Tag Archives: stimulus

Gene Sperling, Then and Now

By James Kwak

Mike Konczal points out Gene Sperling’s recent performance on MSNBC, arguing that uncertainty about long-term deficits is weighing on the economy.

What surprised me is that I was just (re-)reading about the early days of the Clinton economic team, and back then Sperling was on the other side of the debate. In Robert Rubin’s account of the famous January 7, 1993 meeting (well, famous if you’re into economic policy debates from two decades ago), the deficit hawks were Al Gore, Lloyd Bentsen, Leon Panetta, and Rubin. The people who wanted more stimulus and less deficit reduction were Robert Reich, Laura Tyson, George Stephanopoulos, and Sperling. (See In an Uncertain World, pp. 123-24.) In Clinton’s memoir, Sperling was also on the side of stimulus and investment: “Gene Sperling made a presentation of options for new investments, arguing for the  most expensive one, about $90 billion, which would meet all my campaign commitments immediately.” (My Life, p. 461.)

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How Are the Kids? Unemployed, Underwater, and Sinking

This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst.

In some cultures asking how the kids are doing is a colloquial way of asking how the individual is faring, acknowledging that the vitality of the younger generation is a good metric for the well-being of society as a whole. In the United States, the state of the kids should be an important indicator. Young workers bear the significant burden of funding intergenerational transfer programs and maintaining the structure of payments that flow in the economy. Today, the kids’ outlook is almost as bleak as the housing market; they are unemployed, underwater on student debt, and out of luck from a reluctant political system.

Currently, even after a slight boost in jobs growth, unemployment for 18-24 year olds [correction: should be 18-19 year olds] stands at 24.7%. For 20-24 year olds, it hovers at 15.2%. These conservative estimates, using the Bureau of Labor Statistics U3 measure, do not reflect the number of marginally attached or discouraged young workers feeling the lag from a nearly moribund job market.

The U3 measure also does not count underemployment, yet with only 50% of B.A. holders able to find jobs requiring such a degree, underemployment rates are a telling index of the squeezing of the 18-30 year old Millennial generation. While it appears everyone is hurting since the financial collapse, young adults bear a disproportionate burden, constituting just 13.5% of the workforce while accounting for 26.4% of those unemployed. Even with good credentials, it is difficult for young people to find work and keep themselves afloat.

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Did the Stimulus Help?

By James Kwak

This could be a midsize political battle in the run0up to the midterm elections, as discussed by The New York Times. The positions on both sides are too obvious to warrant repeating. If I recall correctly, the Obama administration hurt itself by underestimating the course of future unemployment a year ago when it passed the stimulus (most people were making the same mistake at the time), so now if you compare actual unemployment against original projections it looks like the stimulus had no impact. But that was a forecasting error and has nothing in itself to do with the stimulus itself.

Menzie Chinn has an overview post on the debate in which he argues that, at least from the standpoint of economists, it’s hardly a debate: the stimulus worked.

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Long-Term Returns to Stimulus: Education

The fiscal stimulus debate is currently hampered by confusion over its objectives. On the one hand, one purpose of the stimulus is to generate economic activity quickly in order to boost aggregate demand and break the recessionary spiral we seem to be in. On the other hand, people rightly worry about the capacity of the government to spend large amounts of money quickly without wasting it, and argue that the money should be put to productive use, rather than paying people to dig holes and then fill them in again. (This is why you see (at least) two versions of criticism of the stimulus plan: on the one hand, the criticism is that the government is incapable of putting money to productive use; on the other hand, the criticism is that money for things like electronic health records will not be spent in time to have a short-term effect.)

My opinion is that both are valid purposes. There probably is a limit to the number of tens of billions of dollars the government can spend next month without wasting some of it. But given the projected duration of the output gap (the difference between potential and actual GDP, meaning that the economy is performing below its full-employment capacity), I think there is also value in programs that take several quarters to disburse their money – as long as those programs are also good investments.

