There are really two quite separate debates going on over the stimulus, but they're being jumbled together into one gigantic ad hominem. My take on both--pardon for being perhaps a tad obvious, but I think the debate has had a tendency to wander off into the weeds, so it's useful to be a little general from time to time:
Question #1 Will a fiscal stimulus work?
Define "work". If the question is "Can borrowing money and spending it increase our measured GDP figure?" then yes, it is trivially true that stimulus "works". So why don't we borrow a zillion dollars and spend all of it? We could quadruple our standard of living overnight?
Because fiscal stimulus "working" is more than a question of increasing measured GDP. In every other context, liberals are all too aware of the limitations of GDP as a proxy for human wellbeing. In the context of the stimulus debate, however, all those reservations seem to fly right out of their heads.
When we ask "does it work" what we're really asking is "Will it increase our overall well-being?" And to answer that, I think you need to know a few things:
a) Are we increasing actual output, or only measured output? If you pay people to mow their own lawns, you increase measured GDP, but you didn't gain much. More broadly, if the economy is at full employment, increasing government spending definitionally crowds out private production.
Of course, we are not at full employment now. I think that Gary Becker's worries about how much of the stimulus will truly generate new jobs is well founded--many of the projects don't seem well designed to pick up labor in the markets that have been hardest hit, and certainly not right away. But it seems hard to escape the conclusion that we are probably going to reduce some unemployment by spending this money.
b) Are the increases permanent, or temporary? I'm shocked to see Paul Krugman complaining that people are assuming the jobs created by the stimulus will only last a single year in calculating the cost of creating them--back when the Bush tax cuts were proposed, he got very, very angry at . . . . people who assumed that the jobs created by the stimulus would last longer than a year.
There are two ways of looking at fiscal stimulus. One is to assume that the government is simply closing the output gap between what we could produce at full employment, and what we happen to be producing right now. The second is to assume that we are in a liquidity trap, and that we need a whacking great positive shock to jolt us out of a permanently lowered output level. You might think of the former sort of stimulus as a pacemaker, and the second sort as the ER docs grabbing the crash cart and shouting "Clear!".
The evidence for the former sort of stimulus is decently strong, though it's costly. The evidence that the latter sort of stimulus can actually produce a permanently higher level of output--what we need to believe if we are to accept the need for a huge spending package, and the possibility that our spending will create permanent jobs--is, as I wrote in the linked piece, practically nonexistant.
c) What are the costs? Right now, very little. The government is borrowing near zero interest rates, and the marketplace doesn't want corporate debt at practically any price, so I find it hard to see much evidence for "crowding out".
But in the future, things start to get costly.
i. The government will eventually have to roll over the debt, and the interest rates will not be 0% anymore. Taxes will have to be raised, or other spending cut.
ii. If taxes are raised, we'll see deadweight loss--people working/saving/investing less. Republicans tend to overstate these costs, but they are far from zero.
iii. Future government borrowing on this scale may well crowd out other private borrowing, meaning lower rates of investment.
iv. To the extent that these programs are not temporary--and many of them aren't (I'm looking at you, high speed rail!) they will incur ongoing operating costs. These, too, will require future increases in taxes or cuts in spending.
v. To the extent that the money is shoved out the door quickly, and in political ways, many of these projects will be badly designed, wasting resources and costing the government a lot of money to eithe rfix or end them.
The costs make it especially important to know whether we're getting a permanent boost out of this, or just a temporary tide-over. If we get a permanent boost, we'll recoup a lot of the wasted resources. If it's temporary, there are much more efficient and targeted ways to deal with the problem of unemployment, like temporarily topping up and extending benefits, or providing relocation assistance.
As I say, I'm skeptical that we'll get a permanent output boost. But let's assume we think it will, and that the boost is more than big enough to cover the cost.
Question #2: What sort of stimulus will best provide that boost?
I'm agnostic on the question of tax cuts vs. spending, which makes me an oddity among most econopundits. The complaint that spending is spent while tax cuts are often saved leaves me cold, because I think this focuses too much on that measured GDP figure, and not enough on welfare enhancements. Right now, most households that save $500 by putting it in the bank or paying down debt will gain a big boost in welfare, because they'll worry that much less about credit card payments, or potential emergencies.
On the other hand, given that the banks have really cut back on the credit they're willing to extend, it is worth worrying that that stimulus will stop dead with the consumer--it won't provide income to any other consumers who can then breathe a little easier. But that raises two further concerns: will we stay in a liquidity trap (I'm not sure we will), and if we do, will the people the government buys from spend their earnings, or save them? If the latter, the multiplier isn't too high.
