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This analysis of the House stimulus bill was put together by the Washington Post, and it is a great public service. (HT: Mark Perry) It's not exactly representative of the final bill that will be voted on this week, but it's good enough to give you an idea of the absurdity of this whole enterprise. This is what jumps out at me: very little of the bill involves immediate stimulus or anything that might be actually stimulative; only a little over 10% of the money gets spent this fiscal year, and about 30% gets spent next fiscal year (so much for the argument that we needed to pass this thing urgently); about 30% of the money goes to transfer payments (taking from one person and giving to another); only $20 billion would be spent over the next 18 months on highway construction; and about 20% of the bill doesn't get spent until 2012-19.This means the bill amounts to a gigantic spending spree, and has very little to do with providing immediate stimulus to an economy that, in Obama's words, would face a catastrophe if it weren't passed. And I'm not making this up. When asked about "... GOP criticism that the stimulus had turned into a spending plan, (Obama) replied, 'That's the point. Seriously, that's the point.'"
The bill is just a gigantic Democratic wish list and will do more to permanently expand the size of government than to stimulate the economy. The real tragedy will be that a permanently larger government will require permanently higher taxes, and an increased tax burden will almost surely mean less growth and a slower advance in our living standards. This bill should be called an "Economic Destruction Bill" because it will end up hurting the economy much more than it helps.
President Obama has started out his administration in the worst way imaginable. His stimulus is not a a stimulus. His calls for bipartisanship in crafting the bill were phony. His understanding of economics is zero. Instead of hope, he used fear of disaster to promote his bill. He has squandered much of his credibility in just two weeks. If this bill emerges from Congress in anything like the form represented in this chart, I predict it will go down in history as one of the most egregious examples of government waste in history.
Does this mean that investors should turn pessmistic and sell their stocks? I don't think so, because I believe that the market has already factored in a future that is absolutely miserable. This bill won't give us a depression, but it will reduce the chances of a sharp or quick recovery, and it will mean sub-par growth for the foreseeable future.
10 comments:
Scott,
Thanks for the heads up about the article. somehow I missed it.
Actually 17% of the spending is spent the first fiscal year and 37% the second. On the other hand 34% of the tax cuts go out the first year and 66% the second. Overall 21% of the impact goes out the first year and 44% the second.
The whole problem with designing the stimulus bill was that spending has a higher fiscal muliplier than tax cuts, but tax cuts are easier get out the door quickly. Hence a good stimulus should have both and that's why the President's original proposal included both. Here is Mark Zandi's estimates of fiscal multipliers:
http://www.economy.com/mark-zandi/documents/Small%20Business_7_24_08.pdf
Note that a refundable lump sum tax rebate, such as the Make Work Pay tax credit, has a fiscal multiplier of 1.26 so it actually does act more like spending than a tax cut at least in terms of its ability to "stimulate."
And I just came across Mark Zandi's analysis of the House stimulus bill:
http://www.economy.com/mark-zandi/documents/Economic_Stimulus_House_Plan_012109.pdf
Just skimming it, he seems to be forecasting a much more pessimistic baseline scenario, and to be predicting a more sustained positive effect from the stimulus than other outlooks.
I don't know if you or anyone else has seen these outlooks, but for contrast take a look. Here is Romer/Bernstein's and Bard College's outlooks with a stimulus (Bard's outlook has two different size stimuluses, one twice the size of the current bills):
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
http://www.levy.org/pubs/sa_dec_08.pdf
Oh, and by the way the Obama quote that sent the room full of Democrats into hysterical laughter was "You get the argument, 'Well, this is not a stimulus bill, this is a spending bill.' What do you think a stimulus is? That's the whole point. No, seriously. That's the point."
http://www.youtube.com/watch?v=Dt6eDFLoi6E
Rachel Madow's stimulometer obscures the President's face but you get the point. At least it's not pointing at "soup lines."
Mark: There are no tax cuts, at least to my knowledge. What they call tax cuts are actually tax rebates, meaning that people who don't pay taxes will receive checks. That is the absolute wrong way to use "tax cuts." As I and others have explained, if you take money from those who do pay taxes and give it to those who don't you are creating negative incentives to work. Very bad.
Since as you say only a small portion of the bill will be spent this year, then the rationale Obama has pushed so strongly (we must get this done now, or we face a catastrophe) is pure bunk.
I met Mark Zandi about 16 years ago. I would not consider him to be a luminary or a good source for economic preditions or forecasts. If I had to guess I would say that Mark is nothing more than a shill for this whole exercise in futility.
The notion that a dollar spent on fiscal "stimulus" has a multiplier greater than zero, if not greater than 1, is far-fetched. In the final analysis, no one has a clue, but logic says that the multiplier is less than zero. The government simply can't spend a mountain of money in a short period in a manner that is more efficient than what the private sector could achieve.
