Becker is certainly right that it would be a mistake to enact a further stimulus program. With half the existing $787 billion stimulus package (which has grown to $862 billion while no one was looking—and that’s the figure I’ll use henceforth) that Congress enacted in February of last year still unspent, and given the sluggishness with which our government moves, a new stimulus program would probably not come on line until 2011 or 2012, by which time its principal effect might be to increase our already staggering public debt. Anyway the question of a new stimulus package is thoroughly academic because of the extreme unpopularity of the existing one, which only 6 percent Americans believe has had any positive impact on employment.
I think they’re wrong, and that the original stimulus was, on balance, a justified measure. But I can well understand its unpopularity, and I share many of the reservations voiced by critics.
Because it is being financed by federal borrowing rather than by taxes, by the time the stimulus is fully implemented (probably early in 2011) it will have injected $862 billion into the economy: roughly $400 billion in 2009 and the same amount in 2010. Each figure is a little less than 3 percent of GDP. The economic effect of such an increase in GDP depends on what is done with the money. Suppose all the recipients used it to buy Treasury bonds. Then its economic effect would be zero: the government would be lending the money and then borrowing it back from the borrowers.
Obviously some, and probably much, of the money has been spent rather than saved, though no one knows how much. Since the personal savings rate is less than 5 percent and some personal savings finance private business activities, probably almost all of the stimulus money has been or will be spent. This does not mean that it is or will be well spent, in the sense of financing activities that add more to economic welfare than the same amount used for private investment would do. But the stimulus has not reduced private investment, as it might do if the borrowing to finance the stimulus raised interest rates. Interest rates have been kept very low by the Federal Reserve. Despite that, private investment has been anemic; net of depreciation it was negative in 2009. Banks and consumers alike—heavily indebted and pessimistic about profit and income prospects—have trimmed their expenditures. Banks continue to hoard some $1.2 trillion in excess reserves (lendable cash sitting in accounts in federal reserve banks rather than being lent or otherwise invested), and the personal savings rate, which before the current depression was only about 1 percent, has increased dramatically.
In effect, the Treasury has borrowed from Americans money that wasn’t being used productively, and from foreigners (but mainly from Americans) money that they preferred to lend than to spend, and has recirculated the money into the American economy. Consumption expenditures rose in 2009 at the same time that incomes were falling and saving was increasing because stimulus money financed consumption that otherwise would not have materialized. An increase in consumption stimulates an increase in production (or at least a more rapid drawdown of inventories, so that production recommences sooner), which in turn increases the demand for labor and so reduces unemployment.
No one knows how many people are employed who wouldn’t be were it not for the stimulus money. There are almost 15 million unemployed Americans, and since the unemployment rate is almost 10 percent, this suggests that about 135 million are employed. If the stimulus, which as I said is injecting about $400 billion a year into the economy, has increased the number of employed by 1 percent, that would reduce the number of unemployed by almost 10 percent. Or stated differently, were it not for the stimulus, the unemployment rate might be almost 11 percent rather than almost 10 percent. An unemployment rate of almost 11 percent would cause something akin to panic among businessmen, consumers, and politicians, with very bad consequences for the country. So one can think of the stimulus program as a kind of insurance policy against potential economic and political unrest.
The stimulus has not, not yet anyway, “crowded out” private investment because there is so little demand for such investment at present even though interest rates are extremely low. The Barro-Ricardian Equivalence hypothesis implies that people are reducing their consumption and investment in anticipation of having to pay increased taxes in the future to repay the money borrowed to finance the stimulus. There may be something to this, but probably not much, because no one knows the form and incidence of taxes or other measures (inflation, devaluation, curtailment of government exenditures) that will be necessitated by the borrowing that is financing the stimulus. Probably most people take the view that sufficient unto the day is the evil thereof, rather than curtailing spending in the light of some unknown future prospect of having to pay in some form for their present consumption. The studies by Robert Barro and others that find evidence to support the Barro-Ricardian Equivalence hypothesis are considered unpersuasive by most economists.