What I'm not agnostic about--and neither should any serious proponent of stimulus be--is the difference between stimulus now, and stimulus two years from now. Spending may have a higher multiplier, but if you want an output shock, the immediacy of a tax cut far outweighs any possible benefit of a high speed rail project that's going to be built just as soon as we can design it, and get the EIS, and clear the public hearings . . .
So. It's time to admit what we already know: proponents of the stimulus are in favor of this package in large part because they favor a fairly large transfer of resources to the public sector, and the stimulus is a good way to achieve that. There is, in fact, nothing wrong with this belief, for all that I disagree with it. And most of the opponents of this package are opposed just as reflexively.
Myself, I'm agnostic. I am skeptical that the stimulus will result in a permanent increase in output or decrease in unemployment. However, I have also recognized that we are going to have a massive stimulus whether I like it or not, so I might as well view this as an interesting natural experiment, rather than get into a lather. Especially since it's quite possible that, as an empirical matter, I'm wrong.
On the other hand, I'd like to see the people favoring it commit to some empirical benchmarks to test their case in advance. If unemployment is still rising two years hence, for example, I think that will be a strong sign that stimulus does not work as well as billed. It's no good complaining that "It wasn't big enough", either, because where are the stimulus enthusiasts demanding that we front load the spending into a single year so that it will be big enough, rather than wasting half of it on weakly stimulative spending that is likely to have its biggest effect after the recession is over?
What will change my mind? I'm still trying to figure that out, idly considering exotics like the second derivative of the unemployment rate. For now all I have is a crude intuition: if things are dramatically worse in two years, then the stimulus will have failed as badly as monetary policy.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
Wow. Well done. The fairest commentary on the matter I have seen yet.
The Atlantic got its money's worth today.
On the other hand, I'd like to see the people favoring it commit to some empirical benchmarks to test their case in advance.
This is absolutely right.
I don't believe there are any empirical tests that could be applied. The economy is too big, and there are way too many variables to isolate any one element and "test" it.
The example of unemployment still rising two years hence is one example. Perhaps the stimulus bill will merely slow the rate of increase of unemployment (the derivative) compared to what it would have been without it. Perhaps unemployment will go down for reasons totally unrelated to the stimulus. Maybe interest rates go up because the slowdown causes the Chinese to reduce their US treasury holdings. There are a million different variables that you can't control for in an "empirical test."
All we can do is drop money out of helicopters and hope some of it does some good.
It is a nice review of the stimulus issues. But I must say that your avoidance of political realities is disappointing. Simply put, there is no way that there will not be a stimulus plan (even if it a bad idea) because it would be political suicide for Obama/Democrats in general to not pass a plan and then watch as the economy grinds to the halt.
I hope that you will acknowledge that political reality at some point
Isn't there really only one question to ask?
"Is it better than not doing it?"
Cutting off my leg sounds like a terrible idea, something I would never do. But, if I was caught in a bear trap in the middle of nowhere by myself and certain to die unless I got out of the trap, then it may be better than not doing it.
Bush started off his presidency with massive tax cuts that have caused, and will continue to cause, massive budget problems. Job growth was horrendous, and its not like it ushered in an era of prosperity for the country. In short, I am very skeptical that tax cuts alone can get us out of this. And, obviously, at the zero bound, we have no monetary policy left. So, sure, throw some well-targeted tax cuts in there, every little bit will help, but don't just give handouts to the well-off like some have proposed. Even then though, we will need a lot more than just lower taxes. More gov't spending, in general, is not something anyone wants, but, in this case, it may be the best alternative.
And, do you really think there is zero chance a few smartly placed supertrains could become self-sustaining, and maybe even advantageous?
They're not self-sustaining in Europe or anywhere else, as far as I know . . .
Good post.
Re tax cuts/credits, since companies are laying off workers now to reduce labor costs during the recession, why not propose a temporary payroll tax holiday for, say, the first half of 2009? That would enable companies to temporarily cut their labor costs by about 7.65% (for employees earning less than the Social Security wage base) without laying anyone else off. It would also increase the workers' discretionary income.
Got it. We need stimulus. Some say tax cuts. Others govt spending. No relevant case studies. You're ambivalent.
Thanks Megan!
k1
ryanculver.blogspot.com
Take the 900 billion and do 3 things:
Give a third in checks to everyone they will put it in the bank and that will recapitalize banks.
Give a third in payroll tax cuts to drive consumption.
Give a third to the states based on percentage of population that state has.
Peter has it exactly right... laying out hundreds of pages of detailed gov't spending simply leads to capture by favored interests. Better to harness the power of individual action (and making sure the states stay solvent).
