A second stimulus?

by on July 6, 2009 at 3:47 pm in Economics | Permalink

That's today's topic in the blogosphere, starting with Bruce Bartlett, and then Paul Krugman (and here) and Megan McArdle.  The economy hasn't exactly gone well but a priori that could support either the view that the stimulus won't much help, or the view that we needed (and still need) a bigger stimulus.

I'll restate a few of my core points on this topic:

1. If we're not in a liquidity trap, monetary policy is a better way to stimulate aggregate demand.

2. If we are in a liquidity trap, the stimulative effects of fiscal policy will die out pretty quickly.

3. I have never defended "the Treasury view."'

4. The worst case scenario, which requires that you put your balance sheet in somewhat better order, remains relevant.  I am suspicious when I hear "efficient markets" defenses of current fiscal policy ("Interest rates remain manageable," etc.) from the same people who for years criticized those arguments as applied to banks or for that matter homes.

5. Some temporary, short-run stimulus was indeed called for, consisting mostly of aid to state and local governments.

6. The employment benefits of fiscal policy are mostly temporary and will require a "redo" in two years' time or so, unless we are willing to lose those jobs again or move to "permanent stimulus," which I do not recommend.  We are postponing required labor market adjustments, not solving the labor market problems.

7. There were better ways to spend most of that money.  The assumption was that the American public would be so happy with the stimulus that they would be clamoring for more and more government programs.  That does not appear to be the case.

One new point, based on recent history: We've just seen what special interest groups have done to legislation on health care reform and climate change and neither has even reached the Senate yet.  Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration.  What do you think round two of the stimulus would look like?

I'll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly.  American voters do not in fact have the patience for a lot of good ideas.

Alex J. July 6, 2009 at 4:22 pm

I was under the impression that the first stimulus bill represented the high water mark of Congressional Democrats in the face of an ineffectually new Obama administration.

Daniel W Reeves July 6, 2009 at 4:30 pm

2. If we are in a liquidity trap, the stimulative effects of fiscal policy will die out pretty quickly.

Could you elucidate on this, Professor Cowen? It seems that fiscal policy and monetary policy go hand in hand– they support one another, you could say– because fiscal policy increases the V in MV=PY (because the velocity of money can be written as a function of interest rates). This is what other economists such as DeLong and to an extent Krugman have been pointing out, and it is a pretty convincing argument.

Gabe July 6, 2009 at 4:48 pm

“I’ll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly. American voters do not in fact have the patience for a lot of good ideas.”

Are you saying that the stimulus plan was a good idea that just has not been given enough time to work?

Andrew July 6, 2009 at 5:05 pm

Isn’t one of the big rules (insights?) of economics that of opportunity costs? The market for ‘risk-free,’ aka inflation-risk bonds, doesn’t even have to be irrational. There is no alternative. If you are holding dollars and inflation will eat them, buying Treasurys is a wash, yes? Do we allow the Chinese to bid on foreclosures?

lxm July 6, 2009 at 5:19 pm

A second stimulus is a great idea if we have Goldman Sachs finance it.

Luis Enrique July 6, 2009 at 5:47 pm

I’d very much like to know what you base 6. upon … is there any empirical research on that? if not, what the theoretical motivation?

Josh July 6, 2009 at 6:22 pm

So… since the first stimulus won’t be spent fast enough to be effective… we can fix that with a second one that won’t get spent until even later than the first one! Yay!

Brian J July 6, 2009 at 6:55 pm

“The employment benefits of fiscal policy are mostly temporary and will require a “redo” in two years’ time or so, unless we are willing to lose those jobs again or move to “permanent stimulus,” which I do not recommend. We are postponing required labor market adjustments, not solving the labor market problems.”

I must be misreading this statement, because it seems like you are saying that those jobs have gone away and aren’t coming back, and while we won’t always be losing jobs, we might need to get used to a higher natural rate of unemployment. But I doubt I am reading it correctly, because that doesn’t seem right. Are you referring to specific sectors?

Adam July 6, 2009 at 7:24 pm

Further fiscal stimulus won’t employ the resources that are unemployed resources. It will just keep wages high for government workers and contractors–people who are already employed. Moreover, increased borrowing by the G will outbid private demanders of capital. Net result? Economic stagnation and decay.

It would pay to remember Adam Smith’s statement on growth oriented economic policy: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

Robert July 6, 2009 at 9:13 pm

“Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration. What do you think round two of the stimulus would look like?”

Are you sure about that?

http://www.weeklystandard.com/Content/Public/Articles/000/000/016/659dkrod.asp

I don’t completely trust TWS so maybe this article is BS, but I was still very displeased when I read it. We are supposed to be focusing on using unemployed resources…

Millian July 6, 2009 at 9:33 pm

MR clearly hasn’t seen the memo.

