Blind acceptance of government heroics

Posted by Marc Hodak on June 16, 2010 under Economics, Invisible trade-offs | Be the First to Comment

Alan Blinder, former Vice Chair of the Fed and Princeton economist, takes that school’s reputation down another notch in his panting defense of the the government’s performance during the recent financial crisis–particularly since President Obama took office.

The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs…

Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion—which is roughly correct—and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that—or none at all?

Try to imagine an economics department like Princeton giving an advanced degree for any candidate making such a silly argument.

Surely, Prof. Blinder can imagine a government like the Soviet Union spending a significant portion of their country’s GDP without producing any net jobs.  Or North Korea.  Even less communist countries like France and Greece who have spent public money like drunken sailors have not really created any net jobs.  In fact, the amount of jobs a country creates is just about inversely related to the amount of its GDP spent by its government.

Blinder is trying to trick the reader when says “jobs.”  He means gross jobs, not net jobs.  If I took $10,000 from ten people, and gave it to someone to spend a year digging ditches and filling them up again, that would look like a job “created” in Prof. Blinder’s world.   The fact that the $100,000 was not spent by its original owners to support jobs in dozens of grocery stores, clothing stores, car shops, etc. apparently doesn’t enter into his calculation.  An economist worthy of the name accounts for such secondary consequences of the policy they are defending.  (BTW – The fact that the money is borrowed instead of taxed doesn’t quite save this argument.)

The reality, of course, is that our hapless government did not sprinkle its largess at random, and it did not target its spending toward the areas of highest unemployment.  It funneled much of it to its preferred constituents/supporters in the most politically rewarding way, just as any government would do.

Why would an acclaimed economist like Alan Blinder resort to such sophistry?  Because the economics profession unfortunately does not distinguish between “economics” as a science, with the maddening circumspection that scientists must display in order to retain their reputations, and “economics” as advocacy, which appears to forgive the most unscientific assertions when made for a partisan cause.  Blinder wrote this garbage as an advocate, not as an economist.