Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!
7/18/09 11:16 AM
Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
Support this weblog | About This Website | About Brad DeLong | This Weblog | Weblog RSS feed | Brad DeLong's Egregious Moderation | Order of the Shrill | Office Hours: Evans 601, by appointment, email delong@econ.berkeley.edu | Academic C.V. | John Yoo and the Torture Memo | Audio and Video Read the comment policy: no drive-bys, and if you bring information and humor you will be fine... Stimulus Aid for College Stimulus Bill Aids Working College Students. Get your Degree Online. www.Online-Education.net/FindDegree
Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation July 12, 2009
Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong! Felix Salmon: Why I’m unconvinced by calls for a second stimulus package: Let me try to hazard an answer to that. Start with the guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of http://delong.typepad.com/sdj/2009/07/effects-of-the-stimulus-package-in-which-the-usually-sharp-eyed-felix-salmon-is-wrong.html
Page 1 of 5
Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!
7/18/09 11:16 AM
guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of spending too much paled in comparison with the risks of spending too little. And because the effects of government spending on GDP and unemployment are hard to predict with any accuracy, there was a strong case that a monster $800 billion stimulus bill was in many ways the prudent course of action. Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would. This is a useful datapoint — and one way of looking at it is to conclude that the stimulus was so big that the last few hundred billion dollars have had virtually no positive effect at all. And that any extra stimulus would similarly achieve very little... Ummmm.... No. Jared Bernstein and Christy Romer constructed extremely crude estimates of the delta-effect of the stimulus package on the economy by taking when they thought the different components of the $787 billion would be spent and how long it would then take for the government spending to have an impact on the economy. Their estimate is that we saw the effect of $0 (zero) (none) (nada) dollars of the stimulus package on the economy in the first quarter, that we saw the effects of only $14.5 billion in the second quarter, and that we are about to see the effects of $38.6 billion now in the third quarter as the effects of the ackage ramp up to their peak in the fall of 2010, when we will see $82.1 billion of stimulus spending hit the economy. To say that what happened in the second quarter means that "the last few hundred billion dollars have had virtually no effect" is like sticking your toe into the ocean and pointing out that your hair is still dry... rated 4.09 by you and 13 others [? ] You loved this post (
), you might also like:
Secondary Sources: More Stimulus, Consumer Protection, Tipping Point (@WSJ.com: Real Time Economics) Why I'm Unconvinced by Calls for a Second Stimulus Package (@SeekingAlpha US Market Stocks) 2 more recommended posts Âť Brad DeLong on July 12, 2009 at 06:07 PM in Economics, Economics: Fiscal Policy | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f080038834011571066c70970c Listed below are links to weblogs that reference Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!:
Comments You can follow this conversation by subscribing to the comment feed for this post. Felix Salmon. What a foreign sounding name. Posted by: Nancy Kirsch | July 12, 2009 at 06:16 PM Just for example, in our town in Massachusetts, (half) the stimulus money landed in the fiscal year that began on July 1. We first started spending that money less than two weeks ago (where "spending" means not laying of teachers, fire fighters, police). Posted by: dr2chase | July 12, 2009 at 06:18 PM It seems to me that the right argument for a second stimulus is not "the first stimulus didn't do enough" (since it hasn't had time to work yet), but rather "the economy is doing worse than we forecast, therefore the first stimulus should have been bigger than we made it." I think if people understood that second-stimulus proponents are making the second argument, rather than the first, there http://delong.typepad.com/sdj/2009/07/effects-of-the-stimulus-package-in-which-the-usually-sharp-eyed-felix-salmon-is-wrong.html
Page 2 of 5
Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!
7/18/09 11:16 AM
made it." I think if people understood that second-stimulus proponents are making the second argument, rather than the first, there would be a lot less instinctive fear of a second stimulus. We don't want to throw good money after (possibly-)bad, we want to have thrown a bigger amount of money i the first place... Posted by: Noah | July 12, 2009 at 06:22 PM Once the health care bill goes way over budget unemployment will go down. Posted by: Nancy Kirsch | July 12, 2009 at 06:34 PM If you asked the American people they would probably say they had the impression the stim plan was designed for immediate impact, probably because a lot of chest thumping politicians implied as much. Be careful when politicians imply anything. Obama is burning uphis credibility at an astounding rate, or should I say Pelosi and Reid are burning it for him? Posted by: save_the_rustbelt | July 12, 2009 at 07:02 PM I know its worse than flimsy, but you could say the last couple billion stimulus hasn't done anything (since not even the first couple hundred have been spent yet). But really, when it comes to political campaigning, since when has real analysis, instead of fairy-tale thinking had any real impact? Posted by: bigTom | July 12, 2009 at 07:45 PM It's real simple: we need spending to have jobs. If people don't spend, nobody has jobs, and so nobody spends. If we take away people's money (tax) and spend it for them (spend) then, wowee, we have spending where there wasn't spending before. And if we delay the tax part by taking out a loan and worrying about raising taxes later, we have it even better for the time being, assuming we can handle the interest payments later on, which we likely can. As for the stimulus