Larry Summers disappoints.
One upsetting fact is that a number of well-known economists seem to casually favor such huge spending without considering the details or effects. And even though one economist, former Clinton and Obama adviser Larry Summers, has expressed concern about the bad effects, he favored the CARES Act anyway and appears to favor Pelosi’s bill. It’s not just Democratic economists. Glenn Hubbard, an economist at Columbia University’s Business School and a chairman of the Council of Economic Advisers under President George W. Bush, also favored the CARES act. Do they have good reasons? Maybe. Good enough to favor such an expensive bill? Not even close.
This is from David R. Henderson, “The ‘Casualness’ of Federal Government Spending,” Defining Ideas, May 21.
And:
The third major part of the CARES Act is the loans to small business. The loans are at an interest rate of 1 percent and will be forgiven under the Payroll Protection Plan (PPP) if the borrowers use the funds for payroll, interest on mortgages, rent, and utilities, and if they also spend at least 75 percent for payroll. The stated purpose is to help small businesses stay alive through the crisis and avoid bankruptcy. This is industrial policy. By targeting the funds this way, the federal government chooses winners and losers, discriminating against businesses that spend a large part of their revenue on contractors. Moreover, as Summers pointed out in his Yale interview, businesses that sign up for the PPP will be the ones most able to do it, the ones that would probably have kept their workers employed anyway. Summers also pointed out that such loans will retard the kind of structural changes in the economy that almost certainly must happen as the economy recovers and Americans change the way they live and work.
That Summers has such good criticisms makes it all the more disappointing that he so casually accepts the CARES Act. In the Yale interview, he goes further, saying that spending $3 trillion in the Pelosi bill is “fine.” He thinks, correctly, that more of it should be spent on testing, vaccines, etc., but he seems to have no problem with either the $2.2 trillion CARES Act or the $3.2 trillion Pelosi bill.
Read the whole thing.
HT2 Greg Mankiw.
READER COMMENTS
John Hall
May 24 2020 at 10:51am
The link seems wrong.
David Henderson
May 24 2020 at 11:34am
Thanks. You’re right. I’ll contact the Hoover people and get them to correct it on their site.
Vivian Darkbloom
May 24 2020 at 12:15pm
Suppose the CARE Act passes Congress with a veto override. Would you then recommend to the President that he instruct all Executive Departments under his administration not to enforce it by ignoring it and not spending any of the funds appropriated? Wouldn’t that, according to your view, be “reducing control”?
David Henderson
May 24 2020 at 2:28pm
No, I wouldn’t. It would be illegal under the 1974 Act. But yet, it would be reducing control.
Vivian Darkbloom
May 26 2020 at 5:10pm
Not only would it be illegal under the Impoundment Control Act of 1974, it would be unconstitutional per Second Amendment and the President’s responsiblity to “faithfully execute the laws of the United States”. See, for example, Train v. City of New York, 420 U.S. 35 (1975), which pre-dated that 1974 Act.
Vivian Darkbloom
May 26 2020 at 5:11pm
That is to say that the facts giving rise to the case pre-dated the 1974 Act.
Mark Z
May 24 2020 at 4:52pm
The $600 weekly payment in addition to state unemployment benefits, so the average person collecting unemployment is ~$900-$1,000 a week? What % of unemployed people are eligible? A quick google search found a Pew article saying only 29% of unemployed people collected unemployment benefits in March, so maybe we’re “only” paying 5% of the workforce 40-60k a year in unemployment, rather than the full 15% that is currently unemployed, though I’d expect this to continue to grow for at least a few months, and I’d be shocked if federal benefits are cut to 0 in January, especially if the economy is still weak. Optimistically, it’ll be gradually phased down to 0; pessimistically, some of it will remain permanently. I don’t suppose Larry Summers expressed any concern about hysteresis in the interview?
Thomas Hutcheson
May 25 2020 at 11:07am
What is disappointing about pointing out the exceptional silliness of PPP (or the airline bailouts or the top-up of state unemployment benefits) when what we needed was just a reasonable unemployment insurance program that replaces a high parentage of lost income plus enough to purchase individual health insurance?
David Seltzer
May 27 2020 at 12:15pm
The casualness is endemic to people spending Other peoples money. Milton Friedman said there are four ways of spending money; “There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”
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