Will the economic stimulus package work as expected?

Two top economics scholars with different answers to this question squared off in a March 4 public forum, “Stimulus Smackdown—Can Deficit Spending Save the Economy?”

To watch the intellectual sparks fly between Michele Boldrin of Washington University, St. Louis, and J. Bradford DeLong of UC Berkeley, about 150 people crowded into the University Club. There they witnessed a two-hour battle of jabbing one-liners, obtuse charts and defused economics.

“Dangerous nonsense” was how Boldrin described the Obama Administration’s $787 billion economic stimulus package that passed on Feb. 17. He believes it is disingenuous for the American government to act as if there is a “quick and painless fix” to the unfolding economic crisis. Instead, he says, the main focus should be on fixing the banking system and using tax cuts and monetary policy to boost consumer spending.

On the other hand, DeLong said, “Spending works to spur the economy, and government spending works just as well as anyone else’s money.”

With the economy seizing up and the jobless rate surging to 8.1 percent in February (11.6 percent in Yolo County), he said there is but little choice to use deficit spending on roads, bridges, public buildings, tax breaks, state and unemployment aid, and educational spending.

DeLong and Boldrin are no strangers to each other. This season’s point-counterpoint couple on the issue of stimulus effectiveness, they recently appeared together on NPR in a verbal joust on the stimulus.

DeLong, an expert on business cycle dynamics, formerly worked in the Clinton administration as a U.S. Treasury deputy assistant secretary. Boldrin has held advisory positions with various governments, international organizations, central banks and private companies. He was a signatory to the libertarian Cato Institute's recent full-page New York Times ad decrying the stimulus package.

'Stimula do not work'

Boldrin and others in his camp say that the stimulus would require massive new borrowing and add to a national debt that grew from $5.7 trillion to $10.6 trillion in the Bush years. In a Feb. 22 Denver Post op-ed, he wrote, “fiscal stimula either do no work or work too slow, and bailing out bad (bank) managers is damaging.”

Americans, Boldrin says, have subscribed for too long to the “absolutely insane myth in masters of the universes like (former Federal Reserve chairman) Alan Greenspan” could do no wrong. The reality is that many mistakes were made, and the government should “clean house” in the banking industry and use money supply and interest rate adjustments to move the economy forward.

DeLong accused critics of the stimulus package like Boldrin for using an “Orwellian” arguments and hypocrisy on the issue. He pointed out that the Bush White House used deficit spending to their advantage to build up the military and homeland security and launch wars overseas.

“Deficit spending suited the Republicans in the Bush budget years,” he said. "But now it does not.”

In economic emergencies such as the Great Depression of the 1930s, DeLong said, even the famous conservative economist Milton Friedman supported the idea of federal deficit spending.

“Boldrin is of the ‘we must suffer’ caucus,” DeLong said.

He said the stimulus will “put people back to work” and combat the fast-rising unemployment rate, the most profound threat facing America today. Finally, the Obama White House has acknowledged that the stimulus package is not the singular cure-all for the ailing economy, and that much more will need to be done, he said.

On the jobs issue, Boldrin challenged the assertion that people easily shift occupations. Under deficit spending, the government will spend borrowed money on projects with the goal of boosting employment—but not perhaps in one’s chosen field.

“You will not turn people who are pounding nails in Nevada into nurses overnight,” said Boldrin, referring to homebuilders.

'Well beyond housing bubble'

But DeLong disagreed. “American workers are much more flexible than you imagine,” and he cited instances of surprising employment shifts. The spreading crisis has gone “well beyond the housing bubble, and we face something more serious and significant."  People will think creatively about new jobs and careers, he asserted.

Boldrin and DeLong fundamentally disagree on the answer to this question: For every dollar the government spends in the economy, how much does the country get back in Gross Domestic Product?

Boldrin said less than a dollar, while DeLong says this multiplier is much higher, perhaps two or three dollars. Alas, economists have debated this issue for decades.

As for the causes of the downturn, Boldrin blames it largely on the enormous amount of equity extractions from homes during the last 10 years.

“A huge chunk of the GNP we thought we produced,” he said, referring to the housing bubble. “But we only thought this,” said Boldrin, explaining that “illusionary” housing values skewed the economic reality.

DeLong charged Boldrin with backtracking on his stance against the stimulus, reflected in the latter’s op-ed and New York Times ad.

Boldrin acknowledged the usefulness of “bits and pieces” of the stimulus in turbocharging the economy— it does contain tax cuts, for example. But the spending element of it is largely wishful thinking, he said.

He charges the Obama administration with playing the “fear” game, just "like Bush did after 9/11” when the government mobilized itself and the nation for a costly “war on terror.”

Now the government is about to embark on mammoth new spending in the wrong areas. “If a guy has a broken nose,” Boldrin said, “you don’t put a Band-Aid on his butt.”

DeLong said government spending for spending's sake was certainly not always positive. He noted the lessons of the Great Depression and fascist politics in the 1930s.

“Adolf Hitler’s spending on concentration camps was not real change you can believe in.”

The debate was hosted by UC Davis economics professor Gregory Clark and sponsored by the UC Davis Institute of Government Affairs. Watch a video of the event at http://www.iga.ucdavis.edu. For more information on J. Bradford DeLong, read his blog at DeLong.typepad.com. Michele Boldrin’s Denver Post op-ed is available at http://www.denverpost.com/business/ci_11755186.