A Stimulus For Tomorrow. Maybe.

by von   

The premise of the stimulus is that it will get money -- now! right now! -- into the hands of folks who will spend it.  An immediate, "dramatic" jolt to the economy of near-unprecedented size is the promise.  But the as-delivered still doesn't fully meet that standard.  

The most recent version of the stimulus has three parts (CBO's blog; detailed version):  tax cuts, direct payments, and government spending.  It's important to keep these parts separate.  They have different timeframes, different purposes, and different effects.  Tax cuts are, well, tax cuts.  They happen pronto.  Direct payments are payments that go directly into the pockets of private actors:  tax rebates, unemployment benefits, and the like.  Also pronto.  Government spending is everything else, from the new toilet seats for the State Department to the much-lauded green initiatives to reduce greenhouse gases.  Government spending takes place over a period of time.

There is nothing that says that a single bill needs to contain all three parts.  And it's obfuscating, not illuminating, to lump all three parts together and proclaim to goodness of the heterogeneous whole.  Each part - tax cuts, direct payments, government spending - rises and falls on its own merits. 

The results of this analysis are simple:  the tax cut and direct payment portions of the package have immediate impact.  According to the CBO, these portions get paid out now, with substantial payments in 2009 and a larger lump-sum in 2010.   Very little paid out after that point.  They sunset.

Government spending is a different story.  Spending is the single largest portion of the bill when you consider the entire ten-year period at issue, 2009-2019. But spending has the smallest impact -- by far -- in the critical 2009 time period.  The government spends more in 2010, but spending is still dwarfed by tax cuts and direct spending during that critical year as well.  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.  Worse, the $140 billion-or-so in government spending during the 2009-2010 period primarily goes to boosting the government agencies (buying cars, expanding buildings, hiring staff) that will then incur continuing costs to maintain.  Those are the easiest way, after all, for the government to spend money quickly -- but they are not the kind of shovel-ready infrastructure projects or forward thinking "green" endeavors that have been sold to the public.   And these kinds of government appropriations have real maintenance costs that extend well beyond the life of the stimulus package. 

Now, this doesn't mean that there are no worthy parts of the government spending package.  I, for one, would appreciate some additional spending to assist our overstretched military, as well as targeted spending (or, better, tax rebates and vouchers) for technology, education, and the fabled green revolution. 

But let's not lose our heads and throw money at a problem just because we can print money to throw.  Lumping government spending in with tax cuts and direct payments as part of a so-called "stimulus" package is a mistake. 

*CHANGE:  I changed "most forecasts" to "many forecasts".  I also added a link. I haven't attempted a survey to find out what "most" folks are thinking, but credible sources project an end to the recession in 2009 or 2010. 

UPDATE:  Br, in comments, notes Kevin Drum's post on the subject, in which Drum argues that "spending" equals $600 billion or so and most gets spent in the first two years.  That's obviously different from the above and, needless to say, different from the CBO's estimates (which is the basis for the above).  My suspicion is that Drum is lumping "direct payments" in with "government spending" (or "government appropriations," per the CBO).  If so, it's disingenous:  giving a family a $500 tax rebate (a direct payment to a private citizen) is different on any number of critical levels from spending $500 dollars to buy a bunch of new chairs for the government (government spending).  

Comments

[br]

Von,

Where do you get this number?

That's approximately $214 billion of $358 billion spent after 2010

From the report I saw at Kevin Drum's, the total spending is 600 billion, 477 billion of which will be spect by the end of fiscal year 2011 (July of 2011). And much of the remaining 120 billion is on projects that will take more than two years to complete including infrastructure and energy profits.

[socratic_me]

I, for one, would appreciate some additional spending to assist our overstretched military...

Can I just mentioned that I choked on my gum at this point. Your argument is really that the military doesn't get enough money so we should target our spending there? That is certainly a novel approach.