It is now every economist’s duty to support the Obama Administration. A Nobel Laureate said so.

E. Barandiaran July 6, 2009 at 9:47 pm

Tyler’s terrible post (for the public-choice reasons mentioned by Steve C. in his comment, to which I should add that these same reasons explain why spending is tied to the 2010 election) concludes with an absurd sentence: “American voters do not in fact have the patience for a lot of good ideas” (Tyler: you should ask Brian for a copy of his book).

indiana jim July 6, 2009 at 10:20 pm

I agree with Barandiaran. The notion that American’s writ large can’t be bothered with good ideas is hubristic and patronizing. One can only hope that this mind-set doesn’t poison the professor against presenting his pupils with “good ideas”.

Alan Brown July 7, 2009 at 1:24 am

When the Fed prints money, it reduces the purchasing ability of all the other dollars out there.

When the government borrows massive amounts, it raises demand for capital and thus crowds out other borrowers worldwide.

Both these things reduce demand as much as government action is increasing it.

When huge gobs of money are lent out and wasted, sure people think they are wealthier than they really are for awhile. But the deception is over now. The higher demand that existed before the bubble popped was built on a fantasy.

Looks like fraud and theft don’t create wealth after all. In fact, when spent on things no one is willing to pay for, government dissipates wealth.

You can tell a bad government investment when the capital is gone as opposed to a wise investment where you get the capital back plus a profit and can spend it again.

Should be obvious, but people don’t seem so keen on recognizing the obvious any more.

mulp July 7, 2009 at 2:19 am

Payroll tax cuts are the only way to restore bottom up prosperity. Eliminate payroll taxes for both employees and employers (social Security and such) until we see economic growth. It would be a huge and sustained boost to the economy that doesn’t require any economic plans by the government at all.

Bush tried that repeatedly and it failed to return employment to the level that peaked in 2000. The best Bush tax cuts could manage was replacing full-time jobs with part-time jobs.

See http://barrdear.com/john/2009/06/07/comparison-of-us-recessions-in-hours-worked-per-capita/

And Reagan hiked taxes repeatedly which led to the job growth during his administration. Of course, that was in response to the massive deficits, and Reagan wasn’t fighting a war, just doing a lot of wasteful spending on useless stuff for fighting past wars, and useless for future wars. But that was like JFK who did a lot of wasteful spending on nuclear weapons that are now costing a lot to dismantle and dispose of.

The best stimulous would be a carbon tax which would spur spending on productive capital that would produce either energy from free solar and wind cheaply, or cut energy use, or switch from oil to electric for transport.

What I can’t figure out is how economists can consider a $1B spent on productive capital that will produce returns for decades to come to not create as many jobs as $1B spent on imports of goods and oil for consumption. Is it ideology blinding common sense?

As a carbon tax has been attacked by conservatives as all other taxes, the best alternative is mandates like CAFE and cap and trade with lots of pork going to the polluting industries.

As long as economists won’t attack the conservatives who oppose every tax and have never seen a tax they don’t want to cut, no matter how badly doing so harms the economy, economists don’t have any standing to complain about the legislation passed.

As for monetary policy, I’m not convinced that it has that great an impact on economic growth. Growth in the high inflation, price controlled 70s was greater than during the past decade. Taxes were higher. And during Jimmy Carter’s term, more jobs were created as a percentage than during every other four year period since 1968, while the CAFE standards were being implemented by automakers, inflation was raging, oil prices were extremely high, and for his last year, Volcker was putting the screws to growth of the money supply driving mortgage rates to 18-20%. And jobs were growing slowly when Reagan took office and continued to grow slowly for a couple of quarters.

So every thing that is supposed to be bad for job growth was running against Carter, yet the economy performed better than during the Bush administration when everything was according to the Reagan mythology, tax cuts producing job growth. In fact, most of the bills included “job creation” in their title.

Andrew July 7, 2009 at 4:29 am

Mulp,

Consider when you go into debt, it may actually matter what you spend the money on. Spending money you don’t have may also produce jobs (activity) at the time, while requiring you to pay it back (save) in the future. I say may, because apparently Krugman et. al. have alchemized their way around this.

jerry July 7, 2009 at 11:04 am

the first stimulus was never intended to be a short, immediate boost to the economy. It’s intended to boost demand over time so things look a lot better in say November of 2012…Remember the words of Hillary and the Rahmster…”a crisis is a terrible thing to waste.”

Alan Brown July 9, 2009 at 2:43 pm

The way the government measures things, if they borrow money from China, use it to pay workers to do nothing and then tax it all back and do it again, an endless virtuous cycle of economic growth has begun.

Of course, nothing is further from the truth. We are simply further in debt and unavailable to do real work.

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