Mankiw on the stimulus

Mankiw raises several important concerns (the limited government spending multiplier [I use m sub G = 1], endless budget deficits, whether [permanent] tax cuts would work better), but the most relevent environmental economic issue is where the money is spent (Is government spending too easy an answer?):

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.

The way to avoid this problem is a rigorous cost-benefit analysis of each government project. Such analysis is hard to do quickly, however, especially when vast sums are at stake. But if it is not done quickly, the economic downturn may be over before the stimulus arrives.

Comments

[John Whitehead]

Krugman says m sub G (government spending multiplier) = 1.5. Why do I use 1? Easy math, I'm a microeconomist, etc. Please no comments on this one!

[Michael Roberts]

I've been wondering why macroeconomists haven't been recommending subsidized private spending. Say, a value-subtracted subsidy. That might pull some cash hoarders out to the stores or buying cars. And it's easy to implement and easy to take away.

We got something along this line from Varian with regard to investment. I haven't seen anything else, which could mean it's a very bad idea. But I'd like to know why it's a bad idea.

[Laura Harrison]

Three comments on Gregory Mankiw's article.

1. Is this the same Greg Mankiw who in November 2008 wrote: "IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront." (See NY Times, November 28, 2008.)

2. In his NY Times article today, Greg Mankiw quotes Samuelson on World War 2 emerging from the Great Depression. This captures a really important but generally neglected aspect of Keynes's thinking - that there were important economic causes of war and economic means of promoting peace. (See Markwell's book on Keynes and international relations, and "economic paths to war and peace".)

3. Why isn't more attention being paid to the need for international coordination of economic stimulus - a global response to the global crisis? Again, this was an important aspect of Keynes's thinking. (Markwell's book covers this also.)

[Laura Harrison]

Three comments on Gregory Mankiw's article.

1. Is this the same Greg Mankiw who in November 2008 wrote: "IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront." (See NY Times, November 28, 2008.)

2. In his NY Times article today, Greg Mankiw quotes Samuelson on World War 2 emerging from the Great Depression. This captures a really important but generally neglected aspect of Keynes's thinking - that there were important economic causes of war and economic means of promoting peace. (See Markwell's book on Keynes and international relations, and "economic paths to war and peace".)

3. Why isn't more attention being paid to the need for international coordination of economic stimulus - a global response to the global crisis? Again, this was an important aspect of Keynes's thinking. (Markwell's book covers this also.)

[Mipam Thurman]

The stimulus money should be tied to a set of business guidelines. If your industry is listed among the industries that are eligible for stimulus money, then you can submit a proposal to obtain stimulus money. For example, if one were running a business generating electricity from windmills, then this business could submit a proposal to expand their business. If there are funds left in the stimulus plan, and your proposal was approved, your business would be awarded funding to enact the proposal as submitted to the government. I am not sure why anyone would question this model, it is the only way to insure accountability and to prevent government from controlling private industry.

The question is, should this money be considered an investment by the government, and should interest be charged on this money at a certain point, thereby replenishing and sustaining the fund so that it can continue to stimulate the economy every year and would therefore require less money to be added to it by the government.