not working yet, well, it was kinda a crap stimulus. We really do need all that infrastructure investment, but we should have taken care of it in regular appropriations. For a fast stimulus, pay all the states' payroll for a given amount of time, and put all of what's left toward weatherization, which jobs can be created almost immediately (even if the first few weeks of work will consist of training). Either that, or just give everyone gift certificates, instead of tax rebates, with an expiration date like 30 days after issue. That way people have to either spend it or lose it, and since nobody wants to pass up free stuff, they'll spend it. Posted by: anonymous | July 12, 2009 at 08:13 PM Felix is right there is a need for specifics. One strategic resource is community colleges. ACCT lobbied for and got $5B of a $100B needed (so they say) community college shortfall in the winter stimulus budget: http://www.acct.org/December%2017%20Final%20Stimulus%20Letter%20December%2017%202008.pdf Colleges are important in addressing looming nursing shortage and recession unemployment. The $5B will add almost 100000 I assume mostly construction jobs, I assume person-yrs. I guess Salmon's main argument is you'll get only 80000 jobs and timelines might take longer if done all at once. I'm wondering what the optimal rate of filling this $100B deficit is. Can construction workers be college students after projects are completed (maybe degree is part of pay?), or must they move onto other construction projects? Should construction cost inflation be considered (against present cheap interest rates)? Is there a cost for skills and other transaction costs in transferring unemployed workers to college construction sites? Assuming renewed $5B/yr (IDK if this is planned), that would fill the deficit in 20 years. Too slow for nursing needs let alone recession unemployment. What is the appropriate flow here? I'd guess even with stimulus some colleges are laying off workers, so it wouldn't make sense to build new building beside abandoned viable old ones. I also like using Canada's oil sands and airport anti-bird techniques and technologies; applying these to pig farms to socially distance birds from pigs. And I like healthy low footprint farming, not sure if suburban farming subsidies or helping Monsanto develop novel fertilizer nanoparticles is the way to go. Not sure if either of these pets projects scale (oil sands anti-bird tech is probably expensive). I'll take a look a California's budget (guessing just like a Canadian province) even though Arnie cutting cheap homeless programmes will raise prison and ER costs. Figure I'll be able to weaselly wind-lobby in any event. It seems at least some of the college funding should be at the front of the trough assuming there is a capacity mismatch/shortfall/shrinkage-faster-than-enrollment-shrinkage. Pot tax? http://delong.typepad.com/sdj/2009/07/effects-of-the-stimulus-package-in-which-the-usually-sharp-eyed-felix-salmon-is-wrong.html
Page 3 of 5
Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!
7/18/09 11:16 AM
tax? Posted by: Phillip Huggan | July 12, 2009 at 08:59 PM Yes a very odd error from Salmon who is smart and usually sensible. So what about a second stimulus ? The problem is political -- a sensible stimulus can't make it through congress. Matthew Yglesias argues that the solution is to have an all tax cut second stimulus (second best second stimulus). As policy sending money to state and local government would be much better, but can congress say no to a temporary tax cut ? Is a tax cut only second stimulus (you know the kind that in normal times Krugman and you would oppose because you would prefer to rely on monetary policy) better than no second stimulus ? Posted by: robert waldmann | July 13, 2009 at 06:29 AM When the first "stimulus" takes over 2 years to be spent, it doesn't really matter if there is a 2nd stimulus or not. Velocity matters - if the first stimulus were spent faster, then there would be higher multiplier. It would be hard to design a more ineffective stimulus than what we have. Part of the problem is political - the debt ceiling is 12.1 trillion and the debt is at 11.5. Hard to stuff 700 billion in there without raising the debt ceiling. A tax cut now is idiotic - it would be an immediate transfer to the banks - anyone with enough income to be taxed is deleveraging like mad. No one will put in the market, and it gets 0% return as saving - most likely use will be to pay down debt. If that's the effect we wanted, we could have done that with the bank bailout - in effect a principal write-down via tax payers. Seems like the banks got to the stimulus trough before the rest of us. Posted by: pebird | July 13, 2009 at 08:54 AM "It would be hard to design a more ineffective stimulus than what we have." Considering the problems states are facing right now it's obvious geting a lot more money to the states right now would have a substantial impact (expecially is saving jobs). Posted by: Argel | July 14, 2009 at 04:25 PM
Verify your Comment Previewing your Comment Posted by: | This is only a preview. Your comment has not yet been posted. Post
Edit
Your comment could not be posted. Error type: Your comment has been posted. Post another comment The letters and numbers you entered did not match the image. Please try again. As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments. Having trouble reading this image? View an alternate. Continue
Me:
Economists:
Juicebox Mafia: Moral Philosophers:
http://delong.typepad.com/sdj/2009/07/effects-of-the-stimulus-package-in-which-the-usually-sharp-eyed-felix-salmon-is-wrong.html
Page 4 of 5
Effects of the Stimulus Package: in Which the Usually Sharp-Eyed Felix Salmon Is Wrong!
Paul Krugman Mark Thoma Cowen and Tabarrok Chinn and Hamilton Brad Setser
Ezra Klein Matthew Yglesias Spencer Ackerman Dana Goldstein Dan Froomkin
7/18/09 11:16 AM
Philosophers: Hilzoy and Friends Crooked Timber of Humanity Mark Kleiman and Friends Eric Rauchway and Friends John Holbo and Friends
http://delong.typepad.com/sdj/2009/07/effects-of-the-stimulus-package-in-which-the-usually-sharp-eyed-felix-salmon-is-wrong.html
Page 5 of 5