One major area of spending is education, where the plan includes more than $150 billion in new spending over two years. While politicians (and economists) reflexively cite education as an area where investments can have positive long-term returns (through increases in productivity which increase GDP and our average standard of living), I wanted to see what empirical research there has been on this topic. There has been a lot of research on the impact on individuals’ earnings of additional education (this is a common example used in first-year statistics classes), but somewhat less on the impact on national economic growth.

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Obama Doubles Down

Barack Obama did not actually predict trillion-dollar deficits indefinitely; more precisely, he said, “unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come” (emphasis added). At the same time, the highly competent Congressional Budget Office projected a $1.2 trillion deficit for fiscal 2009 (year ending 9/30/09).

I was initially surprised by Obama’s forthrightness on the deficit question, but on reflection there are three good reasons for him to do it:

  1. He wants to lower expectations by making the case that we have a serious deficit problem before taking office.
  2. He wants to signal that he is aware of the deficit issue, to try to defuse the attacks he is going to get from fiscal conservatives regarding his stimulus plan.
  3. He wants to use the current crisis – and the political opportunity it gives him, as a new and generally popular president with significant majorities in both houses – to tackle the long-term retirement savings problem.

If you parse the sentence, in saying “even after our economy pulls out of our slide,” Obama is saying that the long-term deficit problem would exist with or without the current crisis – and he is right. A $1.2 trillion deficit, caused by a steep fall in tax revenues, partially by the costs of various bailouts, and a little bit by two ongoing wars, is small compared to the Social Security and Medicare funding gaps ahead. In signaling that he will announce some kind of approach to entitlement spending by next month, Obama is implying that he wants to take on not just the short-term recession, but also the long-term deficit problem.

This is good for two reasons. First, someone has to face the problem. President Bush “tried” (not very hard) to do something about Social Security in 2005, although the general direction of his proposal, in shifting from a defined-benefit to a defined-contribution model, would have shifted risk from the government onto individuals.

Second, there are economic reasons why long-term sustainability should be addressed at the same time as short-term stimulus. Virtually everyone (even Martin Feldstein) favors a large, debt-financed government stimulus package. However, the more the government borrows, the more risk there is that lenders will worry about our ability to pay off the debt. While few people expect the U.S. to default, the more widespread fear is that we will print money (in a more sophisticated form, of course) to inflate away the debt. Because of those fears, large amounts of borrowing will drive up interest rates, especially as the economy recovers, both for the government (increasing our interest payments) and for the economy as a whole (undermining growth). The solution, if there is one, is to put forward a credible plan for dealing with the long-term retirement problem.

The risk, of course, is that Social Security and Medicare can be politically lethal, which is one reason President Bush backed off so fast. But I still think this is the right bet for Obama to make. Insofar as any solution is going to involve some pain (lower benefits, increased benefit age, higher taxes, increased control over health care), it is going to be easier to pass in a time of perceived collective crisis. And being willing to tackle the problem could also help gain support from fiscal conservatives for the stimulus that we need now.

IMF Speaks

On Monday, the IMF released a new research “note” entitled “Fiscal Policy for the Crisis,” which sets out recommendations for fiscal policy to address the global economic downturn. The premises of the note are, first, that the financial system must be fixed before it is possible to increase demand and, second, that there is limited scope for monetary policy, leaving fiscal policy as the main weapon. The executive summary provides the main recommendation in short form:

The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets.

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419,000 Jobs Vanish

240,000 jobs lost in October; September revised from 159,000 to 284,000; August from 73,000 to 127,000. That’s 419,000 jobs less than we thought we had a month ago. It’s 651,000 less than there were three months ago. And because we need 140,000 new jobs each month just to keep place with population growth, that’s over 1 million fewer jobs than the economy would need to maintain unemployment where it was three months ago. Unfortunately, everyone expects this quarter and next quarter to be worse than last quarter. On top of that, unemployment is a lagging indicator: because of the transaction costs in firing and hiring workers, companies exhaust their other cost-cutting opportunities before laying people off, and they don’t hire again until they are certain that the economy is growing again.

More than 22% of the unemployed have been out of work more than six months, which is usually when unemployment benefits expire. For this and other reasons, only 32% of the unemployed were receiving state benefits in October. These are more reasons to expand unemployment benefits in multiple directions, at the very least for a limited time period. Alan Krueger has described the other ways our unemployment insurance system is broken.