You should know that Romer has research showing that tax multipliers are far higher than spending multipliers, yet she has apparently suspended disbelief in her desire to achieve fame and fortune working for Obama.
The only that will come of this is that fiscal spending will be totally discredited within a few years. Sadly, that lesson will be forgotten a fews years later.
Actually there are $182 billion in tax cuts in the house bill as classified by the CBO according to their latest analysis:
http://www.cbo.gov/ftpdocs/99xx/doc9976/hr1aspassed.pdf
The CBO classifies Make Work Pay as spending. The CBO does however classify the bonus depreciation, the net operating loss carryback and the Work Opportunity Credit as tax cuts however. It is immaterial to me as it is all a matter of semantics.
I'm still evaluating Zandi's analysis of the fiscal stimulus. It seems to be an outlier in a number of respects but I'll reserve judgment until I have more time to digest it.
However, Zandi's multipliers are consistent with other estimates of fiscal multipliers such as those that are used by the CBO and as estimated by Valerie Ramey. Here is one of her papers:
http://econ.ucsd.edu/~vramey/research/IdentifyingGovt.pdf
Furthermore the Christina Romer working paper you are referring to is here:
http://elsa.berkeley.edu/~cromer/RomerDraft307.pdf
It is my understanding, based on things she and David have said, that Christina Romer believes that the tax multiplier is no larger than the spending multiplier. And she certainly does not believe that a balanced-budget equivalent reduction in taxes and spending provides any fiscal stimulus at all (read the paper).
To compare the fiscal multipliers estimated previously with Romer's estimate is inappropriate. She used a very different (and in some ways revolutionary) methodology. Thus it is not comparable. For example, previous studies have not fully controlled for the tax increases that often accompany spending increases. Thus they are very likely to understate the effects of spending increases alone. Valerie Ramey's study in particular assessed the impact of the Korean-War military spending increase without taking account of the fact that it was accompanied by a large tax increase.
What Romer's study showed is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for tax policy changes leads to an underestimation of their effects. Because these issues of omitted variable bias are likely to be as strong for spending as for tax changes, the most reasonable interpretation of her paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe.
Which leads me to believe that the current estimates of the positive effects of the stimulus may in fact be too low. Thanks for reminding me of the Romer paper.
Scott,
Mark is completely missing the point the truth is that this whole Stimulus debate has been argued from the demand side, " we've got to get money into the hands of consumers" is the rallying cry.
The President and his party have defined stimulus down to the point where he insisted the other day that spending was stimulus! this is the Bond illusion portion of their magic act.
You and I both know that economies don't expand as a result of government taking more money from those in our society who are the most productive and giving it to those who are the least. That line of thought is not from any book on free market capitalism it is straight out of the Communist Manifesto "From each according to his ability, to each according to his needs".
Economies expand when risk takers pursue their own self interest because they feel that conditions are favorable to their success.
Will the impact of the Government borrowing an extra trillion dollars make credit more accessible to entrepenuers?
Will the demonizing of CEO's and the business community in general that the current administration takes great pleasure in,make them more favorably inclined to risk their capital?
Do high tax rates on corporations make the US the darling of global investors looking for a return on their investment?
Will increasing regulation and the added cost it entails for business owners provide them with better profit margins?
None of this so called stimulus does anything to change the fact that taxes on Employers are at high enough levels to discourage production and employment.
Even at the incredible level of spending this bill ushers in , we will get to a point in the future where the money will all have been spent and still nothing will have been done to provide any real incentives to increase production and by extension employment.
At that point we will relearn what Henry Morgenthau knew nearly 70 years ago, he couldn't end the depression through spending back then and Obama can't end this recession with spending now.
Keep up the great work
Scott,
Maybe it's all about perception and it doesn't really matter about the details of how the money gets spent; maybe it's just about building some form of confidence in the system, getting the wheels to churn, and at some point, after equilibrium is established they can re-set some of this nonsense.
Therapist: I don't share your optimism about the market's ability to shrug off the negative implications of the stimulus bill. I think the prospect of just such a bill has been plaguing the market since early September. This bill squanders huge amounts of money, and permanently increases the size of government. That, in turn, means that tax burdens have to rise significantly in the future. Follow the logic, and you soon realize that the discounted, after-tax, present value of future earnings has to decline.
Mark -- unpacking all your DNC and now White House talking points is quite a chore.
I'm amazed that you have the gumption to say, re Christy Romer's 2007 paper, that "the most reasonable interpretation of her paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe." That is manifestly NOT a reasonable interpretation of her paper; you've simply lifted a near-verbatim quote from the White House talking points on this subject.
Have you read the paper or are just citing it? Go back and read it. Here's Greg Mankiw, for one, on her paper, by the way: "The Romer research is about the effects of tax cuts. It does not address the effects of increases in government spending."
