Full Speed Ahead

The Lehmann Letter ©

President-elect Obama has selected his economic advisors and outlined his economic-stimulus package.

But he won’t please everyone, as two recent op-ed pieces in the New York Times make clear.

Yesterday Gregory Mankiw, a Harvard economist, said (http://www.nytimes.com/2009/01/11/business/economy/11view.html?scp=2&sq=n.%20gregory%20mankiw&st=cse):

“…….A recent study by Christina D. Romer and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the G.D.P. by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases.”

It’s clear that Prof. Mankiw cites Christina Romer, a University of California economist, as an authority to buttress his case that tax cuts will be more effective than a federal-spending increase in boosting us out of the recession.

Today Paul Krugman, a Princeton economist, said (http://www.nytimes.com/2009/01/12/opinion/12krugman.html?_r=1&ref=todayspaper):

“On Saturday, Christina Romer, the future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. Their report is reasonable and intellectually honest, which is a welcome change from the fuzzy math of the last eight years.

“The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts.” It argues, however, that “there is a limit on how much government investment can be carried out efficiently in a short time frame.” But why does the time frame have to be short?”

It’s clear that Prof. Krugman cites Prof. Romer as an authority to buttress his case that a federal-spending increase will be more effective than a tax cut in boosting us out of the recession.

How can two economists use another economist to support divergent views?

All these folks are eminences. Prof. Mankiw has been a presidential advisor; Prof. Krugman is a Nobel laureate and Prof. Romer advises Mr. Obama. We can assume that Prof. Romer supports the president-elect’s plan. Profs. Mankiw and Krugman, however, would change the president-elect’s plan – in opposite directions - if they could.

What’s going on? They can’t all be right. Does that mean they’re all wrong? No. But it probably means that ideological differences – Prof. Mankiw is right-of-center while Prof. Krugman is left-of-center – have influenced their views.

What should the president-elect do? Stick with his plan. Mr Obama may very well think that his plan’s spending increase will satisfy Congressional Democrats while the tax cuts will attract Congressional Republicans. Those are, after all, the constituencies that Mr. Obama MUST please to get anything done.

Damn the ideological torpedoes. Full speed ahead.

© 2009 Michael B. Lehmann