The biggest objection to the stimulus is that it adds almost a trillion dollars to our enormous and rapidly growing federal deficit, in a political setting in which measures to reduce the deficit whether by tax increases, spending cuts, inflation, or stimulating more rapid economic growth seem either politically infeasible or economically undesirable, or both. Yet to the extent that the stimulus has increased production, employment, and therefore incomes, it has, by increasing tax revenues, offset some of the increment to the deficit that the borrowing to finance it has added.
The stimulus was poorly designed. A lot of it went to states, and the stimulus supporters brag that it saved hundreds of thousands of state public sector jobs. But without the stimulus the states might have preserved the jobs, or most of them at any rate, by cutting inessential state expenditures. Any such cut would reduce the amount of money in circulation and therefore consumption and therefore production and therefore jobs, but how many and when are entirely unclear.
Moreover, a stimulus that saves public employees’ jobs directly and private employees’ jobs at best indirectly creates resentment among private employees who have lost or fear losing their jobs. They think the government is in effect paying itself, or taking care of its “own” ahead of the broader public, although many of the public jobs saved (policemen, firemen, teachers) may be essential. Federal financing of state employees’ jobs also retards necessary reforms of the swollen public-employee sector.
No effort was made to target the stimulus on industries and areas of the country in which unemployment is greatest; it is those industries and those areas in which the employment effect of the stimulus would have been maximized. Indeed, stimulus moneys spent in areas or industries of low unemployment may not directly reduce unemployment at all, but do so only indirectly through the stimulus that spending imparts to production and hence employment. Becker’s argument that the stimulus reflects Democratic Party priorities rather than national priorities is compelling.
The stimulus was also poorly executed, because its direction was placed in the hands of Vice President Biden, who has no management experience, to oversee; and he allotted only 20 percent of his time to the task. The Administration should have hired an experienced manager, as it did to supervise the auto bankruptcies (which went quite quickly and smoothly), to oversee and expedite the stimulus.
And it has been poorly defended. The critical public relations botch was Christina Romer’s prediction in January 2009 that, without the stimulus that the new Administration was planning, the unemployment rate would rise from its then rate of 7.2 percent to 8 percent. With the stimulus, of course, the unemployment rate rose to 10 percent, though it has now fallen back to 9.7 percent. It’s hard to get people to understand that trying to predict the effect of the stimulus was a chump’s game and that without the stimulus the unemployment rate could well be 11 percent.
Although the President is articulate and intelligent, and Romer and the other members of his economic team are competent and in some cases outstanding (Lawrence Summers, for example), none of them seems able to explain the theory behind a stimulus in words that people who are not economists or financiers can understand. It doesn’t help that neither the members of the President’s team, nor Fed Chairman Bernanke, are gifted communicators, and that Bernanke, Treasury Secretary Geithner, and National Economic Council Director Summers, are implicated (Geithner, and especially Bernanke, deeply) in errors of policy that bear primary responsibility for the economic crisis—complacency, unsound monetary policy, and regulatory laxity. The fact that so few Americans believe that the stimulus saved any jobs suggests a profound failure of communication on the part of the Administration, not to mention financial journalists and public-intellectual economists.
The fact that so few Americans believe that the stimulus saved any jobs suggests a profound failure of communication on the part of the Administration, not to mention financial journalists and public-intellectual economists.
That's rather insulting to the American people, isn't it? Aside from some of the well-documented dubious claims of job creation by states that received stimulus money, you're completely ignoring the very likely possibility that that money would have created more jobs if left in the hands of the taxpayers it came from.
Posted by: jdgalt | 03/01/2010 at 02:05 PM
Surprise, surprise. Arrogance, elitism, covering political and academic rear ends. Send them all back to real jobs if antone would hire them.
Posted by: Jim | 03/01/2010 at 02:14 PM
"ignoring the very likely possibility that that money would have created more jobs if left in the hands of the taxpayers it came from"?
The money was borrowed, mostly on from other countries. So your point is moot.
