Saturday, February 07, 2009

Professor Mankiw Explains





If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off.

People don't usually spend their money buying things they don't want or need, so for private transactions, this kind of inefficient spending is not much of a problem. But the same cannot always be said of the government. If the stimulus package takes the form of bridges to nowhere, a result could be economic expansion as measured by standard statistics but little increase in economic well-being.

And of course we all remember the first rule of holes -- if you're in one, stop digging.

7 comments:

Anonymous said...

Mark,
I have many concerns about the stimulus package, and who wouldn't. It does seem counterintuitive to go deeper in to debt to help end an economic crisis founded on overextension of credit markets. That being said, let's be honest and admit that no one knows what will work for sure, and to pretend to know is ludicrous. Earlier last week, you had noted that Obama is out on a limb on this. I totally agree with you on that. Obama will be held responsible for the effects of this legislation, as he should be; but I would also point out that, given the near uniform opposition of the GOP Congress to the plan, everyone is out on a limb on this one. Obama worked to bring Republicans on board and to allow for a their input; the Republican Congress had no interest in cooperating with the new President, and as a result, they too will be held accountable for this. If the bill fails to make a dent on the collapse of demand, and if it does end up hurting the US through even more debt, then the GOP will be able to make that point in the next election. But if it works, the GOP Congress doesn't have any cover on this and the credit will go to Obama. Secondly, I wouldn't put this as inartfully as Pelosi, but it is not incorrect to note that Obama was elected to tackle this crisis, not McCain, so the electorate did not vote to continue the tax-cutting approach favored by the GOP. Lastly, I don't think we can look at this legislation in a vacuum; the financial reform package, which Congress begins crafting legislation on next week, has to be seen as part and parcel of the rescue. If, as he has stated, Obama can move us toward serious entitlement reform, then the long-term consequences of the debt in the stimulus bill can be mitigated. The debt incurred by the stimulus bill makes the need for entitlement reform dramatically more acute. Given the amount of new debt we are incurring, I am hopeful that true fiscal conservatives will focus on entitlement reform as the balance to this bill.

Regards,
Rich

Mark Heuring said...

I agree - both sides are out on a limb with this one. I would disagree about having no interest in working with President Obama, though -- from what I've read, Pelosi, David Obey, Murtha and the rest of the worthies in the House wrote the bill and basically told the Republicans to pound sand. That is their right -- Republicans have been known to do the same thing. But it won't do to say that Republicans had no interest at all in this.

We've covered this ground before, Rich -- keeping Pelosi et al. in check was supposed to be part of the equation and the specific reason that Rahm Emanuel was brought aboard as Obama's chief of staff. For what it's worth, that didn't happen this time around.

Entitlement reform is an excellent point, though -- things cannot continue as they currently are. Our kids won't be able to pay the bills that their forbears are currently incurring. And you know what? I'll bet that they don't.

Gino said...

if i may add: yes, obama was elected to fix this problem. but so were all the other senators and congressmen.
obama's victory only gave him the executive branch, not the legislative as well.

Right Hook said...

The double-standard lives on. George Bush was re-elected largely to keep us safe in the War on Terror. Democrats/Liberals/Socialists and their willing media lap dogs all did everything they could to thwart his policies.

Obummer can ram his (actually Reid/Pelosi's) ill-advised legislation through without a single Republican vote if he really wants to. If he's so confident in it why does he need to share credit/blame with the Republicans?

This legislation is clearly nothing more than a massive political payoff to those who put the 'Bamster in office.

Dan S. said...

Mr. D,

I find your intolerance toward hole-diggers unsettling, to say the least.

Just kidding -- it's the perfect analogy for this boondoggle...

Right Hook said...

The problem is how Obummer plans on filling the holes, and what will be used for the fill...

Mark Heuring said...

I like the cartoon, RH, but I wish we were simply burying the money. If we did that, there would be a chance we'd get some of it back someday. This money is being burned and someday my kids will be plenty angry when they get the bill.