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Obama's bribe for seniors
$250 for each senior or $13 billion in total. It's bad precedent to go around a COLA calculation, even on a one-time basis, but you can construct a partial defense of the policy (here is Matt's semi-defense). Think of it as a helicopter drop of money, a'la Scott Sumner. If the helicopter drop substitutes for (part of) a second fiscal stimulus, that's a net gain. The drop of money stimulates aggregate demand, limits deflationary pressures, and, by the way, you're giving it to a lot of people who are not stuck in a liquidity trap. They'd love to buy more stuff in The Dollar Store.
How will the expenditure be financed? Obama was vague on that, but as usual the Fed moves both first and last in the monetary policy game. All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been, wink and nod to Ben B., and it is all (or mostly) for the better.
Posted by Tyler Cowen on October 16, 2009 at 07:57 AM in Economics | Permalink
Comments
Gotta make sure to keep that AARP lobby happy, even if it involves running a Ponzi scheme and stealing from everyone else. And the rule is that increases are pegged to inflation, soooo ... wouldn't logic dictate that they actually get a reduction, rather than an increase?
Up is down, war is peace, freedom is slavery.
Posted by: Speedmaster at Oct 16, 2009 8:11:06 AM
It's a bribe for seniors in exchange for their support of Obamacare.
Posted by: Suspicious at Oct 16, 2009 8:12:28 AM
ok, where's the "Bazinga"?
Posted by: Bear at Oct 16, 2009 8:31:32 AM
We are so fucked.
Posted by: MikeDC at Oct 16, 2009 8:51:09 AM
Maybe this is, as Matt Yglesias suggests at the end, more of a disguised mini-stimulus than anything else. I'm not sure why it would necessarily be a tough sell for people to give a flat rebate check, especially one for such a small amount, but perhaps the administration did some digging and found it's easier to get something done this way, even if the intended effect isn't the same. Or perhaps it's a test to see how receptive people are to stimulative measures that aren't called that.
Regardless, it seems unnecessarily harsh to call this a bribe. It's a pretty crappy bribe; who is going to be moved by $250? A couple of thousand would be a different story.
Posted by: Brian J at Oct 16, 2009 8:52:12 AM
Wait, isn't this simply Bush's tax rebate or whatever but on a smaller scale? From the same folks that promised change?
Posted by: Colin at Oct 16, 2009 8:59:02 AM
One has to wonder about the administrative costs of such a giveaway.
How much does each payment cost to make? Wouldn't a tax cut be
a lot cheaper to implement?
Posted by: Robert Speirs at Oct 16, 2009 9:03:26 AM
>Wait, isn't this simply Bush's tax rebate or whatever
>but on a smaller scale? From the same folks that promised
>change?
Yeah, but it was stupid, criminal, and satanic when Bush did it. Because, er, well, it was.
But when Obama does it, it has that yummy hopey-changey taste.
Posted by: holmegm at Oct 16, 2009 9:22:23 AM
Please don't tell me you think he's going to cut $13 billion out of future spending. That is the height of naivete.
Borrowing $13 billion and giving it to people is certainly better than borrowing it and giving it to state governments, as he did with the porkulus bill. But it is still pretty dopey, and "bribe" is indeed the correct word. BHO simply doesn't want to be the first guy in 35 years to have to tell seniors there is no COLA increase.
Posted by: Jim at Oct 16, 2009 9:26:30 AM
Robert Speirs: "How much does each payment cost to make? Wouldn't a tax cut be
a lot cheaper to implement?"
As Colin says, this is just like last year's Bush tax cut, except on a smaller scale. It would be probably be equally costly to implement. It would be cheaper if anything actually, because there is already a system set up to provide payments to the targeted people (Social Security recipients). That doesn't make it a good idea (I don't think it is), but at least it's better than lump-sum tax rebates.
Posted by: libert at Oct 16, 2009 9:27:10 AM
This is a way to overcome the objection to a second stimulus. The next idea is to announce a payment to widows and orphans. Hard as a leglislator to stand up and be against payments to the elderly, widows, and orphans.