Peter's proposal would at least have the virtue of being front-loaded. According to the CBO report, the portion of the currently proposed stimulus that would hit in '09 wouldn't be much larger than the largely ineffectual stimulus we had last year, about $169 billion. If >$200 billion wasn't enough of a jolt last year, why would it be this year?
>>But I must say that your avoidance of political realities is disappointing.
Neo-Realist,
I thought she was doing that here:
>>However, I have also recognized that we are going to have a massive stimulus whether I like it or not, so I might as well view this as an interesting natural experiment, rather than get into a lather.
I am pretty sure this is a great post.
Thanks
Generally good comments, I agree that benchmarks aren't going to tell us anything. Until my time machine starts working instead of making creamy, frozen yogurt, we don't know what would have happened otherwise. If unemployment drops, whose to say it wouldn't have dropped further.
I think if we are going to do anything, front loading with tax cuts and some targeted spending would be so much better. We forget sometimes that the economy has to shake some of this off on its own. We definitely place a bias on action over inaction.
"They're not self-sustaining in Europe or anywhere else, as far as I know . . . "
Given the deep,deep level of ignorance you normally show about anywhere not in the USA , it is of course deeply unsurprising to hear that in certain countries it is the high speed trains that make the profit which subsidises the non high speed network.....
Next up , no doubt, a column about why Pakistanis are glad to be bombed by the USA, written by a cosmopolitan like yourself......
@MMcA: It's time to admit what we already know: proponents of the stimulus are in favor of this package in large part because they favor a fairly large transfer of resources to the public sector, and the stimulus is a good way to achieve that.
Not that it matters much:
I am in favor of the stimulus, and I favor a fairly large transfer of resources to the public sector, but those views don't overlap much. In particular, if the joint congressional leadership came knocking at my door and asked how I would spend the present value of $850b (or whatever the stimulus is now), I would come up with some combination of medicare-for-kids + new electrical grid + trains and transit + KIPP schools in inner cities.
On the other hand, I'd like to see the people favoring it commit to some empirical benchmarks to test their case in advance. If unemployment is still rising two years hence, for example, I think that will be a strong sign that stimulus does not work as well as billed. It's no good complaining that "It wasn't big enough", either, because where are the stimulus enthusiasts demanding that we front load the spending into a single year so that it will be big enough, rather than wasting half of it on weakly stimulative spending that is likely to have its biggest effect after the recession is over?
I favor the stimulus, and I agree that I'd like to have some kind of benchmark to see whether it's working, and it's not obvious what it would be.
Re: "where are the stimulus enthusiasts ..." -- I think there are people who are prepared to make a serious case that the stimulus should be much bigger (Krugman, I think, is one). There's not too much upside to spending a lot of time arguing that case; the White House has done what it's going to do, and if they aren't going to go higher it's not like you're going to talk John Boehner into fighting for a bigger number.
(To clarify the first point just made, the reason I'm not demanding that my medicare-for-kids etc. package be enacted as the stimulus is that it wouldn't work as a stimulus: writing an IOU for little Johnny's cancer treatment in 2020 won't get the economy moving now. Likewise trains that won't be built for 5-10 years. The stimulus package is tolerable as a stimulus, but it's got very little to do with whatever my ideal government spending plans might be.)
Just borrow $3 trillion and send a check to every individual that filed a tax return last year. Surely no Keynesian believes that all of that will be "saved" or hoarded, and individuals will serve as agents for what to spend the money on.
And if you don't get enough spending, repeat next year.
"However, I have also recognized that we are going to have a massive stimulus whether I like it or not, so I might as well view this as an interesting natural experiment, rather than get into a lather."
I'm perfectly content to lather.
To borrow the example from above: Cutting your leg off is a bad idea. If you are stuck in a bear trap, cutting your leg off is STILL usually a bad idea. Just wait for the trapper to come around and help you.
Likewise, markets frequently have downturns, recessions, and corrections... especially on the tail-end of ridiculous bubbles. When we make the obvious choice of doing-something-for-the-sake-of-doing-something, we get in much deeper trouble. When we make the bold choice to let the market work, we typically recover.
I'd like to think that all this is about repairing the markets and/or minimizing our temporary pain, but this smells an awful lot like just another effort to enlarge government's footprint.
But hey, at least Obama's not a torturing, spying, war-mongering, gay-basher with an annoying drawl. So he's still an upgrade over big-government spender we just got rid of.
Given the deep,deep level of ignorance you normally show about anywhere not in the USA...
What makes this doubly funny is Megan is correct, of course.
I don't believe there are any empirical tests that could be applied. The economy is too big, and there are way too many variables to isolate any one element and "test" it.
