The verdict is out on the stimulus package, and many economist are not buying it.

Skeptics to the Obama/Democrat stimulus package whether they be professional, political or otherwise, have  been considered opposition forces and simply labeled as naysayers by the supporters of the bill. The truth of the matter is that there are many qualified professionals who have studied economics and the American economy for decades who came to different conclusions on the merits of the stimulus package.

The debate has brought forth two principled arguments:  To what extent should the economic stimulus address spending increases vs tax cuts? And, what effects will the stimulus package have on the idea of a limited government?

There have been all sorts of political goodies identified as part of the stimulus package that some have viewed as nothing more than measures for patronage building and political pet projects for the Democrat lawmakers. Therefore, many are rightfully concerned that this is a green light towards a permanent increase in the size and scope of government along with a hefty price tag.

What is more, most believe that the economy will eventually return to some sense of normalcy. Rather it will be because of government assistance or not is not necessarily the issue. The concern, however, is when the downturn is over what will  the federal budget look like? What will the future tax structure and tax revenue be? What will the budget deficit look like compared to the GDP?

These are questions that deserve to be debated, fully answered and should not be simply dismissed as dissent or labled as baseless political humbug by the opposition when reasonably presented. The articles that are linked below highlights the current debate and to which the opposing voices have been generally accepted by the supporters of the stimulus package. (Charles Dharapak/AP Photo)

“For Many Economists, Stimulus Falls Flat” by Declan McCullagh

An unusual aspect of the recent debate in Washington is the lengths that supporters have gone to marginalize anyone who questions the so-called stimulus plan.

Robert Reich, Bill Clinton’s labor secretary and member of President Obama’s transition team, claims “almost every economist will tell you the stimulus has to be massive.” Nobel laureate and New York Timescolumnist Paul Krugman accuses skeptics of “making totally non-serious arguments.”

Sen. Chuck Schumer, a New York Democrat, says“economists agree” that doling out large sums to state governments is “effective.” Vice President Joe Biden says that “every economist that I’ve spoken to” believes the spending package “has to be big.”

Perhaps the vice president should broaden his social circles. The truth is that, instead of being uniformly in favor of the massive spending bill, which is being championed by congressional Democrats with Obama’s support, economists remain divided.

You may have heard that respectable economists, including Nobel laureate Joseph Stiglitz, say stimulus spending should be high or higher. But some news organizations have been less than diligent in telling you that other respectable economists are deeply skeptical of the idea, flatly oppose it or favor competing proposals such as additional tax relief.

The University of Chicago’s Gary Becker, another Nobel laureate, warns that “the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies.” Becker says that in that case, spending could do more harm than good.

Naturally, the process of porkification already is underway. An analysis by taxpayer group Americans for Limited Government shows the $825 billion bill includes $200 million for beautification of the National Mall and millions for new cars for federal bureaucrats. Then there’s the flap over contraceptive-related spending. If cars and condoms qualify as emergency “stimulus” spending, what doesn’t? (Full article here).

How can these heavyweight arguments ever hope to be reconciled? A very strong and supported hypothesis has been presented by experts that shows spending increases just do not impact the economy and the consumer as do tax cuts. It not only frees up and forms capital in the private sector, it also increases  investment demand. The fact is, a lot of mechanics to fiscal stimulation are left out of the Keynesian school of thought. However, that doesn’t make them any less believable or practical.

To be fair to both sides of the argument, though there are many skeptical economist of the Keynesian model, Keynesian principles offer sound insights and theories to combat economic downturns. But, does that make the Keynesian model necessarily true and absolute? What is clearly lacking in this debate, which would be foolish to kid oneself in not seeing this as a purely political debate rather than intellectual and scientific one, is a healthy amount of humility. Instead,  a political takeover that showed little regard or interest in debate settled the issue. Thus, this historical stimulus package was handled Washington style. (photo from OpenCongress.org) 

“Stimulus: To Spend or Not to Spend?” by Michael Mandel

On one side are a very long list of pro-stimulus economists, such as Nobel winner Paul Krugman of Princeton University, who believe government spending can have a positive impact in today’s extremely weak economy. On the other side is a shorter but eminent list of economists who are skeptical about the benefits of stimulus, including Nobel winner Gary Becker of the University of Chicago and top macroeconomist Robert Barro of Harvard.

Both sides have plenty of theoretical firepower. The pro-stimulus camp has three main reasons why the multiplier might be large—i.e., significantly greater than 1:

• First, they say the credit crunch makes it difficult for households and businesses to borrow, leaving a hole that must be filled by the government.

• Second, rigidities in the economy make it hard for businesses and workers to shift quickly from contracting sectors such as home construction to expanding areas such as health care, making it necessary for government to provide support for demand.

• Finally, government intervention can boost business and consumer confidence, improve their expectations about the future, and stop a recession from turning into a death spiral.

On the other hand, the anti-stimulus economists also have reasons why fiscal stimulus might not be effective—i.e., why it may have a multiplier of less than 1:

• First, they point to “crowding out”—the idea that government spending may actually draw resources away from the private sector, even when unemployment is high.

• Second, taking on a lot of debt now may weigh down the economy in the future.

• Third, anti-stimulus economists are worried about wasteful spending. (Business Week)