Monday, 2 November 2009

Economic stimulus across the pond

The US government has applied the same Keynesian stimulus principles as the UK, but on a larger scale. "Cash for clunkers" is the American version of our car scrappage scheme. The New York Times asked four economists Did the Stimulus Work?

Jeffrey Miron was sceptical:
Much discussion of the recession presumes it will end only because government comes to the rescue.

In fact, the U.S. economy recovered from significant recessions before 1914, when monetary and fiscal policy had not even been invented. Economies can and do recover on their own, and intervention might make things worse by generating uncertainty and distorting the economy’s allocation of resources.

A further caveat is that two elements of the fiscal stimulus — cash-for-clunkers and the $8,000 tax credit for first-time home buyers — probably shifted significant activity from the fourth quarter and beyond to the third quarter because consumers knew these provisions would expire soon. Thus the stimulus plausibly shifted the timing of economic activity without necessarily improving the long-term path.
Russell Roberts expressed similar concerns:
Everyone seems sure that at least the “cash for clunkers” program was a good thing. A Reuters article, for example, said: “The program, which ended in August, contributed to a jump in consumer spending in the third quarter and helped to pull the economy out of its worst recession since the 1930s.”

But there is no way of knowing whether this is correct. Yes, it was good for consumer spending. On cars. But part of its impact was to encourage consumers to buy cars instead of other things, and to buy cars today rather than cars tomorrow. Its impact on employment was probably minimal.

I think the Keynesian narrative is right about one thing — consumers lack confidence. The crucial question is whether a large increase in government spending financed with borrowed money that swells the deficit to $1.4 trillion is good for confidence or bad for it. No one knows the answer
Miron concluded:
The case for additional stimulus is weak. If further stimulus occurs, it should focus on changes in policy that make sense independent of the recession. This means reductions in tax rates rather than increases in expenditure. Repeal of the corporate income tax would be ideal.

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