CBO Does Not Agree With Brian Riedl

I normally do not cite the Washington Times as a good source for economics but in this case it does seem they are getting what the CBO has to say correct in the following sense:

CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term ... CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.

It is true that the Washington Times also talked a lot about long-term crowding-out. Douglas Elmendorf writing for the CBO also notes long-term crowding-out:

Even if the fiscal stimulus persisted, however, the short-run effects on output that operate by increasing demand for goods and services would eventually fade away. In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity … In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy. The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.

This admission that a long-term fiscal stimulus that concentrated on government consumption rather than government investment would lead to long-term crowding-out follows what Elmendorf writes about the short-term effects:

CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by between 0.4 percent and 1.2 percent by the fourth quarter of 2011. CBO estimates that the legislation would raise employment by 0.9 million to 2.5 million at the end of 2009; 1.3 million to 3.9 million at the end of 2010; and 0.6 million to 1.9 million at the end of 2011.

As we noted, Brian Riedl tried to argue short-term crowding-out, which the CBO quite clearly says will not be the case. Even the most ardent Keynesian would concede that long-term fiscal stimulus leads to long-term crowding-out. Only those pseudo-economists who were apologists for the Bush43 fiscal stimulus would try to deny this. In my view, the ideal fiscal stance would be short-term stimulus followed by long-term fiscal restraint once the economy approached full employment. This was the policy of the Clinton Administration as I understand it – it is what is being recommended to President Obama by his economic advisors.

I guess we should thank the author of this Angrybear post for bringing to our attention the Washington Times somewhat misleading account of what CBO said – even if Sammy refuses to recognize the critical distinction between short-term Keynesian effects versus long-term classical effects.