Posted by: Jonathan | 03/01/2010 at 03:55 PM
Does anyone seriously believe that policy-makers decide upon the size and structure of a "stimulus package" based upon its multiplier effects? This is all a matter of political theatre, which, in this case, obviously did not work. Since not even economists can agree upon the consequences of the stimulus, this discussion displays some of the worst features of an "academic" discussion.
What I think most investors would like to know is how much public debt (as a percentage of GDP) we can carry before we reach the "tipping point" at which debt buyers start to disbelieve our capacity to pay back the money. Some serious observers (e.g. Niall Ferguson) seem to think we are close to that point; others (e.g. Andrew Scott) doubt that we are anywhere near the limit. Is this even an answerable question? Inquiring minds really would like to know that.
Posted by: Tom Rekdal | 03/01/2010 at 08:34 PM
I know it's not a competition, but I give this round to Prof Posner for a detailed and readable article.
John, Jim, if you're going to criticize (and there is a _lot_ to criticize), try to do so in a way that a) makes sense, and b) is constructive.
Otherwise you make people like Tom Rekdal look bad by association, despite his excellent points.
Posted by: Altereggo | 03/02/2010 at 05:32 PM
Tom: I suppose it's much like looking at a stock than a strict ratio of debt to GDP. At one end investors like utilities. Despite their typically heavy debt burdens their predictable incomes streams make them attractive, conservative, investments. At the other an idea like Amazon draws investors despite having lots of debt and no earnings for its expected bright future.
We, who after the golden years of the post WWII era, should be a blue chip mature company, have A. paid out too many dividends for our revenues B. Not made adjustments fast enough in a rapidly changing world.
So we're a bit like a GE? or perhaps AT&T that woke up belatedly to find they no longer held a near monopoly on voice transmission. America has, inherently, more assets and staying power than does any company, but still we're faced with making a corporate turn around in a short time, and unlike GE and others, we don't have the luxury of ignoring the needs of our labor force.
Like a turnaround much will depend on our making some right choices to position ourselves for a world much different from the one that made us the wealthiest nation. America sleeps too long and soundly when thing are going well or the problems still fit under the rug, but once awakened can make changes rapidly. I think we've been awakened!
Lastly, at least in terms of government debt, we should optimistically recall that from 1996-2000 deficits were small and manageable with Gspn wringing his hands as to how T-bonds would be properly priced if sales were not being made. Today I heard Greece's president call on his people for sacrifices to pay their bills, as our costly wars dragged on we should have been asked to at least make the "sacrifice" of rolling back the Bush Admin tax breaks as well.
Posted by: Jack | 03/02/2010 at 09:54 PM
"The economic effect of such an increase in GDP depends on what is done with the money. Suppose all the recipients used it to buy Treasury bonds. Then its economic effect would be zero: the government would be lending the money and then borrowing it back from the borrowers."
you're discussing tax cuts/rebates not fiscal expenditure stimulus.
Posted by: pat toche | 03/03/2010 at 07:52 AM
Pat: While it's unlikely that "recipients" (those earning money from a stimulus package) are likely to use it to buy Treasuries, you touch on an interesting area.
That is, the propensity to spend an increase in income is much higher at the lower incomes where there is always an urgent use of the income for near-necessities while at upper incomes it may well be used "to buy Treasuries" for other investments or perhaps to spend abroad.
Thus when the Bush administration came in proclaiming "we're in recession" despite no dip in GDP growth,
http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230
and unemployment remaining at historical lows of 4.00%
http://www.miseryindex.us/urbymonth.asp
there was no economic justification for inviting, predictable, deficits of $250 billion/year by tax cuts largely benefiting upper, and even the topmost income sectors, and especially not as interest rates were low reflecting, as was the case, a surplus of investment capital in the US and the world and few worthy projects in which to invest.