Spending is of course mentioned in the paper, but only as it relates to tax changes.
As readers of this blog know, the Romer thesis is, contrary to Mark, pretty simple: $1 dollar in tax cuts raises GDP by roughly $3, or more than twice what many liberal economists find for spending increases. Her paper is clear and unambiguous to all but Mark.
Jon S.,
I suspect the White House is getting its economic talking points these days from economists like Christina Romer, so it's getting things just a little bit backwards. It's refreshing to have a White House that pays attention to New Keynesian economists for a change.
I have in fact read, and reread, the paper in its different versions (it's still a working paper of course). When I heard of Greg Mankiw's interpretation early last month it had me momentarily questioning my sanity. But Brad Delong's writings (he knows the Romers personally) reassured me that I had interpreted the paper correctly. In fact he said that David Romer described the results of their paper as "Hyper-Keynesian."
What was revolutionary about the paper was that it classified tax changes according to their intended purpose. A tax cut was classified as "endogenous" if it spending driven (done to accomodate a change in spending) or countercyclical (designed to be stimulative in a downturn, and so a tax cut). All other tax changes were classified as "exogenous." The result most commonly cited is the one concerning this latter category. A passage of the paper that helps to drive the correct interpretation of the paper home is the following (page 22 of the March 2007 version):
"Following a spending-driven tax increase, real GDP on average rises moderately, reaching a maximum of 0.7 percent after two quarters (t = 1.5). Thereafter the effect fluctuates irregularly around zero and is always far from significant. Thus looking at how the economy behaves after tax changes driven by spending changes yields estimates of the effects of tax changes that are starkly different from those based on exogenous tax changes."
In short tax increases coupled with spending increases yielded no statistically significant effect on the economy, and in fact, in direct contradiction to supply side theory, on average, at least temporarily, they increased GDP.
In the final analysis, Romer's working paper found that, with the exception of countercyclical tax changes (possibly because there were too few, or because the economic downturn obscured their effect), the only tax change that had a statistically significant effect on GDP were those that reduced the federal budget balance. (And in fact, in most cases, this increased an existing budget deficit.) This is hardly a result that supports supply side conclusions.
Theoretically, it is possible that the methods employed in Romer's paper could be applied to spending policy changes. The implication is of course that "exogenous" spending changes would have a much larger multiplier than the value of 1.4 estimated by Valerie Ramey for example. From the standpoint of New Keynesian research this would be the equivalent of "the other shoe dropping."
I was dissappointed by Greg Mankiw's remarks in the WSJ, but unfortunately I've seen a lot of that lately.
Well, you sure showed me, Mark. You can dress it up any way you want to but her conclusions are not at all what you say they are, and you can elide all you want but you've simply cut and pasted the White House talking points, which are nonsensical at best. Romer's research paper in 2007 and the one with hubby in Nov. 2008 both indicate that tax cuts do far more for GDP than fiscal spending. Period.
Jon S.
First, my interpretation of the Romers' paper is entirely consistent with the New Keynesian school of thought (of which the Romers are, and I suppose I am increasingly, a part). It was the only interpretation that I was even aware of until Greg Mankiw wrote a Wall Street Journal article last month which presented an entirely different interpretation. That article is now generally considered to be intellectually dishonest in New Keynesian circles mainly because few economists believe that Greg Mankiw really fails to understand the true implications of the paper (but, as Paul Krugman implied, who really knows for sure).
Second, your interpretation (which by extension is really Greg Mankiw's interpretation) of the Romers' paper is at complete odds with the conventional New Keynesian interpretation and doesn't make sense in light of the fact that the paper found that spending related tax changes had no statistically significant effect on GDP. In fact, the only kind of tax change that the paper found to have a statistically significant effect on GDP was a noncountercyclical tax cut that decreased the budget balance.
In layman's terms, the paper found that the only tax cut that provided fiscal stimulus was a tax cut that induced a budget deficit, provided the economy was not already in a recession. Or, more briefly still, and vastly oversimplifying the paper's conclusions: deficits stimulate the economy.
Based on this, and the fact that the methods employed in the paper have yet to be applied to spending policies, to continue to argue that the paper concluded that tax cuts are always and uniquely stimulative is an exercise in sheer illogic.
Third, with all due respect to your "perceptions" I don't know what you are talking about when you say I am cutting and pasting White House talking points. It is possible that I have inadvertantly phrased my explanations of the paper in a way very similar to one contained in a White House talking point, but I have never actually seen the the White House talking points about the paper.(Who knew that White House talking points are providing interpretions of economics research papers?) In any case, when interpreting economics research papers the last thing I am going to consult is White House talking points. Since you are so adamant that I must be doing this, I guess I should go see if I can figure out what you are referring to specifically.
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