In Defense of Stimulus Hypocrisy

In Defense of Stimulus Hypocrisy

In Defense of Stimulus Hypocrisy

Moneybox
A blog about business and economics.
Aug. 20 2012 12:40 PM

In Defense of Stimulus Hypocrisy

There's a lot of hypocrisy going around when it comes to the subject of fiscal stimulus. Like most Republicans, for example, Paul Ryan was a firm proponent of Keynesian stimulus when George W. Bush wanted tax cuts. What's more, at the time of the vote on American Recovery and Reinvestment Act, Ryan, like most Republicans, didn't seem to have strong, principled anti-Keynesian views and was happy to cast a vote for a big stimulus package that just happened to be loaded down with poison-pill elements. Only later did a rather sudden fad for "Austrian" or Real Business Cycle ideas become prevalent. That said, there's one specific form of "stimulus hypocrisy" argument that I think is completely invalid—this thing where members of Congress get dinged for writing letters in support of grants for their district even while denouncing the stimulus bill that funded the grants as useless.

Here's why:

Advertisement

Start by imagining that stimulus opponents are right. Imagine a situation in which stimulus is useless. The unemployment rate is at 5.5 percent with core inflation holding steady at 1.9 percent, during which headline inflation runs higher than that as a drought pushes corn prices up. Now the president proposes a gigantic deficit-financed military construction program and argues that it's not just good for national security but it'll be a jobs bonanza. The right answer is that it may be necessary for national security, but it won't lead to any net jobs. There's not nearly enough slack and idle resources in the economy, so a big defense buildup would be inflationary. To avoid the inflation, the Federal Reserve will need to let interest rates rise. That means production and employment will simply shift out of interest-sensitive sectors (housing, capital goods production, consumer durables) and into military equipment. Members of Congress who aren't persuaded by the national security argument should vote no on this bill.

But if it passes anyway, they ought to do everything they can to make sure their district gets as many contracts as possible.

That's not despite the fact that the stimulus is a bad idea, it's precisely because the stimulus is a bad idea. If all the stimulus does is shift resources around, then it's crucially important to your constituents to make sure that resources are shifted into your district rather than out of your district. Failing to advocate aggressively for your constituents will be terrible for them. If the stimulus is a good idea that doesn't lead to crowding out, this letter writing is much less important. A good stimulus bill doesn't just shift demand around, it works to bolster economy-wide nominal spending levels and helps induce jobs and activity all over the place. Specific geographical targeting still matters some but much less than it matters if the stimulus is a terrible idea.

So no hypocrisy here. To whatever extent a member of Congress thinks deficit-financed government spending can't bolster short-term growth in a recession, he ought to put more time and energy into porking for his district not less.