Streetwise Professor

I came across several articles today that contained succinct statements with which I am in broad agreement.  The first is by Stephen Blank, of the US Army War College (and a University of Chicago PhD who studied under the amazing Arcadius Kahan, from whom I had the honor of taking two classes while at Chicago.)  Writing of Russian hyperventilating over the Arctic in Russia Profile, Stephen says:

Undoubtedly, Russia’s overly aggressive moves in the Arctic have caused NATO and the associated states to react strongly, raising the possibility of a political and military struggle over its resources, especially as they become more accessible.  This has become a continuing theme in East-West relations, where Russia, driven by resentment over Western failure to take it at its own, self-inflated value, makes an excessively aggressive move that it cannot then back up, except at ruinous cost. (Emphasis added.)

That last sentence is priceless, and encapsulates a theme that I’ve sounded on many occasions.  Nursing an injured ego, the Russian government–and Putin personally–goes walking around, chin thrust out, looking for a scrap.  Needlessly, in most cases.  And stupidly, since as Blank notes, the “correlation of forces” (a standard Soviet concept), military, economic, and political, is strongly against Russia.  Part of this is the “man in a hurry” problem that I wrote about some time ago.  Part of it is the neurosis that Putin et al pretty clearly display, and which I’ve also written about.  

Speaking of neurosis, combined with a ruthless authoritarian streak,  Ralph Peters has some trenchant things to say:

The Putin model –  tolerant totalitarianism  – gave the dying command-state a new lease on life. The new czar saw that most human beings don’t care who governs them, as long as the government minds its own business. And if the ruler can revive the illusion of national power, so much the better.

Shamelessly cynical, Putin goes through the stage-managed forms of democracy. He even permits scripted media criticism of the state (though not of himself).

But there are limits to the new totalitarianism’s tolerance. You can call Putin a baboon-butt monkey-boy over the vodka bottle at your kitchen table – butdon’t  do it in public.

Cross that line and you are, literally, dead. A deal’s a deal.

The breathtaking lack of response from the West as the Putin regime murders uncooperative journalists, human-rights activists, defense lawyers, regime apostates and even foreign critics is a glorious gift to Czar Vladimir. His security services are  permitted  to murder ex-pats in Vienna or London. Even an assassination attempt on an American critic in the Washington, DC, area got swept under the diplomatic rug with remarkable speed.

Putin’s starting to look like a slicker version of  Saddam Hussein, with sharper targeting skills (and Vlad really  does  have weapons of mass destruction). As a result of the West’s cowardice, his ambitions are soaring: The most-predictable geopolitical event of 2009 is an assassination attempt on Georgia’s president, Mikhail Saakashvili, by a “Georgian patriot.”

Working through the traitorous Ukrainian power-broker Yulia Timoshenko, Putin’s also going to do all he can to “reunite” Ukraine and Russia. And he’ll continue to use natural gas as a strategic weapon, while Europe boldly responds,  Oh, dear. . . One really ought not to do that . . . Really, one oughtn’t. . .”

A friend who’s gotten up close to Putin sees the dictator as a mere  chinovnik– a petty bureaucrat promoted above his station. But that view misses the elementary human reality that greatness and pettiness, courage and cravenness, brilliance and banality, can all be attributes of the same individual.

As I’ve pointed out in the past, Putin  does  have two weaknesses: his temper, which leads the ice-man to attack his neighbors in fits of pique, and economic illiteracy.

The one-two punch of the oil-price collapse and a global depression is limiting Putin’s ability to keep up his half of the “other New Deal” by improving Russia’s quality of life. A serious outburst of unrest could fire his temper and wreck his political Ponzi scheme.

Yet protests to date have been minor and managed. Developments could go a number of ways as the Russian economy crumbles.

But whether Putin continues to reign for decades or falls in an orgy of Russian self-destructiveness, his intellectual legacy will endure: the dictatorship that stops at the front door.