If the economy is too huge and complex for empirical tests to be possible, isn't that by itself a sufficient argument for the government not spending the money?
But hey, at least Obama's not a torturing, spying, war-mongering, gay-basher with an annoying drawl.
Unless he's changed positions since taking office a week ago (and why wouldn't he, given how many other things he's already done a 180 on), Obama still favors escalating the war in Afghanistan and Pakistan, still supports the expanded FISA espionage powers, and still opposes legal recognition of gay marriage.
But it is true that he hasn't got a drawl. And hasn't tortured anyone so far. You're right on that part.
Bush started off his presidency with massive tax cuts that have caused, and will continue to cause, massive budget problems.
Don't forget dramatically increasing government spending. No doubt about it, Bush left massive budget problems.
We've had tax cuts, deficit spending, a $150B stimulus package and an $800B deficit and that hasn't worked. Yet somehow the solution to the problem is to do the same thing on an even larger scale?
It seems that we have become addicted to bubbles: equities, commodities & real estate have all bubbled and popped in the last 10 years, and no one wants the party to end. So we're going to try to reinflate a bubble using Treasuries. This is not going to end well.
I largely blame the boomers. I don't think it's a coincidence that the markets have gone haywire as the boomers hit their peak earning years.
Peter - bank deposits are NOT bank capital. Haven't we at least learned that much ?
Megan wrote: ....outweighs any possible benefit of a high speed rail project that's going to be built just as soon as we can design it, and get the EIS, and clear the public hearings . . .
alkali wrote: Likewise trains that won't be built for 5-10 years.
The people who write EIS reports don't work for free. The people who go out and tramp the proposed route doing things like surveying it don't work for free. The people back at the office who answer the phone, make the photocopies and file the paperwork don't work for free. Same thing with the people who design it, write the specifications and all the people at the companies supplying the all the stuff the people who do all of the above.
If we spend the money now we will know two years from now that High Speed Rail between City A and City B will cost a gazillion dollars and rerouting around the mountains through City C and using less than full blown HSR techniques will only add 30 minutes to the trip between A and B. And that it would cost only a third of a gazillion dollars.
Same thing with other public works projects. The paperwork may just lay around for 75 years like the initial plans for the Second Ave. Subway but it puts people to work and we do get some value out of it.
The people who write EIS reports don't work for free. The people who go out and tramp the proposed route doing things like surveying it don't work for free. The people back at the office who answer the phone, make the photocopies and file the paperwork don't work for free.
Sure, but they're a small percentage of the project budget. Yeah, a rail line that costs $1 billion and won't get built until 2020 at the earliest might end up generating a few million dollars' worse of business for pencil pushers this year. But that changes the project from "a $1 billion stimulus spending for infrastructure" to "a $3 million stimulus attached to a $997 million Democratic pet project".
Doesn't sound quite as exciting to the electorate that way, though.
The paperwork may just lay around for 75 years like the initial plans for the Second Ave. Subway but it puts people to work and we do get some value out of it.
If we pay people to generate paperwork that never gets used, we haven't gotten ANY value out of it. What we've done is take money away from the people who originally had it and might have spent it on something useful, and use it to pay people to produce useless crap that nobody wants. It would have been more sensible to pay them to dig ditches and fill them back up again -- it would be equally unhelpful to the economy, wouldn't kill as many trees, and the people involved would get some sunlight and exercise.
Bush started off his presidency with massive tax cuts that have caused, and will continue to cause, massive budget problems.
This is a myth. Revenues for the government were up even with tax cuts. The increased spending is what caused the budget problems.
Doing nothing may be the best course of action, but if we have to have stimulus then Peter's plan is as good as any I've seen.
Very well written! I do have a question though. You say that you are agnostic on tax cuts vs spending. There are many examples of the positive effects of tax cuts (Kennedy and Reagan) but I am not aware of a situation where stimulus spending of this magnitude has worked. I understand that there have been situations where stimulus has worked on smaller scales but nothing this large has been attempted before. Do you know of any?
Thanks for the intelligent writing and thoughtful approach. It is appreciated.
Megan,
I appreciate that you are doing your best to be even-handed but the first second and third thing you should say is not "the pro-stimulus crowd want for political reasons to grow the government" but that "the Dems that are in power (Obama, Geithner)and their very main-stream economists/sympathizers (Summers, Romer, Orszag, Krugman) do NOT want to grow the govt given our debt and they recognize that fiscal policy is a blunt, inefficient instrument but IT IS THE ONLY THING WE HAVE LEFT to avoid the economy falling into a really bad long-term Japan/Depression-style low equilibrium until hopefully global demand recovers, and ton more well-thought out spending enables a gradual recovery."
