Stimulus in the real world

by Russ Roberts on October 13, 2009

in Other People's Money, Politics, Stimulus

As I noted yesterday, four government agencies account for 86% of the $110 billion the government has managed to spend since the “stimulus” bill was enacted last February–HHS, Labor, Education and Social Security. This is not exactly the shovel-ready type spending that economists and politicians invoked when the Keynesian fantasy multiplier of 1.57 was invoked as a reason for urgently spending money.

I also noted in passing that the government as spent LESS THAN HALF of the money that has been budgeted and is available. Bryan Caplan observes, beautifully:

I’ve long scoffed at government inefficiency, but it never occurred to me that a full pork barrel could be so slow to empty.

But we both missed the real irony. The Keynesian argument for spending like a drunken sailor is that consumers are being too thrifty. They’re hoarding. They’re uncertain about the future.They keep money under the mattress instead of investing it. Banks do the same thing–instead of investing the money, they hoard it because they’re uncertain about the future. Entrepreneurs are cautious about taking new risks because of the same uncertainty. So, the argument goes, government spending needs to take up the slack and boost aggregate demand.

Guess what? Government is actually staffed by human beings. It is not something called G that economists or even politicians can move up and down at will. Bureaucrats are cautious. They’re uncertain about what is going to happen to their budgets in the future. They’re uncertain about what the best thing is to do with the money they’re given. They’re worried about being accountable for their actions. So what do they do? They hoard. They hestiate. They put the money in the equivalent of a mattress.

I’ve always said that government is more efficient than the private sector in two areas–waging war and spending other people’s money. What governments are actually good at is building armies and collecting other people’s money. They’re not so good at waging war and they’re not even good at spending money quickly, let alone wisely.

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{ 37 comments }

piefarmer October 13, 2009 at 12:35 pm

Very nice observations.
I would add the obvious point that the Keynesians who pushed the stimulus were simply engaging in story telling. They told that story to push more funds to their favored political endeavors. Selling it as shovel ready to restart the economy was just economic cover for a political agenda.

Anonymous October 13, 2009 at 12:52 pm

Well once again – I think the crux of the Keynesian argument isn’t on the saver’s side alone – it’s on the investor’s side. Investment demand is so low that the real equilibrium interest rate is below the real interest rate price floor imposed by the deflation/zero lower bound double whammy. “Shovel ready” has always meant “ready to be spent immediately”. The 1.5 multiplier isn’t only on infrastructure projects – it’s a multiplier that people have come up with for government spending in general (as opposed to tax cuts or tax rebates), which can include teachers and policemen.

All the political economy arguments about the allocative inefficiency of bureaucracy are always worth reminding people about. What’s good in theory doesn’t always work in practice. But this isn’t just about getting people to spend more – it’s about fighting an implicit price floor in two markets: the loanable funds market and the labor market.

Anonymous October 13, 2009 at 7:13 pm

The 1.5 multiplier isn’t only on infrastructure projects – it’s a multiplier that people have come up with for government spending in general (as opposed to tax cuts or tax rebates), which can include teachers and policemen.

There is such a wide range of opinion – and that is what it is, opinion – on what the multiplier is that one shouldn’t even begin to entertain a specific figure like this.

All the political economy arguments about the allocative inefficiency of bureaucracy are always worth reminding people about.

Yes, largely because politicians ignore these concerns; it isn’t in their self-interest to be wracked by such problems. As a practical matter counter-cyclical policies run head long into these sorts of problems and break upon their reefs and shoals.

Anonymous October 13, 2009 at 7:21 pm

RE: “There is such a wide range of opinion – and that is what it is, opinion – on what the multiplier is that one shouldn’t even begin to entertain a specific figure like this.”

It’s not an opinion, it’s an estimate. And yes there is a wide range of estimates, and it seems to center on 1.5 for government spending in advanced industrial economies.

RE: ” As a practical matter counter-cyclical policies run head long into these sorts of problems and break upon their reefs and shoals.”

Keep in mind that empirical estimates of the multiplier are measuring these “practical counter-cyclical policies”, so they already incorporate the way that these political economy issues weaken the punch of stimulus. Theorists should keep them in mind, but if they’re using empirical estimates that already incorporate political failings and weaknesses, they are implicitly keeping them in mind already.

Anonymous October 13, 2009 at 7:28 pm

It’s not an opinion, it’s an estimate. And yes there is a wide range of estimates, and it seems to center on 1.5 for government spending in advanced industrial economies.

