'Chicago School' Economists Have No Love for Stimulus Plan

July 30, 2009

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It's a veritable government spending spree. Billions of dollars are pouring from the federal government to everything from road projects to “green jobs” training as part of the American Recovery and Reinvestment Act or, as it's more commonly called, “The Stimulus Plan.” But there's a set of economists for whom the plan is a terribly wrong-headed way to go about fixing things. They're members of what's known as the “Chicago School”—a view of economics associated with the University of Chicago—that doesn't think government spending can be a cure-all for an ailing economy.

Their central figure is the late economist Milton Friedman—heard here in a 1975 interview on the television program The Open Mind.
 
FRIEDMAN: One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know the famous road that is paved with good intentions. The people who go around talking about their soft heart, I admire their soft heart, but very often it extends to their head as well.

WBEZ's Adriene Hill went to ask some present-day economists at the University of Chicago what they make of the government's appetite for stimulus spending. And, here's a hint, they're unapologetic in their disdain.

I'm here outside the University of Chicago's economics department—former home to Milton Friedman—and current home to economists who, to varying degrees, believe in the power of competitive markets and oppose too much government meddling in the economy. Right now, their opinions pretty much guarantee they are not a part of the economics
in-crowd.

SANDERSON: Sometimes you play offense and sometimes you play defense, and I suppose in that sense, in a sports analogy, it was our turn to play defense.

That's U of C economist Allen Sanderson. The team the Chicago School is playing defense against right now—economists who believe that government spending can help who follow in the academic footsteps of John Maynard Keynes. You might think they'd throw up their hands or cry into their beers over the current economic policies coming out of Washington. But instead, they seem defiant and energized.
 
I ask Sanderson what he thinks about the idea that the government can buy its way out of the recession.

SANDERSON: The straight Chicago spin would be I would suppose, and in large part I agree, which is somewhere aroundno chance in hell. In the end, the $787 billion has to come from somewhere.

He says he's a little mixed in his opinion, during this fiscal crisis there might be a good case to be made for some thoughtful government spending. But Sanderson says he expects the hundreds of billions of dollars Congress approved won't have much of an impact and that, sooner or later, we'll come to regret the infusion. Even now, public approval for the money seems to be waning. 

HILL: Do you feel the economists here at Chicago feel a big 'I told you so moment' coming on with this?
SANDERSON: Yeah, we're sort of trading 'I told you so moments'. Certainly a year ago, or six months ago Keynes has risen from the ashes and the Chicago School is dead, or something like that, to coming around to I think if we wait them out we're probably going to win.

ZINGALES: There is a danger of being the voice screaming in the desert and of you saying things that are obvious and obviously right and obviously unfeasible.

Luigi Zingales is a finance professor at Chicago's Booth School of Business. He's also not shy with his criticism of the recovery act. 

HILL: Do you feel like a voice in the dessert sometimes?
ZINGALES: Yes I do, but I'm not afraid of that, but my biggest fear is that I get too comfortable in being completely right and completely irrelevant.

Zingales says the one good argument for stimulus back in the winter was fear—was psychological—but now that's passed, people have more confidence. The current plan he says is just bad economics born of politics.

ZINGALES: I think that the best and most confidence boosting action that Obama could do in this moment is say you know what, most of the stimulus money is not being handed out yet, the economy is recovering, we don't need the stimulus. We think that the stimulus is really creating serious trouble for the future fiscal stability for the United States. We approved in a moment of panic to reassure you that we are hear to reassure you to do what it takes. But we don't need it, and with withdraw it.
HILL: And what do you think the likelihood that would ever happen is?
ZINGALES: Zero. It cannot be negative, otherwise I'd give it a negative probability. 

And people say economists don't have senses of humor.
 
ZINGALES: For a while I think there was this joke that 'before things get worse, they're going to get worse,' but I think that fortunately we're past that so it's pretty outdated. But that's kind of the grim jokes that we tell around. 

John Cochrane, also at the business school, thinks the stimulus package is an enormous mistake, one he says that ignores decades of research and studies.
COCHRANE: What I think happened is faced with a event of historic proportions, with a patient that was sick, we went back to the leeches and the blood-letting out of the old discredited cabinet because we felt like we needed to do something.

And how does Cochrane think the doctor should proceed instead? He thinks a lot of what may be slowing things down right now is worry about the next wonder-cure-all coming from Washington.

COCHRANE: We're in that period of recovery. So we just need to recover. There is a moment when the patient needs to heal and doesn't need lots and lots more medicine. I think our danger right is in too many doctors too anxious to give the medicine. 

Economics professor Allen Sanderson has another prescription for President Obama:

SANDERSON: Probably a couple valium, I suppose, I think a calming influence wouldn't be all bad right now.