Summers also said that in studies comparing states that received varying amounts of stimulus money, those that received more money experienced higher levels of job growth.This makes no sense as an argument for overall fiscal stimulus.
The fact is certainly possible. A good example of such studies is by Emi Nakamura and John Steinsson, summarized in their VoxEu blog post. Output rises in states that get more military spending:
...when aggregate military spending in the US rises by 1% of GDP, military spending in California on average rises by about 3% of California GDP, while military spending in Illinois rises by only about 0.5% of Illinois GDP. ...we can use regional variation associated with these buildups to estimate the effect of a relative increase in spending on relative output. Our conclusion is that when relative spending in a state increases by 1% of GDP, relative state GDP rises by 1.5%.But they're upfront about the limits of this result:
Are multipliers of 1.5 too large to be true? ... some care is required in interpreting these empirical results. ... in our setting, the region getting the spending is not paying for it. (My emphasis)And that's the problem.
Sure. Suppose the government pays contractors to build a military base, or to dig a ditch from Fresno to Bakersfield (high speed rail.) Is anyone surprised that GDP goes up in those areas? The contract itself is a government purchase, and adds to GDP, whether or not the project is of any use at all. When a donut shop relocates from LA, and people spend their salaries on donuts, that counts for more multiplier.
But where did the money come from? Showing that the government can move output around does not show that it can increase output overall. To build the base or rail line, the government had to tax or borrow the money. Cross-sectional studies do not measure the loss of demand in (say) Chicago from the money that got spent in Bakersfield. Actually, the studies can count the loss for stimulus: Every dollar that Chicago's GDP goes down from the extra taxes or borrowing means that the relative output in Bakersfield goes up.
Amazingly, our government has seemed unable to accomplish much of this manna-from-heaven local stimulus in the recent recession. (Steinsson and Nakamura's study was on military expenditure in general, the potential for such "stimulus," not how much of it actually happened in this recession.) John Taylor shows that the actual stimulus didn't even get spent, and when it did, didn't create many jobs. The Wall Street Journal had a nice article a few weeks ago, showing in detail how a $10 billion in stimulus money for wind farms produced few jobs. Even taking administration numbers at face value, we spent hundreds of thousands of dollars for each $50,000/year job "saved."
Larry may be citing studies of the recent recession that disagree. But I think it is a mistake to get too deep in this argument: As a matter of economics, the government should be able to move output around, making one area worse off and another better off. The delicious irony that it was unable to do much of that in this case shouldn't blind us to the fallacy of composition:
Stimulus has to be paid for. In evaluating stimulus for the whole economy, you have to count the loss of demand from the paying-for-it side equally with the raise in demand or employment from the spending-it side.
(If you like to cite New-Keynesian models, beware they are "Ricardian" so you can't even rely on the magic of borrowed money -- you have to defend the idea that taxing Chicago to dig a ditch in Bakersfield raises output on both places by one and a half times the tax. Not impossible (Jon and Emi try), but not as easy as it seems either.)
Summers was also quoted:
“Use your common sense,” Summers said. “Do you really believe if we had done nothing in response to the crisis in 2008, it would have been a good idea?”That's too easy. Medieval doctors said, "the patient is dying, we must do something" before each bleeding.
I know it's unfair to criticize quotations in a college newspaper, so take these as comments on the (very common) ideas rather than anything personal about Summers or exact about the views he presented at the debate. I presume Larry said something a lot deeper.
The debate will be repeated at Stanford, and I hope we get a transcript or a video of this important event. This could be the Scopes Trial or Huxley–Wilberforce debate for fiscal Stimulus.
