Tag Archives: Stimulus

Specter and the moderates' second pound of flesh---$30-48 billion

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To prevent a filibuster, the administration has to coddle the Senate's Great Men (and Women) Of The Center.  Specter insisting the plan cost less than either the $820 billion house bill or the $838 billion senate version---knocking $40-58 billion, 5% or more, off of a stimulus that may already be too small.  And with the final total looking like it will be $790 billion, pretty much succeeding.   A few Republican moderates (and a Democrat or two) holding the economy hostage so that --- what?  Their power be recognized?  It's been a while since I saw Specter in action in a hearing, but I recall, perhaps erroneously, a really bad gut-check about the guy as he browbeat some poor sap, or maybe some perfectly reasonable guy he happened not to agree with.  True, he's been a voice of reason on some issues, but I was not impressed.   Maybe the Republican moderates feel they have something to take back to their party in order not to be drummed out of it for supporting the plan at all.  Specter also insisting on keeping $10 billion for NIH untouched, while an increase for the NSF was scaled  back by the Senate plan---what's with that, does NIH have a facility in Pennsylvania, or is Specter just a health nut?

Probably Obama's playing it cool at this point is the right game plan... getting the thing passed without having to break a filibuster is probably much better for his long-run efficacy.   But I worry that it is not large enough---that by not signing on, but effectively watering it down through the implcit threat of a filibuster, the Republicans are setting up---not consciously for the most part, except that there probably are those who believe an extended recession is better than any increase in government spending---to try to benefit from an unnecessary extension of the recession.  At some point---perhaps on the second batch of stimulus that will likely turn out to be necess, crying "stimulus was ineffective".  I'm not sure Obama will get a chance to put in another round of stimulus, though he occasionally talks of it.  And, he may be able to get in another round under the guise of longer-term public investment, which he has called for, with stimulus as a side-benefit.  But I imagine there will be a filibuster showdown at some point.  Hopefully the chits will be called in and the moderates will help him break it, maybe with another ceremonial multi-billion-dollar bone or two as compensation.   But it is frustrating that the "senate moderates" are as boneheaded as they are about this.  One can only hope they are doing it because they feel the need to shelter themselves from the ire of their party.

From the AP:

"Earlier Tuesday, the Senate sailed to approval of its $838 billion economic stimulus bill, but with only three moderate Republicans signing on and then demanding the bill's cost go down when the final version emerges from negotiations.

Negotiators initially were working with a target of about $800 billion for the final bill, lawmakers said. But GOP moderate Arlen Specter, R-Pa., said Tuesday night on MSNBC's "Hardball" that he was insisting on a figure at around $780 billion."

Credit for the pound of flesh metaphor to Paul Krugman, back on Feb. 6th.

Greg Mankiw's preferred stimulus plan

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Here’s Greg Mankiw’s preferred fiscal stimulus plan.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid.

Would the equal present value of the payroll tax cut and the gas tax increase be discounted by consumers, who would save in anticipation of the effects of the future increase, resulting in no stimulus to aggregate demand from the policy?  I doubt it; I think it would have some Keynesian multiplier effect nonetheless.  But much of it may be saved, in the form of paying down debt.  It does also give a straightforward reduction in the cost of keeping people employed, a microeconomic incentive effect that might prove to have positive macroeconomic consequences in the present situation.  I still tend to think government spending will, as the simplest Econ 1 Keynesian theory suggests, have a bigger multiplier (a point Greg does explicitly address---he thinks the empirical evidence, though not conclusive, casts some doubt on this).

I’d be most concerned, though, with what would happen to the programs normally funded by payroll taxes:  Social Security and Medicare.  Social Security in particular is at least nominally supported by paying payroll tax receipts into a fund reserved for Social Security payouts to retirees;  would the program continue to pay out at current rates, now funded by general revenues or the gasoline tax?  That might not be such a bad idea, but I’m not sure it’s what Mankiw has in mind….

Note that even if the increased-state-spending-for-payroll-tax-cut exchange would be macroeconomically benefical globally, it might have some negative micro effects if only a few states adopted it, as it would put them at some competitive disadvantage for jobs.

Lessons from Japan on fiscal stimulus?

