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Why The Stimulus Plan Isn’t
I have such conflicting thoughts on the stimulus plan I have no idea how to characterize them. The Republicans are so right, and completely wrong. The Democrats are feckless as usual. President Obama comes out by far the best, but is being disingenuous in his marketing and is thus open to very valid criticisms. I really hope he changes his pitch or otherwise a very good program may be derailed (or at least judged a failure) because it doesn’t meet its aims.
The Republicans are absolutely right that not enough money will be spent fast enough to help drastically (although their evidence doesn’t actually exist) and isn’t the right type of spending to stimulate the economy in its current form. Since most of our economy is a service economy, it is a far better idea to give lots of money to consumers…in theory. In actuality, consumers have way too much debt and are retrenching. This is why the past rebates were ineffectual, and consumers have a looooong way to go when it comes to increasing the savings rate. Here is a graph of the personal savings rate that shows we are very likely to double or even triple the current savings rate. This means that most tax cuts won’t actually stimulate the economy (especially with the decrease in available loans) and the Republican solution is a bad one.
As an aside, the Republicans idea of proper budgeting is asinine.
“Our plan is rooted in the philosophy that we cannot borrow and spend our way back to prosperity,” Mr. Boehner said. “Unfortunately, the trillion-dollar spending plan authored by Congressional Democrats is chock-full of government programs and projects, most of which won’t provide immediate relief to our ailing economy.”
Um, where does he think that tax cuts come from when we’re running a deficit? Since tax cuts will have a much lesser impact on GDP growth, which will result in decreasing taxable revenue, their “plan” is just going to make our deficits way worse. I’m really confused about what is going through the GOP leadership’s heads. I mean I can’t just claim that they are stupid because they had a pretty incisive critique of the plan that showed a deep understanding, but then their proposals have absolutely no grounding in reality. If it weren’t for the critique I could just think they were dumb or blind, but I’m kind of forced to think that they are just cynical and ideological at all costs because they don’t know what else to do. It really bothers me.
I really have no comment on the Democratic leadership.
Pelosi said she has “no apologies” for the spending.
“We have to deal with the consequences of the downturn in our economy,” she said. “What the economists have told us from right to left. There is more bang for the buck, a term they use, by investing in food stamps and in unemployment insurance than in any tax cut. Nonetheless, we are committed to the tax cuts because they do have a positive impact on the economy, even though not as big as the investments.”
On to Obama who has the right idea.
The fact is, that there is no realistic stimulus plan that can get us back to a healthy economy in the near term. The United States would have to run structural deficits that are so large that either they saddle us with a terrible amount of long term liabilities at best, or can’t even be floated and lead to collapse at worse.
So to get where we need to get (if you buy the logic of this sort of exercise) is an additional 6.3% PER ANNUM deficit as a % of GDP. Remember, Obama’s plan is roughly 2.5% per year. 6.3/2.5= 2.5 times.
Read that again, If you believe the math, Obama’s program would need to be 2.5 times bigger to live up to its billing. And that is before you get into details like “tax cuts are likely to be less effective than other measures”.
And that assumes that the math works like its supposed to. In reality this is unlikely.
What was unsustainable about the current global balance, in my opinion, was not the fact of a US trade deficit (although by 2006 and 2007 it had gotten too high to last very long), but rather the level of household borrowing needed to sustain it…This is why I have argued that a program of massive fiscal spending to replace household demand is not going to solve the current problem. It simply replaces one kind of unsustainable behavior with another, and still has to be resolved at some point with massive deleveraging.
To get back to China and current issues, the problem with the US trade deficit now is sort of a “Keynesian” problem. US demand has the impact of generating both US production (and employment) as well as foreign production (and employment), and in a world of contracting demand, it is natural that countries that export demand – i.e. trade deficit countries – are going to be a lot less eager to do so…That is why trade disputes are likely to be very attractive to trade deficit countries who have – I will continue to insist but it seems recently that this has become a much less “surprising” claim – the upper hand in any dispute with the “virtuous” countries with high savings rates and trade surpluses.
