Stimulus: Is it timely, targeted and temporary?
Kurt Brouwer February 6th, 2009
I believe most Americans support some of form of stimulus for the economy. I do. Currently, the Senate is debating the stimulus bill that recently passed in the House of Representatives. In terms of size, this legislation is perhaps the largest appropriation bill in our country’s history. The Senate version is priced at about $900 billion currently. The House version was a bit less. With interest, the cost of the smaller House version would still be about $1.1 trillion. The Senate version would be more.
It’s safe to say that, in order to be effective as economic stimulus, any legislation we consider needs to stimulate the economy now, not a few years from now. That is, to be beneficial, the stimulus has to come very quickly.
And, secondly, the stimulus has to go to activities that contribute to economic growth and produce permanent jobs.
Third, the stimulus has to go away pretty quickly too so that we do not have lots of highly inflationary government spending coming along when the economy heats up in 2010 and 2011. Therefore, the stimulus has to be:
- Timely
- Targeted
- Temporary
Here is a chart based on data from the Congressional Budget Office. It illustrates how much of the $825 billion stimulus package that just passed the House of Representatives will be spent in 2009, assuming the bill goes through as written:
Data: Congessional Budget Office; Chart: ReadtheStimulus
The Congressional Budget Office report estimates the impact of the stimulus as follows:
Assuming enactment in mid-February, CBO estimates that the bill would increase outlays
by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in
fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of
$604 billion over the 2009-2019 period…
In addition to the $92 billion in spending, there will be $77 billion in tax cuts hitting in 2009. The good news is that some of the proposed $825 billion economic stimulus package will take effect this year. Unfortunately, much of it will not. But, the report makes it clear that most of the stimulus spending does not kick in until 2010 or 2011 or even later. Unfortunately, spending in 2010 or 2011 does not help us much and it may even hurt.
When we consider any stimulus legislation, we need to ask ourselves — and our Congressional leaders these questions:
Is it Timely? First, consider simple logistics. The House version is very different from the Senate version. So, even if this version passes the Senate, the legislation has to go to a joint committee from both the House and the Senate to hash out a compromise version. Then, this compromise has to be passed by each body again and then signed into law by the president.
When all that happens, the government can finally get going, but each day that passes is critical. The CBO estimate shown above assumes the legislation will be signed and implemented by the 15th of this month. It is now the 6th and we are quite a ways from enactment.A best case scenario is that the tax cuts and tax credits hit this year and a small amount of spending does too.
In a recent Wall Street Journal piece, it was reported that:
The nonpartisan Congressional Budget Office projected less than half of the $355 billion that House Democrats want to spend on highways, bridges and other job-creating investments is likely to be used before the end of fiscal 2010. The CBO said the balance would likely be spent over the next several years, after the recession is projected to end.
It’s probably unlikely that even that estimate would be reached because most infrastructure projects take years to get off the ground. In any case, why not just authorize the spending that will hit in 2009 and 2010? The other spending does no immediate good and it certainly adds to our debt burden. What’s the rush on authorizing projects for 2011, 2012 and beyond?
It would be much better if we had a more modest bill that just included the items that would do some good by hitting in 2009 or early 2010. Anything else should be put into other legislation to deal with alternative energy, infrastructure or whatever.
On a happier note, I was thrilled to see this Wall Street Journal interview with Energy Secretary Stephen Chu because it appears that he has a real sense of the urgency of getting these projects underway:
Energy Secretary Steven Chu said Friday that he wants half of the roughly $35 billion to $40 billion proposed for Energy Department programs in the economic-stimulus package to be spent within a year.
Mr. Chu said he is prepared to overhaul the way the agency operates to quickly direct the money to projects on weatherization, energy efficiency and support for renewable energy.
“We’ve got to do this, and we’ve got to do it in a way that has not been done at the Department of Energy,” Mr. Chu said. “I think this is solvable. And not only solvable — we’ve got to do it. Otherwise it’s just going to be a bust.”
