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Recent fiscal policies, including the 2008 stimulus payments and the 2009 Making Work Pay tax credit, aimed to increase household spending. This paper quantifies the spending response to these policies and examines differences in spending by whether the stimulus was delivered as a one-time payment or as a flow of payments from reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding in 2009 boosted spending at roughly half the rate (13 percent) as the one-time payments (25 percent) in 2008.

You may recall that the structure of these tax cuts was designed scientifically to produce maximum bang for the buck.  That is from a new paper by Claudia Sahm, Matthew Shapiro, and Joel Slemrod (pdf).

Of course, if you are more worried about the length of the deleveraging recession, some mistakes may cancel out and perhaps the ARRA approach, leading to higher savings and quicker balance sheet repair, was wiser after all.

For this blog post, let’s assume Keynesian economics.

For all the talk of a “large stimulus,” you don’t hear much about a “longer stimulus.”

The problem with a “too small” stimulus is that you get an initial economic boost, but when the stimulus expires the economy slumps back down, as indeed happened in mid 2011.  Ideally a stimulus employs some idle labor, stops it from depreciating, and tides those workers over until they can look for other jobs in fundamentally better economic conditions.  Those last few words are important.  If conditions are not improving soon, the ability of the stimulus to “buy time” for those workers isn’t worth much.  The workers get laid off from the government projects and their reemployment prospects are no better than to begin with.  We end up having spent a lot of money to postpone our adjustment problems, rather than achieving takeoff.

Deleveraging recessions last a long time, as shown by Rogoff and Reinhart.  The need for continuing deleveraging implies that even a stimulus twice the size of ARRA won’t turn the tide.

In those cases a well-designed stimulus program should not be so “timely.”  For a given presented expected value sum spent on stimulus, it is better to spread it out across the years.  It is better to help a smaller set of workers for five years (or however many years it takes for most of the deleveraging to end), after which they are reemployable , than to temporarily boost a larger number of workers for two years, and then leave them back in the dust because deleveraging is still going on.

The effectiveness of a stimulus will be measured by how many workers it bridges over until most of the deleveraging is over.  For ARRA, that number is close to zero.

Length may be one reason why WWII was effective stimulus (again, we are operating within the Keynesian worldview here, no need to argue this point in the comments).  The war lasted a while, and in the meantime a lot of balance sheet repair went on.

Oddly, there is not much discussion about the length of fiscal stimulus.  But there should be.

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.  “We are creating a classic good bank, bad bank structure”…

…“It’s a way to get investors focus on the good,” said Paul Miller, a former examiner with the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. “It’s a way to talk about good things and ignore the bad.”

That was in March 2011.  Here is August 2011.  Here is a chart.

Matt says yes.  Having fewer goods on the shelves prompts retailers to replenish their inventories, which spurs economic activity.  You don’t even need to break any windows!  But there’s more to it than that.  As Matt points out, a key question is what storeowners expect to be the future rate of shoplifiting.  If a lot of shoplifting is expected, costs of supply go up and output will shrink, with some offsetting employment boost in the security guard sector.  In other words, the shoplifters who do the most good are those who don’t get caught and who in fact leave no trace.  If you are caught shoplifting, insist that you have no compatriots or allies and that you are a fully atypical individual and therefore that no Bayesian updating should go on about the likelihood of future retail crime.  Don’t dress or talk like a shoplifter!  (Be creative.)  Similarly, it is best if the invading aliens insist that they too are bothered by the Fermi paradox.

If it’s a durable good monopolist, the shoplifter is destroying/restricting output, benefiting the shop owner, raising prices, and helping the economy only in the strangest of the liquidity trap models.  The benevolent shoplifter will seek out the more competitive markets or perhaps grab ripe strawberries, put down those hardcover books.