Thursday, January 29, 2009

"Stimulus plan" still needs more stimulus

I have supported -- and still support -- a massive fiscal stimulus to restore an atmosphere of confidence, avert a continued, severe downward spiral, and give the economy a big enough jolt to jump start a recovery.

But the $819 billion plan (really a $1.2 trillion plan including interest on the debt) adopted by the House of Representatives yesterday isn't it. A large part of that plan dresses up a Christmas tree of programs sought by Congressional Democrats as "economic stimulus." I like a lot of these programs and might well support them on their own merits; but many are not "stimulus."

The problem with cramming everything you'd like to do into a single bill under the pretense that it's "stimulus" is this: with a trillion dollar federal deficit already on the books, $700 billion almost out the door to shore up the financial system (and according to recent reports, much more dough still needed on that front), we may only have one shot at a really effective stimulus program. So we need to be as sure as we possibly can that it will work.

As we listen to pols, pundits, economists, and self-appointed analysts, we should keep in mind that no one has a very good idea of how to make a comprehensive counter-cyclical fiscal policy work. No one. We haven't really done it before! Consequently, the arguments about it are largely theoretical debates between competing groups of academics or, as in the present instance, a confused jumble of claims in which all parties insist their favored programs are more stimulating than the other guy's.

As a practical matter in recent decades, monetary policy won out as the principal tool of decision makers, Democrats and Republicans, because it could be wielded in a carefully calibrated and timed fashion. The knock against fiscal policy was that by the time we knew the economy was headed down, Congress got its act together and did something, and that something bore fruit, it would probably be too late. The economy would already be headed back up, and the fiscal stimulus would hit just in time to drive inflation.

Well, guess what? That appears to be exactly what's happening today.

A new report by the Congressional Budget office projects that about 65% of the total funds in the House bill, spending and tax cuts, will be out the door by September 30, 2010, or within 19 months. The Obama Administration contends that 75% will be spent by that time. (See the graph above for the CBO's year-by-year projection of federal deficit spending.)

This is really a distinction without much of a difference. According to the National Bureau of Economic Research, the average length of recessions in the U.S. over the past 100 years has been 13 months, with recent recessions shorter. The last prolonged and deep recession was that of 1980-82, which lasted two years. The current recession is already in its 13th month. Most analysts expect it to continue through the first half of 2009, after which there are divergent views on the speed or length of the recovery.

Of course, anyone who actually knows how long or deep it will be is bound to get rich. Everyone is guessing, so it's critical to assume it will be worse, not better, to ensure that we stimulate enough.

The House plan, as it stands, simply does not do that -- not because it's not big enough, but because it dribbles out too much of the money too slowly and fails to put enough money where it will have the greatest impact. In that CBO bar graph, we should see the tallest bar for 2009, so we deliver a big jolt this spring, summer and fall, not next year. The 2010 bar should still be up there, with the larger share out during the first half. After 2010? There is just no excuse for planning to spend $200 billion in those out years and calling it "stimulus." (If the programs are sound, given that the Democrats have the votes they need to approve anything, those expenditures can be taken up separately and passed anyway.)

There are many ways to ensure that the stimulus impact is felt in 2009 and, at the latest, 2010 -- but accelerating the spending side of proposals in the House bill may not be one of them. The CBO has told Congress that speeding up outlays for infrastructure projects and the like would "not be easy" because such projects take time, often more time than thought at the outset.

That advice was contained in a letter to Senate Budget Committee Chairman Conrad (Dem-N.D.). Conrad and other Democrats in the Senate are looking closely at ways to make sure the stimulus is really stimulating. As Sen. Byron Dorgan (Dem-N.D.) put it, “We’re not interested in promoting employment five years from now. We’re interested in promoting employment five months from now.”

One proposal that I think has merit is to slash the roughly 13% payroll tax for employees and employers. As of the next paycheck, that would put money into the hands of workers who would spend it and businesses who would invest it. The program could be designed to sunset after 10 or 12 months or more, unless renewed by Congress.

Harvard economist Martin Feldstein has some good ideas for directing stimulus to sectors of the economy where a boost is most needed. For example, he suggests tax incentives for consumers to spend on big ticket items, such as a temporary tax credit to purchase a car or make home improvements. I'd go a step further with that concept and consider a tax credit -- also temporary -- against the purchase of a primary residence to stimulate home building and help stabilize housing prices.

Alas, there may already be too much water under the bridge to expect that the House-approved package can be fundamentally altered. Hopefully, the Senate will make improvements and the final bill signed by President Obama will be more front-loaded and more on target.

I strongly suspect that Obama and his economic team clearly understand the importance of speed and targeting but had limited control of the bill developed by the House Majority. Obama is also keenly aware of the fact that the success of his Presidency will be closely tied to success in stimulating an economic recovery. Let's hope the Senate gives him what he and the country need.


  1. I agree almost 100%.

    When Obama said that his goal was 75% of the spending in the first 18 months, I was not impressed. 25% of a ton of money is still a ton of money. I believe the Democrats are putting stuff in this bill just to get them through without much debate. As you said, some of it might be worth it, but why not debate it on it's own merits instead of pushing it through as part of a stimulus package?

    The one issue I might disagree with you is tax credits for new home purchases. It seems to me that making buying homes artificially easy is part of what got us into this mess. On the other hand, perhaps it wouldn't hurt to soften the fall a little, so I'm torn on that one.

  2. Thoughtful and persuasive analysis.