The temper is obvious.  The economic illiteracy is becoming more apparent by the day.  Easy to look like a genius when oil goes from around $10/bbl to $140; a lot harder when it goes back down to the $30-$50 range.  Putin gives speeches about the importance of avoiding government control over the economy, after presiding during a 9 year period in which the scope of government control has widened significantly.  And, this control is expanding apace during the financial crisis (he has company westwards, in that endeavor.)  He also warns against protectionism while his government is implementing a variety of protectionist measures (ditto.)  Not to mention his warnings–given in Switzerland–about avoiding military buildups, while bragging at home about how military expansion and spending will continue despite the financial crisis.  Several Russian economists of my acquaintance are appalled at the economic ignorance of Putin and the Putin team.  Kudrin is a sensible guy, but he’s only one man, and one in a tenuous position, to say the least.

The last item is from WindowOnEurasia, where Paul Goble discusses the views of Russian scholar Emil Pain, as expressed in Novoya Gazetta. Pain has several interesting things to say, including this which should sound familiar to SWP readers:

But in less than two decades, all that has changed, a reflection Pain insists of the fact that “Russia is a pendulum. Everything in it changes quickly,” and among the things that have changed are predictions about the future, views about the past, and about the very possibility of still more change ahead.

The Moscow scholar argues that it is quite clear “why there is no demand for democracy in Russia today but there is a demand for paternalism, fatalism, and their ‘intellectual’ defenders.” But intellectuals, who pride themselves on their ability to think critically, should not fall into that trap.

And if such people simply look around, they will see plenty of reasons for why the idea of “a special path” for Russia is a blind alley. The world crisis “dispelled illusions about Russia as an island of stability.” Indeed, it showed that countries that try to live by the export of raw materials alone are more at risk during crises than are industrial and post-industrial ones.
That is because the fate of such “banana” exporters is more closely tied to the rest of the world than are the others, Pain argues. Moscow’s attempt to act as if this is not the case has ended in disaster, not only leaving the country more impoverished but also more isolated as its actions in Georgia showed.

When oil was 140 dollars a barrel, he says, Russians and the Russian state could ignore this reality for a time. But in Pain’s view, now that prices have fallen, “the resources of Russian authoritarianism and imperialism are close to being exhausted.” Already at present, he writes, “there is no ammunition, there remains only ambition.”

In this interconnected world, every country has to be prepared to play by a common set of rules if it is to succeed and to transform itself periodically in order to move forward. That is what the United States has just done, Pain says, having overcome the “cruelest” racism in the past to elect an African American as its president. And other countries have made similar strides.
Pain says that he can imagine the response of his opponents to this observation: “Yes,” they will say, “they can but our thousand-year old history does not permit change.” And consequently we Russians can have no hope for change and must simply and fatalistically go along.

Not many years ago, some of the very same people, during the earlier swing of the pendulum toward democracy, “did not want to hear about the concept of the thousand-year-old history” of their country. They wanted to blame everything on the Soviet system, and they believed that having rejected that, they could overcome everything and become like the West.
Now, however, they have become pessimists and talk fatalistically about historical cycles of reform and counter reform in Russian history, ignoring the reality that this pattern is hardly unique to Russia and that other countries have been able to use such cycles to move forward rather than assuming that nothing can be done.

But Russians now talk only about cultural limits on the possibility of progress. According to Pain, the economic limits the country has imposed on itself are more important. “For 300 years, Russia has lived by selling its natural resources,” first wood and furs and now oil and gas. Countries doing that back the values of empire because territory is “the main resource.”  

“No ammunition, only ambition.”  Concise, clever–and correct.

Pain also says:

Now, he is taking on the perhaps even more widespread conviction that Russia cannot escape its culture or survive without an authoritarian state. That serves the interests of those in power, he points out, but it is ahistorical and dangerously wrong when propounded, admittedly with regret, by members of the Russian intelligentsia.  

