by Mario Rizzo
Brad DeLong thinks that, under present circumstances, the crowding out of private expenditure by fiscal stimulus is not a live issue. The basic argument is that since neither average wages nor interest rates have risen in response to stimulus, no resources are being diverted from private to public uses.
I am unsure what the standards of good analysis are among Keynesian macroeconomists, so I proceed with some trepidation. However, as readers of this blog will know, I am unhappy with the level of macro-aggregation usually practiced by both Keynesian and new-classical macroeconomists. So I want to disaggregate the analysis a bit.
In the first place, expenditure is not simply expenditure in general. It is expenditure on specific things and in specific sectors of the economy. These lines of expenditure use resources appropriate to producing the output in question. They involve input combinations from many areas of the economy – not only labor, but other resource complexes including those that will have other uses. To the extent that these resources are non-specific to a specific line of production they may come from areas in which they were not formerly unemployed.
Second, unemployment of resources, including labor, is not always pure idleness. We are living in conditions of real uncertainty. A bubble has burst, the domestic auto industry faces uncertain prospects, tax rates are on the way up – how far and in what respects in anyone’s guess – we have just faced a possible healthcare transformation with its unique costs and taxes, European debt problems are becoming manifest, and more.
Now this is clearly not merely a problem of aggregate-demand confidence. The private spending the government hopes to stimulate must have a direction. Firms must worry about the sustainability of demands in specific areas and about costs in specific areas. Unemployment is a quite rational response to real sectoral uncertainty. To bring resources out of “unemployment” prematurely is a form of crowding out – crowding out of the economically-valuable activity of recalculation, recalibration or search.
To anticipate a Keynesian response: Some will say that there is a difference between the rationality of the individual agent and the collective irrationality of agents, each of whom is waiting for the others to move (spend) first. This is by no means an inconceivable phenomenon. So let’s think about it.
The phenomenon is not unlike situations that entrepreneurs face all of the time. Factors of production may be underpriced and undercapitalized relative to longer-run predicted demand. Markets may be underprovided with goods relative to longer-run demand. These provide profit opportunities to alert entrepreneurs. Those who move first can earn greater profits than others (and, of course, they open themselves up to losses).
Third, it is difficult to believe that once recovery does occur that the new equilibrium rate of interest will not be considerably higher because of the new large amount of government debt that has been, and will be, accumulated. These higher than otherwise rates will ensure that investment projects in the future will, in effect, be crowded out by today’s stimulus.
I have no doubt that economists can, in sufficient time, generate quantitative estimates to varying degrees of approximation on these forms of crowding out. But consider today’s political problem.
The crowding-out consequences are indirect, complex, and hard to see without theoretical lenses. If stimulus creates jobs in construction, retains various state and local government jobs and so forth, these are more easily seen by voters. (However, there are still many theoretical and methodological issues involved in the counting. It is not a simple matter.) Therefore, as with most government programs there is a political bias toward the direct and immediate consequences, even where the indirect may be far more important. This is Frederic Bastiat’s story of the seen and the unseen. (It may well turn out that even with the political bias working in its favor, the voters still sense that the stimulus crowd has gone too far. So much the better.)
But now dear readers: Do you think Steve Horwitz is a “clueless idiot”?