[von]

Unfortunately, Kevin Drum seems to be obfuscating the issue. So far as I can tell -- it's not clear because Drum doesn't show his math -- Drum lumps direct spending and government spending into a single category of "spending." The CBO, rightly, separates them.

So, "spending" looks good in Drum's post because "spending" includes a huge tax rebate, unemployment benefits, and the like.

[von]

socratic_me, you don't think that spending on wounded veterans is worthwhile? Or providing body armor for the tens of thousands of new troops headed for Afghanistan? Or replacing the weapons we've expended in the last seven years of war? Or paying our soldiers a just wage?

All of the above, by the bye, will have roughly the same dollar-for-dollar impact on the economy as having the state department buy new furniture.

[Gary Farber]

"from spending $500 dollars to buy a bunch of new chairs for the government (government spending)."

"So far as I can tell -- it's not clear because Drum doesn't show his math"

Where's your math?

[Gary Farber]

Von, unless you can give a cite that the majority of government spending will go to furniture, I'd ask you to quit writing as if it does. If you have convincing cites about the proposed spending, please give them, rather than making up mocking claims you haven't supported. Thanks.

[(The Original) Francis]

As the saying goes, elections have consequences.

[KCinDC]

Clearly all military spending is on wounded veterans and body armor, while all other government spending is on gilded thrones for the State Department.

[Kevin Donoghue]

I can’t see anything wrong with Krugman’s take on this. An upturn in output is likely to come long before unemployment starts falling.

[angulimala]

Each part - tax cuts, direct payments, government spending - rises and falls on its own merits.

I think you are just plain wrong on this - the whole of the stimulus is NOT the sum of its individual parts.

[von]

Von, unless you can give a cite that the majority of government spending will go to furniture, I'd ask you to quit writing as if it does.

Where did I write that most of the government spending goes to furniture? I provided two contrasting examples to illustrate the stark difference between "direct payments" and "government spending" -- and why any intelligent discussion of this subject needs to distinguish between the two. But, since some seem intent on missing the forest for the trees, here is an alternative example, liberalized for your liberal pleasure:

"If so, it's disingenous: giving a starving family $500 in food stamps (a direct payment to a private citizen) is different on any number of critical levels from spending $500 dollars to purchase much-needed body armor for our heroic troops who have been tragically misled the last eight years by Bush McMonkey Hitler-On-A-Birthday-Cake.

[br]

Von is sort of correct. Look at the pdf of the report. The chart at the top of page 3 has three rows, corresponding to the different parts of the stimulus package. The first row is appropriations for spending. The second row is direct government spending on unemployment, medicaid, nutrition assistance. The third row is tax credits and rebates. Drum's numbers come from adding rows 1 and 2.

But Von is wrong about what goes in each column. The rebates are not included in row 2. There are no rebates in the bill, but rather there are tax credits. This is revenue that the government doesn't collect, and hence goes in column 3. So Von is griping about not calling extensions of unemployment, medical help, and food stamps "spending." It is a bit of pedantic argument, and ignores the details of how this assistance is implemented. For instance, some of the medicare money is targeted to update IT in hospitals across the country. That's definitely spending of the sort that can help kick start the economy while simultaneously improving the general welfare.

[von]

I think you are just plain wrong on this - the whole of the stimulus is NOT the sum of its individual parts.

My point is that the government spending portion of H.R. 1 isn't stimulus at all.

[br]

My point is that the government spending portion of H.R. 1 isn't stimulus at all.

Let me see if I get you, von.

(1) There are 3 columns of the report.

(2) We must look at each of the three columns independently.

(3) If we ignore columns 2 and 3, then column 1 is too slow and it is mistargeted.

Is that what you are saying? Because if so, I don't agree with (2) at all, and hence I can't agree with (3).

[von]

Br, so we're on the same page, let's follow the report exactly.

