From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.
Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill:
Of the remainder, a very large portion consists of temporary expansions of social safety net programs to help take care of the most vulnerable. Again, the economic logic of this seems to me to withstand Cowen’s complaints—there’s no evidence that needed economic restructuring involves getting people who’ve lost their jobs to go without food or basic health care. And even if it didn’t, the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.
What we’re left with then, it seems to me, is a relatively narrow disagreement about a minority of ARRA funds. It’s useful to have an argument about that stuff. The “race to the top” education money, for example, strikes me as sound public policy that has relatively little to do with economic stimulus and was just smuggled into the bill because the White House likes the idea. And on down the list. But the policy as a whole is what it is.
Meanwhile Cowen repeats his earlier complaints that “current GDP measures and projections aren’t picking up how well the stimulus is or isn’t working.” There are, of course, longstanding criticisms of GDP as a measurement of economic success or failure. And those criticisms have a lot of truth to them. But I don’t understand why it would make sense to suddenly drop GDP as a metric for this specific purpose—especially in the absence of any viable alternative proposal. The shortcomings of GDP are well-known, as are the arguments for sticking with it anyway. Nothing I can see about the financial crisis has suddenly made it a more inadequate measurement. Meanwhile, as Ryan Avent says this whole thing seems to involve inventing a brand new macro theory to specifically deal with the current recession.