Greg Mankiw was recently on Fresh Air with Terry Gross and was asked what's not to like about Obama's proposed stimulus package. Her question implied that it's a win-win: new economic activity which puts people to work and builds needed infrastructure.
His response was along the lines of, how do we know this is money well-spent? Fine, but far too mild and greatly understating the opportunity costs. Here's what I wish he said.
Every dollar of government stimulus is a dollar taken away from citizens, now or in the future. There is no free lunch -- all of it is money that was yours, and now isn't.
$1 trillion of government spending is $1 trillion dollars of new debts to be paid by the same citizens who are supposed beneficiaries of the stimulus.
Without the stimulus, we are already expecting a federal deficit of $1.2 trillion this year -- not least due to plummeting tax revenues as the wealthiest taxpayers saw their incomes decline in 2008. Add the stimulus to that and we will see $2 trillion of new government debt for 2009.
That's over $6600 of new debt for every man, woman and child in the country. But only about half of US citizens are taxpayers, however. So really, if you pay taxes, that's over $13,000 of new debt, payable by you, newly added in 2009. (If you happen to make above-median income, that share is even greater. And you're paying interest on it.)
Can you think of a good use for that $13k, personally? I can. But it's off the table.
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As social policy, this is $1 trillion that will be spent according to the priorities of senators, instead of the priorities of citizens. Perhaps you would like to pay down debts, save for college, or build a new business. All of these things are economically helpful for you and your fellow citizens, but are now out of your hands.
The need for infrastructure in 2009 is not greater than it was in 2007 or 2003. The idea that infrastructure spending is a better investment now does not hold water.
The current economic climate is quite scary. It can only be solved by real, productive, wealth-creating economic activity. To my mind, "productive" must be defined by citizens setting their own priorities.
A lot of our current state was created by government's monetary and fiscal irresponsibility. To believe that greater government spending will get us out of it requires quite a leap of faith.
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Update: here are some more thorough numbers on who is paying for the stimulus.
See Mankiew's latest blog post:
http://gregmankiw.blogspot.com/2009/01/fama-on-fiscal-stimulus.html
"I am. I am willing to concede that many Keynesian effects work in the short run, although I prefer monetary policy to fiscal policy and, within fiscal policy, I prefer the use of tax instruments to government spending as a tool for short-run demand management. By contrast, I read Fama's article as a largely wholesale endorsement of the classical model with complete crowding out."
Fama's article:
http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html
Posted by: Daniel Dreymann | 15 January 2009 at 09:00 AM