Posted by: Bill at Oct 16, 2009 9:52:53 AM
Does anyone else think it's an INCREDIBLY bad idea to get people used to getting extra checks in the mail from the Government in times of difficulty?
Posted by: Eliezer Yudkowsky at Oct 16, 2009 9:56:44 AM
Someone want to help me with a bit of a naive question?
Why does anyone think that devaluing everyone's money will stimulate demand?
I mean, I know this is Keynesian economics 101, but let's get serious here. Whether it's a "stimulus" or a "helicopter drop" or a "lower interest rate," you're adding to the money supply in the long run. To me the flaw occurs at the very initial stage. I mean, people can (and do) argue until they're blue in the face about the multiplier or about which kind of monetary increase is optimal according to which technicality, but do we even have to go there? If a theory is logically flawed from the outset, then it doesn't matter what evidence we find about it later - the theory is flawed. Remember how the stock market was significantly correlated to the length of mini-skirts?
Logically, why does anyone believe that devaluing a currency is good for aggregate demand? It neither makes sense in the short nor the long run, and yet this concept continues to dominate every discussion everyone has about macroeconomics.
Am I the only person who has a problem with this?
Posted by: Ryan at Oct 16, 2009 10:00:17 AM
For all you deficit hawks out there - you don't know your accounting.
Private Savings = Government Deficits
If you want any net savings, the government needs to deficit spend.
Here is the proof:
GDP = Y + T = C + I + G + NX This is the expenditure method of GDP
Y + T = C + I + G + NX
Y + T is the gross domestic production (national income plus taxes), C is
private domestic consumption, I is private domestic investment, G is government
expenditures and NX is net exports (exports - imports)
To find the identity:
Y = C + I + (G - T) + NX
or
Y = C + I + DEF + NX
with DEF the government deficit. Then substract C from both sides
Y - C = I + DEF + NX
Y-C is national saving (S):
S = I + DEF + NX
Rearrange to get the identity
(S - I) + SURP - NX = 0
S-I is the PDFB (net saving by the private sector), SURP (government surplus, or
net saving by the government) is GFB and -NX is the RWFB (the net saving of the
rest of the world):
PDFB + GFB + RWFB = 0
This is a national accounting identity.
In a global economy RWFB = 0. There is no rest of the world.
So
Private Sector Savings = Government Deficits.
This identity can be obtain from Table 5.1 at the BEA (bea.gov) where S, I,
Government net saving (i.e. surplus or deficit) and capital and current account
position are provided (RWFB is more than just the opposite of net exports)
Maybe one day economists will bother looking at the accounting and we can finally get over the frackin' stupid debate about deficit spending not being a stimulus because we need future taxation to pay off the debt. But I will not hold my breath for a generation to pass.
Posted by: Mike S at Oct 16, 2009 10:03:11 AM
All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been
Actually, it would be better not to. If there is a second stimulus at all, Ben Nelson's pound of flesh will already reduce it below what economic experts think is the right size. Letting the $13 billion offset that stimulus shortfall would be better than pre-cutting the stimulus only to have it cut down further in Congress (like the first one).
Posted by: Chris at Oct 16, 2009 10:17:47 AM
Sigh.
Suppose there is a permanent increase in the demand for currency, for whatever reason. To avoid deflation, the government gives $13 billion to old people. (Weren't unfunded Social Security and Medicare benefits and insured pensions enough?) Treasury sells bills, the Fed buys the bills, thereby increasing the amount of currency, a la helicopter drop. It is essentially a free lunch.
But what if the rise in demand for currency is temporary? In a few years, households reduce desired holdings of currency. To avoid a jump in the price level, the Fed must sell bills and suck up the currency. Higher level of bills in the hands of the public requires higher taxes to fund the greater interest payments or to retire the debt.
A $13 billion "gift" from Uncle Barry is not a free lunch. It will be paid for by higher future taxes, or higher future inflation. Nancy Pelosi seems to have figured that out; she is calling for a value added tax. Obama may have figured it out, but it is not politically prudent to talk about it. We have "starve the beast" in reverse.
Posted by: B.B. at Oct 16, 2009 10:23:11 AM
Mike S--thanks. good work in explaining national income accounting and its relevance to the "deficit" issue.
