themselves. There is no need to artificially increase them.

Clinton’s nationalism-influenced thoughts on trade are very similar to the mercantilism that economists have been openly mocking for centuries. Considering that Clinton is the man who passed NAFTA, this is very disappointing.

Stimulus

Clinton also believes that fiscal stimulus softened the recession’s impact. He cites a study arguing that it kept employment 1.5 to 2 percent higher than it would have been without stimulus. But again, he forgets opportunity costs. Every dollar spent and every job created under the stimulus was a dollar and a job taken away from somewhere else.

Stimulus works by taking some money out of the economy and then putting it back in – less transaction costs, of course. The best possible outcome is negative. Even allowing for a Keynesian multiplier over 1, the politicking and waste that go into any large spending bill almost guarantee that the stimulus hurt the economy.

Bailouts

Clinton praises TARP and the auto industry bailouts. Even if all the loans are repaid, the bank and auto bailouts will still be costly, as George Mason University’s Russ Roberts has pointed out. This is because capitalism is a system of profit and loss. Not one or the other. Both. Profits encourage risk. Losses encourage prudence. When government removes losses from the equation, it also removes prudence. Banks take more and more risks, because they know they won’t bear the losses from the ones that don’t pan out. This does not save the financial system. It undermines it.

The auto bailouts saved the American auto industry, Clinton claims. But it didn’t need saving. A couple of firms were in danger, and the bailout saved them. But Ford, Toyota, Honda, and the many other American companies that make cars in America using American workers were doing just fine. The bailouts locked scarce resources into inefficient companies that had good political connections. The opportunity costs are massive.

Immigration

Clinton has some good immigration ideas, not least because he lets go of his nationalism on this issue. He would like to allow more high-skilled immigrants into the country, especially the ones with advanced degrees in the STEM fields – science, technology, engineering, and mathematics. These types of immigrants are far more entrepreneurial than most native-born Americans. They would create a lot of jobs, which is Clinton’s main concern.

More importantly, they would also create much more wealth in America’s relatively entrepreneur-friendly environment than in countries with less liberal institutions. It could well be that the next Google or Microsoft will never be founded because the strict H-1B visa quota kept the wrong person out.

Summary

Almost all of Clinton’s ideas outside of immigration involve more government, instead of less. This could be because of a lack of creativity. It may be because of the planner’s hubris: “I am clever. Put me in charge.” It could also be because of an antipathy to the disorderly, and unpredictable ways of creative destruction and the market process. His plans are so much tidier, so much neater.

But the source of his ideas doesn’t matter so much. It matters if they’d work or not. Would they create more wealth and jobs on net? From the economist’s perspective, the answer is yes in a few cases, but mostly no. Clinton might like his work to be treated as one of pragmatism, but it is really a work of ideology. Given how moderate his presidency was compared to either of his successors, this is disappointing.

CEI Podcast for September 15, 2011: Solyndra

 

Have a listen here.

Myron Ebell, Director of CEI’s Center for Energy and Environment, takes a look at the brewing Solyndra scandal. Solyndra is a company that makes solar panels and recently declared bankruptcy. In 2009, the federal government gave Solyndra a $535 million loan even though its own analysts predicted the company would go bankrupt in 2011. The company’s cozy relationship with political figures, including a major political donor with an investment stake, make the loan — and its low interest rate — look rather suspicious.

CEI Podcast for September 8, 2011: The Infrastructure Bank

 

Have a listen here.

In a speech tonight, President Obama is expected to announce the creation of a government infrastucture bank as part of his plan to reduce unemployment. Vice President for Policy Wayne Crews explains why it won’t work as planned, and offers an alternative idea: liberalization.

Stimulating Language

I’ve argued for a long time that stimulus bills are poorly named; it implies that they stimulate the economy. “Spending bill” is a non-loaded term that has the added advantage of being accurate. Both parties have passed spending bills over the years in the hopes of stimulating the economy. Intentions being different than results, Democrats are finally starting to agree with me on this misuse of language, as The Hill reports:

Democrats are now being careful to frame their job-creation agenda in language excluding references to any stimulus, even though their favored policies for ending the deepest recession since the Great Depression are largely the same.