There are two divisions, Division A and Division B. (See the detailed report, p. 3). Division A is appropriations. That's what I am calling "government spending" because, well, it's government spending. Appropriations are divided into thirteen titiles (pp. 5-10). That includes various expenditures on DOT, HUD, the state department, the military, interior and environment, homeland security, etc. As the CBO Report acknolwedges Division A consistss of "Purchases of goods and services, either directly by the federal government or
indirectly in the form of grants to state and local governments. Many of those
involve construction or investment activity that would take several years to
complete." (CBO Report, p. 4).

Division B has two components: Division B - Direct Spending and Division B - Revenues.

Division B - Direct Spending is what I am calling direct spending, i.e., "Direct payments to individuals (for example, unemployment compensation or
refundable tax credits), which would generally occur fairly rapidly during fiscal
years 2009, 2010, and 2011[.]" (CBO Report, p. 3.)

Division B - Revenues captures tax cuts. That is, "Reductions in federal taxes, which would have most of their effects on revenues in fiscal years 2009 and 2010[.]" (CBO Report, p. 3.)

Division B broadly includes tax credits, tax deductions, tax cuts, unemployment insurance payments, SSI, child support, health insurance, etc.

Are you on the same page? Do you see the distinction that I am drawing between Division A (government spending) and Division B (direct payments/tax cuts), or is it still unclear to you?

[tgirsch]

My point is that the government spending portion of H.R. 1 isn't stimulus at all.

Neither are tax cuts, unless you can guarantee that the extra scratch is actually spent in ways that stimulate the economy. Which, unless you attach strings to the tax cuts, you cannot guarantee, or even close to it.

As I've argued with tax cut proponents elsewhere, if businesses are cutting back right now because of low demand for their products and services, giving those businesses additional tax cuts does nothing to change the demand side of the equation, and therefore provides no incentive for those businesses to invest the extra money in ways that create jobs.

[tgirsch]

Kevin Donoghue:
I can’t see anything wrong with Krugman’s take on this.

I can:

The 1990-1991 recession officially ended in March 1991; but the Fed kept cutting rates, and it didn’t start raising the target rate until Feb. 1992, 2 years and 11 months later.

I can only assume this is a typo, because I don't know on what planet February of 1992 is "2 years and 11 months" after March of 1991. By my calculations, it's 11 months later.

Still, I think his larger point is spot on. I just couldn't pass up the opportunity to Farber Krugman. :)

[dr ngo]

Do the forecasts that the recession will end before 2011 include the assumption, explicit or implicit, that there will be a sizable stimulus (or "stimulus") package this year?

I do not know the answer to this question, but it would seem germane to the issue, would it not? It doesn't seem right to compare the "stimulus" package - whether or not you like it - to an outcome predicated on the same, or a similar, package, rather than a stimulus-free alternative.

[Bernard Yomtov]

if businesses are cutting back right now because of low demand for their products and services, giving those businesses additional tax cuts does nothing to change the demand side of the equation, and therefore provides no incentive for those businesses to invest the extra money in ways that create jobs.

Exactly.

[socratic_me]

Well, von, you could certainly characterize my position as feeling that veterans are well enough taken care of already and none of our troops need armor. This contrasts well with your sanctimonious "liberalization" which is apparently how you think I am supposed to feel... or not, it seems this argument cuts both ways.

Or, possibly, you could read my position as noticing that our military already gets a ridiculous amount of money and thinking that maybe we should require that they do some prioritizing of money towards those things that their soldiers need but aren't getting and away from the latest boondoggle or fancy small-nuke weapons system.

It just strikes me that arguing for government largess for the military because they don't get enough money already is exceedingly odd.

[Gary Farber]

"...our heroic troops who have been tragically misled the last eight years by Bush McMonkey Hitler-On-A-Birthday-Cake."

That's very substantive of you, Von, given all the times I've used such phrasing, which over the last eight years, is precisely zero. As you know.

So you're not interested in rational discussion. Fine.

[BP in MN]

A few points I think von fails to address.