It is an opinion. One should take it with a grain of salt no matter who they are coming from. It resembles so much pseudo-science, which is of course why these sorts of things have no consistent predictive ability.

Keep in mind that empirical estimates of the multiplier are measuring these “practical counter-cyclical policies”…

Not very effectively it would seem. And of course for government actors there is every incentive to water down these concerns.

Anonymous October 13, 2009 at 7:31 pm

OK – maybe the way I should be coming at this is to ask you exactly how you define “estimate” and “opinion” and why you think “opinion” applies to 1.5. I’m at a loss, Mommsen1625.

RE: “Not very effectively it would seem”

And on what basis do you say this? What I mean is that the estimate of a 1.5 multiplier comes from work done on actual data from actual fiscal stimulus that is presumably the victim of these same political economy concerns. So the political economy concerns are already included in the 1.5 estimate (ie – if everything worked perfectly in the bureaucracy, it would be higher than 1.5 – but it’s not perfect).

MiltonF Admirer October 16, 2009 at 9:35 pm

On Keynesian multipliers. Taylor, et. al. have done some good work on multipliers and show the model used by the admiinstration (Mrs. Romer) was an Old Keynesian model not robust to alternative explanations. A New Keynesian model shows the stimulus to have a multiplier less than 1.

http://www.volkerwieland.com/docs/CCTW%20Mar%202.pdf

Anonymous October 17, 2009 at 3:11 am

My understanding is the Cogan, Cweik, Taylor, and Wieland paper you cite doesn’t look at fiscal stimulus with zero interest rates and savings that exceed planned investment. It’s therefore irrelevant to the current situation. No objective Keynesian would support stimulus unless those conditions hold.

You’re also mischaracterizing Romer’s model. She’s a monetarist and gets those numbers from New Keynesian models. Nobody uses the simpler Old Keynesian models anymore, except for pedagogical purposes.

rpl October 13, 2009 at 1:14 pm

Russ, it’s worse than you imagine.

I’ve had a front-row seat watching a government agency try to get a stimulus project off the ground, and if what I’m seeing is typical, then the reason the bureaucrats are so slow at spending the money has nothing to do with bureaucratic uncertainty about the future. Quite the contrary, the civil servants know that they have a limited amount of time to spend the money, and they are trying to get the projects up and running as soon as possible.

Unfortunately, Congress, which has little understanding of how the government it oversees actually works, loaded the stimulus up with an enormous helping of red tape, meaning that it takes months for the agencies to get their hands on the money they are trying to spend. First, understand that it takes the government a long time to negotiate a contract, so they prefer to add the stimulus to existing contracts. However, the stimulus spending has restrictions that are inconsistent with many contracts’ T’s & C’s; cue delays for contract modifications.

The SOW has to be “accessible to the lay public,” so that’s another delay while the stimulus people review the SOW proposed by the agency and recommend changes to make it more understandable. (Is it still rigorous from a contractual point of view? Who cares?) There are steps in the process that have to be approved by specific designated officials, some of whom are on vacation and not expected back for a couple of weeks. Also, the stimulus money has restrictions on how it can be spent (e.g., can’t pay another government agency, like the GSA), and some of those restricted budget lines are contractually required, so the agency has to find additional funding elsewhere to pay those charges, and so on. It never seems to stop.

None of this is to say that things would be much better if it were easier to spend the money; only that, in light of the way the stimulus bill was written there was no way it was *ever* going to be spent as quickly as the posturing politicians suggested.

Anonymous October 13, 2009 at 1:36 pm

You’ve just given us a more detailed description of “bureaucratic uncertainty”.

rpl October 13, 2009 at 1:59 pm

Russ described bureaucratic uncertainty thus:

Bureaucrats are cautious. They’re uncertain about what is going to happen to their budgets in the future. They’re uncertain about what the best thing is to do with the money they’re given. They’re worried about being accountable for their actions. So what do they do? They hoard. They hestiate. They put the money in the equivalent of a mattress.

None of that is equivalent to what I described. Maybe your argument is that it doesn’t matter, since the effect is the same as if they civil servants were hiding the money in a mattress. That depends on what your objective is in having the discussion. My impression was that Russ was trying to gain some understanding of why the process didn’t play out the way the politicians envisioned out. I’m going to go out on a limb here and suggest that before you can understand why something happened you first have to get your facts straight about what happened.

Anonymous October 13, 2009 at 3:25 pm

Both of you discuss “bureaucrats” as individuals, but in this case, collectivism really is the right approach. The individual bureaucrat is not cautious. The bureaucracy is cautious. The bureaucrat, to adhere to his regulations, must jump through all of these cautious hoops, so his caution is not an individual characteristic. He may be a skydiver on his own time, but he’s a bureaucrat on his employer’s time, and nothing else matters.

