A Stimulus For Today And Tomorrow, And That's OK

by hilzoy

Earlier, von criticized the parts of the stimulus bill that involve government appropriations, as opposed to tax cuts or direct transfers to people (e.g., food stamps, unemployment benefits, etc.) on the grounds that "the requested government spending won't occur until after the recession is projected to end." I'm responding to it partly because I think there were arguments that he missed, but also because, as luck would have it, Menzie Chin put up a post with data that bear on this question. 

I will assume that von meant to say not that no appropriation spending will occur until after the recession is projected to end -- in fact, according to the CBO, about 40% of it will be spent by the end of FY 2010, and 70% by the end of FY 2011. Here are the CBO's projections in convenient chart form:

I will also ignore the question who projects the recession to end by the end of FY 2010, except to note that as far as I can tell, this is nothing like a unanimous opinion among economists, and that since, as I said, 70% of the appropriations in the stimulus bill will have been spent by the end of FY2011, von seems to be putting a lot of weight on people's ability to predict the end of the stimulus recession (oops!) with precision.

What I do want to address is von's claim that there are only two defenses of stimulus spending: (a) "obfuscation.  Hiding.  Eliding", and (b) Krugman's claim that unemployment will be rising after the recession ends. As I understand it, there are several main arguments for government spending, as opposed to tax cuts and, to a lesser degree, transfers. 

The first is that you get more bang for the buck. In testimony before Congress on Jan. 27 (pdf, see chart 5, p. 27), the Director of the CBO estimated the multipliers for both "purchases of goods and services by the federal government" and transfers to states for infrastructure spending at 1-2.5, for transfers to persons at 0.8-2.2, and for "temporary, well-targeted tax cuts" at 0.5-1.7. 

The second is that if the government appropriates money at all wisely, we, the taxpayers, will get some tangible benefit from this spending, above and beyond its stimulative effect. We could, as Keynes said, stimulate the economy by paying people to dig holes and then fill them up again, but other things equal, it would probably be best to pay them to fix bridges and modernize the electric grid instead.

These arguments seem to show that appropriations of the sort contained in the stimulus bill have real advantages over transfers and tax cuts, other things equal. But, of course, other things are not equal. In particular, these appropriations take longer to get going. And none of the arguments I just made would work if von were right that appropriations spending would come too late to do any good. In a normal recession, he probably would be right: normal recessions tend to be reasonably short-lived. However, the projections I read claim that this recession will be unusually long, and that we need to worry about the possibility that even after we emerge from a technical recession, we will face years of low growth and underutilised capacity.

Here, via Menzie Chin, is a chart from the Director of the CBO showing the gap between our potential GDP and the GDP we can expect in the absence of a stimulus (or any other actions not taken by early January, when this chart was published; it does include the effects of earlier actions, like TARP):

(Here's a related chart showing the output gap in absolute terms (pdf, see p. 2.)) There is a very substantial gap in FY 2011, and so I'm not sure I see why spending during that year would somehow be wasted. It would be a problem if none of the spending in the stimulus bill occurred before FY 2011, but as the stimulus bill is not written that way, we don't really have to worry about that. 

In testimony before Congress on the 27th, the Director of the CBO said:

"Because most periods of economic weakness are fairly short-lived, it is generally preferable that stimulus policies be short-lived. Currently, however, CBO projects that economic output will remain significantly below its potential for several more years, so policies that provide stimulus for an extended period of time may be appropriate. Indeed, a fiscal stimulus that ends before the economy has started to regain its footing runs the risk of exacerbating economic weakness when the stimulus ends."

So he, at least, seems to think that spending in FY 2011 will not be wasted. The chart above shows why.

Comments

[now_what]

I will also ignore the question who projects the recession to end by the end of FY 2010, except to note that as far as I can tell, this is nothing like a unanimous opinion among economists

2010? Von has argued that credible sources are projecting that it end in 2009. This is the crux of his argument. And the credible sources he cites are the credible sources that didn't see a recession on the horizon in the summer of 2007, didn't think one was likely in December of 2007 when we were already in one, didn't think a recession was likely in the spring of 2008 when one had been going on for months, and didn't think a recession was going to be long-lived in the fall of 2008 when it already was long-lived.

