As should not be too surprising as the economic news deteriorates the chorus for a new, larger stimulus package rises.
Before I turn to the President, though, let’s be clear: The lousy economy is due to insufficient demand. Consumers – who are 70 percent of the economy — can’t and won’t buy because they’re running out of cash. They can’t borrow against homes that are worth a third less than they were five years ago, and most consumers are bad credit risks anyway because they’re losing their jobs and their wages are dropping. They also have to start saving for the kids’ college or for retirement, which will cut their spending even more.
Without enough consumers, businesses won’t hire enough people and pay them enough to reverse the vicious cycle. So we’re dead in the water. Even the stock market has caught on to the truth.
Which means government has to step in to boost the economy – as it has every time the economy has fallen into recession over the last eight downturns. Include the massive spending on World War II that lifted us out of the Great Recession, and it’s nine. The Fed can help, but it can’t do it alone. And it’s least helpful after a huge asset bubble has burst because the financial system won’t channel low interest rates where they’re most needed – to small businesses and average consumers.
This time we tried one stimulus that was way too small relative to the size of the falloff in demand that started in 2008 — especially given that states and locales cut their spending by almost as much as the federal government increased it.
So we need another – a bold jobs plan.
Mr. President, it’s time to go big on the economic solutions. It’s time to propose a massive second stimulus, offset by some serious tax hikes and budget cuts once the economy regains a semblance of good health. Republicans won’t go for it, but they don’t go for small economic solutions either, be they extensions of unemployment insurance or a miniaturized infrastructure bank. (The current level of GOP commitment to infrastructure would about cover the purchase of a Lego set.)
Economically, the case for a massive stimulus is a good deal stronger than the case for the rather minimal one that you’re calling for — extending unemployment insurance and the payroll tax cut, and establishing an infrastructure bank. A major stimulus is the only conceivable source of substantially increased economic activity and jobs for at least several years.
I won’t link to Paul Krugman’s repeated demands along these lines due to the NYT’s paywall. You can find them for yourselves—it’s not hard.
In my view the Obama Administration, abetted by the president’s overconfident and excessively eager to please economic advisors, squandered its prime opportunity for an effective stimulus package following Barack Obama’s historic 2008 election with an inadequate plan that was targeted more at maximizing political impact than economic impact. I also think that there are good reasons to doubt that even a much better constructed fiscal stimulus plan can be effective under the present circumstances. As Ken Rogoff has repeatedly pointed out our present problem is too much debt. Ameliorating the effects of too much debt with more debt is pretty unlikely.
It’s also been pointed out to me recently that the most devout Keynesians and neo-Keynesians are Platonists who disdain mundane things like evidence on the grounds that their models should be enough to satisfy everyone and real world evidence cannot produce metaphysical certitude.
I’m not looking for metaphysical certitude but I do think that a little empirical evidence would be nice. Evidence of previous successes, for example. Japan’s many attempts at fiscal stimulus for ending their own lengthy slump have not been effective.
BTW, while I’m on the subject at least here in Illinois the claims of anti-stimulus budget cutting are greatly exaggerated. The state, county, and city budgets have gone up year over year in both nominal and real terms. What hasn’t gone up is revenues.
It is also true that the state, county, and city governments have laid people off. How can both of these things be true? Simple: like the rest of us the state, county, and city budgets aren’t getting as much for their dollar as they used to. Healthcare expenses have increased. Prevailing contracts require that public employee pay rises. Consequently, layoffs and increasing budgets at the same time.
I’ve posted this stuff already. If you don’t believe me you can look it up for yourselves.
However, if we’re bound and determined to put another fiscal stimulus plan into action here’s my modest proposal for such a plan:
- Make it a one year plan. If it’s effective, put another plan into force next year.
- Pick a number but be prepared to defend that number to the death.
- Eliminate Davis-Bacon requirements so the maximum number of people get the maximum amount of benefit with the maximum level of output.
- Make it a direct WPA-style government employment program (which is, after all, what Keynes himself recommended)
i>No writers’ projects, artists’ projects, or other make-work projects. All infrastructure (in the sense of roads, bridges, etc.).
I also think that the academics and pundits who are recommending fiscal stimulus need to have some skin in the game. I’m open to suggestions but I’m thinking of a commitment to resign their tenured positions, their columns, etc. if GDP hasn’t risen by an agreed-upon amount after an agreed-upon interval. Talk is cheap.
My guess is that the results of such a plan would be very disappointing and followed by a series of recriminations about how inadequate it was, etc. What do you think?
Update
But the real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability. Even given the same budget situation, restructuring spending and taxes towards growth – by lowering payroll taxes, increasing taxes on the rich, as well as lowering taxes for corporations that invest and raising them on those that do not – can improve debt sustainability.