Anonymous October 13, 2009 at 1:43 pm

Russ:

Once again enjoyed your economic observations. In addition the comment section usually brings out some additional substantive thoughts to help put the overall issue into perspective. Both danielkuehn and rpl have strong points. The government multiplier has always been a favorite figment of the imagination of politicians and political economist. And the past 40 years of government regulations and “public” involvement in government decisions all but guarantees that these “stimulus” dollars on shovel ready projects will take years if ever.

One observation that I had on the political process that created this boondoggle spending is that despite all of the changes to our economy over the past 100 years – politicians seem to be stuck in a time warp thinking that we are still in the 1930′s. Back then – construction projects were labor intensive. It took a lot of people to build roads and bridges and government buildings. However over the past 80 years – productivity improvements such as large earth movers and contruction techniques have reduced the need for large pools of skilled and semi-skilled laborers for these projects. As you have so astutely argued with regard to the so call decline in manufacturing in the U.S. – the decline in employment has been a direct result in productivity improvements. As a sector it is larger today than it was in any years past.

Anonymous October 13, 2009 at 2:16 pm

Has it occurred to anyone that this administration does not care about jobs, people or anything else except its own power. I don’t buy the idea that they cannot figure out how to spend it. It appears to me that they are saving the money for the mother of all spending binges just before the next election. They are even discussing another “stimulus” bill. I guess unemployment is so high that they figure the original “stimulus” was not going to be enough. The funds when they are spent, will be directed at their own supporters and just enough moderates to ensure the election. They are taking the sweet time carefully planning this targeting for maximum electoral effect. The spending will be so fast and furious that it will consume the sycophant media with non-stop glorifying stories about how Obama ala Roosevelt has finally solved the unemployment problem. (Yeah, I know Roosevelt did not actually do that, but that won’t matter). The stories about the graft, fraud, abuse and outright theft that inevitably go along with any attempt at such insane spending will not be discovered until after the election. Krugman will then cap it with a column about the confirmation of the ideas of Keynes. Then of course the dollar will fall to a new low and the inflation will be underway.

Name October 13, 2009 at 2:51 pm

“If one rejects laissez faire on account of man’s fallibility and moral weakness, one must for the same reasons also reject every kind of government action.” – Ludwig Von Mises

JohnK October 13, 2009 at 6:02 pm

nice

Sam Grove October 13, 2009 at 6:03 pm

He’s produced some great lines.

I like: “Only the government can take something valuable like paper, and make it worth less by printing on it.”

Anonymous October 13, 2009 at 8:35 pm

Another illustration of why Yasafi and Daniel aren’t so fond of Mises.

Sam Grove October 13, 2009 at 9:51 pm

What does YASAFI know of Mises?

Anonymous October 13, 2009 at 10:24 pm

:-D

Probably not much more than Mises mocked Government with that statement.

That would be enough!

Dave October 13, 2009 at 2:59 pm

“The Keynesian argument for spending like a drunken sailor is that consumers are being too thrifty.”

And consumers aren’t even being all that thrifty in the first place. The current savings rate is still relatively low compared to historical norms.

Anonymous October 13, 2009 at 6:39 pm

Investors haven’t been all that thrifty either.

Andy October 13, 2009 at 4:04 pm

Shovel Ready “Green” Projects:
Install solar panels on every roof in every neighborhood of Southern California, New Mexico, Arizona, & Nevada. Install solar panels on every carport in Southern California.

It could probably be done in the next year or two. It would cut energy costs for families that get the solar panels. It would lower the cost of electricity. It would reduce carbon emissions. There are companies out there that do it, and more would certainly pop up to fill the gaps.

Of course, once the project is over we’d have to find other jobs for these employees, but that’s not part of the stimulus discussion.

Anonymous October 13, 2009 at 4:10 pm

“You know, we could say they spend money like drunken sailors, but that would be unfair to drunken sailors … It would be unfair, because the sailors are spending their own money.”Ronald Reagan, August 23, 1984

Mike M. October 13, 2009 at 7:26 pm

Kind of like how Reagan ran up enormous deficits to defeat a Russian enemy that (in hindsight) was already defeated.

I love Reagan for a lot of reasons; however, this was the beginning (in my opinion) of the modern day Republican double talk of small government / less spending except when it comes to maintaining / increasing our empire.

