Category Archives: Stimulus

CPI Inflation Indicator Hits 5 Percent: Not Stagflation, But a Useful Warning

The Consumer Price Index (CPI) for May came out this morning. At 5 percent, it was higher than expected. CPI has its flaws as an indicator, but the fact that it is now the highest it has been since the 2008 financial crisis still says something useful. We’re not going back to 1970s stagflation, so nobody needs to freak out, but today’s numbers are a warning. Policy makers should listen.

Trillions of dollars of proposed new deficit spending would further increase inflation, and would mostly stimulate the politically connected. The Federal Reserve should resist political pressure to further flood the money supply in hopes of stimulating a faster COVID recovery.

The timing is also off. Most projects would not kick in until the economy is already mostly recovered anyway. While there is still a way to go, unemployment is already below 6 percent, GDP is working its way back to trend, and the return of in-person schooling this fall will allow more parents to reenter the workforce. Continued progress depends on vaccination rates, not new political projects.

Rather than producing more cash, Congress should enable more production of actual goods and services with a deregulatory stimulus, lowering of trade barriers, and incentives for more vaccinations. Almost a third of occupations now require some sort of license. These keep thousands of would-be small entrepreneurs out of the market, and make it harder for workers to find or change jobs. Financial regulations make it hard for startups and struggling businesses to find capital to grow or stay open—and higher inflation would worsen the problem. Endless permits and years-long environmental reviews are blocking infrastructure projects that could already be underway.

Tariffs left over from the Trump administration, along with new ones the Biden administration is proposing, are making cars and houses more expensive at a lousy time, and could hit billions of dollars of other goods this holiday shopping season.

Vaccination rates are the single most important factor for reopening the economy. People are itching to get back to normal, but first they need to feel safe. Remember, people didn’t wait for governors’ orders to lock down in the first place. Opening back up is also a decision people are making for themselves. Lifting government restrictions might have some impact at the margin. Politicians are not in the driver’s seat here, but there are still things they can do. Some states have tried incentive programs, like lottery drawings and free goods. These are already having a positive impact in communities, saving lives and letting people open back up. More of these would speed the process more than inflation would.

An inflationary boost is tempting for politicians because it is easy. It takes hard work to make substantive reforms to regulation and trade policy and to reach out to vaccine-hesitant people and ask them to do the right thing. But what is worthwhile is rarely easy. While today’s inflation news is not doom-and-gloom, it is cause for concern. We are at an inflection point. Will Congress and President Biden do the right thing?

For more, see my recent explainer on how inflation works, and my recent op-ed on how to stimulate the economy without new spending.

Stimulating the COVID Recovery without Trillions in Spending

Over at Inside Sources, I make the case that deregulation, freer trade, and continued vaccinations will do more to open up the economy than the trillions of dollars of politicized spending Congress is lining up:

Federal, state, and local regulators eased more than 800 regulations last year that were blocking access to telemedicine, medical supplies, and food and grocery deliveries, along with unneeded occupational licenses that were keeping people out of work. We’ve already seen the benefits. Now policymakers need to continue this important work as entrepreneurs look for ways to adapt to the new normal but find themselves blocked because they don’t have the right permit.

Steel and aluminum tariffs left over from the Trump administration are adding hundreds of dollars to car prices and thousands of dollars to construction costs, at a time when housing prices are becoming unaffordable for many buyers. Congress could get rid of them today if it wanted to. Congress should also stop Biden’s proposed doubling of Canadian lumber tariffs, which would further increase housing prices while alienating an ally with whom we just signed the USMCA trade agreement. He has also proposed an additional $2 billion in tariffs against six mostly allied countries with whom we will be negotiating trade agreements in the near future. These would come into effect in the middle of the holiday shopping season.

My colleague Wayne Crews has a good term for this type of proposal: a deregulatory stimulus. Read the whole thing here.

CEI Experts on COVID-19 Relief Bill

My colleagues and I have a generally dim view of the proposed coronavirus stimulus bill. A roundup of our reactions is here. Here’s my contribution on its minimum wage proposal:

Senior Fellow Ryan Young:

“The Democrats’ demands require firms seeking federal aid to pay a minimum wage of $15 an hour. Small businesses across the country are struggling to make payroll. An unexpected increase in payroll costs could put far more workers at risk of losing their job than under normal times. At the very least, workers would see cuts to their non-wage pay such as insurance, meals, parking, and other benefits. These tradeoffs would appear at precisely the worst time.​”

Keynes – The General Theory of Employment, Interest, and Money

Keynes – The General Theory of Employment, Interest, and Money

My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.

People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.

Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.

Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.

On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.

Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.

This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.

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.

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.


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.


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.


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.


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.


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.


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.