Your post on big, good, fast was excellent but again you claimed to be agnostic. We are in an awful situation were there are no fantastic options and the trade-offs are ugly BUT, as Buffett says, we have to throw everything and the kitchen sink at the problem.
And talking about metrics... did you not find Romers and the CBOs reports helpful in terms of giving you a sense of the metrics we should judge the administration by?
And say the other ugly truth that of course Obama would like a bigger stimulus but in addition to the Reps who are playing politics, there is a $1-2 tln bill coming called rescusitating the banking sector.
So while I appreciate your posts, I am surprised that Martin Feldstein, including his article in the Post as well, is being ultimately more constructive and honest about this than you are.
But it is true that he hasn't got a drawl.
No. Instead, he has an odd, perhaps annoyin' way of clippin' the "g's" from his "ings", like "we've gotta stop these companies from shippin' their jobs overseas".
I suspect that Obama finds this interestin' habit to be more "authentic", or maybe he just picked it up in the Midwest.
Sadly, the only thing we've learned from the initial stimulus plan proposal is that Obama is officially Pelosi's beeyatch.
If you pay people to mow their own lawns, you increase measured GDP, but you didn't gain much
Actually in an economy working below full employment to the extent that said mowers spend the extra income on consumption and investment goods, you should have a real, not just a measured increase in GDP. It gets technical in terms of underutilised resources (which the equilibrium crowd insist cannot exist).
Dan: "But it is true that he hasn't got a drawl. And hasn't tortured anyone so far. You're right on that part."
He hasn't tortured yet, but prominent members of his cabinet believe that torture should be legal.
http://www.nydailynews.com/blogs/dc/2007/09/hillarys-torture.html
The people arguing over the utility(or goodness/badness) of cutting off one's leg to escape a trap need to consider the true story of the guy in Utah a couple years ago who got trapped by a fallen rock and had to cut off his own arm to escape. So the hypothetical isn't that hypothetical.
I don't believe there are any empirical tests that could be applied. The economy is too big, and there are way too many variables to isolate any one element and "test" it.
If I follow this logic, then I don't have to accept the fact we are in an economy-wide recession in the first place, since we use similar empirical tests and variables to determine this.
Of course, I would be foolish to reject evidence of a recession because there are empirical tests and variables that we can use to assess economic slowdown - conversely, there should be some way to determine the effect of a large stimulus.
Megan's argument against GDP as a marker is sensible. Unemployment, sector specific and in the near-term, is probably the best way to evaluate how fast this stimulus creates jobs. However, increasing unemployment benefits could have a counter effect to this.
The origin of this recession - finanical and credit market instability - had plenty of markers to evaluate (LIBOR, TED spread, 3-month and 30-year bond yields). I'm still looking at those for my "recovery signal." In many respects, I could give a fig about near-term unemployment; if financial institutions are still running to treasury bills 3 years from now, the original problem is not fixed, and we'll be back where we started.
We should build a monorail!
Mark Zandi over at economy.com has had the courage to produce an 18 page report wherein he lays out his "with stimulus" and "without stimulus" scenarios, quarter-by-quarter - numbers for GDP and employment rates. So, there is at least one economist who has had the courage to post his model for all the world to see.
He supports the stimulus. And he is a Republican.
Colin,
Isn't that a North Haverbrook thing?
"Job growth was horrendous, and its not like it ushered in an era of prosperity for the country."
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CES0000000001&output_view=net_1mth
The job growth in 2004 was actually quite good. If you are going to debate these things, STOP LYING. It doens't help anything.
I guess Megan not having children and with no plans to have them can be agnostic about saddling future generations with crushing debt. It is not like she or any of her spawn will around to pay for it. Even if we are in a liquidity trap, are we in a $1.5 trillion dollar liquidity trap? Is that much money and debt actually necessary to get us out of it?
There is a famous story about Keynes going to a meeting in Washington and leaving it saying "everyone there was a Keynesian but me". Keynes understood in his later years the limited usefulness of infrastructure and stimulus spending. Keynes argued for "priming the pump" with spending and tax cuts in certain situations for limited duration. He would have never endorsed spending at this rate and aquiring this kind of debt.
It is important to understand that this "stimulus package" is not a one shot deal. The new spending levels will become the new baseline for spending. That means in 2010 when the public throws out Pelosi and Reed and a new Congress tries to do something about spending, the Democrats will scream "they are cutting billions from education and healthcare" never mentioning that those billions were sold as a one time stimulus package.