Suppose that the more optimistic of von's supposed credible sources are correct and the recession will end before the end of 2009, and that in addition there is no post-recession stagnation in employment as seen in previous recessions. Given that, would all the spending you are advocating be wise?

I don't think it would. I would think in that case, you would just want a massive one-time increase in unemployment benefits and other short term assistance to temporarily mitigate the effects of a recession that was on its last legs.

But reliance on the consensus forecasts of mainstream economists is not sane policy. They are ideologically trained to be optimists and paid to be optimists and they give optimistic forecasts.

Relying on the data, however, gives a very different picture. In myriad ways, this recession is the worst since the Reagan recessions, in some ways it is worse than any post-war recession, and in a few ways it is already worse than the Great Depression. Who are you going to believe, the data or the sunny stoned glibertarian optimism of the always-wrong and always-extremist right-wing economics establishment? That's the whole question.

[TJ]

All I can say, the guys like Roubini who have been right all along see an L-shaped recession, not a V.

[john miller]

von's biggest mistake, IMHO, is believing that tax cuts provides immediate relief. They don't, never have and never will. He is right about unemploymet extensions and food stamp increases making a difference, but more from a social safety-net POV, not a jobs creation POV, which is the most critical aspect of all this.

[Slartibartfast]

von seems to be putting a lot of weight on people's ability to predict the end of the stimulus with precision

I think you meant "...people's ability to predict the end of the recession with precision", no?

[hilzoy]

Slarti: opps. Thanks.

[Ugh]

How is it that tax cuts and direct payments don't count as "spending"?

[hilzoy]

now_what: I was working off this:

"By 2011, the government is still spending over a hundred billion dollars. Tax cuts and direct payments have been dropped to near zero: the "stimulus" package is now mostly government spending. But 2011 is also after the end of the recession by many forecasts.*

So: most of the government spending won't occur until after the recession is projected to end. That's approximately $214 billion of $358 billion spent after 2010, too late to be counted as part of the so-called "jolt" to the economy."

[Justin]

Although it's not the primary point of the post, I don't think von has to be especially confident that the recession can be predicted to end in 2009 or 2010. So long as we're not confident that the recession will last through 2010, that lack of confidence undermines the argument for stimulus spending that would occur in 2010. If the probability of the recession continuing in 2010 is 50-50, then that's a 50% chance that the spending will be wasted, qua stimulus (how serious this is depends on your evaluation of the spending's independent merit, but this particular point is on the merit of the plan qua stimulus).

[John Thullen]

I think a better idea would have been to move the Presidential election up a year, to November 2007, so that President Obama could have passed the stimulus package a year earlier, guaranteeing that the spending would occur before the economy totally tanked.

The stock market rose 200 points yesterday, discounting an amazing economic boom starting exactly six months from now as a result of the Reagan tax cuts passed in 1981.

The stock market futures are slumping this morning, discounting an economic recession beginning six months and one day from yesterday caused by Bill Clinton's hike in marginal rates in 1993.

[bedtimeforbonzo]

If tax cuts were a panacea, how did we get in this mess after eight tax-cutting years of the Bush Administration?

The stock market did rise 200 points yesterday, of course, apparently on the expectation of the creation of a so-called bad bank where all of Wall Street's toxic assets will go -- what may have been the best use of the original $350 bailout.

[OCSteve]

How about the WPA?

And if WWII had not come along to insure full employment? IMO there would still be a WPA today…

And when that $2.1B for Head Start is not renewed Democrats won’t scream that the programs funding is being slashed… Any of these programs – returning to current spending levels will be portrayed as “slashing the budget of X program”.

Look, Republicans don’t have a leg to stand on here. They increased government spending by 50% during the Bush years. So yeah, it’s pretty pathetic to hear them decry it now. But come on – this thing is chock full of stuff Democrats always want to increase spending on. It’s like a wish list of stuff you guys want anyway.

BTW – if increased government spending is the answer, and Republicans increased government spending by 50% over the last 8 years - then how did we get here?