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Paul Krugman's thoughts on Japan from around a decade ago are quite interesting.  He wrote:

But it is quite a stretch to argue that Japan in the 90s is a parallel case [to the US from the Great Depression through World War II]. It might be; but an at least equally, if not more, plausible story is that Japan has a structural excess of saving over investment, even at a zero interest rate; in that case a temporary fiscal stimulus will produce only temporary results.

What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy - the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance - are rejected as dangerously radical and unbecoming of a dignified economy.

The "exotic" multiple-equilibrium story must not really be that exotic, since just above this he entertains it as an explanation of the 1996 Asian financial crisis, and of the apparent success of WWII spending in lifting the US sustainably out of depression.

The current situation certainly differs from Japan's in the 90's in many ways, but it does raise the question which of those ways are likely to render fiscal policy more effective for us now, than for Japan then.  Of course, I think no-one would argue that we have a structural excess of savings over investment.  But it does appear that the propensity to save may have shifted up at least temporarily.  Do we face an S-shaped consumption-income relation?  If this slump drags on too long, will we need to target inflation?

At the time Krugman wrote these pieces, he felt the multiple-equilibrium possibility looked dubious because there had been prolonged fiscal stimulus, but it  hadn't rendered itself unnecessary.  Others (see the article linked below) think apparently think it just wasn't large enough, and intense enough over a short period of time, to succeed.  And there are those who think that Japan didn't clean up its banking problem effectively---that its banks still had the balance sheet problems that, Krugman argues, fiscal stimulus can provide breathing room to work out.

Greg Mankiw links to an interesting article on Japan, that largely confirms the continuance of the situation Krugman described in 1999---fiscal stimulus not having rendered itself unnecessary by producing a self-sustaining recovery.  Make sure and read past the first page.  It would be interesting to further investigate the content, and methodology, of the Institute for Local Government study that concluded:

every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger boost of 1.74 trillion yen, the report found. But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product, a measure of its overall economic size, by only 1.37 trillion yen, mainly by creating jobs and other improvements like reducing travel times.

Mankiw has his own suggestion for a stimulus plan, about which a bit more in the next post.

Niall's back with an extra dose of Keynes-bashing, but now Brad's on the case

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In an LA times editorial, Niall Ferguson augments his Feb. 2 Financial Times piece, which I commented on earlier, with much more explicit Keynes-bashing and fiscal-stimulus-dissing.  This time, Brad's on the case.

Long Treasury yields did rise a bit (roughly from just under 3, to just over 3.5, percent over the last few weeks), and there was similar if less pronounced movement across the longer end of the curve, so maybe we shouldn't count on financing the whole stimulus at todays low rates---though I couldn't tell you if this is a response to the clear likelihood of a stimulus package, which I would have thought would have been priced in for a while now.  But if we're getting output closer to potential, sooner, with the stimulus, we're increasing the overall stream of real output that the Treasury will have avaible to tax to pay these things back---increased indebtedness being met with increased debt-servicing capability.  Maybe not one-for-one, although that cuddly, big-eyed multiplier sure helps.  The cuddly reference:  "Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear."---Ferguson from the LA Times piece.)  Among the most multiplier-besotted economists would seem to be Paul Krugman;  here is a fairly random sample of him failing to anticipate the current crisis (you can go back much further with him on the dangers --- and let's not forget, the existence --- of the housing bubble).  As for regression to childhood, there seems to be a more serious epidemic among some (but far from all!) politically conservative economists, of regression to being macroeconomically unborn.  What's Ferguson's argument here: If they teach it in Econ 1 in every halfway respectable university in the country, there can't be anything to it?

Radicals asking for bank takeovers in left-wing rag: Reinhart and Rogoff on the WSJ op-ed page

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Carmen Reinhardt (Economics, U MD) and Kenneth Rogoff (Economics, Harvard), on the WSJ editorial page:

"For far too long, official estimates of the likely trajectory of U.S. growth have been absurdly rosy and always behind the curve, leading to a distinctly underpowered response, particularly in terms of forcing the necessary restructuring of the financial system. Instead, authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership, and only then recapitalizing and reprivatizing them."

But what would the former chief economist of the IMF know about such things?