Posted by: Bill at Oct 16, 2009 10:40:37 AM
Hi BB,
I think the demand for currency is going to be very long lasting. My model for the path of the U.S. consumer savings is that because real estate has crashed, the major source of wealth for the U.S. consumer is gone for anywhere between 5 and 15 years. The only option for Baby boomers to increase their wealth for retirement is saving cash money. Therefore we are going to see an extremely high demand for U.S. consumer savings. Also, the demand for U.S. dollars as the reserve currency is not going away for at least a decade, simply due to the fact that the U.S. is still the largest economy on the planet by a large amount.
We have a free lunch then for two reasons. 1. Demand for savings will be very high. 2. Private Sector Savings = government deficits. total credit/savings = leverage. We are reducing leverage when we deficit spend.
Posted by: Mike S at Oct 16, 2009 10:45:58 AM
Mike S., I'm not sure if your proof is the same as the one I critiqued a few years ago, but for anyone who is curious I took on an NRO guy (yes, NRO) when he argued that government deficits = private net savings. Here.
Posted by: Bob Murphy at Oct 16, 2009 10:47:11 AM
Yglesias says "judged as economic stimulus, what the administration is proposing isn’t a totally ideal use of $13 billion but it works pretty well."
Any other plausible economic stimulus, after it passed through Congress, wouldn't be "totally ideal" either.
Posted by: Tomasz Wegrzanowski at Oct 16, 2009 10:53:36 AM
OK I looked at Mike S.'s proof a little more carefully, and I think he is making the same misleading move that the NRO guy did. Here is the crucial part of Mike S.'s demonstration:
(S - I) + SURP - NX = 0
S-I is the PDFB (net saving by the private sector), SURP (government surplus, or
net saving by the government) is GFB and -NX is the RWFB (the net saving of the
rest of the world):
PDFB + GFB + RWFB = 0
This is a national accounting identity.
In a global economy RWFB = 0. There is no rest of the world.
So
Private Sector Savings = Government Deficits.
So no, it's not "private sector savings" that equal government deficits, it's "NET private sector savings" which means "private sector savings in excess of private sector investment."
So what Mike S. is saying is that gross private saving = gross private investment + government borrowing. That is the accounting tautology.
Now, Mike invokes a Keynesian theory as to the causality, and says that if the government borrowing goes up on the right side of the equation, then private saving goes up on the left side.
But it's also possible that an increase in government borrowing reduces gross private investment. That would also balance the equation.
Posted by: Bob Murphy at Oct 16, 2009 10:54:44 AM
People don't want to save cash, they want to save purchasing power. The government or whoever destroyed the value of real estate by helping inflate it. People realized that the marginal sale price really wasn't savings. But, you can save purchasing power in things other than houses or cash, say gold for instance. Destroying the value of cash...wait...did you really say we have a free lunch?
Posted by: Andrew at Oct 16, 2009 11:09:04 AM
"Think of it as a helicopter drop of money"
The helicopter drop is suppose to be newly created money. This helicopter drop will be borrowed money.
Posted by: Richard A. at Oct 16, 2009 11:20:16 AM
I think it is really lazy to blame Obama for the payout to seniors. Do you have some reason to believe that a republican congress and a republican president would fail do make a similar payout if they faced 0 or negative inflation? Furthermore, do you really think this is a political calculation rather than an admission that people get used to "wage" increases (The wage comparison stems from some research that workers interpret wage hikes for inflation as a function of time and their skill, not actually of inflation)?
Which is more reasonable? The assumption that Obama et al. made a partisan political calculation to send a payout to seniors (of the princely sum of 250 dollars) at the height of concerns about government spending or that seniors grew used to compensation increases and would have demanded one otherwise?
Posted by: Adam Hyland at Oct 16, 2009 11:21:43 AM
Which is more reasonable? The assumption that Obama et al. made a partisan political calculation to send a payout to seniors (of the princely sum of 250 dollars) at the height of concerns about government spending or that seniors grew used to compensation increases and would have demanded one otherwise?
Are you actually arguing that the first isn't plausible?
Posted by: holmegm at Oct 16, 2009 11:34:35 AM