Even from a liberal perspective, this bill is terrible. It does nothing to eliminate inequality, does nothing to attack the problems of poverty. It does none of the things liberals are supposed to care about. What it does do is give out billions to politcal chronies and interest groups at the expense of future generations. Isn't everyone, liberal and conservative supposed to be against that? Wasn't Megan's man Obama supposed to end this kind of unserious looting of the national wealth and usher in a more serious bi-partisan age?
I can't believe that any serious person right or left could be anything but appalled by this bill. The fact that Megan claims to be agnostic about it greatly reduces her credibility.
megan,
what's your take on this bonus issue? are wall st. bonuses more an 'ataboy or are they just direct compensation dispensesd in another way? in other words, if financial companies stopped paying bonuses, how much more would they have to pay in salary to recruit and keep the same people?
You wrote:
c) What are the costs? Right now, very little. The government is borrowing near zero interest rates, and the marketplace doesn't want corporate debt at practically any price, so I find it hard to see much evidence for "crowding out".
David:
I'm not worried about the interest rate. I'm worried about repaying the principle of the loan.
If you borrow money for consumption, all you have done is time-shifted the consumption. In the future when you have to repay the loan, that money comes from money you would have spent on consumption in the future.
I believe that a huge part of the current mess is that we are reaching the limit of how far we can kick the can down the road before we have to cut back on consumption and repay all these debts. Just like there is a limit to how many times you can balance transfer your credit cards and pull out equity in your home, there is a limit to how far debt can carry us on the corporate and government level.
Borrowing to fuel consumption is not sustainable.
I think ordinary people, when made aware, can readily understand the difference between stimulus, for stimulus' sake, and investment. People can understand the difference between government spending for the "Bridge to Nowhere" and government spending for the Grand Coulee Dam. The one would have created temporary jobs for the builders and benefited several property owners on an island. The other spawned the aluminum industry, jet air travel, and irrigated enough acres to pay for itself in tax receipts from permanent jobs and production many times over. Clinton knew the difference, saying in his 1992 campaign, "We need to invest." Obama knows the difference, based on his campaign platform. The stimulus should be about improving America's comparative advantage in producing goods and services. The question is whether this Congress can discover and stay focused on that end.
Good news. I just checked with my astrology chart and everything will begin to turn around by 2010.
Most news that I've seen use all of their alotted time in mentioning some pork or other they don't like. Anderson360 last night mentioned several things totaling about 9B$ that were questionable, but not a single mention about the other 810B$ (99%) that might help us citizens. I'm still struggling with the 600+ pages, but so far I've seen a lot of good, and some bad. Please talk more about what is good in the plan; we've already heard the bad.
"I'm shocked to see Paul Krugman complaining that people are assuming the jobs created by the stimulus will only last a single year in calculating the cost of creating them--back when the Bush tax cuts were proposed, he got very, very angry at . . . . people who assumed that the jobs created by the stimulus would last longer than a year."
Why are you shocked? Krugman is very, very much a partisan. I don't see why you are shocked at any sort inconsistencies arising from partisan behavior from him.
My wife reports than my younger son, having obtained a box of granola bars, took all of them out and put them on the floor. Realizing the box was empty, he started picking them up and putting them back in.
We will be submitting our $1 billion invoice to DC for "stimulating activity."
What in the word "stimulus" suggests "permanent"? Is the stimulus not designed to be a temporary boost until the economy gets back on track and can generate jobs independent of government spending again? Sure, there's some fundamental problems in our economy, but what people need is a short-term solution while we figure this out (if we're not trying to "figure it out" in the meantime, then we are indeed in trouble). As for tax cuts, no one has meaningfully explained how a reduction in income taxes will benefit someone who has lost his/her job, i.e., has no income.
"The second is to assume that we are in a liquidity trap, and that we need a whacking great positive shock to jolt us out of a permanently lowered output level."
"The evidence that the latter sort of stimulus can actually produce a permanently higher level of output--what we need to believe if we are to accept the need for a huge spending package, and the possibility that our spending will create permanent jobs--is, as I wrote in the linked piece, practically nonexistant."
Megan,
I think you miss to point of stimulus in a liquidity trap. Even the most ardent New Keynesian will tell you that monetary policy exercised through the Fed Funds interest rate is the simplest, least intrusive way to stimulate the economy. But in the liquidity trap the interest rate becomes useless as a tool because even at a zero percent rate it is incapable of stimulating aggregate demand through consumption or investment. The goal therefore really is to shock the economy back to life with a stimulus so that monetary policy becomes effective again, not that it permanently take the place of monetary policy. The idea then is for one large massive jump start.