The “Keynesian” problem refers to the fact that most stimulus will flow out of the country due to our trade deficits and exacerbate the problem. Thus, we need more production and less imports, but it takes years to develop that. In the meantime, the drop off in consumption is hitting all the exporters (Japan, China, Germany, etc.) very hard and leading to mass unemployment. The result is a global decrease in trade that is a far harder problem to correct than our domestic spending will fix.
This is why I love reading about Obama’s actual long term goals. While Congress is busy debating how best to blame each other for things falling apart, Obama is paying attention to things that will help us in the coming decades: increasing energy, reducing the trade deficit and rebuilding an educational base for future workers. I’m not even sure he is that worried about ending the recession quickly, because he understands that long term structural problems that can’t be fixed through stimulus will determine how bad it ends up. To me the entire thing sounds looks like a giant feint.
I have a problem with that though. Since he is billing it as a recovery plan, then when the economy doesn’t recover he is going to be attacked on both sides. The Krugmans of the world will berate him for not spending enough (even as they ignore the structural problems) and the Republicans will attack government efficacy. I really hope that the President reframes the issue completely and explains that there is little that can be done to stop our current downslide other than to increase unemployment insurance, food stamps and other safety nets…and that we need to use this time to make vast long term changes to our economy. The benefits might not pay off for 5-10 years, but I fear that the current pitch will lead people to get off that long term path and push for something rash.
17 Responses to “Why The Stimulus Plan Isn’t”
The down-and-out Republicans who are pushing for tax cuts are just trying to win back some votes, hoping to retain/regain some power. How many people would find fault with “The Republicans want to give you tax cuts”? People like the idea of more money in their pocket and to them more money in their pocket is sexier than “investing in infrastructure” or some other stimulus. Naturally many people will agree with the Republicans, especially those who are just looking for a reason to believe what they want to believe.
If the Republicans make it seem as though there are only two choices for economic recovery, tax cuts or investment in infrastructure (or some other Dem plan) then people will support what they know, which is tax cuts…. and believe that the Dems' plan won't work.
Remember the Republicans' back-up for president if McCain fell ill was Sarah Palin who, while being sexy and perky, can barely put two sentences together.
I agree with much of what you wrote mikkel, but i'm not as skeptical of the stimulus. Jobs programs accomplish both stimulus and future building. For example, there are 120 million homes that need retrofitting to be more energy efficient. The work needs to be done by local builders. This employs people doing work that must be done. It does more good than putting money in consumers' pockets that they can spend on Chinese products. Even though roofers and carpenters may do just that, at least they are employed (the home building industry is dead right now), and they are doing essential work. And even though we have let our manufacturing sector crash and burn, buying Chinese products at Walmart (or wherever) does employ workers at their stores, and lifts their stock which helps the markets recover.
The same goes for installing insulation and solar on all federal buildings. Local work, local jobs and work that is needed. Ditto lighting up all the dark fiber optic cables with expanded and cheaper broadband that will help our service economy compete with the countries that “got it” years ago — like Korea and India. Better, faster connectivity is the key to providing global services.
It depends how you define “stimulus.” When I say I'm skeptical I mean in the “full employment” sense of the word, i.e. that we will be able to get back to positive GDP growth and under 5% employment in the next couple of years. This is how they are currently selling it.
When it comes to “alleviating” the downturn, I agree with you wholeheartedly. It will help hundreds of thousands if not a couple of million people (even though unemployment will still continue to skyrocket), and as long as Obama makes it clear that the main focus is on optimal long term investment with helping those people as a bonus, then I believe it will be a success. Over the 5-10 year period (and especially beyond) I think we would have enormous positive impact and tens of millions of high income jobs that wouldn't exist otherwise, but all the rhetoric has already been built to concentrate on whether the unemployment rate is higher in a year or two than right now…and there is a very good chance of that.
Yeah, it's true. Unfortunately the Democratic leadership seems intent on filling the bill with needless pork. (Contraception? Really? Now is the time to fight about that?)
I just watched the Boehner interview and he sounded very wise and moderate, even though his proposal was complete crap. He also wove in the stupid parts of the Democratic pork in with unemployment insurance and state assistance — things that are critical and widely hailed by all economists no matter how conservative. They are setting up the Dems for failure by treating everything as “Government” and Congressional Democrats are so stupid to follow it…just like the TARP. There were awful provisions in there that were totally WTF grab bags of the worst sort.