Unfortunately, there is fear that President Bush (remember him?) will veto the stimulus package, including extended unemployment benefits, that the Democrats want to pass in November, thereby accomplishing nothing except delaying it by two months. Sigh.

Recession for Beginners

(For the complete set of Beginners articles, see the Financial Crisis for Beginners page.)

So, it looks like we’re in a recession. What’s a recession?

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Financial Crises and Democracy, Part Two

We have several times emphasized the need for a large economic stimulus package to limit the extent and damage of the recession that we are almost certainly in already – a need recognized by economists from Nouriel Roubini to Larry Summers to Martin Feldstein. More recently, I speculated on the relationship between democratic politics and economic policy in a time of crisis. Well, as just about everyone in the world knows, things are coming to a head.

Whether we get a large economic stimulus package in the US – the economy whose health affects, for better or worse, just about everyone in the world – could very well depend on who is elected on Tuesday. For a summary of their short-term economic proposals, see here.

If Barack Obama is elected, we are likely to see a large stimulus package. It would probably include the measures that many economists are favoring, including extended unemployment benefits (and suspension of tax on those benefits), immediate cash aid to state governments, increased home heating cost aid, and infrastructure spending. These measures will have a direct impact on the economy by increasing spending now, while increasing it in ways that are necessary (keeping poor people alive) or that are productive long-term investments (infrastructure). Some of his other suggestions will have a more limited impact on the economy, such as a cash tax rebate, or are more or less irrelevant to the economy, such as relaxing the minimum distribution requirements for retirees.

With John McCain, we are not likely to see a stimulus package – or, more accurately, the package we see will be built around tax cuts that are not likely to have a direct economic impact. His proposals include: reducing taxes on retirement account withdrawals; increasing capital loss write-offs; reducing long-term capital gains tax rates; exempting unemployment benefits from taxes; also relaxing minimum distribution requirements; extending all of the Bush tax cuts; and reducing corporate tax rates. Except for the tax cut on unemployment benefits, these proposals suffer from the basic problem that undermined the last stimulus package this spring: in tough economic times, people take their tax rebates (or tax cuts, or cash you give them in any form) and stuff it under their mattresses, or pay down debt. McCain’s plan also includes the famous (or infamous) proposal for the government to buy up and refinance mortgages directly. (Obama favors increased loan modifications and legislation to eliminate some of the legal barriers to modifications.) But while that could potentially help homeowners and lenders, it doesn’t increase economic activity any.

(For an explanation of why different programs have different marginal impacts on GDP, see Menzie Chinn’s post.)

That said, given the way legislation is passed in Washington, the final package is likely to differ from either person’s proposals, whoever is elected. But the next major step that our government takes to combat the financial and economic crisis will depend directly on the outcome of Tuesday’s election.

Martin Feldstein: Stimulus Should Be Big

Conservative economist and deficit hawk Martin Feldstein is arguing that we need an economic stimulus package now (immediately after the election) that is big ($100 billion won’t cut it) and long. OK, he didn’t explicitly say it should be long, but he did say this:

Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

This is basically what we said in the National Journal and what Simon said in this morning’s testimony. I’m not claiming that Feldstein listens to what we say (I strongly doubt it). But his op-ed emphasizes the fact that most economists from across the political spectrum are on the same page on this issue.

Update: Business executives and Republicans” are on board, too.

Testimony Before Joint Economic Committee, Today

Here is the written testimony I submitted to the JEC.  In my verbal presentation this morning (5 minutes only, strictly enforced) I stressed the following.

1. The global economy is slowing fast, and likely faces an unprecedented (since 1945) recesssion.  The pressures on emerging markets are intense, and inflexibility in Europe in both policy (Eurozone, I’m talking about you) and labor markets (for almost all the European Union) creates serious macroeconomic vulnerability at this stage.

