Every Economist, Mr. President? No, sir!

The President seems to believe that he can say whatever he wants and no one will hold him accountable. He now claims that "every economist, from both sides of the aisle, believes that the stimulus program created jobs." http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Obama-says-every-economist-back-claim-stimulus-saved-or-created-two-million-jobs-83550017.html

I am an economist, Mr. President, and I know, based either on simple first principles of economics, or on a more rigorous controlled study of labor markets in each major sector of the economy, that the unemployment rate would have been much lower today had the stimulus program never occurred.  

You are either woefully unaware of the facts, Mr. President, or are purposefully distorting the facts. Neither is good.  When are you going to realize that just because you say something does not make it so. The world does not contort itself to support your version of the truth.

Do not put words in my mouth, sir.

Comments

[FR]

Dr. Jarrell,

I have recently picked up reading your blog and thoroughly enjoy it; thank you for taking the time to produce this!

Could you please shed some light on why you believe, without any stimulus, the nation's unemployment rate would be much lower today?

Regards,

Faithful reader

[Sherry Jarrell]

Thank you! Sure, I'm happy to answer your question. I've touched on it in earlier posts about government spending. In my view, because government spending is funded with taxes that would have been invested by private industry in value-creating activities, we lose economic value with every dollar the government spends. I think people forget that it is business profits that generates every dollar of taxes collected by the state, local and federal governments and that, if not for the taxation, those businesses would do more of whatever they did in the first place to create the profits that enabled those taxes. This includes buying more capital and hiring more labor. Some taxation is necessary, of course, to pay for public goods, like defense, but even then we are trading off economic wealth. I hope that answers your question!

Sherry

[Rick Rutledge]

Sherry,

The problem with your explanation here is that it states that "government spending is funded with taxes that WOULD HAVE BEEN invested by private industry" and that "the unemployment rate WOULD HAVE BEEN much lower today had the stimulus program never occurred." (Emphasis mine.)

This argument, it seems to me, is predicated on the conceptual fiction of a two-dimensional relationship between government spending and business investment, with taxes as the lever. That model lacks a time vector, not so much from omitting it, as compressing it. The relationship between those factors can only be simplified to this level by compressing all time into the representational plane.

That is to say that, to fairly represent the relationship between government spending and business investment (via taxation), we have to compress three presumptions into one premise:
- Past government spending that resulted in increased taxes diminishes past, present, and/or future business investment resources;
- Increasing present taxes to fund present and future spending diminishes business' investment resource pool.
- Past, present, and future government spending without matching funding WILL, EVENTUALLY result in increased taxation, diminishing future business investment resources. (And, consequently, MAY have a chilling effect on present business investment attitudes.)

However, unless NPR has let me down (it could happen), and I've missed a big, breaking story about an increase in business taxes, these stimulus programs have been wholly funded by deficit spending.

Of course, it could be argued that deficit spending generally COULD (nay, should) have a chilling effect on business investment. This, together with the third presumption of the aggregate premise above (that is to say, burgeoning national debt), does create a basis for the belief that the unemployment rate COULD have been much lower today, IF a number of things had been done differently. The French have a saying: "With enough 'IFs,' we could put Paris in a bottle."

To simply state that "the unemployment rate would have been much lower today had the stimulus program never occurred" strikes me as conclusory, and the sort of reasoning on which our elected officials too often rely to justify partisan and ideological positions.

Too, and unfortunately, there is a great body of evidence to suggest that business leaders have historically taken a disappointingly short-sighted approach to management, so I would be reluctant to put too many eggs into the "chilling effect" arguments.

As a person who teaches financial literacy, I'm fully aware that sometimes there are urgent needs that justify the use of leverage (and short-term deficit spending) to deal with near-term emergencies. Credit has its uses. I'm of the belief that short-term deficit spending is not the primary (and certainly is not in and of itself) the cause for our current woes. I'm more inclined to believe that short-sightedness, whether in the form of The Quick Buck on Wall Street, or a systemic refusal to acknowledge the looming problem of the national debt, is more to blame than any single short-term stimulus program. Government spending on stimulus, OUTSIDE THE CONTEXT OF DEFICIT SPENDING, wholly evades your argument.

(But then, there may be good reason I don't claim to be an economist - through no fault of yours, to be sure!)

[Sherry Jarrell]

Hi Rick,

Goodness. Where to begin! I simply stated my conclusion because it's a post, and I was responding directly to Obama's claim about what "all" economists think or say. He was misinformed or stretching the truth, and I wanted to point out that fact. So, yes, there were a lot of unstated underlying assumptions and data and studies and research and theory that I did not specify. Apparently you've supplied some of your own to try to deconstruct the "reasoning" or "ideology" that I might have used to arrive at my conclusion! Creative and ambitious but, alas, wrong.

You've ignored or misunderstood the very essence of causality: the only thing one needs to know is that business profits are the ONLY source of tax revenues to the government, and when the government takes and spends those tax revenues, they are spending dollars that WOULD HAVE BEEN RETAINED AND INVESTED by the business that created those profits and those very tax revenues IN THE FIRST PLACE, and would have then caused further profits next period. CAUSED. And it doesn't matter whether you talk one period or multiperiod or lags. This fundamental economic fact does not change.

You bring deficit spending (the relation between this period's G and this period's T) and the level of debt (cumulative deficits) into the picture, both of which are entirely irrelevant to the issue I am raising and, worse yet, are the accountant's version of business profits.

You site "evidence" that business leaders have been short-sighted (do please share some of that evidence with me -- cite the source and let me have at it -- it will not hold up) and use that to conclude that government spending does not reduce economic wealth? And then literally blame our current woes on the short-sightedness of business? or on national debt? huh?

You say: "Government spending on stimulus, outside the context of deficit spending, wholly evades my argument." Not so. My point is that when the government takes a dollar of tax revenues, whether the government is running a deficit or surplus, it reduces the economic wealth of the economy relative to what it would have been had the government not taken that dollar of business profits as taxes. Very simple. Very straightforward. The plain, simple, unadorned, incontrovertible truth.

Thanks for your interest and for taking the time to write such a thoughtful, thought-provoking comment!

Sherry