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Stimulus Arithmetic
There is considerable confusion over what impact we should expect from the stimulus and when. Much has been made of the fact that only a relatively small portion of the stimulus (@15 percent) has yet gone out the door. This is not a bad record in terms of spendout, but it also should not be excuse for waiting.
In terms of spendout, it takes time to spend money even for the most shovel ready projects. If we are repairing a bridge, even if everything moves quickly, the project itself might take several years. The government will not make the full payment for repairs in the first month.
On the tax side, the government has put in place a schedule of lower tax rates so that we are all paying lower tax rates. That will continue through 2010. So, we have already had 3 months of lower tax rates, with 18 more yet to come, that's about 15 percent of the total period. So, we've done reasonably well in getting the money out the door.
But, we should already be seeing most of the impact that we will see. The logic is simple. The tax cut put another $45 in our paychecks in April, in May, and in June. We will continue to see this extra $45 a month for the next year and a half, but that will not be a further boost. In other words, insofar as we will spend more each month because of this extra $45, we presumably are already seeing this effect. There will be no further uptick in consumption based on this money.
So, we have probably already experienced most of the boost that we will get from the stimulus. The economy would have been in worse shape without it. Consumption is higher than it would have otherwise been and state and local governments have been able to keep many programs funded that otherwise would have been cut. People have jobs (most obviously in state and local governments) who would have been unemployed in the absence of the stimulus.
However, the stimulus clearly was inadequate to get the economy back towards full employment. With the unemployment rate almost certain to cross 10 percent this summer, it should be clear that we badly need more stimulus.
--Dean Baker
COMMENTS (8)
Dean Baker is ruling the airwaves on onpointradio.org
today.
http://www.onpointradio.org/2009/07/a-second-stimulus-package
Let's hope he doesn't say something stupid. OK, it's live radio, so he'll say something stupid. Let's just hope he doesn't say something _really_ stupid.
Get at 'em Baker!
Posted by: gladstone | July 9, 2009 7:58 AM
Tax cuts are too "leaky" for domestic job creation. Too much of the tax cuts takes money away from government that could spend it productively on domestic employment. There are plenty of good projects that need to be done.
Instead the money goes to buy cheap plastic crap made in foreign countries, to pay off the oil speculators, investment in capital industrial equipment that replaces labor and building new production capabilities off shore which also decreases domestic jobs. In a global economy, tax cuts result in a net decrease in jobs if they are not targeted.
The US should expect too high unemployment for the next several years even if the economy recovers. We need a medium term jobs program in addition to whatever money is needed to help the economy recover. This is especially critical in the US where much of the worker training that takes place is on the job training. No jobs, no training.
Posted by: bakho | July 9, 2009 8:04 AM
Left out the word "may". Tax cuts may decrease domestic employment or increase employment depending on how they are spent and targeted. There is NO guarantee that tax cuts in a global economy will create domestic jobs. The Bush experience- big tax cuts, little job creation- should reinforce this.
Posted by: bakho | July 9, 2009 8:07 AM
"So, we have probably already experienced most of the boost that we will get from the stimulus."
This is a key sentence, but I don't see how you have supported it. I understand that the tax cuts have happened and that therefore their impact should be felt by now. What I don't understand is why the tax cut boost is "most" of the boost expected from the stimulus package.
If spending were half of the package and all multipliers were 1, only half of the "boost" would be apparent by now. But isn't the multiplier for spending greater than for tax cuts? And I though spending was roughly 65% of the stimulus bill.
I think this is the point Krugman was making in a blog post last week: we haven't seen most of the boost from the stimulus yet. Although he thinks the stimulus package was too small, he thinks critics are premature in asserting that the first package has utterly failed.
Posted by: mark | July 9, 2009 8:50 AM
Mark,
we also have higher transfer payments like unemployment benefits and food stamps already in the works, and even some of the shovel ready projects. The rate of spending will not increase much from here.
Posted by: Dean Baker | July 9, 2009 10:27 AM
Businessmen and state governments have to plan ahead for investment and employment, so they must anticipate the probable effects of government spending. If they think the stimulus will be effective they will at least stop contracting their own spending before the federal money is actually spent.
As Krugman has pointed out, the "critics" are not claiming that the stimulus has failed on the basis of astute economic analysis, this is just political spin. He and Dean were among the many economists who argued from the beginning that the stimulus was too small.
Posted by: skeptonomist | July 9, 2009 11:06 AM
"it should be clear that we badly need more stimulus"
If our only goal is full employment or achieving full productive capacity, sure. If our goal is creating the best long term economic outcome, it's not so clear, given that there are only so many productive economic activites to throw money at.
Posted by: patient renter | July 9, 2009 12:34 PM
Dean,
What is the role of the economic advisors to Congress and the President?
Why don't the intelligent and competent men and women who form a council of economic advisor have a game plan for stimulating the economy?
Can you imagine a Defense Department that fails to have a war plan to deal with threats and attacks? Can you imagine a Pentagon that does not keep its war plans ready despite a change in the administration?
Despite their intelligence and competence our economists just do not compare favorably with our military. Both are parts of the infrastructure of government.
Posted by: Ron Alley | July 9, 2009 12:59 PM