Wednesday, February 11, 2009 9:46 PM CST
To spend or not to spend?: University economists weigh in
By NATHANIEL WEST, Staff Writer
nwest@jg-tc.com
CHARLESTON — The national financial crisis is proving to be uncharted territory for many experts, including economics professors at Illinois public universities.
And even as leaders of the U.S. House of Representatives and Senate announced an agreement Wednesday on a $790 billion stimulus package, educators differed in their views on the role of government spending in revitalizing the economy. Some economics professors believe immediate and massive federal spending is the best answer, while others essentially said the opposite.
Consequently, educators also disagreed about the stimulus package that President Barack Obama may sign soon.
“This is economics, not politics,” said Noel Brodsky, associate professor of economics at Eastern Illinois University and author of the book “A Short Drive Through the 21st Century: The Future of Energy, Trade and Demographics.”
“Do you want to save the economy or not? The answer is spend.”
But in a full-page ad Monday in The Wall Street Journal, about 250 economists from across the country — including more than a dozen from Illinois universities — signed off on a statement from the conservative CATO Institute criticizing government spending as a means of stimulating the current economy.
“The hard empirical evidence just doesn’t support the notion that changes in economic activity are affected by discretionary fiscal policy actions,” said R.W. Hafer, chair of the Department of Economics and finance director for the Office of Economic Education Education and Business Research at Southern Illinois University Edwardsville.
“Short-term changes in taxes and federal spending do not seem very effective in countering an economic downturn,” said Hafer, who also spent a decade as a research economist with the Federal Reserve Bank of St. Louis.
Instead, Hafer pointed to data that expansionary monetary policy precedes economic recovery, and he favored policy actions “in the form of lowered interest rates and more rapid growth in the money supply.”
But Brodsky argued that “if you can’t get monetary policy to work, (then) the only answer you’ve got left is fiscal: government spending.
“I think that’s the situation we’re in right now,” he said. “Forget tax cuts; spend like crazy — spend as much as you can ... We need a stimulus, and it needs to happen really, really fast.”
Brodsky also said he supports the general principles behind the stimulus plan, but he takes exception to some of its specifics — namely, tax cuts and tax credits — which Brodsky believes “will not work (because) they’re not going to happen fast enough.”
Like Hafer, Peter Colwell, a professor at the University of Illinois in Champaign-Urbana who teaches real estate finance, appears on the CATO Institute statement. He did not disagree that government spending would create measurable job growth.
“Unfortunately, (spending) will also reduce jobs, and the jobs that it eliminates will not be measurable,” Colwell said.
“The increase in government spending will cause funds to be withdrawn from other activities as the government funds the various projects by floating bonds. That is, expenditures in other sectors will decline.”
Rather, Colwell called for boosting government insurance for deposits and business loans; examining whether accounting rules are affecting banks’ reluctance to make loans; reducing the corporate tax rate to encourage international investment in the United States; and prohibiting mortgages in which the loan is greater than 80 percent of the value of the borrower’s property.
For borrowers who are already in default, Colwell said, “They need to become renters; after all, their equity is zero.”
The stimulus package, he also said, “will not produce a recovery.”
Hafer said he fears a “dramatic shift in the perception of what government’s role in the economy should be” because of the stimulus package, as well as the federal plan to tackle the credit market crunch.
“This change will have lasting effects on the economy, as it will increase the deficit and the government’s debt,” said Hafer. “While a growing economy can offset those outcomes, the more important question is whether, once the storm has passed ... the government’s role (will) diminish, or will it remain at this heightened level?
“Are we moving into a new era where the government is the solution?”
At EIU, James Bruehler, an economics professor, said the effect of government spending programs in the Great Depression is unclear. And even though Obama pledged that the stimulus plan “would take the form of investment projects that could justify themselves on their own merits, (that) is not what we see when we look at the details of the packages coming out of the House and the Senate,” Bruehler said.
He noted that he does support an increase in unemployment benefits, which is part of the stimulus package, “not because it will stimulate the economy but because it will help displaced workers cope with the downturn. It is simply the right thing to do.”
Additionally, Bruehler is in favor of grants to the states included in the stimulus package. “If you are going to attempt discretionary stimulus, the fastest thing you can possibly do is act to prevent state and local government spending from shrinking,” he said.
Contact Nathaniel West at nwest@jg-tc.com or 238-6860.
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coonbug wrote on Feb 12, 2009 12:09 PM:
None of us have experience with what is happening today -- those claiming they KNOW the answers are just plain lying.
Doing nothing is NOT the answer, unless you want to seem thousands more out of jobs and banks folding.
http://coonsey.wordpress.com/ "