Thursday, January 29, 2009

A few thoughts on stimulus

[ed. - Rob, dont mean to pile on but my thoughts were too long for the comments]

1. Leadership Vacuum
Whatever leadership vacuum in the GOP people seem to be going on about (especially given all the huffing and puffing about Rush Limbaugh as the new de facto leader), I think the House GOP's unanimous showing couldn't have happened by accident -- someone must have been shepherding. As much of a fan of spontaneous order as I am, someone was pulling the strings. This leadership vacuum, which was certainly real, goes back to at least last September when GOP leadership got behind Bush and still couldn't rally passage of TARP in the House. What's changed? Well, an election I guess.

Nate Silver has a point that this could have been the result of the roll call vote, which shames ambivalent caucus members into falling in line -- basically an information cascade. But where was this effect on TARP? And since most remaining Republicans are in safe seats, why would they care? I suspect this explains a few fence-sitters but not the rare showing of unanimity.

2. The Orphaned Tax Cuts
Yglesias may be right that Obama, for policy reasons, should've focused on getting the best deal his team wanted, and not trying to buy out Republicans. Because the end result was totally predictable based on what was offered and was politically shrewd to boot. No one really liked these "tax cuts"....except Democrats. It's probably deserved that anything that involves "taxes" and "cuts" is assumed to be part of the conservative Republican ideology. But this large share of the bill devoted to tax cuts are not the supply-side kind that right wing economists salivate over.

These tax cuts are tax rebates, in other words a bunch of checks that will go out. You may remember this plan from all the way back in 2008. And what was the result? A small, temporary blip in GDP and then it fell right back to trend. We know (and conservative economists especially know) these kinds of one-time rebates don't work(since 1820), especially in an environment of uncertainty and mounting budget deficits. In fact for all the talking points from Dems saying "we don't want to repeat the economic policies of Bush," they're doing a fine job of rehashing.

The tax cuts Republicans like are incentive-changing: preferably permanent, but sometimes temporary, changes to rates and application that change how people decide to order their economic arrangements. No one in the Republican leadership was asking for one time rebates, especially not for low-income and non-tax paying individuals. The tax cuts portion included in HR1 were drafted by Dem leadership, and championed by no one. What Obama got was a way to say he made an effort to compromise on the bill, done so in a way that most people wouldn't see the difference in what Republicans wanted and what they got. It was brilliant -- House R's look bad either way.

3. The GOP alternative
GOP leadership picked way too late in the game to get their shit together, but they did eventually and did not simply foot stomp their way to voting "no" (well, there was some foot stomping going on). Before the vote they offered their own alternative.

Some portions of it are basically right out of the Heritage Foundation proposal (I was there when it was being pitched). That's no big surprise. But it was so late that I don't blame Pelosi for calling the vote.

4. Heterogeneous Views
As Rob has aptly explained, there are plenty of legit economists who disagreed on how and whether a stimulus would work. Coming out of the gate, Obama and Biden and others said otherwise, and Greg Mankiw has some ideas why that is. But it simply wasn't true and it may have alienated GOP members early on.

5. My Stimulus
I've got my own thoughts on how a stimulus should be structured, and without belaboring this post, the basics are:

--The annual aggregate state sales tax is worth about $400B. The federal gov't buys out this sales tax for one year, and on day of passage, states suspend their sales tax. If you want people to spend, make it cheaper to do so, and go directly to the source. Consider phasing the tax back in next year instead of a sudden reinstatement.

--If employment is your primary goal, you have to operate on that margin instead of a roundabout one. Reduce the employer contribution to payroll tax by 50% for one year. This would cost about $200-250B

--Embrace the built-in, counter-cyclical (some would even say Keynesian) policies we already have. Unemployment insurance, food stamps, and Medicaid all cost more (because of increased demand) in downturns by design. They are also already targeted at the most needy. Unfortunately these burdens largely fall on states and they are running red all over. So increase federal support of these programs with conditions that they ease restrictions on eligibility and duration.


Rob said...

On #5, I have a vague recollection of hearing a radio story about how people go crazy for sales tax holidays, much more so than they rationally should. So, I'm willing to think that this may be a good idea.

Extending unemployment etc., that is being done now, correct? So fair to say that is something you agree with?

On #3, sort of unconvinced, I think offering a half-assed "alternative" is just what the minority party always does, but so what. There's no shame in voting against something you oppose, but the business of "I preferred our alternative" is strictly CYA, I think.

#2, basic agreement all around. The tax rebates are a way for Obama to fulfill a campaign promise at least somewhat, which is fine as politics, but I'm not sure it makes them economically useful.

stridewideman said...

I agree in theory with making it easier for people to spend, and easier for employers to employ, but without actually creating demand of some sort, it's hard for me to believe that this would work.

Part of the green jobs stuff is creating new manufacturing jobs for a new, government sponsored demand. Without that demand, even with the tax holiday for a year, if people don't have jobs, how much are they likely to spend/create demand on their own? And would one year of that demand really be enough?

Not that this stimulus plan is perfect. But a lot of it is in programs that will be spent immediately (food stamps, unemployment, etc.), and some of it is geared to create demand with infrastructure (the clean energy and transportation stuff). It will keep the wheels on the bus for the neediest, for a while, while pumping money in the 'shovel ready' projects.

The tax cuts are silly. But I'll certainly use my rebate.

Not perfect. Likely not enough, given where world demand is and the number of jobs we're losing vs. the number we'll create. But way better then I'd have expected a couple years ago.

Saxdrop said...

Stridey -- i think your point about private sector demand vs. government created demand is valid. In fact, from a Keynesian point of view their interchangeable and that's the point.

I happen to think government sponsored demand, for a given increase will cost much more because of the inherent problems in trying to spend massive amounts of funds, in a short amount of time, decided by a committee of people (whoever they are, and I'm not picking on Congress here).

As far as infrastructure and alt. energy spending helping the neediest, I'm not so sure. Construction jobs are pretty inelastic in the short-run (and certainly are tech-type jobs related to energy even in the medium-term) so I suspect these programs will employ very few unemployed people, and instead displace private sector employment. Remember, as of December, unemployment among college grads was only 3.2%.

Will a sales tax holiday have an effect? Maybe. Income actually isn't down in the last year, although that will certainly change this year. According to weekly stats from the St. Louis Fed, consumer lending has actually been increasing over the last couple months, despite what the news says -- so there's not much of a liquidity constraint. No demand? Well the idea is to create demand by shifting future demand (say two three years out, especially for durable goods) into this year.

what good will one year do? well, i think the idea is only to have a stimulus when we're in the throes of a recession. A stimulus doesn't make much sense, I think, when we've shallowed out and are returning to trendline growth. God willing by middle of 2010, we'll see positive growth again.

Saxdrop said...

"Stimulus measures should not raise the deficits beyond a short horizon of a year or at most two.”

--so sayeth Larry Summers.

This is unrelated, but i think an interesting tension in this administration will be whether Geithner or Summers get to drive policy. I think it's not clear who will reign, but that tension always exists between the WH and Treasury. Paulson made it clear he wouldnt come unless he was in charge, which was a rare thing for Bush to concede. We also know Summers is a pretty hard-headed guy and has already sandpapered some others in the WH team, but Geithner is sitting on top of the largest expansion in Treasury authority in history, not to mention a $350B blank check.

Chandler said...

As for that leadership vacuum: problem solved??