Tag Archives: Fiscal Stimulus

Now, About That Stimulus Bill

As I understand them, the Republicans’ main reasons for opposing the stimulus bill (0 votes in the House, 3 in the Senate) were: (a) the bill contains too much evil government spending, (b) it doesn’t spend money fast enough to affect the economy, and (c) it’s too big. There are really no grounds for bipartisan agreement on (c), especially since many Democratic economists believe the stimulus is too small given the yawning output gap. But even conceding for a moment that (a) and (b) are valid concerns, I’m still baffled by the reduction of state aid from $79 billion to $40 billion. (See the New York Times comparison here.)

According to the Center on Budget and Policy Priorities, states are facing new budget shortfalls of $51 billion this fiscal year (ends June 30) and at least $94 billion for next fiscal year. Direct federal government aid to states will do no more than partially fill those budget gaps and enable state and local governments to keep people employed instead of firing them – teachers, firefighters, etc. While one might have concerns about whether the government can spend money on new programs efficiently, in this case the money will go to basic services that the government is already providing. This is only wasteful if you take the extreme view that all government spending in general is wasteful and any excuse to reduce it is a good one (the old “starve the beast” argument). The money can be spent quickly, because all the mechanisms needed to spend it already exist. Even if it is spent over several months (because people earn their salaries over the year), it will still have an immediate stimulative effect, because people who have jobs spend a lot more than people who don’t have jobs. It will have a high multiplier, because every dollar of government payrolls counts as one dollar of GDP, so the multiplier on government salaries is roughly the multiplier on tax cuts plus one. And it will even save a little money in unemployment benefits.

There are a lot of things one can argue about in the Senate version of the stimulus, but this I just don’t understand at all.

And Now, the Counterargument

With mainstream and not-so-mainstream economists (including us) tripping over themselves talking about the need for a stimulus plan (and how the current one may actually be too small), and having just written an article saying the U.S. can probably absorb some more national debt before things go haywire (so did Simon), I thought it was only fair to point to the counterargument.

William Buiter at the FT argues that the U.S. cannot afford a major fiscal stimulus because the government (by which I think he means the entire political system, not just the Obama Administration) has no deficit-fighting credibility. If people do not believe that the government will raise taxes in the future to generate positive balances (I’m sorry to inform Congressional Republicans that cutting spending is not really an option, given the growth of entitlement commitments in the future and our increasing military needs, although cutting the growth rate of spending might be possible), they will conclude that the debt can only be paid off by inflating it away, which will drive interest rates up, the dollar down, and inflation up. Buiter spells this argument here and more recently here where he adds the U.S. is behaving like an emerging market economy in crisis (something with which we would agree).

Continue reading

Global Fiscal Stimulus: Should It Be An Obama Administration Priority?

The US has the opportunity – and perhaps the responsibility – to immediately retake a leadership role in global economic policy thinking, with the pressing priority of preventing the world’s recession from becoming something more serious.  But what should be Mr Obama’s priorities in this regard, for example in the run-up to the G20 summit in early April – which, given the timetable for these things, will have an unofficial dry run of sorts at the Davos meetings next week?

The obvious message could be: a large US fiscal stimulus is coming, but the rest of the world needs to do more.  In this option, Mr Obama could devote considerable effort to encouraging others to expand their government spending and/or cut taxes.

While worldwide cooperation of this form may have been a constructive thought last year at Davos, when the idea was first broached publicly by the IMF, a joint global fiscal stimulus is a glorious idea whose time has for now passed. Continue reading

Exit Strategy: Inflation

We know there is going to be a large fiscal surge in the US (the latest estimate is a stimulus of $675-775bn, which is a bit lower than numbers previously floated).  This will likely arrive as the US recession deepens and fears of deflation take hold. 

The precise outcomes for 2009 are, of course, hard to know yet – this depends primarily on the resilience of US consumer spending and whether large international shocks materialize.  But we can have a sense of what happens after the fiscal stimulus has played out (or its precise consequences become clear).   There are two main potential scenarios. Continue reading

One World Recession, Ready or Not

The usual grounds for optimism these days is the fact that the Obama Administration is clearly going to propose a big fiscal package with two components: a large conventional stimulus (spending plus tax cuts); and a big housing refinance scheme, in which the Treasury will potentially become the largest-ever intermediary for mortgages.