I think Obama should come out publicly and yell at the Democratic leadership and distance himself away from some of their idiotic pet projects. He should threaten to veto anything that has too much and force them to actually have a bill that focuses on long term infrastructure, with short term help that everyone can agree with.
Of course he already has said that pork won't be tolerated and everyone who bothers to think about it knows that the current “plan” is not a final bill. As far as falling for how the Republicans are painting things as government, and therefore evil, what if Obama just comes out and says “Yes, part of the bill includes a revamping and streamlining of Medicaid rules. If Mr. Boehner insists on mischaracterizing it, I can't help that.”? I don't think the Representative would win that argument at this point, frankly.
What is the percentage of pork in the stimulus bill. McClown waged war on pork, which is only a small percentage of most bills. A few million compared to billions is insignificant.
Well yeah of course, but that's talking about reality. McCain got people thinking he was a tough budget fighter by vowing to get rid of $15 billion in earmarks while cutting $400 billion in revenues…man I yelled at so many people that should have known better when they said he was for helping make the budget better.
If they pass the bill, the economy still goes down the tubes and the Republicans can successfully create the perception that it was because the government is incompetent…then the long term plans are at risk — and that's much more likely with pork in there.
Monday morning links
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The…
I don't know how much of it is pork, but my impression is that the GOP is complaining that the Dems are loading the bill with long term programs instead of the type of spending that could inject an actual short term stimulus. This is a problem for two reasons: first, because they're introducing this stuff into this bill specifically to avoid any real scrutiny or debate (because we've all been told and understand that time is of the essence) so in that sense it's like pork (part of the problem with earmarks is that they are slipped in without debate as to relative merit.)
And second, there's the inertia of bureaucracy so that a program created or expanded today will be with us for a long time- so instead of accepting these absurd deficits in the short term we're also allowing the budget to be seriously out of whack ad infinitum.
Now, I'm not commenting on how accurate these GOP accusations are because I haven't read the bill- but I think those are very legitimate concerns that should be addressed if they do apply.
Mikkel, it seems to me that you're complaint is basically that the reality of our political system doesn't permit anyone to argue for or against anything on actual merit, but instead it all has to be sold in a disingenuous manner. So, you have Dems claiming a multiplier effect for federal spending- for which there isn't nearly the evidence that they want to have us believe- and the GOP resting on conservative belief that tax cuts don't cause a net reduction in revenue (so that they can ignore that the tax cuts are increasing the deficit just as the spending is.) I'd say at least on the GOP side though that to whatever degree their assumption is wrong then at least the potential negative effect isn't as great- because transferring $1 through tax cuts can't really be less than a 1:1 ratio (I don't think?) whereas some people are showing that instead of a positive multiplier, the transfer through spending can actually be less than 1:1. So it seems to me that perhaps neither approach has any chance of succeeding but the current Dem approach could potentially make things worse.
I can't say at all that I have a great understanding of the economic principles that are being argued, but that's my cursory interpretation and gut feeling- tell me if you think I'm completely off base.
I agree that infrastructure spending is useful but will have nothing to do with a recovery, because, as you imply, the ramp up period is too long.
The recovery will actually and only come from the private sector and the best hope for immediacy is for private equity to turn on their spigots once again.
While I see you favor liberal sources for quotation, nonetheless, it would be interesting to see if you can find untruths in this non-left analysis……..http://www.heritage.org/research/economy/wm1776.cfm
As Krugman points out, the CBO is reporting that the recession will last well into 2011 when we'll have 8% unemployment. Keep in mind that things are still getting worse and will continue to for quite some time. That means that even long term projects (ones that might not even start till 2011) are worth putting on the plate, because they'll be needed then.
We have to be smart and think long term about how to solve this economic crisis. There isn't much use in returning to the bubble economy of the last 20 years. One way out is to actually facilitate business through better infrastructure. You and I are more productive if our roads are better and our internet is faster. Our businesses are more efficient if they spend less on energy because of a better electricity grid. And that's just the tip of the iceberg.
