A Project of The Annenberg Public Policy Center

Will the Stimulus Work?


A lot of readers have asked us to sort through the various arguments about whether or not the stimulus bill (which, at the moment, is actually two different bills, one in the House and one in the Senate) will actually work. But we just don’t know the answer to this one. For that matter, even the experts don’t know. On one side, Nobel laureates Paul Krugman and Joseph Stiglitz argue that the only problem with the stimulus bill is that it needs more spending and fewer tax cuts. Those opposing the stimulus have their share of Nobel winners, too. Gary Becker warns that government spending will “crowd out” private spending much more than stimulus supporters believe, while James Buchanan, Edward Prescott and Vernon Smith signed a full-page New York Times ad saying that they don’t believe that more government spending will improve the economy.

Why all the uncertainty among first-rate economists? Well, for one thing, economists have very little data with which to work. There are plenty of theoretical models out there, but those models are largely untested. See, economics is a relatively new discipline, with much of its most important work having been done just within the last 50 years. Fortunately for most of us, the world hasn’t seen many serious, worldwide economic crises during that time. Unfortunately for us, our long period of relative prosperity means that economists haven’t been able to plug a lot of real-world situations into their models to see how well those models hold up. Indeed, there are basically just two modern depressions: the Great Depression and the so-called “lost decade” in Japan during the 1990s.

But even if we had more data, we might not end up with any more consensus. In an opinion piece in yesterday’s Boston Globe, George Mason University economist Russell Roberts says that disagreements about the stimulus plan are more “philosophy and ideology” than macroeconomics. Roberts offers a helpful thought experiment:

Roberts: Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.

I think most economists would argue that the first program would be a bad use of federal money at a time when we’re already running a growing budget deficit. Yes, it would put money in the hands of workers but the effect on the non-hole-digging part of the economy would be insufficient to justify increasing the future taxes necessary to repay the borrowing that financed the program. Most economists would also agree that the second program would be a bargain that would yield benefits well beyond the money put in the hands of those executing the project.

I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?

Roberts is certainly correct in one respect: determining whether a particular project is worth the money it costs is not the sort of question that can be determined simply by sorting out the facts. It’s ultimately going to come down to what you value and how much you might value it.

In the meantime, if you want to keep up with the experts and their (sometimes quite technical) arguments for and against the stimulus plan, we suggest Krugman and former Clinton Treasury official Brad DeLong on the pro side and Becker and George Mason’s Tyler Cowen on the con side. The Atlantic‘s new Atlantic Business page helpfully breaks down the experts’ arguments for the layperson.