2. In the US, significant (OK, also unprecedented) countercyclical policies have now been put in place.  In particular, the Fed is running through its anti-deflation playbook (which Mr Bernanke was kind enough to publish back in 2002).  We have no idea how to properly measure the scale, let alone the impact, of this increase in: liquidity, contingent liabilities, actual or potential direct lending to almost everyone in the US, and, via unlimited swap lines to some central banks and new $30 billion swap lines to four emerging markets, to many institutions around the world.

3. So deciding what to do with fiscal policy is very hard.  In other industrialized countries, you can rely on “automatic stabilizers” to a greater degree than in the U.S., meaning that their government spending (and deficit) increases in recession because unemployment benefits and the like are more generous.  In the U.S., we have to make a conscious decision.  And that decision needs to be made soon, within a month or so, because any fiscal stimulus works only with a time lag – and the more you want to do things that definitely raised GDP (like infrastructure), the longer the time lag.

So my recommendation is… (well, read the testimony; the numbers are on the first page; detailed recommendations follow on how to spend, for both immediate impact and longer-term benefits).

Comments welcome – there is still a long way to go, in terms of legislation design and implementation.

Update: If you want to see the actual session courtesy of C-SPAN, go here. (Note there were 8 speakers and the session was two hours long.)

Economic Stimulus Proposals: The Data, Please

Economic stimulus is in the air. (Simon, in fact, is testifying on the subject before the Joint Economic Committee later this week.) Menzie Chinn at Econbrowser has a data-heavy post today on multipliers – the impact on GDP of in different types of stimulus (tax rebates, tax cuts, unemployment benefits, etc.). He concludes that the stimulus should include extended unemployment benefits, aid to state and local governments, and infrastructure spending. To the counterargument that infrastructure spending takes too long to have an impact, he shows multiple GDP forecasts, all tending to show a protracted recession (and, note, getting worse with each update). If you read one article about the stimulus, read this one.

(Like Simon argued in the National Journal, but with more data.)

Economic Stimulus and Investing for the Long Term

With recession news getting worse every day (here’s one depressing roundup), there is a high likelihood that the Congress will pass an economic stimulus plan either in a lame-duck session in November or immediately after reconvening in January. General sentiment seems to be against tax rebate checks (Martin Feldstein summarizes the argument that the vast majority of the rebates went into savings, not consumption) and in favor of fast-acting measures like extended unemployment benefits and direct aid to state and local governments to replace lost tax revenues. In addition, however, we (and Larry Summers) think that now is the time to invest in long-term economic productivity, for example through infrastructure projects, in part because we are probably looking at a long recession. Our thoughts are presented under Simon’s name and picture on the National Journal’s Economy Blog, which is hosting a discussion of the stimulus package. Note that even the participant from the American Enterprise Institute favors a stimulus package of between $300 and $500 billion.

So Much Going on …

One of the challenges of the current financial crisis/credit crunch/recession/whatever you call the mess that we’re in is that there are so many things going on at once – stabilizing the financial system, housing, economic stimulus, regulation, emerging markets crisis, now incipient currency crisis, … Luckily, there are many other smart commentators out there working weekends when we all should be spending more time with our families.

On the topic of regulation and economic stimulus, Mark Thoma cites and expands on Larry Summers, who argues that we need to not just give the economy a boost in the short term, but take advantage of the opportunity to take steps – both investments and regulation – to boost productivity in the long term.

Mark Thoma (again) and Yves Smith both provide roundups and analysis of the currency crisis, which Simon raised a couple of days ago. Quick summary: it could be bad.

So if you can’t sleep, there’s plenty to read and worry about. (Or you could watch the World Series.)

Can We Afford the Bailout?

Even the most casual observer will have realized that the U.S. government is laying out a lot of money to combat the financial crisis. Which raises the obvious question: can we afford it?

The first important thing to keep in mind is that the U.S. government, unlike every other government in the world, has the ability to borrow virtually unlimited amounts of money. The U.S. dollar is still the world’s reserve currency, and Treasury bonds are still the risk-free asset of the global economy. In times of crisis, when smaller countries find it harder to raise money, the U.S. actually finds it easier, because investors are ditching whatever risky assets they are holding and buying U.S. Treasury bills and bonds instead. Currently, the U.S. is paying virtually no interest on short-term borrowing (and probably negative interest in real terms).

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