Reply #1: CBO Says Stimulus Will Work, But in the Long Run…

[ProSense]

CBO Says Stimulus Will Work, But in the Long Run…

Some good sense from the Congressional Budget Office as they estimate the macroeconomic impact of the recovery act:

We estimate that the legislation will raise gross domestic product (GDP) and increase employment in the short run—by adding to aggregate demand and boosting the utilization of labor and capital. In contrast, we expect that the legislation will reduce output slightly in the long run because the resulting increase in government debt will tend to “crowd out” private investment and thereby reduce the stock of productive private capital. That crowding-out effect will be diminished to the extent that some of the funding in the legislation will go for activities that could add to the nation’s long-term output.

There’s been a stunning renaissance over the past few months of long-discredited arguments to the effect that a short-term increase in deficit spending can’t boost growth amidst a giant recession. One would hope that this kind of analysis from the CBO can help put a stop to that kind of talk. Among other things, you can tell that this is serious analysis and not just propaganda by the fact that the CBO is rightly calling attention to the very real possibility that short-term deficits will have detrimental long-term impacts. This, rather than debates about whether or not stimulus can “work,” is a debate about priorities that’s worth having.

One element to the debate is whether or not the things funded by this bill have the capacity to boost growth over the long-term. I would argue that some of them certainly do have that impact, and that the absence of such a beneficial long-term impact to things like the AMT patch is one of the reasons why its inclusion is problematic. Obviously, though, disagreement about the macroeconomic impact of public sector investments in things like health care, education, and basic infrastructure is one of the fundamental points of ideological disagreement so it’d hardly be surprising to find that many people on the right side of the spectrum disagree with me about that.

Another aspect to this is just disagreement about the relative value of the short- and long- terms here. In the spirit of us all being dead in the long-term, I think that faced with a severe crisis it makes sense to focus on short-term recovery. Really grave economic downturns pose enormous political risks both domestically and internationally that could do far more to harm long-term growth potential than would a higher budget deficit. Standing impassively in the face of these kind of job losses will lead to demands for protectionism, and risk really severe political meltdowns in China and Eastern Europe. And politics aside, if we’re underestimating how bad things will get in the short run there’s a risk that, absent stimulus, we’ll wind up in a serious deflationary trap. Long story short, there are serious short-term downside risks that stimulus helps us avoid. For the long-term, there’s always time to try to adopt counterveiling pro-growth policies—tax reform that broadens the base and lowers rates, congestion pricing for our key transportation infrastructure, schools that better serve the needs of low-income children, etc.

DeLong: Deficit Spending Does too Spur Employment and Production: U.C. Davis Stimulus Debate