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A second stimulus?
That's today's topic in the blogosphere, starting with Bruce Bartlett, and then Paul Krugman (and here) and Megan McArdle. The economy hasn't exactly gone well but a priori that could support either the view that the stimulus won't much help, or the view that we needed (and still need) a bigger stimulus.
I'll restate a few of my core points on this topic:
1. If we're not in a liquidity trap, monetary policy is a better way to stimulate aggregate demand.
2. If we are in a liquidity trap, the stimulative effects of fiscal policy will die out pretty quickly.
3. I have never defended "the Treasury view."'
4. The worst case scenario, which requires that you put your balance sheet in somewhat better order, remains relevant. I am suspicious when I hear "efficient markets" defenses of current fiscal policy ("Interest rates remain manageable," etc.) from the same people who for years criticized those arguments as applied to banks or for that matter homes.
5. Some temporary, short-run stimulus was indeed called for, consisting mostly of aid to state and local governments.
6. The employment benefits of fiscal policy are mostly temporary and will require a "redo" in two years' time or so, unless we are willing to lose those jobs again or move to "permanent stimulus," which I do not recommend. We are postponing required labor market adjustments, not solving the labor market problems.
7. There were better ways to spend most of that money. The assumption was that the American public would be so happy with the stimulus that they would be clamoring for more and more government programs. That does not appear to be the case.
One new point, based on recent history: We've just seen what special interest groups have done to legislation on health care reform and climate change and neither has even reached the Senate yet. Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration. What do you think round two of the stimulus would look like?
I'll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly. American voters do not in fact have the patience for a lot of good ideas.
Posted by Tyler Cowen on July 6, 2009 at 03:47 PM in Economics | Permalink
Comments
I was under the impression that the first stimulus bill represented the high water mark of Congressional Democrats in the face of an ineffectually new Obama administration.
Posted by: Alex J. at Jul 6, 2009 4:22:14 PM
Rasmussen has a poll up that says by 60-27% those polled oppose a 2d stimulus.
The NYTimes has an article up on their website on France's stimulus. They think it is better than America's although the statistics do not seem to bear them out.
Last, we need to include and elevate as a factor for deliberation the issue of inter-generational fairness - saddling future citizens with debt to finance current consumption by people who have spent the last decade or two fueling their consumption via debt. None of the economists to whom the main post links give that issue its due.
Posted by: Mark at Jul 6, 2009 4:30:35 PM
2. If we are in a liquidity trap, the stimulative effects of fiscal policy will die out pretty quickly.Could you elucidate on this, Professor Cowen? It seems that fiscal policy and monetary policy go hand in hand-- they support one another, you could say-- because fiscal policy increases the V in MV=PY (because the velocity of money can be written as a function of interest rates). This is what other economists such as DeLong and to an extent Krugman have been pointing out, and it is a pretty convincing argument.
Posted by: Daniel W Reeves at Jul 6, 2009 4:30:53 PM
Payroll tax cuts are the only way to restore bottom up prosperity. Eliminate payroll taxes for both employees and employers (social Security and such) until we see economic growth. It would be a huge and sustained boost to the economy that doesn't require any economic plans by the government at all.
Then interest rates remain manageable and will remain manageable. The problem with interest rates when applied to mortgages was that they were not transparent and subject to going up based on rates outside of the control of the borrower. The U.S. govt is not subject to liquidity constraints, despite your repeated assertions of this fallacy.
Posted by: mickslam at Jul 6, 2009 4:35:53 PM
"I'll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly. American voters do not in fact have the patience for a lot of good ideas."
Are you saying that the stimulus plan was a good idea that just has not been given enough time to work?
Posted by: Gabe at Jul 6, 2009 4:48:45 PM
"7. There were better way to spend most of that money. The assumption was that the American public would be so happy with the stimulus that they would be clamoring for more and more government programs. That does not appear to be the case."