The article continues:

Recognizing the unpopularity of the 2009 package, however, Democratic leaders have revised their message with less loaded language – “job creation” instead of “stimulus” and “Make it in America” in lieu of “Recovery Act” – in hopes of tackling the jobs crisis.

Spending bills work by taking some money out of the economy and then putting it back in, minus transaction costs and political malfeasance; one can see why they don’t have much effect. The thinking is that Congress can invest money more wisely than private investors. If Solyndra is any indicator, that isn’t true.

Public opinion has soured on spending bills after some initial optimism. That same public also wants its politicians to do something, anything to get the economy going.

But the only tool available to Congress is spending. That’s why politicians insist on following the same failed policy over and over – it is their only tool. The only alternatives are doing nothing, or actively paring back spending and regulations. And those don’t look nearly as glamorous on camera.

Stimulus, spending bill, job creation bill – a rose by any other name has thorns just as sharp. And this particular rose refuses to bloom. That means it’s time to try something else. Maybe reducing spending to sustainable Clinton-era levels, which isn’t even particularly austere. Congress should also try a deregulatory stimulus sometime.

Broken Window Fallacy: Hurricane Irene Edition

Huricane Irene largely spared the East coast’s larger cities from the worst of its wrath. It still cut off power to about 4 million people. And it cost 25 lives. But there is a sunny side to the billions of dollars of destruction! Politico’s Josh Boak quotes the University of Maryland’s Peter Morici:

Morici said there could be some economic growth at the end of this year and the beginning of next year, because with the rebuilding, “largely what we’re going to get is a private-sector stimulus package.”

Morici fell for the broken window fallacy; if a kid (or a hurricane) breaks a window, it creates a job for the repairman. He then spends his wages on other things, and the economy gets a boost. Why not break every window in the entire country, then? Think how much wealthier everyone would be if only a hurricane would come along and level the entire nation!

Morici could well be right that Irene could cause a small GDP boost. But that doesn’t mean that America is richer for having endured a natural disaster; hurricanes are not stimulus packages. St. Lawrence University economist Steve Horwitz draws a useful dichotomy that can help us understand what’s going on here:

GDP measures a flow of activity, not a stock of wealth. Destroying things and then rebuilding them might increase economic activity in the area affected (by drawing resources from elsewhere), but leaves us with less wealth than we would have had without the disaster. That is the real meaning of the Broken Window Fallacy.

Irene destroyed billions of dollars of America’s stock of wealth. Getting back to where we were before the hurricane will probably give a boost to GDP. But we aren’t wealthier for it, even if GDP does look better. If nothing had been destroyed, all the time, energy, and materials put into playing catch-up would have been put into making something new.

Alien Stimulus

If hostile aliens invade the planet, “this slump would be over in 18 months,” according to New York Times columnist Paul Krugman. It’s a bizarre way to express a bizarre idea: that war is good for the economy.

He draws an analogy with World War II, where the massive military buildup – conscription is left unmentioned – reduced unemployment and caused GDP to skyrocket.

The Independent Institute’s Mary Theroux points out:

The World War II years were a time of shared privation, with virtually every item that we take for granted today either rationed: e.g., meat, gasoline, sugar, clothing; or not available at any cost: e.g., new cars, appliances, etc. The American standard of living throughout World War II remained at an excruciatingly low level that no 21st century American would accept.

War does not create. It can only destroy. True, aggregate numbers like GDP can thrive during such troubled times. Workers were cranking out munitions like nobody’s business. But those workers’ actual standard of living was not high; everyday essentials were being rationed.

That’s the peril of relying on GDP as an economic barometer. It certainly has its uses. But over-reliance on it has made Krugman ignore other, harsher aspects of war. The fighting. The dying. The separated families, in some cases made smaller by the economic stimulus. The privation at home. The lost opportunities, economic and otherwise.

Krugman’s claim that an alien invasion would stimulate the economy is as alien to the economic way of thinking as our new overlords are to us.

Fortunately, not everyone is taking him seriously. A satirical Twitter account, @KrugmanAliens, is poking devastating fun.

Some readers might also be interested in this working paper I wrote a few years ago about the economics of war.