Subject: Re: List of economists for or against stimulus
From: Lloyd Cohen
Date: Sun, 15 Feb 2009 12:49:22 -0500
To: Eric Rasmusen
CC: "[email protected]" , Viard-Alan , "[email protected]" , glaesered , "Jeffrey A. Miron" , DeLong_Brad , "[email protected]" , Stan Liebowitz , "[email protected]" , "[email protected]" , Buiter


Always a pleasure to hear from you. 

I responded affirmatively to the CATO request to add my name to their list of those who opposed "The Stiumulus Bill." As in all such things only the fanatic insists that the letter reflect all the nuances of one's own views. About a week ago someone from Boston asked me to expand on my views. I did so below case for some reason you might be interested. 

"This was a signed letter composed by others rather than a precise statement of my own views. 

"So in answering your questions let me give you a summary of my views on the current economic "crisis."

"1. We are indeed in a very serious economic situation.

"2. The triggering event of this crisis and a large share of the losses that have been and will be generated by this crisis can be laid directly at the doorstep of: (1) two government sponsored entitities and Fannie Mae and Freddy Mac; (2) the awful perverse "regulation" they were subjected to by Congress; and (3) the Community Reinvestment Act. 

"3. Those terrible "errors" led to a breakdown in the financial system on which the rest of the economy rests. It remains a puzzle to me why all too many investment bankers got snookered into buying up all the bad paper being unerwritten by Fannie and Freddy. My friends say that the bankers believed there was an implicit federal guarrantee for these mortgage instruments. 

"4. It is eminently appropriate and quite important that the federal government do something major to revive the financial system and not permit the money supply and the "velocity" of money to shrink dramatically. 

"5. Just what to do is a difficult question. I have much sympathy for Mrs. Bernanke, Paulson, and Geithner in this matter. I don't pretend to have a clear answer but I think they have been generally moving in the right direction--albeit in fits and starts. Enough said on that. 

"5a. That said, one thing I would very much favor is for the federal government to get the hell out of all aspects of Mau Mauing the mortgage industry. 

That brings us to the consequent now growing sharp decline in the real economy. Here federal policy is less clearly correct and in some aspects is perversely bad. 

"6. The auto industry bailout is an affirmatively terrible policy, reminiscent of (though not quite as bad) as the worst single economic policy of Franklin Roosevelt (The NIRA). In an economic downturn what brings an economy back is resiliency. Resiliency in an economy is most clearly represented by vibrant markets in which wages and prices can rise AND FALL quickly. The best thing that could happen in the economy is for GM to go into bankruptcy. It would be both a real and a symbolic tonic. Wages and benefits could easily be cut in half and rather than employment falling it would rise. Auto prices would drop precipitously and total sales would increase with an increasing share of that going to domestic producers. 

"6A. More generally, the "Keynesians" are correct we are faced with inadequate aggregate demand. C + I + G + X - M has fallen. And it is no wonder! People are much poorer. The stock market has lost 40% of its value. Real estate prices are down 30%. These are the principle forms in which the public holds its marketable wealth. People have less wealth. When they have so much less wealth they consume less. I know I do. If the prices of the goods and services they must purchase with their income and wealth fall they thereby become richer and will consume more. So anything that allows wages and prices to fall is good and anything that stops or slows that is bad.

"7. Now on to the stimulus package--- The other technique to bring about an increase in aggregate demand is through "fiscal policy," that is higher government spending and lower taxes. I do not oppose these measures per se. It is just that the current stimulus package is a very bad form of this. Why?

"8. First, given the historical record, with the exception of the 1930s, economic downturns are shortlived (under 2 years). If the government revives the financial sector, expands the money supply, encourages downward flexibility in wages and prices and modestly increases spending we will be in recovery within two years. Much of the government spending in this package will take longer than that to work its way into the economy. 

"9. Government expenditures intended to serve as a fiscal stimulus rarely remain such. Once a government spending program is put in place it becomes deeply embeddded in the fabric and government and can not be eliminated, wasting resources year after year. Let me give you a Boston example. My facts may be slightly off--as I am writing this from a 40 year old memory. During the Civil War the north was cut off from southern rope. The government established (or expanded) a rope factory near Boston. The rope was considerably more expensive than southern rope. When the war ended rather than closing down the factory and buying cheaper southern rope the business was kept going at a loss for more than a century. John Kennedy fought to keep it in operation. I wonder if it is still in business. 

"10. So unless the spending project is really inherently worthwhile it is very dangerous and slow acting. 

"11. I would much prefer and support the following stimulus package:

"Tax cuts: across the board cuts in marginal tax rates on individuals and businesses and elimination of whole category of taxes like the inheritence tax. 

"substantial increases in the allowable capital loss tax deduction.

"unconstrained block grants to the states based on population. --In that way each state can choose whether to use the grant to fund new spending for its own (non-stimulus reasons) or to reduce taxes. 

"12. When the federal government gets into "the stimulus" business it gives rise to a feeding frenzy. Lobbyists gather like barracuda around a school of prey. 

"13. Specifically in response to your question about the Great Depression it was government spending that ultimately got us out of it--the spending required by WW II. Note though that was not a stimulus program, the spending was for a valid and worthwhile government program that happened to come along at the right time. Indeed government spending (though it had to work at cross purposes against the NIRA and contractionary monetary policy) did a great deal of good in bringiing us back from the depths of 1932 all through the 30s with the exception of 1938. 

"14. So the more nuanced view I offer to you now is that the diagnosis of the problem is largely correct though incomplete but the remedy being prescribed is gross, wasteful, and possibly on net more farmful than just waiting this out.


Lloyd Cohen"

----- Original Message -----
From: Eric Rasmusen <[email protected]>
Date: Saturday, February 14, 2009 11:59 pm
Subject: List of economists for or against stimulus

Dear Economist,

I've written up a web post trying to list everyone who is publicly 
or agains the stimulus bill. I've mentioned you there in some way. 
I've misrepresented you, could you please let me know? Links to 
where you write about the stimulus would be helpful.

I don't have everybody's email address handy and I'm just sending 
the easy ones, so please spread the word if you know someone I've 
mentioned.  Maybe I'll get round to looking up more addresses.

If  you would like to read the stimulus bill as passed, I have 
links to 
it via

Yours truly,


Eric Rasmusen
Dan R. and Catherine M.Dalton Professor
Dept. of Business Economics and Public Policy
Kelley School of Business, Indiana University
BU 438, 1309 East Tenth Street, Bloomington, Indiana 47405
[email protected]. Http://
Office: (812) 855-9219. Home: (812) 331-0012. Fax:(812) 855-3354.