I hope it all works. I really do. Anything to help my 401(k) recover before I have to actually rely on it will be much appreciated.

[Jesurgislac]

And if WWII had not come along to insure full employment?

If war is a panacea, how can the US be in this mess after nearly six years in Iraq? *echoing bedtimeforbonzo*

[Ugh]

Anything to help my 401(k) recover before I have to actually rely on it will be much appreciated.

Nope, your fncked like the rest of us. ;-)

[bedtimeforbonzo]

That's a good one, Jes.

[John Miller]

OCSteve, it is not the spending of money per se, but where and how the money is spent.

The money spent in the last 8 years was spent in ways that did nothing to benefit the economy.

[Catsy]

Others have alluded to this, but I don't know that I've seen it put quite this plainly: if the recession is projected to end at a known time, why do we need any kind of an emergency stimulus package in the first place?

I thought the idea behind this thing was that we were in a downward spiral that would consume the country if we didn't do something. If that's the case, then any argument about the stimulus not taking effect until the recession ends is frivolous. If it's not the case, and it's going to end on its own, why not let it run its course and work on making things easier for displaced workers at a less hysterical pace?

[ThatLeftTurnInABQ]

If tax cuts were a panacea, how did we get in this mess after eight tax-cutting years of the Bush Administration?

Not all tax cuts are created equal.

It sort of makes a difference whose taxes are being cut. The upper 1 percent tend to save and invest that tax cut money, the lower 80 percent are more likely to spend and consume it. One of these increases the velocity of the money supply and the other does not.

An the same applies to govt. spending, as John Miller points out about at 10:28.

I wish we would could get beyond the rather simplistic paradigm we currently seem to be stuck in of the two sides chanting at each other

Left "govt spending good, tax cuts bad"

Right "govt spending bad, tax cuts good"

The details do matter. I think the President may have even mentioned something about this in his inaugural address. Something about less arguing about big vs. little govt and more work at having smarter govt.

[bedtimeforbonzo]

". . . if the recession is projected to end at a known time, why do we need any kind of an emergency stimulus package in the first place?"

I have seen on the news the idea of "doing nothing."

That seems like a novel concept, one not afraid of the economy bottoming out so we we experience our very own Great Depression.

Seriously: How can anyone possibly know when this damn thing will end?

[ThatLeftTurnInABQ]

If war is a panacea, how can the US be in this mess after nearly six years in Iraq? *echoing bedtimeforbonzo*

Perhaps something about having several million people under arms rather than a few hundred thousand? I should think the sheer scale of WW2 made it a bit different in terms of the effect it had on the labor market, but what do I know?

;->

[GoodOleBoy]

Tax cuts, particularly for business, improve cash flows immediately and can therefore facilitate hiring quickly. Infrastructure spending occurring in budget out years creates confidence that jobs will not go away as soon as the recession ends, whenever that may be. Both components seem to be valid incentives for the purpose of causing jobs to be created.

[gwangung]

Tax cuts, particularly for business, improve cash flows immediately and can therefore facilitate hiring quickly. Infrastructure spending occurring in budget out years creates confidence that jobs will not go away as soon as the recession ends, whenever that may be. Both components seem to be valid incentives for the purpose of causing jobs to be created.

This makes sense.

Therefore, it will be ignored by media commenters and pundits.

[ThatLeftTurnInABQ]

Tax cuts, particularly for business, improve cash flows immediately and can therefore facilitate hiring quickly. Infrastructure spending occurring in budget out years creates confidence that jobs will not go away as soon as the recession ends, whenever that may be. Both components seem to be valid incentives for the purpose of causing jobs to be created.

Ditto that, although the impact of improved cash flow may be less that businesses are hiring, and more that they are retaining employees who otherwise would have lost their jobs.

It seems to me that in this stimulus bill Obama's economic team is trying to get out the door as quickly as possible both some short term help (the tax cuts and transfer payments to the states) and some medium term help (the infrastructure projects) that will boost economic confidence right now, and they may be flirting with the practical ceiling on how much we can finance these with deficit spending right now without triggering larger disruptions to the economy which will make things worse.

