Wednesday, February 22, 2012

What parts of the stimulus worked?

Previously, I've shown some evidence that the stimulus worked in halting the spiral of job losses. There are very legitimate questions as to whether this was true, since the slide stopped before much of the stimulus money filtered into the economy. Looking at the evidence again, I think the stimulus was successful at stemming the recession, and I'll present that case here.

 Tax Credits
First of all, much of the stimulus was in tax credits, some paid in 2010, but about $140 billion in 2009. This money probably benefited the economy right away. Some of the money went into spending as intended, some into paying down personal debt, and some into savings.
Comments: Savings rate went up, so not all the money went into consumer spending. However, it's better for individuals to decide how to use the money, since they better comprehend their financial situation. In this atmosphere, the money probably didn't go into bubble investments.

Payments to States
The federal government gave states approximately $175 billion to make up for their sharply declining revenues. States would have been forced to make significantly deeper cuts in teachers, police, firefighters, Medicaid, Head Start, community development programs, and health programs.
Comments: This portion was very effective at reducing massive public job losses. However, that means that it shielded public employees, who tend to vote Democratic. I doubt that cash infusion into the private sector could have be as effective, unless we set up programs like those in Germany that help companies keep people in jobs at fewer hours.

The government allocated $184 billion for various infrastructure (highway, other transportation, broadband, water projects, schools, and veteran hospitals).
Comments: These are classic stimulus and/or pork barrel projects, which tend to range from excellent projects for safety and efficiency to throwing money down a sinkhole. On the plus side, it funneled money to a sector especially hard-hit by the recession, and some project were a boon to their regions. But among the negatives, it takes time to plan wisely before construction can begin. There's also a risk of boondoggles, such as the notorious high-speed rail program costing $8 billion. One important lesson: A recession is not a good time to spend on expensive, highly speculative projects. Put away the wishlists and stick with vanilla, well-understood engineering projects.

Direct Aid to the Poor, Disabled, and Unemployed
For those you didn't receive tax credits due to lack of taxable income, the government gave $82 billion. About half was unemployment benefits, but also included extra payments to those on SSI (federal disability) and Social Security and a large expansion of food stamps to meet increased demand.
Comments: I've read many places that money given to the poorer people in society ends up flowing very quickly back into the economy as consumer spending. This is helpful in keeping our economy afloat, but not in building it back up or correcting imbalances. I support food stamps as basic necessity, though the allotment is often more generous than necessary. I'm against raising and disability and unemployment benefits when working people are generally doing with less. This may work as a fairly pure Keynesian stimulus, but it is terrible as a prolonged policy. It also looks like a gift to a favored cause.

Science, Research, Energy, and Technology
This is a grab bag, some of which are like infrastructure spending, but on a smaller scale, only $67 billion. It includes grants for many green energy and efficiency programs, information technology upgrades for many federal agencies, and small grants increases for scientific research.
Comments: As with infrastructure projects, it's hard to tell good projects from wasteful ones, but at lest most of these projects were small and probably created future savings in energy costs. However, it also looks like a gift to favored causes and constituencies--environmentalists and white collar scientists and engineers in government agencies. Again, it may be easiest to stem unemployment by saving the jobs of government workers. But I'd argue that it's an expensive short term benefit and are likely areas to be cut when necessary budget cutting is finally undertaken.

Why (I Think) The Stimulus Worked
The stimulus worked because the federal government showed that it wasn't going to let employment go down the tubes--it would throw money at the country to prevent a depression. That, along with quantitative easing and the auto bailout, reassured businesses and people that we weren't going to let the free-fall continue, and it was safe to spend somewhat, rather than saving every scrap we could.

Parts of the stimulus were wasted, but time was of the essence, so careful consideration wasn't possible. The biggest boondoggle was probably high-speed rail. Probably some of the energy projects were also wastes, but of much smaller amounts of money.

This stimulus definitely had a liberal spin on it--money to ensure jobs for government employees and green energy, but not for large defense systems or oil exploration or coal projects. I can understand Republican anger about it. The stimulus does look like a big jobs program for Democratic constituencies. However, I think a temporary funneling of money into government was the best way to staunch to loss of jobs.

 Why a Conservative Stimulus Wouldn't Have Worked
Funneling money through more corporations probably wouldn't have helped, since corporations that had cash were mostly hoarding it. (The TARP, a different topic, was necessary to unfreeze money circulation). Giving more money directly to people in the form of tax cuts wouldn't have directly saved jobs. State governments would have had to cut very deeply. And people who had extra money mostly saved it to create extra cushions in case they were next to lose their jobs. Giving extra money to individuals and companies that already had money didn't work to the extent it was done.

The conservatives are definitely right about something though. You can't maintain stimulus year after year without getting into a monstrous level of debt. As I've said before, it's high time to end stimulative spending and start intelligent cuts.

