Macroeconomists On The Stimulus Bill

Will Wilkinson, interviews two leading Marcoeconomists on the recently passed Stimulus bill:

I talked to Prescott just hours before Obama set the presidential pen to the stimulus bill. “There is an old, discarded theory that’s been tried and failed spectacularly, which is where that language of stimulus comes from.” The stimulus bill, Prescott told me, “is likely to depress the economy.”

That was from Edward Prescott, 2004 Nobel Laureate in economics.

He also asked Edmund Phelps, the most recent macroeconomist to win the Nobel Prize. He writes:

“There’s a chance that some of the infrastructure spending will do the job of creating more work for earth-moving equipment and construction workers, Phelps noted. “I said, ‘a chance’,” he continued. “Now, there’s also a chance that the perceived increase in the role of government of this sort will have some unanticipated effects on the animal spirits of entrepreneurs. These projects may stand as a sort of symbol of the weakening of the private sector.”

By significantly increasing government involvement in so many sectors of the economy, Phelps worries the enacted stimulus plan could make the climate of investment more rather than less uncertain, and make growth-enhancing innovation less rather than more likely. Potential investors may become spooked by businesses increasingly dependent on government contracts, Phelps notes, since these firms may face additional regulations and bureaucratic requirements which may make them appear less able nimbly to adapt. Additionally, the anticipation of higher future taxes–the price of the current spending surge–could dampen consumer demand and “have a chilling effect upon the desire of entrepreneurs to innovate,” Phelps says…

Phelps says he “just doesn’t understand” the argument that government can spur innovation through top-down subsidies for selected new technologies. Citing his Columbia colleague Amar Bhide, Phelps suspects that “a lot of money will be made by being in the right place at the right time and knowing the right people. Especially knowing the right people.” Phelps is disturbed by the thought that we may be shifting from an entrepreneurial economy toward a lobbying economy. “A lot of potential entrepreneurs, who were contemplating making an innovation and launching it in the marketplace, will now think, ‘Well maybe the safer thing to do is to try to get that government contract.’ … And nobody does the innovation. They’re all too busy trying to get the government contract.” 

The full article, which should be read in full, is here.

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