I have yet to read anywhere that tax cuts can have a higher multiplier than direct government spending over the near term..especially in a deflationary environment, it will be all saved. This is a pretty near consensus view amongst all the economists (the few outliers have gotten smacked down hard especially since their “proof” was to point to a report that the authors said they were mischaracterizing completely; and they were the main people that helped with the Obama plan) including the most conservative ones and people that have been advisors to Republicans (e.g. Martin Feldstein who was an advisor to McCain). That said, I don't believe that the multiplier effect number they are throwing around is even anywhere close to accurate. When you account for the rise in yields on the long term debt, it'll look even worse. Based on the amount of consumer debt there is, I would expect at least 50% of the tax cuts to be saved, and a real government spending multiplier just a bit over 1, like 1.2 or something. (By definition if they are spending it then it adds $1 to the GDP, so it's impossible for it to have a multiplier under one since GDP doesn't account for debt. It's really stupid by only focusing on the “asset” side of productivity.)
If the political environment ever let tax cuts expire without having it be a major political battle, then I could maybe see how the Democratic plan is worse in terms of long term structural deficit. However, considering that never happens — and the likelihood of keeping those tax cuts around for as long as the long term spending is billed for (I mean it's only talking about 3-4 years) — then a tax cut is quantitatively worse when looking at the government's balance sheet. That said, it would help private balance sheets start to pay back their debt, and even though that wouldn't help in a “recovery” it could at least go a long way into helping people that don't lose their jobs be in a better position. I'm definitely not opposed to tax cuts per se, but just believe they have even less chance of turning things around over the short term.
I agree with you it's a problem that they are putting all this long term spending into an “emergency” bill. The emergency should be to extended unemployment benefits, give grants to the states to help cover their unemployment and some construction projects, and look into figuring out how to deal with housing issues.
The longer term vision he has should be in a separate bill and debated over the next couple of months. I believe on that they should look at spending $2 trillion over the next 5 years on infrastructural programs, and should have close to revenue neutral tax cuts (let the Bush tax cuts expire and cut on the bottom two tiers similar to what the Republicans are opposing…I'd also look at having a progressive income tax for investment income). I'd also cut about $500 billion out of government programs.
Well, all you're really saying about the fights over tax cuts expiring is that the other side does it too, and I do agree to a large extent.
I think we're in agreement about the core issue- that bunding everything into this bill is a problem. Even the infrastructure stuff IMO should be handled separately (quickly, but separately) because I've always felt that we need more centralized planning on the federal spending for roads and infrastructure and with a big increase in those expenditures it's surely a time for that to happen rather than allowing the usual where the most powerful incumbents get to throw more money to their states' projects, and to projects that often amount to political favors instead of those that have been properly vetted and prioritized. There's just no way that any of that is really going to happen with this kind of emergency bill.
Yes that's a good point. I'm not sure how to centralize it though, I'm kind of loathe to give the Executive more power, but on the other hand congress is completely broken. I guess I'd like to see more independent congressional offices such as the CBO and GAO handle this sort of thing as they seem to be the most prudent parts of government. They could create a CIO I guess.
DOT maybe (at least for the roads projects?) I have no idea if that could work- that could be just adding more layers of problem if that agency isn't well run- but in theory it seems that would be the place to evaluate projects and oversee priorities.
Excellent analysis, I was wondering the same thing myself: How can the Republicans critique the Democrats so well only to propose something that is even more irrelevant (and much more blatantly so, economists have found that middle class people tend to save with tax cuts while poor people and the unemployed tend to spend; and of course rich people by definition have no incentive to spend more). Clearly this is as much about getting Obama's economic agenda passed as the meager effort at jumpstarting the economy. However, in claiming Obama has opened himself up for criticism when the economy doesn't improve you missed that Obama has said that the recovery might take years and that the primary aim was to keep things from getting worse, Obama is simply stretching the term “stimulus” to include his long-term economic goals.
President Roosevelt implemented a campaign under the National Recovery Act following the Great Depression where a Blue Eagle symbol was used to bring together America's businesses in supporting job creation and fair trade. It worked. All of the pieces are in place to build upon and implement a similar economic recovery strategy today where public/private collaboration can bring about immediate economic relief for the 26.7 million small businesses across America. It would only take 10% of America's current small businesses to create 1 new job to represent over 2.6 million new jobs. Where are small businesses in the economic recovery strategy?