JONATHAN CHAIT AUGUST 20, 2010
A couple weeks ago, I wrote that you can't precisely measure the effect of the stimulus, because doing so requires knowing what would have happened under a different set of policies, which is impossible. Jim Manzi at TNR's in-house critic blog says I'm "right," and then takes this as a reason to oppose any stimulus at all:
“[B]oldness” in the face of ignorance should not be seen in heroic terms. It is a desperate move taken only when other options are exhausted, and with our eyes open to the fact that we are taking a wild risk. Actual science can allow us to act on counterintuitive predictions with confidence--who would think intuitively that it’s a smart idea to get into a heavy metal tube and then go 30,000 feet up into the air? But we don’t have this kind of knowledge about a stimulus policy. We are walking into a casino and putting $800 billion dollars down on a single bet in a game where we don’t even know the rules. In general, in the face of this kind of uncertainty, we ought to seek policy interventions that are as narrowly targeted as is consistent with addressing the problem; tested prior to implementation to whatever extent possible; hedged on multiple dimensions; and designed to be as reversible as is practicable.
Manzi is a much nicer person then I am, so it's no surprise that I will return the favor of him saying that I'm right by replying that he's wrong. Here are a few of the problems with his case. First, and more importantly, I was arguing that the precise effect of the stimulus can't be measured. That doesn't mean we have no idea whether it worked. There is a general, though not unanimous, consensus within the economic field that increasing spending or reducing taxes temporarily increases economic growth. Basically, we do know the rules -- increasing the deficit in order to pave some roads and cut taxes for middle-income people will increase the size of the economy; the primary debate is just how much.
Now, it's true that the conservative movement has invested a great deal of time into throwing cold water on this basic consensus. I think this campaign should be viewed as largely political. Private forecasters unanimously believe that fiscal stimulus can temporarily boost growth. They give no credence whatsoever to the various right-wing alternative models in which fiscal stimulus does not boost growth. Moreover, in 2001, when the objective case for fiscal stimulus was much weaker, there was no real debate about the efficacy of fiscal stimulus. The fact that Republicans are fiercely contesting the merits of fiscal stimulus now, while almost nobody was doing so when the case was much weaker in 2001, suggests that the right's skepticism is a political phenomenon.
Second, we are not really taking a "wild risk" by devoting $800 billion to mitigating the deepest economic crisis since the Great Depression. The long term fiscal cost of the stimulus is quite minimal:
The opposing risk, of allowing an economic free-fall, seems much greater. The risks of a depression are enormous. Of course, one side effect of such an outcome would be massive political gains for the opposition party. No doubt this helps explains the more sanguine attitude Republican elected officials -- I am not implicating Manzi here -- took toward the 2008 crisis, as opposed to their urgency in the face of the far more shallow 2001 recession.
Third, Manzi suggests that remedies be as narrowly targeted as possible, reversible, and tested prior to implementation. The stimulus was pretty narrowly targetted. It consisted of spending and tax cuts designed to increase consumption. It is completely reversible in the sense that the spending and tax cuts are temporary.
Being "tested," as I noted, is not possible. But it's not possible to test very much in macro-economics. We can't run natural experiments with whole economies without the aid of time travel. Manzi's analogies of flying in an airplane assume is that there's some safe, default option -- staying on the ground, keeping away from the casino. That isn't a realistic way to think about economics. Doing nothing in the face of economic catastrophe is a policy choice. To the extent that it's been "tested," it's been shown to produce terrible results. The better attitude than trying to imagine some safe default course of action, I'd suggest, is to hew to precepts generally accepted within the economics field.