Mr. Chu is already coming under pressure from some lawmakers to set a time line for dispersing a separate $25 billion in loans from an Energy Department program for the struggling automobile industry. In an interview, Mr. Chu said, “We can probably get a time line out in a week or two. We’re trying to understand, why the heck did it take so long before?”
Mr. Chu’s comments highlight a fundamental challenge for President Barack Obama’s effort to transform and revive the American economy. To carry out that change, he is relying on a government bureaucracy that can often be slow-moving, inefficient and bound by multiple missions and red tape…
Even with Secretary Chu pushing hard, the article points out the difficulties faced in dealing with our Federal bureaucracy. Just as one example, most big projects need to have environmental impact statements completed and approved. This process alone often takes years.
Is it Targeted? The list of wacky projects in this legislation is too long to go through, but targeted is not something even the most ardent proponent would claim.
As one commenter at the liberal online magazine Washington Monthly wrote:
…How hard would it have been to come up with a clean stimulus bill containing increases in unemployment benefits, higher earned income tax credits, and targeted tax cuts? Then they could have followed up in MAR-APR with an infrastructure package. Later in the year when the middle class would be selecting their health plans for 2010, he could have come out with a health care program…
Probably the most unlikely and most unpopular item in the bill is $2 billion for an experimental ‘clean’ coal project touted by impeached Illinois Gov. Blagojevich. Even though he has been ousted, his project lives on. Is an experimental coal-fired plant really necessary to get the economy going this year? Is it likely to help this year or even next year?
Here are a few projects in the bill as listed on the conservative publication, National Review Online. To me, these seem like a stretch in a stimulus bill:
$4.5 billion for U.S. Army Corps of Engineers
$87 million for polar icebreaking? $150 million for livestock, honeybees and farm-raised fish? $7.6 billion for rural community advancement? What is that exactly anyway?
No doubt these are all interesting projects, but to just take one example, the U.S. Army Corps of Engineers already has more than $3 billion in unspent funds for other projects it has not been able to get going. Another $4.5 billion won’t do any good because the Corps is already awash in cash. So, this amount won’t do any good at all.
Is it Temporary? Most of the projects extend over several years, some for a decade. And, when you propose a ‘temporary’ increase in unemployment benefits or Medicaid funding, this will almost certainly become permanent. After all, what politician is going to propose ‘cutting’ unemployment benefits or Medicaid funding in a few years?
When we look at longer term effects, the likelihood is that stimulus spending will probably act to slow economic growth.
The Congressional Budget Office Director’s Blog had this to say:
…In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy…
In other words, we are trading long-term economic growth for this attempt to get us out of the recession. Now, I’m fine with that and I suppose most Americans are too. However, we should only spend what we really believe is necessary now. That way, we get the stimulus we need, but we reduce the negative long-term effects of incurring so much government debt. And, despite the ease with which Congress is debating billions or even a trillion dollars of spending, that’s a lot of dough as this chart illustrates:
Source: Heritage Foundation Blog
- Business , Economy , Geopolitics , Money , income taxes , inflation
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I won’t debate every little proposal contained in the Senate stimlus bill. (I will point out however much of the “pork” is Republican in origin. The Army Corps of Engineers’ money was put there to get Republican votes, and both Senators McConnell and Vitter voted for the “honeybees” money (a favorite with farmers in deep Red country) in the past although they seemed to have forgotten that fact more recently.)
Here is what the CBO Director’s Blog had to say about the long term crowding out effects:
“The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provisions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.”
http://cboblog.cbo.gov/?cat=8
In other words the current Senate bill will reduce long term GDP growth by 1/100 to 1/300 of a percent per year through 2019. Although any reduction in long term growth is bad, this is, quite frankly, extremely small.
So, in summary, CBO has said that the current Senate stimulus bill will have a significant positive benefit in the short term and a tiny negative effect in the long term. Furthermore, it says that spending on infrastructure, education and tax incentives for investment (currently 25% of the bill) have a positive long term GDP growth effect. Why not just include more of those types of programs so that the net long term effect is at least neutral?
