Monday, January 12, 2009

Did Gary Becker Really Argue Complete Crowding-Out?

Conservative criticism of the Obama fiscal stimulus plan seems to be reverting to mischaracterizing what certain economists have said. Brad DeLong is calling one foul on this score:

Is there any way to interpret Greg Mankiw's Sunday New York Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Greg Mankiw is now citing Gary Becker as one who thinks any increase in public infrastructure will have almost no aggregate demand effect ala crowding out but let’s review the portions of Gary’s statement that Greg left out:

If the government increased its spending on infrastructure when the economy has full employment, its main impact would likely be to draw labor, capital, and raw materials away from various other activities. In effect, increased government spending under these employment conditions would "crowd out" private spending ... Of course, the present situation is not one of full employment but of underemployment and excess unemployment, and employment is still falling. How does one adjust the full employment analysis in the first paragraph to account for the presence of unemployed labor and capital? One extreme assumes no crowding out of other private spending when governments increase their spending with significant underemployment in the economy. Increased government spending through a stimulus package under these conditions might even have a "multiplier" effect that would greatly increase, not crowd out, other private spending. The reason is that the recipients of the government spending in turn would increase their spending, and thereby stimulate other activities. Intermediate assumptions assume partial crowding out of other private activities, so a stimulus package would still increase employment and GDP.

Gary presents us the standard reasoning and then asks us to apply it to the current situation. It is true that Gary makes the following argument:

For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending.

In other words, he starts with the intermediate position and then tilts towards the full employment view but my reading of Romer-Bernstein suggests we are likely closer to the view held by the no crowding-out crowd.

We should welcome a real debate on this issue but cherry picking quotes is not exactly the best way to make a point.


Shag from Brookline said...

Mankiw in his column does not seem to answer its title: "Is Government Spending Too Easy an Answer?" He boldly asks a number of other questions thoughout his column without providing answers. Perhaps he is positioning himself to refer back to his column if the economy doesn't improve or worsens. Perhaps Mankiw has opinions on what the answers should be but keeps them to himself to avoid commitment.

And his references to Paul Samuelson seem to be critical without forthrightly so stating. Is he suggesting that Samuelson's text in out of date and that perhaps his, Mankiw's, presents better economic views? Mankiw closes with a Samuelson quote followed by a comment that even an economist might consider as snide, suggesting that Congress might make a mistake if it relies upon Samuelson's economic textbooks. Did George W. Bush do so well, assuming he may have relied upon Mankiw's textbook when the latter worked for the former? There seems to be a concerted Republican attack on Keynes and economists who follow him.

Ken Houghton said...

Thank you, pgl. I was afraid I was the only one who read Becker's statement that way, and Dr. DeLong appeared to be giving him.

Shag from Brookline said...

Perhaps Mankiw's role is to provide economic "talking points" to neocon pundits, such as Jonah Goldberg in today's LATimes. And to sell more of his favorite book on economics.