Anonymous October 14, 2009 at 4:09 am

I’m inclined to agree with your sentiment — as I think Reagan was. We know that the executive branch doesn’t spend money — don’t we?

Mike M. October 14, 2009 at 1:50 pm

Well, unfortunately, I wasn’t a close friend of the late President and have a hard time knowing what he would have done given a more receptive Congress. We do know what he presided over; however, it was one of the largest increases in deficit / national debt in quite some time.

I, for one, will hold President Obama responsible for the outlandish spending of Congress just as I hold Reagan responsible for his deficits. I understand your point though … and believe me, I think there is plenty of blame to go around.

roversaurus October 13, 2009 at 5:17 pm

I still want someone to explain why stuffing money in the mattress is bad for the overall economy.

Isn’t it just like someone working for free?
They are producing something for the rest of humanity and yet they are consuming nothing in return.

Mike M. October 13, 2009 at 7:25 pm

Well, if you’re asking why it’s actually bad … it isn’t. If you’re looking for why Keynes thought it was bad — check out the paradox of thrift. The Austrian Economists’ reply to his “paradox” is that he is ignoring the movement of prices. Keynes would reply by saying that prices and wages are sticky and don’t move instantaneously. This causes friction and an “unnecessary” contraction in GDP.

I don’t dispute that some prices take longer to change than others (perhaps capital goods as opposed to consumer goods? I’d have to think about it more). However, I would argue that any good that is accomplished by government trying to smooth that transition is far outweighed by the damage of government meddling in the market place. Also, as someone who was recently laid off and accepted a position at 80% of his prior wage, I can say that wages aren’t all that sticky. Not getting paid for a while helps you to reevaluate what you’re willing to accept.

As always, the advocate for central planning / allocation of resources is presuming to know the right answer and the right allocation. They may know an answer that is better than the status quo but there is no guarantee that it is a, sustainable or b, the best answer.

Mike M. October 13, 2009 at 5:31 pm

Russ-

As a long time listener of EconTalk, I’ve always enjoyed your insights. This one is perfect in its simplicity.

Apologies to other posters as I haven’t read all of the comments, but this is precisely the point that you and others have made countless times in various ways. The idea that markets need to be regulated because of greed / corruption / incompetence / etc. However, it should be regulated by a government full of people also prone to greed / corruption / incompetence?

If I may quote you (who I believe was quoting Kling?) — At Chicago they say markets are efficient, trust Markets. At MIT they say markets fail, trust government. And at GMU you say markets fail, trust markets.

Anonymous October 14, 2009 at 5:58 am

“The idea that markets need to be regulated because of greed / corruption / incompetence / etc.”

Markets are almost always self-regulating, if permitted. Most problems arise when governments removes those regulations, usually in the name of, ironically, regulation.

Mike M. October 14, 2009 at 1:52 pm

I should have been more clear in my original post and certainly agree completely with yours.

I was trying to say that — some — would argue that markets need to be regulated because of … And that these people are the same ones that don’t understand that members of government have the same issue.

Anonymous October 14, 2009 at 2:11 am

If the Keynesian multiplier is 1.57 with government spending, then isn’t the multiplier for private spending more…after the government takes it out of the private sector to spend? If the money is simply being printed, does the inflation effects negate much of the G-spending multiplier when factoring in the opportunity costs of what the private sector would have (or could have) done?

Anonymous October 14, 2009 at 5:59 am

That’s why the real Keynesiac multiplier is negative.

Anonymous October 13, 2009 at 7:42 pm

Because even those who proposed 1.5 – or rather, adopted it from the Federal Reserve – admitted to “considerable uncertainty” (that is a direct quote as I recall) on the matter. If I have “considerable uncertainty” on a point and yet I adopt it, I call that an opinion, not an estimate.

Of course my earlier point about the predictive quality of these things undergirds this entire conversation; the ability to make reasonably accurate predictions is part of what makes something a science. If economists cannot do this in this field then it isn’t a science and it shouldn’t be regarded as one nor should its prescriptions be given much weight either.

Anonymous October 13, 2009 at 7:43 pm

Estimates always have uncertainty – that’s life. You’re essentially defining objectivity to be extreme risk aversion. I don’t personally buy it, but fair enough – at least I understand your point.

Anonymous October 13, 2009 at 7:47 pm

Estimates have uncertainty, but that is bounded; when something escapes those bounds it is no longer an estimate. In other words, this is a pretty good example of the Emperor Having No Clothes, yet everyone ignoring that fact because of the unpleasantness that would cause.

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