1) As Kevin noted above, I think it's incorrect to make the assumption that stimulus will be unneeded after the nominal end of the recession. If the purpose of the stimulus package were solely to return us to positive economic growth, von's point would be well-taken. But the stimulus is meant also to cushion the shock of the recession, and thus stimulus spending is appropriate through the period where growth is sufficient to recoup the losses of the recessionary period.

2) That said, remember that fiscal 2011 ends on September 30 2011. As a shorthand, 25% of the fiscal year spending should be assigned to the previous calendar year.

3) Much of the spending is for projects that take more than a year to complete; spending past fiscal 2010 is inevitable if the money is to be spent on projects of lasting value rather than make-work.

[TheWesson]

A couple of smallish points here:

I never hear economists discussing this, but -

Isn't a large part of a recession a slump in confidence?

Therefore, doesn't anticipated spending also have some effect on the overall economy - by increasing the confidence of a certain set of producers?

Also -

Isn't it wise to try to buy some insurance against a five- or ten-year recession or depression? There simply may not be enough short-term projects ready to go.

There are plenty of reasons to anticipate - to fear - a longer-term slump than one or two years. Will consumer spending be able to recover in two years? Maybe not, considering that $500 billion or more of consumer spending per year was driven by HELOC's - mortgage equity withdrawal. Not only is that spending essentially gone now, but much of that money spent in the last decade has to be paid back - or the debt written down.

This could be very very painful. I don't think it's all misguided to look more than one or two years out.

[now_what]

I haven't attempted a survey to find out what "most" folks are thinking, but credible sources project an end to the recession in 2009 or 2010.

Are these some of the same credible sources that "predicted" we would not have a recession at all well into 2008, months after a recession had begun? Meaning they could not "predict" the present or even the near past, but we are now going to rely on them to predict the future years out? That's not a good idea.

In addition, unemployment typically stays high well after recessions end. The risks of market failure in the employment markets lasting longer than our so called credible sources predict is far greater than of our economy recovering sooner than expected.

As for a just wage for soldiers, to answer that I would first want clarification of how you think a just wage for employees is determined in the general case. How do you believe that is done, von?

[tom p]

"giving a family a $500 tax rebate (a direct payment to a private citizen) is different on any number of critical levels from spending $500 dollars to buy a bunch of new chairs for the government (government spending)."

I get really tired of pointing out that it matters where the chairs come from.

[MikeF]

Great stuff, von. The most painful year of this recession will be 2009 without doubt, and outlays in 2009 under the current plan are pitifully small compared to 2010 (which needs high outlays) and 2011 (which doesn't). I think the best option is to slash all of the appropriations/public works money that generates outlays after 2010 and replace it with increased unemployment benefits; increased food stamps; increased aid to states' budgets; and temporary (2-year, 2009 + 2010) tax cuts targeted at raising employment, even on a temporary basis. If the recession worsens beyond what most economists are predicting, then pass a second stimulus aimed at 2011.

[bedtimeforbonzo]

"Isn't a large part of a recession a slump in confidence?"

Indeed it is, The Wesson.

And surely, you've heard of economists talk about "consumer confidence."

Oh, yeah, consumer">http://www.deseretnews.com/article/1,5143,705274102,00.html">consumer confidence hit an all-time low in Decmember.

Another reflection that things are really, really bad.

People feel poor.

[br]

can someone kill the italics, please?

[br]

MikeF, if you read the report I link to above, you will see that the stimulus bill is exactly what you are requesting. It is chock full of "increased unemployment benefits; increased food stamps; increased aid to states' budgets; and temporary (2-year, 2009 + 2010) tax cuts targeted at raising employment." On top of that, there's additional infrastructure spending, energy investment, and other targeted projects that will supply jobs and encourage business spending in anticipation of future payment.

[Gary Farber]

"Are these some of the same credible sources that 'predicted' we would not have a recession at all well into 2008, months after a recession had begun?"

Interestingly, Von's link doesn't go to a survey of economists, but to a post of Andrew Sullivan's quoting a blogger whose post is actually quoting and castigating journalists for their incompetence:

[...] A survey of the nation's top financial journalists shows that many believe reporters seriously screwed up by failing to adequately warn about the financial excesses and investment bubbles that have pushed us into an economic crisis.

