Giving with One Hand and Taking with the Other

I admit I supported Barrack Obama in both the Democratic primaries and the general election. I still think he’ll make a better president than either John McCain or Hillary Clinton would have. And I think he’s quite an intelligent person, with a reasonable layman’s understanding of economics. But every now and then he says the dumbest-ass things.

I think the phrase “universal coverage” alone should be sufficient to substantiate my point. But the universal coverage thing was a merely semantic piece of nonsense. I doubt it interfered much with people’s ability to judge health policy proposals on their substantive merits. And after all, it had a certain entertainment value, like when the Wizard of Oz says, “Pay no attention to the man behind the screen.” It’s always fun to hear someone deny the obvious.

I’m worried, though, that the president-elect is now having one of his attacks of nonsensicality in a context that has actual policy implications, and policy implications that might be of some importance given the severity of the current economic crisis. Apparently, if I understand the press reports correctly, he is saying that he will finance part of his fiscal stimulus by cutting out wasteful and ineffective government spending.

I’m not going to push on the point that wasteful spending could be more effective than useful spending in preventing deflation, but surely wasteful spending is at least almost as effective as useful spending in stimulating the economy. If you increase useful spending while decreasing wasteful spending by the same amount, what you end up with is very little, if any, economic stimulus. (I must say, though, I’m optimistic that the incoming president will not be able to find and eradicate enough waste to pay for much of his stimulus plan. To the extent that it exists at all outside the fantasies of reformist politicians, wasteful spending is generally there because somebody wants it to be there, and usually the relevant somebodies have quite a bit of influence on Capitol Hill, which is why the spending hasn’t already been cut.)

Here’s one way to see the point. I expect that part of the stimulus plan will consist of increases in government benefits, such as unemployment benefits, and an expedited implementation of the promised middle class tax cut, perhaps with some additional temporary tax relief added in for good measure. Now, when the government sends somebody a check, does it really make any difference whether they call it, on the one hand, a paycheck, or, on the other hand, a tax refund or a benefits payment? The employees involved in wasteful government activities are getting paychecks. Is there any net economic stimulus to be had by taking away their paychecks so that you can send the money to someone else as a tax refund or an unemployment benefit?

If anything, I’d say it’s just the opposite: when someone loses a wasteful government job, their permanent income declines dramatically, and they’re likely to curtail their spending dramatically. When someone receives a larger tax refund or a larger benefits check, they’re not likely to consider it a significant increase in their permanent income (even if the tax cut is ostensibly permanent), and, under the current environment, they will likely find it prudent to save most of the money for a rainy day, especially seeing that the barometric pressure is already low and falling.

I don’t deny that the choice of where to spend stimulus money can be important, or that, in some cases, the effectiveness of a stimulus can be increased by combining the net increase in spending with a shift of spending between different categories, projects, etc. In particular, some types of government spending are likely to produce more and better jobs than are other types. But is there any reason to believe that there is a correlation (in the short run, anyhow) between spending that is wasteful and spending that creates fewer or worse jobs? Is there any reason to believe that useful spending, as such, is the type that will create more and better jobs in the short run? I can’t think of a reason.

Offhand, again, I would guess that it’s the other way around. If the wasteful spending didn’t involve many good jobs, then there wouldn’t be many people with good jobs to protect who would have a strong interest in maintaining that spending, and Congress would have cut it long ago. The useful spending, on the other hand, could be justified on the basis of its usefulness, and, even if there were few good jobs to protect or special interests to satisfy, Congress might have thought it more prudent to keep than to cut.

I have to acknowledge that the one actual example Mr. Obama gives of wasteful spending – subsidies to rich farmers – is one that actually does create fewer jobs than an equal expenditure from the stimulus plan would probably create. But still, the subsidies themselves are certainly a positive stimulus, and it doesn’t make a whole lot of sense to cut them at just the time when a stimulus is needed. You could make an argument that the case for cutting them in the long run is so strong that we should take advantage of any opportunity, even if it’s at the worst possible time. But that argument seems kind of lame to me.

So, Mr. President-elect, once this crisis is over and we have reversed the economic contraction, escaped safely from the threat of deflation, and set ourselves on a healthy and robust macroeconomic trajectory, I will enthusiastically support attempts to cut wasteful government spending. (After all, as everyone knows, the support of anonymous bloggers is critical to the success of any public policy initiative.) Actually, maybe not so enthusiastically, because I have some concern that the project of identifying and eradicating government waste may itself be a waste of the government’s resources. But if that’s your thing, more power to you. Just don’t do it now.