The graphic is from Wikipedia, but I put some of the money into different categories. These are also interesting sources:


Couves said...

Fiscal and monetary levers can be manipulated to create more jobs in the short term, but they don’t ultimately stimulate anything… unless you consider stock and asset bubbles “stimulus.” Obama’s stimulus, for example, will actually give us lower GDP in ten years than we would have had without the stimulus (according to the CDC), and that’s from only a relatively small increase in national debt. The problem with stimulus is that it allocates our scarce resources in a way that reduces future growth. The housing bubble is the most obvious example of such malinvestment, but any time the government induces spending, it steers it away from more productive uses -- investments that will ultimately produce more jobs and a stronger economy.

Regarding your idea that the stimulus sent a message to business that we weren’t going to let the economy collapse… I completely disagree. Business wants certainty before making long term investments and there’s no certainty with a temporary stimulus, no matter how good it is for their balance sheets (which already look pretty good, in many cases). The best thing we could do is end the stimulus and let the markets quickly find bottom -- until that happens, businesses will not be eager to follow positive market signals because there’s no confidence those signals aren’t the result of some artificial government stimulus, which we all know must end.

Not many people are going to advocate a policy that might cause higher unemployment, reduced consumption and depressed profits, but our choice is to take a little corrective medicine today or be forced to swallow a whole lot tomorrow.

ModeratePoli said...

There's a lot that I disagree with. First, you should know from reading my blog that I don't think stock and asset bubbles are good results of stimulus.

You say 'according to the CDC.' I'm afraid the only CDC I know of is the Centers for Disease Control. Provide a link if you can without too much work.

When you say the stimulus allocated "our scarce resources," I have to disagree. The country was running well under capacity, and there aren't more productive uses going undone. Instead, there's a lack of profitable uses for all the money and manpower on the sidelines.

So I don't complain about the stimulus sucking up resources, and it isn't an argument with strong support.

Further, I don't understand your argument that the stimulus was the exact opposite of what business needed. In a few ways it raises uncertainty, but it's better than a longer, deeper tumble. Frankly, we don't know how deep the tumble would've been, and that is a hell of an uncertainty.

What do you mean by "the best thing we could do is end the stimulus?" Do you mean that we never should have had a stimulus, or that we should have backed off the policy at an earlier date (if so, please name the date and the rationale). I do agree that the stimulus can muddle market signals, but in such a deep recession, it's a disadvantage I prefer over other outcomes.

I agree with the idea of corrective medicine once things have stabilized sufficiently. A good time for it would have been starting (slowly) in 2010.

Couves, I hope you'll answer these questions. Thanks.

Couves said...

MP - I’m against stimulus because it doesn’t work and it actually gets us into more trouble. You don’t like bubbles and inflation? Neither do I. That’s one good reason to oppose stimulus.

On the CDC -- Sorry for screwing up my acronyms, I meant the Congressional Budget Office. I’ll find the source for you if I get a chance.

Limited resources -- When the bubble burst we underwent a massive deleveraging. All of the wealth we thought we had in real estate suddenly disappeared, leaving us a whole lot poorer than we thought we were. Our economy now has to rebuild based on an honest appraisal of our actual wealth and what the most productive investment of those limited resources are. Stimulus gets in the way of this process. Heck, we’re still trying to prop up the housing market -- that’s not just delaying the inevitable bottoming-out, it’s delaying the recovery of our economy. We need to let our economy restructure, not try to trick the system into thinking there’s nothing wrong.

Just one small example -- DC always seems very concerned with helping the construction industry hurt by the crash. Well guess what, there are no McMansions left to build! Much of the capital and labor invested in construction needs to find more economically productive uses. Yes, you could just give a quick boost to the economy by giving them work to do, but that prevents the necessary restructuring from happening.

"Frankly, we don't know how deep the tumble would've been, and that is a hell of an uncertainty."
Without government intervention, the tumble would have been deeper, but it would be over by now. Instead, we're still waiting for the housing market to find bottom... it's hard to imagine a policy that would have produced more uncertainty this long after the collapse.

Couves said...

Here's the link you asked for:

ModeratePoli said...

@Couves, I'm finally getting back to your comments (ugh, tax time). I checked out the link. Elmendorf (my hero), says the 10 year effect of the stimulus is net positive, with a big positive effect in the first three years, and a small drag in the out years "if nothing is done."

I think you have too much faith in what would happen without the stimulus--that we wouldn't have gone into a prolonged depression. I see that as a very likely outcome without the fiscal measures by the Fed and Obama. Can you cite any countries where they didn't do a stimulus and how that worked out?

Just to be clear, I'm not for endless propping up and bailouts, which just leave us in deep debt. But the shot of stimulus helped (from the evidence I can find). We should have been weaning ourselves starting maybe midyear 2010.