These ideas are appealing under the circumstances, but this Fiscal First approach also has definite limitations, for both domestic and foreign reasons.  Continue reading

Global Fiscal Stimulus: Will This Save Weaker Eurozone Countries?

Finally, the global economic policy ship begins to turn.  We are now seeing fiscal stimulus package announcements every week, if not every day.  And packages that we previously knew about are re-announced for emphasis and with an expanded mandate.  In all likelihood, we are looking at a fiscal stimulus in the order of 1-2 percent of world GDP, which is exactly what the IMF has been calling for.  Is this a modern miracle of international policy coordination?

The problem is – the IMF started calling for this in January 2008 when, with the benefit of hindsight, it would really have made a difference.  Fiscal policy is slow.  Even when everyone wants to move fast, when you can get the legislation through right away, and when there are “ready to go” projects, infrastructure spending will take at least 6-9 months to have perceptible effects in most economies. 

In the US we have some additional ways to boost spending, most notably as support to local and state governments, extending food stamps and the like (see my recent testimony to the Senate Budget Committee for further illustrations), and in most other countries that kind of government activity comes by way of “automatic stabilizers,” i.e., it happens without discretionary packages of the kinds that make headlines.  Still, the general point holds – the big fiscal stimulus package you put in place today is a bet on how the economy will be doing in a year or so.  And a year ago would have been a good time to start – remember that the NBER has just determined that the US recession actually started in December 2007 (but they were able to make the call only now, demonstrating how hard it is to forecast the present, let alone the future.)

My concern today, however, is not about the appropriateness of the overall package in the US, China or other emerging markets – in a crisis, erring on the side of “too much, too late” is better than “too little, too little.”  The problem is that in Europe we need not just a general fiscal stimulus (and more interest rate cuts), but also specific targeted measures that will provide appropriate, largely unconditional support to governments with weaker balance sheets (read: Greece, Ireland, Italy, but don’t exclude others from consideration). 

Monetary policy was consolidated in Europe (i.e., there is one currency for the eurozone) but fiscal policy substantially was not.  This imbalance is going to be addressed, one way or another, and perhaps under great stress.  Much progress has been made towards sensible policies in the US and some parts of Europe over the past two months, and calamity can still be avoided.  Let us not fall at the final hurdle.

Update: I talked with Madeleine Brand of NPR about some of these issues earlier today; audio recording and transcript are here.

Testimony This Morning: Senate Budget Committee

Wednesday morning, starting at 10am, I’m on a panel testifying to the Senate Budget Committee about the need for a fiscal stimulus.  The other witnesses are Mark Zandi and John Taylor.

I’ll post my written testimony after the hearing. I expect to make three main points in my verbal remarks:

1) We are heading into a serious global recession, caused by and in turn causing a process of global leveraging (i.e., reduction in lending and borrowing).  We have never seen this kind of deleveraging – synchronized around the world, fast-moving, and with an unknowable destination.

2) I do not think we can prevent this deleveraging from happening.  Nor do I think we should even try to keep asset prices high (or at any particular level).  But in the United States we have the ability to mitigate some of the short-run effects and to lay the groundwork for a sustainable, strong recovery.  One sensible tool to use in this context is fiscal policy.  I lean towards smart spending programs, but as the economy continues to worsen, I think some kind of temporary tax cut could also help – it can potentially have relatively quick effects.  (Note: contrary to those who think that if tax cuts are saved by consumers, they are somehow “wasted,” I would point out that anything that improves consumers’ balance sheets is both good for them and for the financial institutions that lend to them.)

3) But there is a real limit to how far we can go with fiscal policy (and with other policy measures).  Irresponsible budget policies would not be a good idea – we need to continue a process of fiscal consolidation; it is most vital that people around the world remain confident in the U.S. government’s balance sheet.  Some of the highest numbers now being proposed for a fiscal stimulus are probably too high and a mega-stimulus could be counterproductive if it undermines confidence.

I’m proposing a fiscal stimulus of roughly 3% of GDP, to be spent over several years.  Given the uncertainties involved, this seems like reasonable middle ground – it’s enough to make a difference, but doesn’t promise a miracle; it can be spent sensibly and at an appropriate speed; and it will not undermine our ability to consolidate the U.S. fiscal position (i.e., bring government debt onto a sustainable path) over the medium-term.