No, not really. The politician's natural predilection is to "do something" and in a happy confluence for the new Democratic President and the Democratic controlled Congress, that was also the demand of the populace. But we didn't spend three months debating the best way to stimulate the economy. The default was a replay of 1933, without considering how much has changed in the past 75 years. And the motivation was not to build a broader constituency for more government programs, it was, in the words of Governor William J. LePetomane, "We have to do something to save our phoney baloney jobs!"
"One new point, based on recent history: We've just seen what special interest groups have done to legislation on health care reform and climate change and neither has even reached the Senate yet. Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration. What do you think round two of the stimulus would look like?"
Obama outsourced those decisions to the Congress. All the administration provided were guidelines and talking points. In the event of Son of Stimulus, Obama's contribution will be "more, faster, please".
"I'll also note this: even if you think the pro-stimulus forces are correct, they are losing the rhetorical battle rapidly. American voters do not in fact have the patience for a lot of good ideas."
Yes, they are losing the rhetorical battle because they over promised and under delivered. Most people only remember the headlines about spending $800 billion to create 3 million new jobs by tomorrow. The details about how difficult that would actually be were just that, details. Can you blame the average voter for being disappointed?
Maybe American voters don't favor good ideas because they aren't such good ideas. Who's problem is it when the dogs won't eat the dog food?
Posted by: Steve C. at Jul 6, 2009 4:52:30 PM
Isn't one of the big rules (insights?) of economics that of opportunity costs? The market for 'risk-free,' aka inflation-risk bonds, doesn't even have to be irrational. There is no alternative. If you are holding dollars and inflation will eat them, buying Treasurys is a wash, yes? Do we allow the Chinese to bid on foreclosures?
Posted by: Andrew at Jul 6, 2009 5:05:25 PM
What about spending the remaining 90% of the first stimulus?
http://www.marginalrevolution.com/marginalrevolution/2009/06/is-the-revolution-over.html
Posted by: R at Jul 6, 2009 5:16:24 PM
A second stimulus is a great idea if we have Goldman Sachs finance it.
Posted by: lxm at Jul 6, 2009 5:19:38 PM
Where can I get average housing prices for the past couple decades?
Posted by: Doc Merlin at Jul 6, 2009 5:33:32 PM
I'd very much like to know what you base 6. upon ... is there any empirical research on that? if not, what the theoretical motivation?
Posted by: Luis Enrique at Jul 6, 2009 5:47:19 PM
Professor Cowen -- "We are postponing required labor market adjustments, not solving the labor market problems."
This seems to say that some sectors of the economy have unsustainably-high levels of production and employment. They need to shrink; and the sooner, the better.
Maybe that's true in a few areas, such as house-building, mortgage-financing, etc. But it doesn't account for the broad declines in production and employment that we've seen since last September. For example, auto manufacturing volumes are down by almost half; the industry is not even producing enough autos to replace those that wear out. That's not bloat.
So here's a challenge -- List the major labor-market imbalances that you believe underlie this recession and estimate their size. Let's compare that to the level and mix of actual job losses.
I suspect you'll find that you're adressing a minor side phenomenon .. the real problem lies elsewhere (as both Keynes and Friedman would recognize).
Posted by: pireader at Jul 6, 2009 5:57:35 PM
So... since the first stimulus won't be spent fast enough to be effective... we can fix that with a second one that won't get spent until even later than the first one! Yay!
Posted by: Josh at Jul 6, 2009 6:22:32 PM
mark: "saddling future citizens with debt to finance current consumption by people who have spent the last decade or two fueling their consumption via debt."
Mark, please explain what you mean by "spent the last decade or two fueling their consumption via debt".
Are you referring to government debt? I think Newt Gingrich and Bill Clinton had overwhelming support from Boomers when they almost achieved a balanced budget a decade ago. Boomers have likewise been angry with Congress for its uncontrolled spending the past 8 years.
Are you referring to household debt?