I don't think this bill is designed to deal with longer term infrastructure needs. I expect to see those in transportation and energy omnibus bills later this year or next. And properly so since long term planning on these issues requires a care and thoroughness in preparation which would have been incompatible with the need to get this bill signed as quickly as possible – particularly the transfer payments to the states and extended unemployment benefits, which are desperately needed ASAP.

[OCSteve]

OT: Gary – linked by Instapundit. Your Blair posts are starting to get attention…

[Catsy]

I have seen on the news the idea of "doing nothing."

That seems like a novel concept, one not afraid of the economy bottoming out so we we experience our very own Great Depression.

You misunderstand me. Of course nobody knows when it's going to end on its own, or if it even will, which is why it's absurd to make any kind of argument against a given stimulus on the grounds that it won't take effect until "after" the recession ends.

If it were any kind of normal business cycle that comes and goes in fairly predictable ways, we wouldn't need an emergency OMFG the economy is going to DIE stimulus package.

[von]

I've posted a reply on the front page, Hilzoy. It may not persuade you, but it's all I can offer at the moment. The lawsuit business may be slowing, but it hasn't stopped!

I do think that you're cherry picking one line from my posts for rebuttal, and ignoring the broader context. But that's suitably addressed in my recent post.

[Gary Farber]

"OT: Gary – linked by Instapundit. Your Blair posts are starting to get attention…"

As I pointed on my blog yesterday, Blair's now been passed by the Senate Intelligence Committee, and the full Senate vote is pure formality, so it's Too Late Now.

And, yes, that was my first Instapundit link in more than a couple of years, and due to Aziz Poonawalla's post here. Aziz noticed it via Facebook. Glenn, of course, is delighted to link to anything that makes either the Democratic Congress, or President Obama, look bad, so a double-whammy is extra points.

[Jeff]

Something about less arguing about big vs. little govt and more work at having smarter govt.

A good start would be to ignore all House Republicans, who have shown themselves to be totally meaningless.

"Stupid is as stupid does", indeed.

[OCSteve]

Gary: Glenn, of course, is delighted to link to anything that makes either the Democratic Congress, or President Obama, look bad, so a double-whammy is extra points.

Huh. Sorry it’s a bad thing. Here I was happy for you - that something you thought important, that you have been trying to get bigger bloggers to focus on – had finally got some serious attention… My bad. I guess it has to be the right kind of attention?

Here’s an earlier post from Gary Farber.

He didn’t even say uber-lefty Gary Farber… Out of curiosity – what was your hit count this afternoon?

[Gary Farber]

"Out of curiosity – what was your hit count this afternoon?"

A jump from when don't have a link from any bigger blogger, but not a particularly huge one. And about as many were from Aziz Poonawalla at Beliefnet as from Reynolds. A Crooks and Liars Blog Round-up link generally gets me more; the really major hit explosions I've ever gotten come from Pharyngula.

See here for today's breakdown, if you read this before midnight. A peak of 286 page views per hour at 11 a.m., and then dropping off thereafter to a mere 59 or less per hour now. So far today 1,436 page views, which is nice, and 3-4 times what I'd get with no links pointing to me on a given day, but not all that large in the general scheme of things. (4000-6000 is a nice high for a day, and 2000-3000 isn't that unusual if the stars align correctly; ~10,000/day is the highest I've ever gotten, as I recall. Mind, all this is only when Big Name Bloggers link to me; on my own I only get around 300 hits a day, give or take, these days, and most of those are google searches, rather than actual readers.)

My stats are set to be publically readable, so you can click on the little icon towards the bottom of my blog page any time you're interested.

(I'm amused I also got my first Belmont Club link via a quoting of Aziz's post via GR.)

[Gary Farber]

"Sorry it’s a bad thing."

I didn't say that; I just have no illusions as to what or why Glenn Reynolds chooses to link.

[OCSteve]

Again - I was just happy for you. Enough so to note it OT here. I was thrilled when I saw it. I said - "Cool!" - and came over here to tell everyone I know (online, for the most part anyway).