Sixty-two of 100 journalists surveyed by Abrams Research, the research and consulting firm started by former MSNBC chief Dan Abrams, were critical of the media’s role in the crisis. (We’d really, really like to have a long conversation with that thirty-eight percent who think the media performed just swimmingly.)

[...]

It should be noted that the journalists are now very bearish. Asked when the recession would end, 31% said early 2010, 26% said mid-2010, 22% said January 2011, and 21% said even later. The survey also asked where the DJIA would close on June 30, 2009. The average of the responses was 8639.12, or about 100 points lower than today. Since journalists screwed up so badly last time and are reliably contrary indicators, this might be a signal that we’re in for a quick recovery.

Or maybe it just means the recession will last a very, very long time. After all, only 30% of those responding think that our economic crisis will someday be called a Great Depression.

This is an interesting notion of credibly supporting one's assertion. That, and making up phrases and attributing them to people who respond to him ("Bush McMonkey Hitler-On-A-Birthday-Cake"), while using sleight of hand in responding, aren't Von at his best.

Me: Von, unless you can give a cite that the majority of government spending will go to furniture, I'd ask you to quit writing as if it does.

Von: Where did I write that most of the government spending goes to furniture?

Von switches terms from my "as if it does" to "goes to." Nice. It's easy to refute the charge that you wrote something when the assertion is actually that you wrote something else.

For the record, where Von wrote as if government spending was largely furniture:

[...] Government spending is everything else, from the new toilet seats for the State Department

[...]

is different on any number of critical levels from spending $500 dollars to buy a bunch of new chairs for the government (government spending)

As it happens "a bunch of new chairs for the government" isn't an accurate summary of "(government spending)."

[acrannymint]

I am hoping that the current Obama outreach is really setup so that they can say "we tried but the the republicans have no interest in working together"
I can dream in any case.

[TheWesson]

italics killed

Hope that worked.

[MikeF]

br,

You're right, I sort of mis-read the revenues column. That makes the plan more palatable, although I think there should be more tax relief (targeted and short-term, not 10-year income tax cuts as some are calling for) for 2009 and 2010, and more discretionary money for states. Hell, it's not even that I object to spending beyond 2010, I'd rather just see more relief from now until 2010. But if the net amount is essentially fixed, then it needs to be more front-loaded.

[von]

Please die, italic!

Socratic me, I was just pointing out that I might have had other kinds of military spending in mind other than more planes, bombs and tanks ... but, who am I kidding? I really want more planes, bombs, and tanks.

Gary, you made a ridiculous claim and I responded in kind. Stop making foolish statements and you won't get brush-offs.

Tom P., you're right.

Bernard and Tgrisch, we can argue about the relative impact of tax cuts. Depending on how they are framed, they can be pretty stimulating .... albeit not as stimulating as something like unemployment insurance. The important point for my current post is that the government spending side of the equation is not going to have much, if any, of an impact on the economy. If the economy corrects itself before 2011, it will be because of tax cuts, direct payments, the free market system, or my devilish good looks .... i.e., anything except government spending.

[hilzoy]

I killed the italics.

I note that the vast majority of the spending is over at the end of FY 2011. I'm glad there's spending in 2011: it begins at the end of September 2010, and I will be surprised if the economy is not still in need of stimulus then. Plus, a bunch of it seems to be part of programs that take that long to complete -- it's not as though we could excise the 2011-infinity part and keep just the first 18 months.

I think this crisis needs us to use as many strategies as we can come up with. Tax cuts don't help people who don't have jobs, and their incentive effects aren't nearly as powerful when no one is hiring or investing. Direct payments are good and quick stimuli, but have the disadvantage that we, as taxpayers, aren't getting any return on our spending, nor are we taking advantage of the fact that spending now is comparatively cheap, since there will be a lot less crowding out of private investment, what with there not being much private investment at all. Government spending does that, and puts people to work, which also really matters.