Our situation is further complicated by a malfunctioning financial sector, the transmission of monetary policy.In this latter regard I favor nationalization in the manner that was done during the S&L Crisis. The banks are insolvent so to keep bailing them out only socializes the loss at the expense of the taxpayer, and will lead to a huge moral hazard problem. We need to seize them, wiping out the shareholder and the bondholders, rehabilitate them, and sell them back to new owners as quick as possible. Otherwise one stimulus will fail to solve the problem, and we may need another one and another one.
With respect to what is effective as a stimulus, I recommend looking at Mark Zandi's multipliers. They are not based on empirical evidence but come from his economic simulations. Much of what has gone into the current stimulus bill is there because of his research.
I don't understand the fascination with high speed rail - there are reasons why it hasn't caught on here to the extent that it has in Europe. We use airplanes between cities because they are flexible. You can add to or subtract from the number of planes servicing a given route, as needed. You can shift planes to new destinations. The cost of buying a right of way is enormous in an area like Southern California. Put simply, we don't need a TGV here.
That said, what we DO need is more commuter rail - like the RER trains that connect Paris to its suburbs. I use the Metrolink trains here in LA all the time - right now they are running at capacity. We need more routes, more trains and it should be cheaper. It's not all that high tech (uses diesel electric propulsion, 70 mph tops) but it beats the hell out of driving.
You can add to or subtract from the number of planes servicing a given route, as needed.
Just like you can add or subtract trains from a schedule.
You can shift planes to new destinations. The cost of buying a right of way is enormous in an area like Southern California.
And adding a new airport or two in So. Cal. to handle the projected passenger volume between there and No. Cal. is going to be cheap? Building the HSR line in California is projected to cost half as much as building the same amount of capacity using roads and air. And you do realize that much of the route in So. Cal. is on existing right of way?
Put simply, we don't need a TGV here.
That said, what we DO need is more commuter rail
We need both or by 2020 we all will be sitting in traffic. And since the HSR will be sharing right of way with existing commuter rail in some places it will speed up the commuter rail. Not to HSR speeds but things like grade separation and modern signaling will help commuter rail at the same time.
I'm not an expert with resepect to transportion, but I did my own seat of the pants calculations that showed that a cross country high speed railroad network could be finished for less than $700 billion or less than the cost of TARP, and slightly more than the inflation adjuated cost of the Interstate Highway System at $425 billion.
Mark, when you did that calculation did you take into account a high-speed route must be much more straight than existing rail? This means buying land even though there are existing tracks.
Personally, I hate to fly. I get claustrophobic, the food sucks (when you get it at all), TSA sucks, and there's always a 500 pound sweaty guy sitting next to me. So I would love to have the option of taking rail.
But that's a whole lot of money, and rail requires an ongoing subsidy. Plus the only way it makes sense is if you have a decent public transportation system at both ends, something most places in the US don't have.
What in the word "stimulus" suggests "permanent"?
Are we talking in a theoretical world or the real world? You realize TVA is still around, right?
Congress is not about to pass anything I would label a stimulus package. What's on the table now is just the massive expansion of social programs the Democrats have wanted for decades, laden with barrels of extra pork to grease it through. Most of that spending has a politically powerful constituency, like the NEA, so it'll be permanent - I'd bet my last dollar on that.
As for tax cuts, no one has meaningfully explained how a reduction in income taxes will benefit someone who has lost his/her job, i.e., has no income.
The idea is people have more money, so they spend it, the economy grows, and he gets another job. Big infrastructure projects are so back-end loaded he's gonna be waiting a long time for that road/rail/water project job unless he's one of the very small (comparatively) number of paper-pushers you need for planning.
Eric,
I based my calculations on the estimated cost of connecting San Francisco to LA and Boston to Washington. Both are supposed to cost about $40 billion, or $0.1 billion a mile. I figure we could link up all the major hubs of the ten Megapolitans (2/3 of the U.S. population) with about 7000 miles of track. Although most of it would run through densely populated areas, some would not, so my estimate is probably on the high side.
HSR makes far more sense than the alternatives for journeys between 100 and 400 miles. It reduces the need for airports and freeways so it could actually more than pay for itself. (As Adirondacker pointed out, it has been estimated that for every dollar spent on TGV in CA and the Northeast you would save $2 on airports and freeway.) It is also much more energy efficient and less polluting than planes or automobiles. The positive externalities probably justify a subsidy. As for the bad state of municipal public transportation, I think given our energy and environmental concerns it's high time they were addressed.
Of course HSR would be a long term public investment, and so not a very good choice if the goal is a quick stimulus. The interstate highway system took over 30 years to complete as originally planned. HSR could take just as long. Still, I think it's worth having a public debate about it.
"Just like you can add or subtract trains from a schedule."