Pain begins his essay by noting that in Soviet times, many Russians blamed the country’s climate for the chronic shortages of food. Now, even though the climate has not changed, few talk about it, focusing instead on “the so-called cultural determinism” that supposedly makes it impossible for Russia to be anything by an authoritarian empire.

According to Russia’s current rulers, the country’s current “imperial form of rule, which is called ‘sovereign democracy,'” is the product of Russia’s “special path” of historical development about which nothing can be done, however much some in the intelligentsia may regret that fact.

In the view of “the ideologues of [this] new edition of official nationality in Russia,” Pain continues, “the best periods of its history have been connected with despotism,” whereas “all attempts at liberalization and democratization have taken place during periods when the state was weak and the country experiencing crises.”

At a superficial level, of course, this argument may appear convincing. When things are going well, no one thinks about changes, and consequently reforms always occur when the state is weak, something Pain says that sets off “a new cycle of swings of the Russian pendulum, from the strong hand to freedom and then back again.”

Russia’s liberal intellectuals who “angrily reject” the regime’s suggestion that this special path represents “a millennium of the greatness of Russia” are nonetheless quite “ready to accept this very same myth in another form” and view the history of their country as being “a millennium of slavery.”  

One can understand why Russians accept this fatalistic view about their past and hence their future at present, Pain says. Making bleak prognostications is profitable: If they turn out to be true, their authors are viewed as visionaries; if they don’t, “no one will take note and all will be happy.”  

But he goes on to say that such views now are not so much a manifestation of Russian national culture as “a sign of the times.” In the early 1990s, “during the period of democratic euphoria and massive hopes for a rapid improvement in life,” few talked about older historical and cultural factors that would make that task extremely difficult in the short term.

It is more than ironic–in fact, it is tragic–that the “liberal” episodes in Russian history are deemed catastrophes, while the eras of autocratic rule are idealized, and the more autocratic the era, the more it is worshipped.  This attitude gets cause and effect exactly backwards.  The liberal eras occurred because of the utter collapse of autocratic regimes due to their inherent failings.  Those in power during the (relatively) liberal periods were reaping what had been sown by the autocrats that proceeded them.  Case in point: the USSR couldn’t feed itself in the 1980s because Stalin had destroyed Russian (and Ukrainian and Kazahk) agriculture in the 20s and 30s.  When oil prices collapsed, so Russia couldn’t pay for imported food, the entire system collapsed, leaving a shattered hulk of an economy as its legacy.  That is, the autocratic failure ushered in the (relatively) liberal era, and bequeathed it with an existential economic problem.

Now, Yeltsin and the “reformers”/”liberals” made errors, but I doubt anyone could have done much with the catastrophe they inherited.  Blaming them for the Russian economic travails of the 1990s is like blaming the paramedic who couldn’t revive the guy with a gunshot wound to the temple for the victim’s death.  

So, the autocrats get the glory, even though they are the prime culprits behind the periodic catastrophes that Russia has suffered.  

Sadly, though understandably, in the aftermaths of autocratic collapse, Russia has not been able to build institutions that would support the development of a (relatively) free economy and civil society.  Instead, the conditions of chaos have proved tailor made for opportunistic wielders of force to create their own autocratic systems.  

And that is the Russian conundrum.  How to get off the pendulum?  

Or is it a see-saw?  De Custine has an interesting passage about the this “favorite amusement of the Russian peasants”:

The two performers, sometimes of the same, sometimes of opposite sexes, place themselves, always standing, and with legs firmly planted, on the two extremities of the plank, where they preserve their balance by taking hold of the cords.  In this attitude they are impelled through the air to a frightful height, for at every swing the machine reaches the point beyond which it would turn completely over, and its occupiers dashed to the earth from a height of thirty or forty feet, for I have seen posts at least twenty feet high.

An apt metaphor for Russian political history.  