To my eye it looks as though Dr. Stiglitz has a much clearer view of what constitutes a “high-return investment” than I do. Building another 1,000 miles of interstate would be a sizeable infrastructure project. Would it be a high-return investment? I don’t see it. Would we receive a high-return for spending another couple of hundred billion on the same lousy education? Because that’s what would happen if we just dumped more money into the system.
I’ve given my ideas for high-return investments. Nobody seems interested.
I think the stimulus debate is more about politics than policy as the GOP will go along with very little. The most likely stimulus is an extension of the payroll tax cut, which Chait predicts is likely to be tied to a deficit increasing tax break for repatriating overseas corporate funds. Why Republicans Don’t Want To Extend The Payroll Tax Cut
If I were in charge of economic policy (being a spec. ed teacher who likes politics and economics and reads a lot of blogs makes me highly qualified) I would do more stimulus. I like Jared Bernsteins
FAST proposal. It seems to meet some of the criteria you laid out.
I also like B. Delong’s suggestion to bring some new players onto the economic team. How Should Obama Answer the Stock Market’s Wake-Up Call? We-Need-Different-Cossacks Department ( an excellent summary of economic policy of past couple years which is only slightly over my head)
(as their is no preview, I hope my hyperlinks worked, I occasionally mess them up)
As I see it, the problem with additional roungs of stimulus is crowding out. The CBO assumed the original stimulus would have no such effects in the short run based upon its structure and the state of the economy. “CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital . . .” (2/11/09) As the long-term approaches, it looks more like new rounds of stimulus are needed to avoid the negative impacts from the previous round. Yearly plans may Swiftly prove to be too modest.
Robert Reich: Include the massive spending on World War II that lifted us out of the Great Recession, and it’s nine.
When did the Great Depression get the demotion?
Laurie: The most likely stimulus is an extension of the payroll tax cut, which Chait predicts is likely to be tied to a deficit increasing tax break for repatriating overseas corporate funds.
If it’s the usual stuff for a tax holiday, how does it increase the deficit? If there is no such holiday, the corporations simply won’t repatriate the money. The is no loss to government by not extending such a break, but there is a loss to the general economy by not extending such a break.*
*Well, there’s a major loss to the balance sheets of whichever places those corporations would store the money in country. I doubt they’d engage in the economic investment that most of the proponents of the tax holiday imagine. There just isn’t much need for investment at this point in time.
Laurie – I agree that the current debate is more politics than policy. As far as politics go, I want to agree with you that a “Stimulus2” would be both good politics and good policy because that would mean there is an easy solution to our global economic problems. Unfortunately the Japanese experience of the last 20 years makes me wonder if a “Stimulus2” in the U.S. would accomplish much. The Japanese have had one failed stimulus program after another and have very little (other than a mountain of gov’t debt) to show for it. In fact our experience might be much worse because our citizenry cannot fund our gov’t debt through domestic savings and we rely to a great extent on foreign governments to buy up all those newly issued U.S. Treasuries.
Also, Jared Bernstein’s “labor intensive” proposal for a stimulus seems wrong headed. My common sense meter tells me undertaking a project in an intentionally inefficient manner is never the best course of action. Sounds like some sort of economic fallacy.
As Ken Rogoff has repeatedly pointed out our present problem is too much debt. Ameliorating the effects of too much debt with more debt is pretty unlikely.
As I have said, I believe that we actually haven’t had a crisis because of too much federal government debt in this country yet. That said, a stimulus program at the start of Obama’s Presidency that was geered towards reducing consumer debt (by transferring some of that debt to the federal government) might have had a positive effect. Examples:
a) write-downs or write-offs on mortgage debts (ideas for particulars have ben discused here and elsewhere ad naseum)
b) write-downs or write-offs on student loan debts
c) reduction of credit card debt for bail out funds
d) similar actions for smaller commercial loans
e) etc.
That wouldn’t have made several parts of that gross chart you cited from last week-end somehwat less gross, and might have lessened the load on those much bally-hooed consumers.
That would have been risk for the federal government balance sheets, and would have ultimately proved useless without majpor reforms in the country, but it might have been a gamble worth taking.
Of course, there also would have been moral hazard from such actions. But the actions taken also had moral hazard, and made certain that the wealth transfers went upwards on the income and wealth charts, instead of downwards.
It’s too late for any such action now, however. We’ve added several trillions in debt to the federal government over the last two and a half-years, and more than half of that has been from increased spending. Now we are getting up against the point where federal government debt will cause a crisis. Given the softening economy plus the financial crises in Europe (now coming to a head), I think that crisis may hit here sooner rather than later.
i>No writers’ projects, artists’ projects, or other make-work projects. All infrastructure (in the sense of roads, bridges, etc.).
Yeah, the only problem is most of that kind of work can’t be done by just anyone any more. There’s more skill in some of those jobs than most of the white-collar jobless had in their old jobs. So I still don’t think it would work.