And they all run between the same endpoints. The point is, all cities that are reasonably large in the US already have some kind of airport.
"And adding a new airport or two in So. Cal. to handle the projected passenger volume between there and No. Cal. is going to be cheap? Building the HSR line in California is projected to cost half as much as building the same amount of capacity using roads and air. And you do realize that much of the route in So. Cal. is on existing right of way?"
Who said anything about adding an airport, or two? But lets say you do? It is still easier to get the land for an airport than it is to buy up a long strip for tracks. As to the last point, in So Cal, you are going to need to buy new right of way for high speed rail. Or do you propose to run them on the existing tracks? Do you want our HS trains to share tracks with freight trains?
"We need both or by 2020 we all will be sitting in traffic. And since the HSR will be sharing right of way with existing commuter rail in some places it will speed up the commuter rail. Not to HSR speeds but things like grade separation and modern signaling will help commuter rail at the same time. "
I don't understand your argument here. HS trains can't make many stops, which means tracks have to be cleared of freight and commuter trains when they run. And this is supposed to speed commuter trains? As far as fighting traffic goes, commuter rail helps far more, at lower cost. I travel to San Diego, San Fran or Las Vegas maybe 3-4 times a year so I am willing to drive or fly and put up with some hassle. I commute from Orange County to Los Angeles (100 mi round trip) every day. I used to take the 405 freeway, now take the metrolink trains.
If we are going to have high speed trains, it will have to be done by fiat as there are practical reasons why noone has done it yet in the US.
It is stated that the U.S. uses up 25% of the world's energy while only having 6% of the world population.
Does the U.S. own 25% of the world's resources?
Does the U.S. sell goods and services to buy energy?
Or does the U.S. increase its debt to buy energy?
If the stimulus is spent on imported goods, will the multiplier effect be as intense as domestic goods or services? So spending it a Walmart might not be as good as "buying American" in that the ripple might be felt more in China and or some other country? In any case this should be a consideration as to more gov't spending or letting the consumer spend.
calculations that showed that a cross country high speed railroad network could be finished for less than $700 billion or less than the cost of TARP
Does anyone here feel that the TARP was the total cost of the ill-fated banking situation? I'm feeling and have calculated this is but a 20% down payment at most. There may be a need to use taxpayers funds to cover the bank reserves for the banking system full recovery.
For those who believe the cost estimates for high speed rail ($100M/mile), I can only say 'dream on'. Look at recent large public works projects - the 'big dig' in Boston, the red line in LA, etc...
All were WAY over budget and behind schedule. Why should we expect anything different?
"It is stated that the U.S. uses up 25% of the world's energy while only having 6% of the world population.
Does the U.S. own 25% of the world's resources?
Does the U.S. sell goods and services to buy energy?
Or does the U.S. increase its debt to buy energy?"
What is your point? We obviously trade something the rest of the world wants, since last time I looked, we haven't forcibly taken any of these precious resources from anyone. We could, but we don't.
My question: who does 'own' the worlds resources? Nations, which come and go? Hell, humans? who have been here maybe a million years out of the 4.5 billion year history of the earth?
I don't deny that we have a foolish and wasteful lifestyle. I am continually struck by what inefficient means we have of satisfying basic needs: shelter, food, continuation of species, etc... Why on earth does it require a college education, commuting 3 hours a day, high def tv, the internet, etc...? The list is endless. Something is definitely wrong - hard to put my finger on what though.
Why will high-speed rail be different than Big Dig or Red Line?
Simple: It's easier to build in new projects when you're not working over/under existing buildings and infrastructure. It's easier to build in when you have the space to do it.
Just like it's easier to fix a broken leg than to perform brain surgery. There's less stuff that you can screw up.
"Simple: It's easier to build in new projects when you're not working over/under existing buildings and infrastructure. It's easier to build in when you have the space to do it."
Boy, are naive.
Like most people, I'm skeptical over 'temporary' government jobs. If you phase out a tax cut, somebody loses money, but thats significantly less painful than losing a job. And its much less visible. Also, government jobs tend to end up being represented by government unions, which are very capable at protecting them. For these reason, I don't see most of these jobs ending.
An idea I haven't seen is the synergistic effect of some of the jobs/works on the larger economy. If the govt. pays me to make cadbury cream eggs, all it really gets is creme eggs and me as a consumer. If it pays me to make vaccine that wouldn't otherwise get made, or a reading specialist at a school, it gets me as a consumer, but it also gets a significant savings in the form of health care costs avoided or greater worker productivity over the life of the kids I've educated (and hopefully reducing prison expenses).
In theory all government programs aim for this synergy. In practice, most achieve it to a very minimal degree.