Keynesians get Trumped

During the Obama years, most conservatives were against fiscal stimulus and most liberals were for it. Now that president-elect Donald Trump has proposed a major boost in government spending, many commentators will feel urges to migrate to the opposite positions. In light of this ideological turmoil, we should keep a clear head on when government spending truly stimulates the economy.

The first principle is not to be fooled by increases in measured gross domestic product. A new Trump stimulus would probably boost GDP, but that doesn’t mean it would be working well.

Measured GDP just doesn’t capture the relevant trade-offs for evaluating government spending. For instance, a lot of U.S. workers are producing organizational capital. They work on business plans, building client lists, developing marketing strategies, cultivating customer relations and performing other future-oriented activities common to service-sector enterprises. On any given day, most of us are not churning out additional widgets.

Government stimulus, on the other hand, usually is oriented toward concrete outputs such as roads and bridges or military hardware. It’s more like old-style manufacturing.

Stimulus therefore pulls workers out of producing organizational capital. In the short run, measured GDP goes up, yet the economy may or may not be doing better overall, especially in the longer run. In desperate situations, it is indeed prudent to emphasize the short run, but that is not obviously the case in 2016, when we are nearing full employment and last quarter’s GDP growth was estimated at a respectable 2.9 per cent.

There are valuable infrastructure projects governments could and should spend money on, like road maintenance. But a shortterm rise in GDP is not itself an good indicator of quality or success. Even if the Trump full employment. After that? Recent history suggests that many countries switch back to austerity precisely when they shouldn’t. That is a reality proponents of “spend more now” have to reckon with, and it means stimulus can bring a bigger contraction in the future than the boost it gives today.

For years, I have been reading about evidence that the 2009 fiscal stimulus promoted by the administration of President Barack Obama was good for the American economy. Study after study shows that it boosted GDP across a two- to three-year time horizon, as indeed it did.