For the most part all those tax cuts did was to accelerate the disturbing trend of growing wage inequality that denies those in the lower half of incomes a participation in productivity increases and leaves them strapped and unable to consume or buy the services upon which most of our economy depends. (The 2nd graph illustrates well)
http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/
So what happened? What can we learn and where are we now after $5 trillion plus of deficit government spending plus at least another trillion in spurring from a false housing boom that built a million more homes a year than there were household formations?
Despite all this spurring the eight years ginned up only a couple million jobs and those lower paid ones to boot, with unemployment creeping up until the meltdown when the rate exploded.
Even if the tax cuts (of half the $5 trillion) were poorly targeted and military expenditures are not efficient spurs to economic growth, is something so fundamentally wrong with our economy that it won't function w/o massive, unaffordable deficits?
Have we reached a plateau of 1% or less of GDP growth, but more worrisome "official" rates of unemployment of 10% with under-employment rates adding another 7% for a decade or more? If not, where are the labor intensive industries that might generate 10 - 20 million jobs in the near term?
Posted by: Jack | 03/06/2010 at 02:35 AM
If I may post a surly rejoinder to the blogs on the effect of the stimulus, if the outcome is neutral or even slightly negative, that will be a screaming success.
As the quote goes, "in the long run we are all dead." The result of not doing a stimulus would have been deep depression. To use the current term of art, it is not even close. And the cost of a depression, not represented in the above arguments, would be staggering.
Headline unemployment is about 10%, actual is perhaps 15% to 16%. Think for a moment about the outlook if headline were 20% and actual 30%.
As it is, we must now solve three difficult problems: structural unemployment, transparency of financial instruments, and infrastructure. Without addressing these three issues, the US will only emerge as a shadow of its former self.
Structural unemployment: 4 to 5 years of deep unemployment means rebuilding a generation of college students.
Derivations: they are not going to go away, all of the whining to the contrary not withstanding. Lehman brothers is the perfect example. The net loss was pretty miniscule, but it was not known at the time and so we had wild gyrations in the financial markets as bankruptcy ensued and the positions were wound down. Barclays did very well by buying it. Wealth transfer to the UK for pennies on the dollar, underwritten by the US Gov. (That is us.)
Infrastructure: the US is becoming a third world country with the poor quality of infrastructure, decaying bridges, deteriorating roads and leaking water pipes. No country can succeed, let alone grow, without being able to move stuff around and insure the health and well being of its citizens.
My complaint of the focus of the stimulus is that it would have been a perfect time to restock the US Military, in particular the National Guard. Useful, "shovel ready," and many of the jobs are US based. We still have that burden to look forward to over the next decade.
Posted by: Walter Jones | 03/11/2010 at 10:15 PM
Test
Posted by: Jack | 03/13/2010 at 08:47 PM
Walter: You're right that we've a trillion or more in delayed maintenance to attend to and I'd thing that is what would be both timely and stimulative.
"Restocking" the military is typically much less stimulative and as we've projects in progress for new fighters and subs to go up against real or imagined foes of great power, I'm not sure what should be restocked. Looks like an age of people power and intelligence to find international bad guys prior to their attack.
Derivatives don't strike me as being an inherently bad thing Trouble is they were used as part of massive international Ponzi scheme "backed" by a foolish bet that US housing prices that look like the following graph would not have plateaued or had a sharp correction. At lending ratios of 30 to 1, all it would take is a pullback of a few percent to wipe out the underlying asset base.
For this last decade I've had a strong hunch there was no one in the wheel house and now we see our highly compensated financial wizards buying and selling boxes of "assets" w/o knowing what's in the box. Wouldn't you think a firm buying or insuring billions worth of mortgage backed securities at sky-high margin ratios would at least spot check a percentage of them before placing their wild gambles? Ha! but dumbly "not knowing" does keep one out of prison!
Posted by: Jack | 03/13/2010 at 09:03 PM
Housing bubble graph for above post:
http://mysite.verizon.net/vzeqrguz/housingbubble/
........... now wouldn't any rational investor buying huge chunks of mortgages margined at 30 : 1 have gotten very, very nervous about 2001 or 2002?
Posted by: Jack | 03/13/2010 at 09:09 PM