12 February, 2009

Waste and Spending

Yggles makes a really stupid argument in favor of apathy about what we spend the stimulus on:

In other words, when the primary point of spending money on something is to get the thing you need to worry a lot about efficiency. You don’t want “wasteful” procurement wherein you overpay for stuff, or spending on stuff that doesn’t work. For the purposes of fiscal stimulus, however, while it’s better to spend the money in an efficient way on useful items, it’s not essential to do so. Which doesn’t mean we should totally throw caution to the wind and pay people to dig holes. But it does mean that it makes perfect sense to relax our criteria for what counts as useful and what counts as efficient. The efficacy of stimulus as stimulus just has to do with how quickly the funds cycle into private hands and then out into the wider economy and has relatively little to do with “efficiency” in an ordinary sense.


This is of course the classic broken window fallacy.* Even though Matt disavows any hole-digging aspirations, let's use that example for the sake of argument. We hire 1,000 people to dig holes and fill them back in. We pay them each $40,000 a year and, voila!, we have reduced unemployment by 1,000 jobs and have increased GDP by $40,000,000. These 1,000 people take this money home, spend a lot of it, save the rest, and create demand for goods and services. The economy has been stimulated.

What's missing here is any analysis of what the alternatives to hiring hole-diggers are. Why not just give each of the 1,000 potential hole-diggers a transfer of $40,000 a year and not actually make them dig the holes? Each person would take their $40,000, spend most of it, save some of it, and create demand for goods and services. It's not like people are more likely to spend money just because they get it as "income" for a "job" instead of as a "transfer". This is exactly as stimulative as the first plan.

Except there are two big differences between these plans. One difference is that the second plan increases GDP by $40,000,000 less than the first plan. This is because the first plan's distribution of the $40,000,000 counts as "jobs", which is recorded in the GDP numbers, whereas the second plan's distribution of $40,000,000 counts as "transfers", which is not recorded as GDP.

The other difference is that the second plan, while having the same stimulative effect, is far less wasteful. Instead of wasting everyone's time by requiring them to do a completely useless chore in order to get the money, the second plan allows people to do something productive with their time. They could spend time with their family, cook, start a business, get a job, go to school, and any number of other things that are clearly better uses of their time than digging holes and filling them back in.

Okay--so as Matt says, what's in the stimulus bill is not hole-digging. All of these projects do have a positive benefit. But as long as that benefit does not exceed the project's cost, the argument above still applies. It would be better to give the money directly to the unemployed workers that would have been employed by the project. And it's likely that many of the projects in the stimulus don't pass a cost-benefit test. More fundamentally, we just don't know if they do or do not. There's not nearly enough time to evaluate each one.

Now, I am not saying we should necessarily start sending $40,000 checks to people. Who would we send them to? When would they end? (Note that these are questions that apply to stimulus projects as well. In fact, I challenge you to think of a criticism of this plan that doesn't apply as well to hole-digging.) But this example illustrates why it's important to look at the possible alternatives to stimulus projects. Saying that it's not essential for stimulus to use the money in an efficient way is about as useful as saying that it's not essential for eating that I consume any vegetables. The important thing to me is not eating, per se, but the health that I get from eating. Similarly, the important thing when considering government policy is overall welfare, not an arbitrary measure of "stimulus".

* For nitpickers, no, it's not technically a logical fallacy.

2 comments:

Elliot said...

"In fact, I challenge you to think of a criticism of this plan that doesn't apply as well to hole-digging."

Well, I'm not going to defend hole-digging. But my response to this challenge is to point out that, from what I understand, the projects towards which the stimulus bill is directing money have already been planned. Money towards things like unemployment benefits and health programs are merely extensions of current programs. Money to infrastructure projects is limited to those that are "shovel-ready": that are all lined up an ready to go, except for the funding. And aid to state governments that will go to things such as paying teachers and building schools are likewise spending plans that have been in the works for some time. There is nothing like the Tennessee Valley Authority or the CCC that is being dreamed up out of whole cloth, necessitating a huge new bureaucracy.

Thus, the crucial factor is time. The recession has a vicious circle dynamic, and the longer we wait to get the money out there, the less chance it has of turning things around. The questions about "Who would we send them to? When would they end?" don't apply to most of the stimulus projects, because, per above, they are already planned out and ready to go. Exactly which projects we do does need to be decided, but negotiations in Congress took care of that relatively quickly.

So, no, we don't have enough time to scrutinize every 5m program like we might want to if there were no urgency. But neither are the programs hole-digging. Most of the opponents of the bill (politicians, at least) aren't really saying that the projects are inefficient, per se - they either disagree with them ideologically (gov has no role to intervene, etc) or (more maddeningly) they agree with the specific projects but for vague reasons of legislative purity they argue that they don't "belong" in a stimulus bill.

Unless you're David Vitter, in which case you object to the bill on the grounds of ACORN assuming dictatorial powers, which, to be fair, is a proposition that probably does not survive a rigorous cost-benefit analysis.

spencer said...

That's a great point--most of the stimulus projects were already in the works, and are now getting the go-ahead and funding to make them happen. Presumably they've undergone some sort of analysis, either formal or informal.

Yggles' point was different, though. He was saying that even if these projects were in fact wasteful, they'd still be good stimulus. My point stands that there are clearly better alternatives to wasteful spending. (Sending large checks to unemployed people would be very very fast.)