This is very good. I really like your analysis. I read an article a few days ago on http://www.recessioninfocenter.com that pointed out this
I’ve already talked to the general population in my state. They blame the failure to pass a bill so far on the Repubs. There will be 15% unemployment before the year is over and the people will blame it on them. God help them! The Republican Party is done, finished, through.
I don’t think this stimulus bill is free of partisan issues. And, certainly the Republicans did not distinguish themselves on the issue of pork spending in the previous Congress. And, I’m experienced enough to recognize that there will be waste in almost any government program, whether promoted by Democrats or Republicans. The partisan stuff is not my issue.
The CBO gave a range of economic outcomes that is so broad, it is clear to me they really are guessing. I hope they are right on the short-term stimulus because we need it. But, we don’t need huge deficits in 2011 and on into the future. Those would contribute to the already inevitable inflationary pressures. Therefore, I think we should target those items that really are short-term in nature and eliminate the rest.
Forgive me that last comment. My partisanship was showing. It was Friday night and I had a couple of beers, and politics is my sports (go team!) It appears that the bill will pass after all (as of today).
I agree that any government spending bill is likely to contain waste. Among the most prominent critics of stimulus the only one I really take seriously is James Buchanan of Public Choice Theory fame.
If the effect of the stimulus is on the low end of the CBO’s madroeconomic forecast, then the debt forecast will be more similar to the Heritage Foundation graphic. If on the other hand, if the effect is on the high end of the range, then the debt situation will be even better than what I tried to describe in the earlier posting. But in the final analysis no matter what happens, there will still be enourmous disagreement as to what were the actual effects of the stimulus (and unfortunately, probably along partisan lines).
I’m not terribly worried about inflation however. It seems to me that core inflation expectations were suddenly reset from about 2% annually to 0% last quarter. And persistent high unemployment above NAIRU in the next few years could lead to further disinflation, as happened in the recessions of 1974-1975 and 1980-1982. I’m not as much an alarmist as Krugman is about this issue, but it seems to me that few people are taking this possibility seriously enough. A worse scenario than inflation would be the one Japan endured with stagnation and modest but relatively steady deflation (in terms of the implicit deflator). Most of Japan’s increase in public debt was not due to the much ballyhooed stimuluses (in terms of actual new spending they were trivial) but deficits incurred by slow revenue growth and an increase in the real value of public debt due to deflation.
My hope is that the stimulus, coupled with an effective fix of the credit crisis, will close enough of the output gap that we avoid the “stagdeflation” that has cursed the Japanese for the last 15 years now (and still counting).
Actually, this brings up another topic. Could it be possible for the economy to recover before the financial sector? The answer seems to be yes. (And in which case that shifts the onus even more away from monetary to fiscal policy.) A recent paper (which I can’t find right now) contains a large dataset that suggests that this is consistent pattern in financial crises. In its stead I’ll leave you with this classic on the Mexican and Asian financial crises, which reached the same conclusion:
http://home.gwu.edu/~graciela/HOME-PAGE/RESEARCH-WORK/WORKING-PAPERS/twin-crises.pdf
Maybe that’ll make up for my previous insane rant.
Not a problem Mark. If we can’t unleash a good rant now and then, what’s the point?
I hope your thoughts and ideas are correct that this stimulus actually does a lot of good. I’m less hopeful.
I’m also more of a believer in inflation, albeit three years or so from now.
The financial sector is likely to be in the doldrums for a long time. There will be a big rally in financial stocks at some point, but earnings are likely to be severely constrained for many years. And, thanks for the link, I’ll check it out.
“My hope is that the stimulus, coupled with an effective fix of the credit crisis, will close enough of the output gap that we avoid the “stagdeflation” that has cursed the Japanese for the last 15 years now (and still counting).”
The ‘stimulus spending package’ claims to have shovel ready jobs available the moment the scam is passed. Given this, am I to believe that out-of-work MBAs and out-of-work Bway actors are willing to pick up a shovel and dig dirt for a few dollars a day?