Besides, I think there's a non-negligible chance that this depression turns out to go on longer than expected, in which case we will be very, very happy that we didn't put this off only to find ourselves, in 2011, lamenting the fact that our stimulus package won't spend all its money by the end of FY 2013.

[von]

I killed the italics

Thanks, Hilzoy. My blog-fu ain't what it used to be.

Besides, I think there's a non-negligible chance that this depression turns out to go on longer than expected, in which case we will be very, very happy that we didn't put this off only to find ourselves, in 2011, lamenting the fact that our stimulus package won't spend all its money by the end of FY 2013

That assumes that the projected government spending is, all things equal, better than the alternative uses for these dollars. It strikes me that such requires at least some defense of how these dollars are actually being spent. I mean, it might make perfect sense to spend $4.5 billion to modernize the electrical grid (Division A, Title V). But is that going to have a greater stimulus effect -- long term or short term --than the alternatives (providing a refundable tax credit for low and mid income families; allowing businesses to expense capital investments or green investments; provide new tax credits for schooling)? Dollar for dollar, do you want to build new coal-fired plants or do you want to encourage businesses to invest in green technologies? It's a tradeoff.

And this is, of course, to say nothing about the deficit. (The rejoinder -- popular with Andrew Sulivan -- that Republicans can say nothing on this subject because of Bush's errors is foolhardily foolish. Two wrongs definitely do not make a right.)

[Gary Farber]

"Gary, you made a ridiculous claim and I responded in kind."

No, I didn't -- please feel free to quote my "ridiculous claim," by all means -- but even if I did, this would be the response of a six-year-old: "you made me say something ridiculous!"

If you're going to engage in online discussion, Von, try engaging as a grown-up. This sort of behavior ill-becomes you.

[J. Michael Neal]

That assumes that the projected government spending is, all things equal, better than the alternative uses for these dollars. It strikes me that such requires at least some defense of how these dollars are actually being spent. I mean, it might make perfect sense to spend $4.5 billion to modernize the electrical grid (Division A, Title V). But is that going to have a greater stimulus effect -- long term or short term --than the alternatives (providing a refundable tax credit for low and mid income families; allowing businesses to expense capital investments or green investments; provide new tax credits for schooling)? Dollar for dollar, do you want to build new coal-fired plants or do you want to encourage businesses to invest in green technologies? It's a tradeoff.

This is a very interesting paragraph. You simultaneously admit that the spending might be a good idea, and that we shouldn't do it. You then go on to continue to argue as if you don't understand the difference between running deficits in normal times, and during a liquidity trap.

[Tsam]

Today I heard a local radio discussion of which types of jobs would be the most effective, if subsidized, to stimulate the economy. One person described a job as a caterer.

This led me to consider a different type of stimulus. Instead of adding to consumption by government deficit spending during the downturn, it would encourage rich individuals to spend more of their savings on discretionary spending during the downturn rather than later.

The most direct way to accomplish this would be to enact a tax on such luxury goods, but delay its effective date until the estimated end of the downturn.

This is probably not enough of a pool of potential demand to make much of a difference, but an interesting idea.

[von]

J. Michael, I think that you're either misapprehending what I wrote or have a strange definition of "liquidity trap" and its relationship to fiscal policy. (I hesitate to rely on Wikipedia, but it's just too on the nose here: "The liquidity trap theory applies to monetary policy in non-inflationary depressions. The theory does not apply to fiscal policies that may be able to stimulate the economy."

You need a monetary response to a liquidity trap, not a fiscal one. When Bernanke says he's dropping money from helicopters, he's talking about avoiding a liquidity trap.

[Bernard Yomtov]

You need a monetary response to a liquidity trap, not a fiscal one.

This sounds exactly backwards to me. My idea of a liquidity trap is that further lowering of interest rates is impossible or ineffective, so fiscal policy is needed.

Maybe I don't understand your point.