Posted by: John Dewey at Jul 6, 2009 6:30:16 PM
"The employment benefits of fiscal policy are mostly temporary and will require a "redo" in two years' time or so, unless we are willing to lose those jobs again or move to "permanent stimulus," which I do not recommend. We are postponing required labor market adjustments, not solving the labor market problems."
I must be misreading this statement, because it seems like you are saying that those jobs have gone away and aren't coming back, and while we won't always be losing jobs, we might need to get used to a higher natural rate of unemployment. But I doubt I am reading it correctly, because that doesn't seem right. Are you referring to specific sectors?
Posted by: Brian J at Jul 6, 2009 6:55:32 PM
"What do you think round two of the stimulus would look like?"
If it's purely based on infrastructure and aid to states, and passed without it being watered down to please the senators from Maine, then I'd happy with it, and so would a lot of other Democrats. There will probably be a little crap thrown in, but that wouldn't surprise me.
Posted by: Brian J at Jul 6, 2009 6:58:19 PM
Further fiscal stimulus won't employ the resources that are unemployed resources. It will just keep wages high for government workers and contractors--people who are already employed. Moreover, increased borrowing by the G will outbid private demanders of capital. Net result? Economic stagnation and decay.
It would pay to remember Adam Smith's statement on growth oriented economic policy: "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical."
Posted by: Adam at Jul 6, 2009 7:24:04 PM
Further fiscal stimulus won't employ the resources that are unemployed resources. It will just keep wages high for government workers and contractors--people who are already employed. Moreover, increased borrowing by the G will outbid private demanders of capital. Net result? Economic stagnation and decay.
It would pay to remember Adam Smith's statement on growth oriented economic policy: "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical."
Posted by: Adam at Jul 6, 2009 7:25:07 PM
"Round one of the stimulus represented the high water mark of the influence of the technocrats in the Obama administration. What do you think round two of the stimulus would look like?"
Are you sure about that?
http://www.weeklystandard.com/Content/Public/Articles/000/000/016/659dkrod.asp
I don't completely trust TWS so maybe this article is BS, but I was still very displeased when I read it. We are supposed to be focusing on using unemployed resources...
Posted by: Robert at Jul 6, 2009 9:13:34 PM
John Dewey, I was referring to household debt as well as Bush 43 era debt to finance guns & butter budgets.
Posted by: Mark at Jul 6, 2009 9:15:58 PM
MR clearly hasn't seen the memo.
It is now every economist's duty to support the Obama Administration. A Nobel Laureate said so.
Posted by: Millian at Jul 6, 2009 9:33:14 PM
With all respect, I don't think you are right to dismiss the energy bill as flawed or counterproductive. The impact of the House bill has yet to be fully analyzed but it is very likely to produce a major monetary-like stimulus due to the Green Bank, and it would kick in as soon as the bill becomes law. The tax provisions would act like stimulus and indeed are usefully focussed on a new market and new technological advances. Please don't be groundlessly negative!
Posted by: reed hundt at Jul 6, 2009 9:37:18 PM
Tyler's terrible post (for the public-choice reasons mentioned by Steve C. in his comment, to which I should add that these same reasons explain why spending is tied to the 2010 election) concludes with an absurd sentence: "American voters do not in fact have the patience for a lot of good ideas" (Tyler: you should ask Brian for a copy of his book).
Posted by: E. Barandiaran at Jul 6, 2009 9:47:43 PM
Historically, government stimulus does not correlate with increased economic growth. The only real correlation is that government spending increases about 6 quarters following economic upturns. If government spending could lead to economic growth or prosperity, Zimbabawe would be the Switzerland of Africa instead of having 231,000,000% inflation.
Posted by: WS Grizzard, MD at Jul 6, 2009 10:10:07 PM
I agree with Barandiaran. The notion that American's writ large can't be bothered with good ideas is hubristic and patronizing. One can only hope that this mind-set doesn't poison the professor against presenting his pupils with "good ideas".
Posted by: indiana jim at Jul 6, 2009 10:20:27 PM