Oh, and DR–just having a little fun at your expense (you’ve seemed a little testy lately).  No offense taken, I hope;-)

Vladimir Shlapentokh is a sociology professor at Michigan State University (not far from my old stomping grounds).   He’s written some very interesting things, most notably Contemporary Russia as a Feudal Society.   Vladimir sent me his latest piece, which compares three autocracies: Tsarist Russia, the USSR, and Putinist Russia.   It is a very insightful and interesting read.

One important fact that Vladimir emphasizes is that virtually nobody predicted, even immediately before the events, the fall of the first two autocracies.   He quotes Vladimir Ryzhkov saying “They [i.e., both regimes] wore off almost instantly” and Vasilii Rosanov as saying that Tsarist Russia “dissipated in two days, maximum three.” As a result, he concludes that the apparent solidity and popularity of the Putin government could be misleading.

The most interesting part of the article (to me) is this:

At the same time, in both cases, the leadership could have avoided “the period of danger,” if it abandoned its geopolitical ambitions. For the tsar, the Entente (the alliance with France and England) and the victory in the war promised the expansion of the empire. For the Soviet leadership, the structural changes in the economy promised military parity with the West. In both cases, some advisers warned the rulers about their actions. In one case, the pro-German party at the court was against Russia’s involvement in the war; in the second case, party conservatives were against the radical reforms. However, the combination of pure subjective and objective factors pushed both regimes to their termination.

This seems particularly apposite today.   I have noted several times that Russian pugnacity, its cavorting with the world’s most disreputable regimes, its aggressiveness in the near abroad, all at a time of existential economic crisis is foolhardy.   And today’s news brings more evidence of this.   Responding to Russian pressure and blandishments, Kyrgyzstan agreed to deny the US and NATO access to an airbase used to provide logistical support to operations in Afghanistan.   Purely coincidentally, I’m sure, Medevedev also announced a $2 billion loan to Kyrgyzstan and $150 million in aid.   Tajikistan is also apparently attempting to leverage its geographic location to induce the Russians to provide financial support in exchange for not supporting US efforts in Afghanistan.

NATO is apparently is search of a clue (I suggest reading the paper, and then adding two and two):

NATO said on Wednesday it would be a worry if Russia were found to have had a role in Kyrgyzstan’s decision to close a U.S. military air base which supplies U.S.-led troops fighting in Afghanistan.

Kyrgyz President Kurmanbek Bakiyev said that the Manas base would be shut after he secured Russian aid at talks on Tuesday in Moscow, a traditional ally of the former Soviet state.

“If it were to be the case that a Kyrgyz decision to withdraw U.S. access to Manas was as a result of Russian engagement that would be of concern,” NATO spokesman James Appathurai told a news briefing.

Moscow has denied a connection between a $2 billion package to combat an economic crisis — the equivalent of about half of Kyrgyzstan’s gross domestic product — and Bishkek’s decision.

Appathurai said any Russian interference would be out of line with Russia’s repeated statements that it supports the international effort in Afghanistan and its position as a U.N. Security Council member that approved the mandate.

“If Russia were found to have a role”?   Are they serious?

Actions speak louder than words, and this kind of action speaks very loudly.   It puts the lives of American (and other NATO) servicemen-and-women at risk.   It strikes at a vital US interest, and one that presumably should be a Russian interest too.   (Just how is Russia helped by a Talibanized, or chaotic, Afghanistan?) It means far more than any nicey-nicey words that Lavrov, Medvedev, or Putin say in Obama’s direction.

The primary motive here seems to be epater les Americans, regardless of the cost.   And again, as Shlapentokh says, pursuing geopolitical ambitions has cost Russia dearly in the past.   And, as the quote by Edward Radzinski that titles this post indicates, the problem with the Russian past is that it too often is its future.   Russia can’t afford its geopolitical ambitions, especially now.