I also think that the academics and pundits who are recommending fiscal stimulus need to have some skin in the game. I’m open to suggestions but I’m thinking of a commitment to resign their tenured positions, their columns, etc. if GDP hasn’t risen by an agreed-upon amount after an agreed-upon interval. Talk is cheap.
Come on,Dave! Even if ou could get those folks to agree to this, and even if they followed up at the end of it, what ou would get would be a bunch of pundits quiting their jobs at the NTimes – and getting hired for the newly vacant positions at the Washington Post. Similarly, a bunch of Harvard economists would end up at Yale, the Yale economists would end up at Princeton, and the Princeton guys would end up at Harvard.
Thanks for reading and responding to my comment. Because of my lack of economics expertise I generally don’t debate the details. My Chait link (which hopefully works this time) has a nice chart showing the impact of a tax repatriation holiday on budget deficits from CBPP. I have no idea how long the money would be kept overseas or what the impact would be of no tax holiday.
As to labor intensive school upgrades/repairs, I don’t see what makes that intentionally inefficient. Maybe that is just the nature of the work as compared to bridge repair. The dollars spent might employ more people. I don’t know about the long term benefits of either type of stimulus, besides better bridges or schools but that seems good enough to me. Maybe by the time this work is done the housing market will pick up a bit and keep some of the construction workers employed.
I fully support the idea of “us[ing] the money to make high-return investments.” We just need to be wary of the hucksters and carnies this opportunity would present.
For example, when Barry Ritholtz’s blog links to a study showing approximately half of U.S. roads are not in good condition, and points out the costs of roads in poor condition, misdirection is being served. Good, fair, mediocre and poor are not synonyms.
Location, location, location. How many of the roads that are “not in good condition” serve fewer than 1,000 people? How many serve fewer than 100? Would refurbishing or expanding these roads be a “high-return investment”? Would adding another lane to the 405 be a high-return investment?
My point in all of this is that I don’t think that either what most people think of as infrastructure or education are high-return investments. I think they’re both diminishing returns to scale investments. We’ve picked the low-hanging fruit in those areas. The high return on investment is elsewhere.
The recession was much worse than thought. If the severity had been known, maybe we would have had a bigger stimulus and maybe it would have worked. I do not know. I do know that deficit spending has been an integral part of several of our recoveries (Reagan, Bush, FDR off the top of my head). However, it certainly is possible that fiscal policy does not work so well when you start out with lots of debt (thank you starve the beast believers and tax cuts increase revenue people). It does appear to have helped stop the crash.
“I also think that the academics and pundits who are recommending fiscal stimulus need to have some skin in the game.”
I like this idea a lot. Could we impose this on those who said that banks knew best how to regulate themselves, or cutting taxes increases revenue?
Steve
No disagreement here. I think they’re all idiots.
The recession was much worse than thought.
I call bullshit. We were repeatedly told by damned near everyone in authority that this was a catastrophic financial and economic disaster – the worst of our lives, as the President recently put it. Guess what? It turns out it WAS a financial and economic catastrophe. Or were they just lying about it at the time for their own purposes, and only found out later that it was really REALLY bad?
This catastrophe was obviously terrible at the time – IS terrible NOW . Frankly, the recently revised stats still don’t seem like an honest accounting. (The PCE numbers in particular just don’t jibe with reality.) It isn’t that it was “much worse than we thought.” It was much worse than the assholes running the country would admit to – which is to say they were lying as per usual.
And your story doesn’t even hold up to the commentary of the time. I believe it was Paul Krugman himself who was calling for a much larger stimulus package. The whole “much worse than we thought” meme is just more political cover for the President and his shills are dutifully spreading the fertilizer.
Over time my attitude towards Reich has changed somewhat for the better, but the above…yeesh. Here is how I read it,
“Okay, look we spent lots and lots of money on stimulus to bring unemployment down and in the words of the supporters of the stimulus, to jump start the economy. And while we did get out of the recession, technically speaking, We just haven’t seen that much improvement in unemployment…so lets do what we did previously, spend gobs of money (we don’t really have cause we’ll have to borrow it, and that will likely make our fiscal outlook even worse) doing the exact same thing we did previously that didn’t work like we said it would, but this time it will be different.”
Heh, I guess it was worse than an economic catastrophe.
I’m open to suggestions but I’m thinking of a commitment to resign their tenured positions, their columns, etc. if GDP hasn’t risen by an agreed-upon amount after an agreed-upon interval. Talk is cheap.
Or a bet. When Mankiw and Krugman had their dust up over post recession growth Mankiw offered a bet with Krugman. Krugman never replied, which told me something about the strength of his beliefs. Of course, now we know that Mankiw would have absolutely won. Post recession growth has been decidedly anemic to put it nicely.
Heh, I guess it was worse than an economic catastrophe.
Only if they fail to get re-elected.