The largest part of the proposed stimulus is appropriations -- aka, government spending. But, as noted below, this part of the stimulus isn't much of a stimulus. It can't have nearly as much of a stimulus effect as the other two parts of package -- direct payments and tax cuts -- for a very simple reason: the requested government spending won't occur until after the recession is projected to end.
This isn't Keynes v. Friedman. Nor is it a Democrat v. Republican debate. It ain't Krugman v. Norquist neither. (More on Krugman below.) It's a simple function of the time it takes to spend government dollars v. the immediate impact of direct payments and tax cuts. Direct payments and tax cuts -- what the nonpartisan CBO calls "Division B" of the package -- are faster. They are the primary components of the "stimulus package" when it matters most, 2009 and 2010.
Moreover, a relatively small amount of the proposed spending has to do with so-called "shovel-ready" projects that have been promised, much less green shovel ready projects that are going to launch us toward a bold tomorrow. (Review pages 5 through 10 of the CBO report for yourself.)
Thus far, there have been two primary defenses of the government spending side of the stimulus package. The first is obfuscation. Hiding. Eliding. Kevin Drum, regrettably, takes this approach. The CBO distinguises government spending ("Division A"), which "would take several years to complete" (CBO Report, p. 4) from direct payments and tax cuts ("Division B"), which have an immediate effect (id., p. 3).
Drum selects about half of Division B and adds it to Division A, relabling the combined $600 billion beast "spending." It's crude, but effective. Government spending looks a lot more stimulative if you add stuff that ain't government spending. And Drum has a foolproof argument, so long as the fools don't read the CBO.
The more sophisticated response is from Paul Krugman. Krugman acknowledges that the government spending side of the equation is going to take time, but asserts that it doesn't matter. Krugman argues:
It’s not a problem if some or even most of the stimulus arrives after the official recession, as determined by the NBER, is over. Why? Because in modern recessions, unemployment keeps rising long after the NBER has determined, based on things like industrial production, that the recession proper is over. You can see that the need for stimulus doesn’t end with the recession by the simple fact that in each of the last two recessions the Fed continued to cut interest rates long after the official cycle trough. if it’s good enough for the Fed, it’s good enough for fiscal policy.
That is not a wholly irrational response, although Krugman's reference to the Fed seems misplaced in the post-Greenspan era. Haven't we all retroactively decided that Greenspan was a fool to keep cutting interest rates after the end of the last recession? It supposedly caused the current housing market mess and all that? Well, that used to be Krugman's opinion. C'est la vie, I suppose.
Anyhoo, crossed finger-pointing aside, the meat of Krugman's position is that "in modern recessions, unemployment keeps rising" after the recession's through. The qualifier, "in modern recessions" is important to Krugman because Krugman's claim is not true for every recession prior to 1991. (Yup, that's Krugman's own chart.)
In other words, Krugman's argument holds if the mild recession of 1991 and the even milder post-9/11 recession of 2001 define a new paradigm. If they do, Krugman's on sound footing. If they don't -- if, say, this recession is more like the deeper recessions of the late 1980s (and every one before) -- then Krugman's argument doesn't hold.
Hello, brave new world.