Chaffetz: Wrong on Stimulus

Our 3rd District Congressman Jason Chaffetz voted against the stimulus package and recounts his reasoning on cnn.com.

Most economists, myself included, think he's wrong on this issue.

The big immediate problem we face in the economy --- the problem that's leading to the half-million jobs lost each month --- is a kind of coordination problem.

To understand it, think about a firm making decisions about how much output to produce over the next six months and, by extension, how many people to employ. If our firm expects demand for its product to be strong, then it will plan to produce a lot. It will plan to employ a lot of people. If it expects demand to be weak, our firm will cut back on output, and we'll have to lay some of our workers off.

Now, what determines demand for our firm's product? One factor that determines demand is whether our firm's customers are likely to have jobs. So, if our firm expects other firms to have layoffs, then our firm will expect demand for its product to be weak. Expectations of other firms layoffs can trigger layoffs at our firm.

The reason I refer to this as a "coordination problem" is that our firm's best strategy --- layoff or no layoff --- depends on what other firms are doing. One outcome of this game is for no one to have a layoff. Another outcome is for everyone to have a layoff. We're on the "everyone" track as of now.

So how can we stop this cycle?

Well, this isn't the sort of thing that any single firm can undo. One firm deciding not to lay off its employees won't have a big enough impact. A group of firms --- a very large group --- could undo this by all simultaneously deciding to maintain or increase employment. But think of the problems of getting all those CEOs on board.

A final possibility is to take the single biggest player in the US economy --- the federal government --- and have them spend money. And this is what the stimulus package is for. The idea is that the government puts people directly to work --- and this will support demand and induce the firm we considered a few paragraphs above to not do layoffs. This will then support demand at other firms, and we can limit the spiraling job loss we are currently seeing.

This is what the president means when he says that only the federal government is large enough to have an impact on this crisis.

Don't take my support for the stimulus bill to be support for each and every provision in it. My view is that it would be better if we saw more immediate spending and less in the way of tax cuts for anyone with high earnings (unless those cuts are in rates that could somehow be made permanent, which I don't think is feasible.)

But when Congressman Chaffetz votes no because he "spoke with a guy who employs 12 people in his small trucking company, (who) sees a trillion dollars in new deficit spending and yet nothing that will help him," I just have to respond.

Ask the trucking company owner whether his business has been affected by the general economic slowdown. Ask him whether he'd prefer Utah's unemployment rate to rise to 6-7 percent (which it is likely to do even with the stimulus package), or whether he'd prefer Utah's unemployment rate to hit 8-9-10 percent. Most economists think the stimulus bill will mean lower unemployment. And this is likely to be good for the demand faced by local trucking companies.

And since I'm criticizing a Republican here, let me praise some as well. How should governments manage their fiscal policy, if they want to limit the impact of the business cycle on residents? They should do pretty much exactly what I'm guessing the State of Utah will do. Run surpluses and eliminate debt in good times. Bond --- that is, borrow --- and use the Rainy Day fund to support spending in bad times. This allows the state to work against the business-cycle coordination problem outlined above, without running massive long-term deficits.