The Casualness of Federal Government Spending
By David Henderson
Larry Summers disappoints.
One upsetting fact is that a number of well-known economists seem to casually favor such huge spending without considering the details or effects. And even though one economist, former Clinton and Obama adviser Larry Summers, has expressed concern about the bad effects, he favored the CARES Act anyway and appears to favor Pelosi’s bill. It’s not just Democratic economists. Glenn Hubbard, an economist at Columbia University’s Business School and a chairman of the Council of Economic Advisers under President George W. Bush, also favored the CARES act. Do they have good reasons? Maybe. Good enough to favor such an expensive bill? Not even close.
This is from David R. Henderson, “The ‘Casualness’ of Federal Government Spending,” Defining Ideas, May 21.
The third major part of the CARES Act is the loans to small business. The loans are at an interest rate of 1 percent and will be forgiven under the Payroll Protection Plan (PPP) if the borrowers use the funds for payroll, interest on mortgages, rent, and utilities, and if they also spend at least 75 percent for payroll. The stated purpose is to help small businesses stay alive through the crisis and avoid bankruptcy. This is industrial policy. By targeting the funds this way, the federal government chooses winners and losers, discriminating against businesses that spend a large part of their revenue on contractors. Moreover, as Summers pointed out in his Yale interview, businesses that sign up for the PPP will be the ones most able to do it, the ones that would probably have kept their workers employed anyway. Summers also pointed out that such loans will retard the kind of structural changes in the economy that almost certainly must happen as the economy recovers and Americans change the way they live and work.
That Summers has such good criticisms makes it all the more disappointing that he so casually accepts the CARES Act. In the Yale interview, he goes further, saying that spending $3 trillion in the Pelosi bill is “fine.” He thinks, correctly, that more of it should be spent on testing, vaccines, etc., but he seems to have no problem with either the $2.2 trillion CARES Act or the $3.2 trillion Pelosi bill.
Read the whole thing.
HT2 Greg Mankiw.