Thursday, July 15, 2010

Are Representations Ruining Advancement?

What I like about reading Matthew Yglesias is that of any post which isn't about sports, politics, or Obama cheer-leading (thankfully there are few of all three), he's sometimes right and sometimes wrong. Sorting out what's what makes me a better and more honest economist. For example, today he replied to a couple of lawmakers who called the American Reinvestment and Recovery Act (ARRA) signs at construction sites wasteful spending.
For one thing, the quantity of funds involved here is tiny so it’s not clear why anyone’s even bothering.
For the signs, the linked report is $5 million. Is $5 million tiny? It depends on the context. If you're trying to reduce the deficit then he's right: it's not worth the time and effort. But if we're talking about the opportunity cost, well $5 million can do a lot. I'm a skeptic of the benefits of the stimulus plan so I'd bet the opportunity cost is high. Me, I vote for the laser cannon.
For another thing, stimulus works in part through expectations, so informing people about its existence is important.
I'll grant you that. If Keynesian economics works, and it well might, expectations certainly plays a role. And not just expectations but it's close relative, verification.
And last, government purchases of paint and metal have a legitimate stimulative impact.
OK this I don't buy. You just said it was tiny and yes, here you compare the size of the expense with the size of the economy. It's very tiny! Besides, this seems like a "dig a hole and fill it up again" story. If the activity of making the signs is good in of itself, why not make them 50 feet high with a flashing LED display? More people will know about it, too.

I saw a lot of these signs when I drove from DC to Iowa this summer. For me, they mostly said "if Keynesian economics wasn't so tempting in a crisis, you wouldn't have to slow down right now."

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