Russia may gain in the short run, as a distracted country with a dreamy President convinced of the power of his mere words and gestures to resolve historically intractible conflicts may not respond to Russia’s reapolitik and reprise of the Great Game.   But that won’t last.     If Russia succeeds in achieving its objective of diminishing American interests while our attention is fixed elsewhere, or while some of us our hypnotized by visions of hope and change, it will attract the attentions of a distracted hyperpower.   And Russia cannot prevail once that happens.   Counting on Obama to be forever naive and overconfident is a dangerous thing, as even the feckless Jimmy Carter eventually awakened to the Soviet threat.

Geopolitical ambition is an important driver of Russian policy.   It was an unaffordable luxury even when oil was north of $140/bbl.   It is an insane goal when the country is on the financial precipice.   As Vladimir Shlapentokh notes, unrealistic realpolitik has destroyed Russian regimes in the past.   But, since Vladimir Putin et al have learned nothing or forgotten nothing, Radzinski’s lament may soon be illustrated yet again.

I am in DC today and tomorrow.  Was walking to dinner, crossing Connecticut at M/Rhode Island (just a couple blocks north of the White House), when I was almost run over by what I am sure was Obama’s motorcade–5 motorcycle cops (with sidecars) with sirens wailing and lights flashing, several limos, several big SUVs, inc. a couple with antennas/comm gear that doesn’t come standard from the factory, followed by a couple more motorcycle cops.  

Thinking about the “stimulus” bill always makes me feel like I’m about to be run over, so I had a sense of deja vu watching this assemblage blow by.  

And if you suggest it wasn’t Obama’s motorcade–that’s my story and I’m sticking to it’-)

One contentious element in the “stimulus” debate is the role of Ricardian equivalence.  That is, that private individuals will take actions that undo the effects of additional government spending or tax reductions financed by government borrowing.  Krugman endorses this relatively intuitive rejoinder to the Ricardians, so it seems like a good place to begin:

Menzie is right about transitional changes in tax policy not being able to change consumption in this Barro-Ricardo model, which is why GOP calls for using tax cuts to stimulate demand are likely not going to be the most effective policy tool. But what about transitional changes in government purchases? It is interesting that Wikipedia noted Ricardo’s 1820  Essay on the Funding System:

Ricardo studied whether it makes a difference to finance a war with the £20 million in current taxes or to issue government bonds with infinite maturity and annual interest payment of £1 million in all following years financed by future taxes. At the assumed interest rate of 5%, Ricardo concluded that “In point of economy there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever … are precisely of the same value”.

Let’s modernize this example. Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?

In a blog post today, Krugman repeats the same argument almost word-for-word:

But suppose the government introduces a one-time, $100 billion program to repair bridges over the next year. The government will have to issue debt to pay for this, and will have to service that debt, requiring higher taxes — say, $5 billion a year. That’s a much smaller impact on consumers’ future after-tax income than the permanent program. So much less of the spending rise will be offset by a fall in consumer demand. (I’m not considering the effect of the spending in raising income, which would probably cause consumer demand to rise rather than fall.)

So economic theory — Milton Friedman’s theory! — says that spending is a more effective form of stimulus than tax cuts.

So this makes it clear: the stimulus is a good thing because even in the presence of Ricardian equivalence, it increases current aggregate demand/consumption/measured output, and the expense of future demand/consumption/measured output.  

So that’s the metric, eh?  Current output goes up. QED.  End of story.  Vote for the stimulus.  And opponents–shut up!  

Well, to put it mildly, that’s a stupid metric.  I, you, etc., are not necessarily better off just because current measured output goes up.  

Framed this way, the “stimulus” and the associated increase in government spending is a forced intertemporal reallocation of consumption.  That is not necessarily welfare improving.  

Note the question that is begged: if individuals prefer to enhance current consumption at the expense of future consumption, why can’t they do this trade themselves?  

There is an implicit assumption here: namely, that there is some constraint on intertemporal resource allocation that precludes people from attaining this putatively superior consumption pattern.  They want to borrow, but can’t for some reason, so the government does it on their behalf and makes them better off by doing so.  