Is this the way to economic utopia, everyone is a serf with a shovel?
By the way Sen Chuck.e.Schumer (D) is now bragging about all the money he stole from the American people to continue financing NYC’s Nannydom. Thanks everyone, your dollars will not be spent wisely and in a year NYC will be back for more.
Just wait until America has to pay for Kingdom Hollywood California, Democrats will be really popular then.
Lastly, rather than Japan as a comparison why not compare Obamaland to Great Britain where Brits are warning us about the insanity of building a Soviet-style government they themselves are now suffering under.
Welcome to Democrat’s Economic Utopia where everyone is a serf with a shovel.
What I do not understand is that just a few months ago we already paid some $800 Billion to save us all from the worst economic disaster since the Great Depression yet the situation is now worse than before the first $800 Billion.
Now I am told that if we don’t spend an additional $1 trillion we’re facing the worst economic disaster since the Great Depression.
If spending $800 Billion did not work the first time around how in the hell will spending an additional $1 trillion going to help solve the second worst economic disaster since the Great Depression?
And, how is spending $4 Billion on ACORN voter fraud going to stimulate anything other than establishing a permanent “ACORN’S 24/7 Get out the Democrat Vote” plan?
The ‘smart’ people got us into this mess yet I am suppose to believe that this brilliantly-played Confidence game is respectable economics.
This ‘stimulus spending plan’ is all a scam, man and the affluent are the biggest suckers of all.
And another thing; since Democrats scam on paying their fair share of taxes how in the hell are we going to pay for this stimulus spending scam which is suppose to save us all from the worst economic catastrophe since the Great Depression?
I will say this, I live in the city and don’t own a car so for the next two years I am only purchasing food while everything else taxable will not be bought by me; I don’t need fuel, entertainment, clothes, furniture etc etc etc.
I am very willing to give up my momentary happiness in order to save myself from serfdom’s misery.
At this blog, we try to stick with financial, investing, economic and other topics and we avoid politics as much as we can. So, let’s just stipulate that this is neither a Republican nor a Democratic issue. It’s an economic, geopolitical and financial issue that we as Americans need to resolve.
Ideally, when a solution is proposed we should analyze it to see if it really is likely to be part of the solution or not.
“The ’stimulus spending package’ claims to have shovel ready jobs available the moment the scam is passed. Given this, am I to believe that out-of-work MBAs and out-of-work Bway actors are willing to pick up a shovel and dig dirt for a few dollars a day?”
I’ve tutored a lot of MBAs over the years. It would be the first honest work most of them have ever done. The only problem is, based on how our financial geniuses have preformed for the last few years, are you sure you want to grant them the responsibility of building a house or constructing a bridge?
Sorry Kurt,
I just noticed your admonishment. As I already crossed the line on this post earlier, I probably should not have posted the previous comment. Still, it was too difficult to resist. It was funny (to me at least) because it was true.
Feel free not to approve these last two comments if you prefer. I will not be offended. I’ll only be offended if you ever fail to approve honest critical analysis.
Mark–I believe it is safe to say there will not be many MBA grads laboring with shovels on any of these projects. And, keep up the honest analysis, whether critical or not.
Kurt,
Nice work but a very important fact is being left out of the Stimulus debate and that fact is that the bill is purely a spending bill there is no stimulus in it. So even if it is timely , targeted and temporary which it isn’t either it still is not stimulative.
Is there a single marginal rate cut anywhere to be found in this massive spending bill? Tax rebates and tax credit do nothing to spur future production, they are transfer payments to people who already performed work in the past.
Keep up the good work
“I’ve tutored a lot of MBAs over the years. It would be the first honest work most of them have ever done.The only problem is, based on how our financial geniuses have preformed for the last few years, are you sure you want to grant them the responsibility of building a house or constructing a bridge?”
This is a rather bold statement to make about your tutoring skills. In any event; you tutored them, you tell me if they’re able to construct anything.
