Posner, Becker and the Stimulus

As always, Posner and Becker offer insightful comments in this weeks posts, "The Obama "Stimulus" (Deficit Spending) Plan--Posner" and "On the Obama Stimulus Plan-Becker." 

Posner begins using the "D" word.

I suspect that we have entered a depression. There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis.

Both Posner and Becker note a dramatic rise in economists calling for a Keynesian stimulus.  Posner writes,

Almost the entire economics profession converted--virtually overnight--from being Milton Friedman monetarists (Friedman believed that only bad monetary policy could turn a recession into a depression) to being John Maynard Keynes deficit spenders. I'll assume they're right, and move on to the question of structure.

Becker responds,

As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a "conversion" is not apparent (although maybe most economists were closet Keynesians all along).

After building a Keynesian economic case for a fiscal stimulus, Posner expresses doubts about the effectiveness of tax cuts and transfer payments, while supporting the soundness of infrastructure projects .  He concludes,

Properly structured, a Keynesian program can help to check a downward economic spiral. With monetary policy apparently inadequate to avert a downward spiral big enough to trigger deflation, there may be no good alternative to such a program.

Becker stresses several problems.  The first is government spending crowding out private.  For example, if the government builds new public schools financed through borrowing, interest rates would rise, increasing the cost of private investment.  The higher cost of borrowing crowds out private investment that is no longer profitable at the higher cost.  He  then notes the lack of empirical support for fiscal policy, and finally expresses doubts about the size of the multipliers that Romer and Bernstein use to estimate the impact of the Obama stimulus package on the economy.  Multipliers are the ripple effects that the economy receives from the fiscal stimulus.  For instance, if you receive a tax cut, and spend those funds buying electronics, the owner of the electronics store gains benefit above the benefit that you received from the tax cut.  If she spends the money at the pet store buying dog toys, the pet store owner benefits as well.  The larger the multiplier, the greater the justification of a fiscal stimulus.  Becker ends predicting, 

Time will tell whether I am right that a spending and tax package of the type analyzed by Romer and Bernstein may stimulate the economy as measured by GDP and employment, but that the stimulus will be smaller then they estimate, and its value to consumers and taxpayers could be even smaller.

Like the Glaeser article analyzed (by me) here, Posner's post is a little scary.  With no new empirical support, another economist well aware of the limitations of fiscal policy supports it.  It gives me some solace hoping that, as Becker quips, "maybe most [of these] economists were closet Keynesians all along," and it may be true that some were just waiting in the bushes to jump at the next opportunity to show their true Keynesian stripes.   But that solace does not ease my fear that many well trained, reasonable economists support policy that six months ago they would have opposed.