You can make arguments as to why moving consumption from the future to the present is constrained (relative to some ideal, first best world.)  For instance,  it is costly to use human capital and future labor income as collateral for borrowing.  You might also argue that the problems in the banking system have also made it impossible to consummate some welfare-improving trades.  

But, to argue that the government has the ability and incentive to identify and fix the distortion in intertemporal consumption, you have to presume that it can solve the knowledge problem and the political problem.  That is, it must have the ability to determine what the preferred consumption pattern is (which would require immense amounts of information about individual preferences and technological possibilities) and the political mechanism must be able to translate that information into efficient action.  Color me skeptical.  Extremely.

Moreover, even if you overlook those minor details, you can’t use the increase in current income to measure the benefit of the stimulus, because this ignores the cost in future consumption.  If the stimulus does improve the intertemporal allocation, the difference between benefit and cost is positive, but the cost (the value of future foregone consumption) is zero.

In the analysis quoted above, the difference benefit is zero; the $100 million increase in current income is worth exactly the same as the $5 million per year lost in perpetuity.  Given the inefficient constraint on private intertemporal resource transfer, this difference would be positive (i.e., $100 million today is worth more than the $5 million lost in perpetuity), but it ain’t $100 million, or $95 million.  

Even if the inability of individuals to implement their desired intertemporal consumption plans is the rationale for a stimulus package, this does not justify a preference for direct government expenditure, as opposed to a tax cut, financed by borrowing.   Indeed, as the latter allows each individual to choose his or her own consumption bundle so as to maximize utility, rather than consuming a one size fits all bundle chosen by a political process.   Why, pray tell, should we believe for a nanosecond that the bundle of “goods” (more on the use of this word below) selected in a political Bacchanalia is optimal in any sense of the word?  

Arguments over the form of the stimulus also demonstrate a fundamental contradiction at the heart of the government spending stimulus argument.   Advocates of this view vehemently oppose (for the most part) tax relief in place of direct government spending because individuals will save, rather than spend the tax cut.   But, if the fundamental problem is that people are constrained in their ability to implement their optimal consumption plans, and want to borrow more and thereby shift consumption from the future to the present, as is implicit in the stimulus argument, they wouldn’t save the tax cut.   They’d spend it.   So, if one argues that tax cuts are not stimulative because people save them rather than consume them, one cannot believe that people are prevented (due to some capital market imperfection) from trading future consumption for present consumption.   But if you don’t believe that, what is the justification for government borrowing to fund current consumption via direct government spending?     Maybe there’s an explanation, but it seems very hard to square denigration of tax cuts with advocacy of government spending.  

The inability to achieve optimal intertemporal allocation also seems to be inconsistent with another phenomenon observed during the credit crisis; the intense desire to increase holdings of government liabilities (Treasury securities and money).     Certainly, individuals are liquidating private claims (e.g., equity, corporate debt) and using the proceeds to buy government securities and increase their money balances (note the stratospheric increases in base money).     But, if they really wanted to increase current consumption, they could liquidate private claims and use the proceeds to consume.   The evident desire to save in low risk-low return (and close to zero return) forms, rather than consume, is flatly inconsistent with the intertemporal misallocation justification for a fiscal stimulus.

At root, stimulus advocates appear to be substituting their preferences for those of the great unwashed.   People want to save too much, the bastards.   If we give them money, they’ll STILL save it.   So, we’ve got to consume for them.     Traditional Keynesians attributed this demand to save to “animal spirits”—i.e., irrationality, or perhaps, insanity.   Maybe modern Keynesians are of the same view.  

Whatever the rationale, it is fundamentally elitist, and anti-individualist.   It is the attitude of those who know what’s good for us.     They’re from (or for) the government and they’re here to help us.   And we all know how that usually works out.

