So, when you overbuild houses in Nevada or condos in Florida, you cannot lure very many people with lower prices. Most unoccupied houses have close to zero marginal value to the vast majority of consumers, just as most unemployed workers have zero marginal product to the vast majority of firms.

He was responding to the question of why there are still so many housing vacancies. While I’d like to excoriate policy (and I can) I find this very compelling – and it raises the question of why this recalculation story is not applied more broadly. Maybe it is, maybe everything is cast in a transactions cost framework. Thus, if you offered me the opportunity to “buy” my exact home in, say, Pittsfield, Massachusetts, for zero dollars, I would say no. But the same is true for lots of other goods and services. Perhaps sadly for me, the provision of an economics education is not one of those services!

We know so far that the stimulus signs cost from a few hundred dollars to as much as $10,000, which was the cost for the giant billboard that adorns renovations underway at Washington Dulles airport. The Washington Metropolitan Airports Authority confirms that the $10,000 was diverted from runway resurfacing. With 190,000 projects having been funded by the stimulus, tens of millions of dollars have probably been spent telling Americans how their money is being spent.

If stimulus funds are used to displace work within a stimulated project, is it really that much of a stretch that these funds are displacing productive private activity?

New York State spends $11,524 per capita – in a state where median HH income is $56,000. That’s just the state. Add to that another $10,000 of spending by the federal government and you see that for a typical New York household, state and federal government directly spends  almost 40% of the amount they earn. And that says nothing about indirect taxes and the regulatory burden, deadweight losses imposed from raising taxes, and the equity of such a system.

Here’s another fact for New York: “only” 4%  is spent on “Administration. How much is that? Try $9.8 billion per year.  I’d love to see a site which lists all such watchdog sites. I’ve seen several pop up in the past years …we’re watching …

The point I’d like to make is that supporters of stimulus and look at this and say, “yes, this is in fact what we intended.” I do not dispute that. But if you accept that Cash for Clunkers and the home buyer tax credit stimulated economic activity, then how can you at the same time argue that lowering taxes across the board would not do something similarly? And note the interesting thing about the Clunkers program above – when the tax rebate ended, the consumption plunged. Would it take too much imagination to think that if tax rebates persisted, that consumption would increase along with it?

The reason I bring it up is that from an accounting standpoint, you can run counter-cyclical Keynesian budget deficits with either spending increases or tax cuts – there is no difference. So when you see the Progressives calling for more spending while at the same time continuing their soak the rich and non-rich tax policies, remember that all of their hand waving about the necessity of spending increases is nothing more than a cover for continuing the upward march of government in this country. There is one more important differences between tax decreases and spending increases. When we increase government spending, that spending gets politically directed to politically favored projects and interests, and expands the power of those in Congress, the Executive office and the bureaucracies. Oh yeah, plus we impose at least another 30% cost on taxpayers in the form of lost economic activity from the distorted incentives required to collect the taxes (now or later) to pay for this spending.

When we use tax decreases as stimulus, we empower the decentralized many, we reduce the power of those in Congress and the Executive office and we eliminate the dead weight losses that the taxes imposed in the first place. In fact, even if all other effects of taxes and spending were identical, eliminating the distortionary impacts of taxation seriously works in favor of tax reduction.

In any case, how has the Keynesian apparatus held up over time? I’d argue that rather than government spending stimulating during recessions and dampening during expansions, government spending has been a major source of instability. On its face this should not be all that surprising. By the time politicians get the data on private activity, and by the time the legislative process takes its course, the stage of the business cycle is almost certainly changing. In other words, the difficulty in obtaining just-in-time information and the long lags in the legislative process virtually guarantee that fiscal efforts to mitigate business cycle movements are like a drunk man groping in a closet for his lost keys.

Below is some simple data to begin to make my point. The BEA reports on a quarterly basis total government spending, private consumption spending and private investment spending back to 1947.  The chart shows the quarterly percentage change in government expenditures and private consumption expenditures. A chart showing the same data, but taking 4 quarter moving averages before computing the quarterly percentage changes is identical. If I added in private investment to the consumption data, the pictures would be indistinguishable as well.

A careful look at the chart would tell you virtually nothing. Sometimes it appears that government spending and private consumption move in the same direction, sometimes in opposite directions. In fact, of the 252 quarters this chart covers, in 64.3% of the cases, government spending and private spending move in the same direction. If I add in private investment, the share actually rises. The correlation of these percentage changes is -0.12 – a very small slightly negative correlation. In an ideal Keynesian world, while the correlations would not be -1, they should certainly be much closer to one than zero.

But what about the timing problem I mentioned above? Well, suppose you look at changes in government spending a quarter after a change in private spending? Then we should see more occurrences of these two moving in opposite directions, right? Of course you would be wrong. Looking at changes in G one quarter hence, we see government spending and private spending moving in the same direction in 65.5% of the cases and if we look at G two quarters hence, we see government spending and private spending moving in the same direction in 67.9% of the cases.

Now, you cannot argue that these changes are reflecting successful government policy because I am looking at whether or not the government itself responded to the observed private data in a way consistent with Keynesian policy. This is an extremely primitive “analysis” so don’t take it at much more than reflecting the simple idea that it is not likely that governments respond in the way they think they can and that if there is truth to what I depicted then what appears to be going on is that government spending seems to ramp up during economic good times and ramp down during bad times – precisely the opposite of Keynesian proscriptions, and certainly destabilizing if you take that theory seriously.

My view is that if in fact this data is correct, then the government is doing exactly the correct thing if it hopes to alter business cycles. Government spending extracts resources from the private sector, making us poorer. So we should “want” more of that during expansions. Similarly, we should want less of this wasteful activity during recessions.

There’s lots more to say – I hope this inspires a student to dig deeper into what is really going on.

Here is Robert Heilbroner on Keynes:

Keynes himself in a letter to the New York Times in 1934 wrote, ” I see the problem of recovery in the following light: How soon will normal business enterprise come to the rescue? On what scale, by which expedients, and for how long is abnormal government expenditure advisable in the meantime?

Note “abnormal.” Keynes did not see the government program as a permanent interference with the course of business (wintercow emphasis). He saw it as lending a helping hand to a system that had slipped and was struggling to regain its balance.

I suppose that is large by today’s standards. But our preindustrial ancestors probably faced those kinds of odds each year, not each lifetime. I would love to see an estimate of such a number over time.