The President is stating he needs the stimulated spending plan in order to save the economy with shovel-ready jobs, so where will an unemployed MBA find work if the only jobs available are digging dirt for few dollars?
“It’s an economic, geopolitical and financial issue that we as Americans need to resolve.”
Again please inform us how the Trillion$$$ spending plan resolves the current economic, geopolitical and financial issues we are all facing?
How does spending $4 Billion on ACORN resolve current economic, geopolitical and financial issues?
“we are trading long-term economic growth for this attempt to get us out of the recession.”
However, recessions are a natural occurrence with free markets and are a healthy part of economic recovery; the fundamental problems have not been fixed because none will allow the recession to clean out the rot.
There is nothing in the current stimulus bill which is designed to ‘get us out of a recession’ so why all the mumbo-jumbo about economic analysis?
The ‘current economic, geopolitical and financial issues we are all facing’ are not going to go away by piling on more economic, geopolitical and financial problems.
The whole stimulus plan is dishonest, so cut out the honest analysis mumbo-jumbo; I am sick of the double-speak.
By the way, the economic guru and head of the IRS Timothy F. Geithner can’t even get his own taxes right yet he is suppose to FIX the economy?
Non-partisan, why yes of course Mr Brouwer, you really are as non-partisan as your analysis is honest.
I have a question
Conservatives are deriding much of the spending as “pork” not stimulus. However, let’s take the money for a new Coast Guard IceBreaker ship – That ship will be built by a private ship building company creating private sector jobs. Is that not stimulative? I suspect the if the money were for a new navy war ship of some sort, conservatives would be all for it. But what’s the difference in terms of jobs and stimulus between building a ship for the Coast Guard vs. the Navy?
Another item criticized by conservatives – the $600 million to replace the federal auto fleet with fuel efficient cars and trucks. Isn’t buying cars from the auto companies so they can keep their factories and workers employed a good idea, better than “bailing them out”.
Another example – Buying new computers for the Agriculture Department so that payments and services to farm bureaus could be improved. The computers would be bought from say, Dell and the programming would be done by say, IBM or Computer Sciences Corporation. Would this companies benefit by this spending. How is that not stimulative.
If someone could explain the conservative mind-set in this, I would really appreciate it. It seems to me that in conservatives view, government spendiing is “bad” by defintion, no matter what the specifics or reality of the spending would be.
Thanks
AVan — It’s not the purpose of this blog to defend conservatives or liberals. We are trying to understand these issues and present as much solid information as we can.
And, I’m a boater so I’m personally all for Coast Guard spending. But, that’s not the issue.
On any of these issues, I believe we have to ask, is it timely — that is hitting in 2009 or early 2010? An icebreaker vessel probably takes several years to go from awarding of the contract to completion, so it would fail on that front. Is it targeted? I don’t think there is any argument here that our economy depends on icebreakers. And, certainly, it fails the temporary test.
With regard to replacing the Federal fleet, the issue is again the same. Just ask those questions. Replacing good vehicles with ‘greener’ ones is something worth doing, but it fails the three tests. And, what actual economic value is enhanced by dumping perfectly good cars and buying new ones right now? $600 million is a huge amount of money that we have to borrow and pay back with interest.
The merits of a particular type of spending may be fine, but the point of this legislation is economic stimulus, not just a ‘catch all’ spending bill for the government. Those things can be addressed later when the economy has recovered.
One of the problems with designing the stimulus bill was that the fiscal multipliers being referred to (Mark Zandi’s and the CBO’s) showed that spending was more effective as a stimulus than tax cuts. On the other hand, spending takes time and tax cuts are much easier to implement quickly and so satisfied the timeliness requirement. The fact that there is this trade off, and the fact that there are diminishing returns to scale with any type of proposal, led to the idea of a stimulus that incorporated both. I personally think a good balance has, and continues to be struck, but I certainly understand why those who prefer one or the other would be disappointed with the bills under consideration.
(Feb 9th)
What on earth does the blankety-blank market want?
They passed the stimulus bill and the thing is tanking…again??