I suggest it’s better to start from a presumption that people aren’t idiots, driven by irrational impulses, and to try to understand the reason for their behavior.   A substantial increase in the demand to save—i.e., to transfer consumption from the present to the future—likely has a rational explanation.   Like, oh, I don’t know, maybe an incredible increase in uncertainty associated with the potential implosion of the financial system.     Just a guess.     But the stimulus advocates, the neo-Keynesians, argue that people have things exactly backwards, and just don’t know what’s good for them.   What they REALLY want, the NKs are saying, is to consume more today and less tomorrow—even though through their behavior people are revealing the exact opposite.   The arrogance of this is pretty mind blowing.

This further strengthens my belief that the stimulus is akin to identity theft.   People borrowing in our name to do what they want, not what we want.

The decline in consumption, which as Bob Lucas has noted NEVER happens in US data, indicates a strong desire to increase saving.   To consume more tomorrow.   The “stimulus,” whether delivered via direct government spending or a tax cut, implicitly assumes the exact opposite.   Moreover, it means that to understand the situation, and to devise a reasonable, efficient policy response, it is necessary to understand and address the source of this increased demand to save.  

The most immediately obvious explanation is the implosion of the financial system.   This, in turn, suggests that efforts should be focused on ameliorating that problem.   And every dollar p***ed away for ACORN or some bridge in the Right Honorable Foghorn Leghorn’s district is one that can’t be used for that purpose.    Thus, this spending is doubly wasted.   It doesn’t buy anything we want today, and diverts resources from a beneficial use.

Maybe I’m wrong that individuals are increasing their demand to save due to an increase in risk associated with the financial meltdown.   So, by all means, let’s investigate alternative explanations.   But let’s not propose “cures” based on dubious (at best) diagnoses of the disease.     And any diagnosis must explain why the demand to save by LENDING to the government has exploded.

The other key issues is “measured output/consumption.”  That is, from an accounting perspective, the $100 million in government expenditure is counted as income.  But what if the money is largely spent on things that people don’t value, but we have to give up things we do to pay for it?  Much of the stuff in the “stimulus” package is of dubious value.  Hell, to me, some of it has a negative value; they’re bads, not goods.  So, let’s say $100 million in resources are used to buy things that are worth only $50 million (to be generous).  But to pay for it, I–and you–have to pay higher taxes in the future, and give up stuff we do value; in my case, say, travel, books, iPods, a new SigSauer 9mm, leisure.  

So, here’s the real trade-off involved in the stimulus (and remember, economics is all about trade-offs): we give up future private consumption in exchange for current consumption of all the stuff–I wouldn’t say goods, unambiguously–in the stimulus bill.   My view is that the stuff in the stimulus bill is largely worthless–if we’re lucky.  So, the measured increase in income overstates the true increase in income.   The stuff we’ll have to give up due to higher future taxes isn’t worthless.  Moreover, even if there is an argument to justify that a reallocation of consumption over time can (due to some capital market imperfection) improve welfare, it’s clear that the measured increase in output overstates the benefit of this.

In brief, the case “for” the stimulus, namely, that it will increase measured income/consumption, is highly misleading.  It overestimates the benefits and underestimates the costs–when it doesn’t ignore them altogether.

The views I have expressed here are clearly those of a “freshwater” economist, as one wag calls Chicagoans, hard by the shores of Lake Michigan, as distinguished from “saltwater” economists on the seacoasts.     Guilty as charged.   But, I would rather be a freshwater economist than a bilgewater economist any day.   And, in my view, the pro-stimulus arguments are just bilge.   They are bilge because they propose remedies that are flatly contradicted by the symptoms that are there for all to see.     The stimulus would make sense if some market failure precludes an efficient transfer of resources from the future to the present.   But people seem quite intent on doing the exact opposite, transferring resources from the present to the future.     Add to that the fact that the government will use resources to purchase goods of dubious value, and indeed, to purchase some bads, and the case for the stimulus disappears altogether.