Fiscal Stimulus or Pandering?

Alan Reynolds writes,

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education — sectors where relatively secure government jobs are also prevalent.

Now that is some fiscal policy I can get behind. Lets spend money in those areas of the economy where unemployment is already extremely low. Housing and manufacturing…pfffftt those guys can go to Hell.

FILED UNDER: Economics and Business, Government, ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. just me says:

    Pandering, but then this is congress and politicians we are talking about, pandering is their middle name.

    I personally think the vast majority of the stimulus bill was nothing more than pandering and pork. Some of that pandering may be worthwhile government spending-and worth writing a bill and debating about in congress, but it isn’t stimulus and doesn’t belong in a stimulus package.

    Granted I would rather do nothing than borrow a trillion dollars, but I am in the minority on that one.

  2. MarkedMan says:

    This type of nonsense is why the Republicans will find themselves in the wilderness for a long time. They are only interested in making statements that sound meaningful and dramatic, never mind reality. The money going to state and local governments will be used primarily to fund construction (roads, etc). I assume Steve knows this, but reality doesn’t matter, only the proper application of snark.

  3. just me says:

    I see no reason to hand tax dollars over to the states either in this case.

    If all that spending is necessary, let’s break it down, debate each one on its merits and then take a vote, because so much of what I see in this bill looks like a typical congressional pork barrel spending bill with the stimulus label on it to make it sound good.

  4. Davebo says:

    Who pays unemployment benefits?

    The states.

    Who receives unemployment benefits?

    Unemployed manufacturing, construction and other workers.

    Why is Steve deliberately acting obtuse?

    The same old reasons.

  5. Michael says:

    Now that is some fiscal policy I can get behind. Lets spend money in those areas of the economy where unemployment is already extremely low. Housing and manufacturing…pfffftt those guys can go to Hell.

    Not that I agree with this move, but it strikes me as counter to your usual argument. Manufacturing and constructions are in decline because the market demand for them has declined, and you are complaining that the government isn’t dumping money into these areas to prop them up?

    If you want to argue that this move doesn’t accomplish the goals of the bill, that’s fine. But it sounds like you’re saying that money should be going to prop up declining industries, simply because they are declining.

  6. odograph says:

    If you don’t fund the states you’ll have more than just California in crisis (teetering on default).

    You guys remember the term “vicious cycle?”

  7. Steve Plunk says:

    Most of these states find themselves in trouble not from the economic downturn but from lacking discipline in their spending. California is the shining example of this. Everybody knew this was coming yet they continued increasing spending.

    People screamed at the idea of bailing out irresponsible home buyers but the Dems want to bail out irresponsible state governments? All of these bailout proposals need conditions attached.

  8. odograph says:

    California has a very foolish legislature, no doubt, but all they really did was assume that the business cycle would not turn. They set their spending based on tax flows enjoyed during the dot-com bubble (centered in this state).

    It was a fore-runner of what other states are experiencing now. A business downturn, which they should have expected and prepared for, catches them flat-footed.

  9. Matt T says:

    I smell hackery. How much of that 39% goes to pay state workers, and how much is distributed to the private sector via contracting for goods and services?

    Even griping about the amount actually going to state and local salaries seems like knee-jerk hatin’ on government employees. In Sacramento, CA employees have been told to expect a mandatory furlough 1 day every two weeks – that’s a 10% pay cut, which means a big drop in discretionary income to spread around to local businesses that serve state workers.

    Payments to the states to avoid these furloughs and other cuts is one of the quickest and easiest to keeps money flowing into the economy and slow the contraction. But hardboiled anti-government ideologues like Reynolds and Verdon would apparently be happier if gov’t unemployment rose to match levels in the private sector. Please, I beg you, run on that platform in 2010!

    The services paid for are especially menaningful in these times, too – Reynolds should explain to the laid-off manufacturing worker who’s had his care repo’ed why he doesn’t support funding for bus and train service, which local governments all over the country are cutting back due to the economy. And to the (formerly) working mother who won’t afford to take her kids to the beach this summer that he’s opposed to funding for the community pool.

  10. Who pays unemployment benefits?

    The states.

    Wrong. Employers pay unemployment benefits. The states collect the money and skim a litle off the top before writing the checks to the unemployed.

    You don’t know what your talking about.

  11. Matt T says:

    Wrong, customers pay the benefits, since they provide the revenue that employers later pay in taxes.

    In the Sacramento area, a sizeable fraction of those revenue-generating customers are state employees. Let the state apply a 10% across-the-board pay cut, and see how well local private business does.

  12. Steve Verdon says:

    Who pays unemployment benefits?

    The states.

    Who receives unemployment benefits?

    Unemployed manufacturing, construction and other workers.

    Oh yes, that is oh so much better than having a job. All that additional leisure time and what not. Please.

    If you want to argue that this move doesn’t accomplish the goals of the bill, that’s fine. But it sounds like you’re saying that money should be going to prop up declining industries, simply because they are declining.

    My problem is that a vast portion of the bill is bullshit. It is being sold on the notion of stimulus when, as we can see, it is anything but.

    If you don’t fund the states you’ll have more than just California in crisis (teetering on default).

    California is in a mess because of its politicians…whom I might add are mostly Democrats. If the budget had grown at a rate equal to inflation and population growth the state would be running a surplus.

    California has a very foolish legislature, no doubt, but all they really did was assume that the business cycle would not turn.

    Don’t you live in California? This is patently NOT true. California had a budget issue when Arnold came into the governor’s mansion and we have an even bigger one now. The rate of increase in spending has been wildly out-of-line…so much so it is borderline insane.

    It was a fore-runner of what other states are experiencing now. A business downturn, which they should have expected and prepared for, catches them flat-footed.

    As Steve Plunk said, they were foolish. So the solution: reward foolishness. Brilliant. Incentives schmincentives.

    I smell hackery. How much of that 39% goes to pay state workers, and how much is distributed to the private sector via contracting for goods and services?

    Look, the bottom line is that if you want to engage in stimulus spending just send the unemployed the money. They will spend it. In fact, send money to the people in the lower end of the income distribution. This, we are told time and again, are the people who will spend it. We aren’t doing that. When given the opportunity the Democrats don’t do it. The level of intellectual dishonesty here is quite apparent.

  13. Drew says:

    LOL I will leave this debate in the most competant hands of Mr Verdon, who, although annoyed, is swatting these silly argumentative flies quite effectively.

  14. Michael says:

    Look, the bottom line is that if you want to engage in stimulus spending just send the unemployed the money. They will spend it. In fact, send money to the people in the lower end of the income distribution. This, we are told time and again, are the people who will spend it.

    Unless you plan on continuing to give those people free money, they won’t be a reliable source of spending. If I were a business owner, I wouldn’t hire new employees because of a brief spike in sales following the distribution of stimulus checks, would you? Getting people to spend money you give them is easy, getting them to spend their own money after you stop giving it to them is the hard part.

  15. Drew says:

    Uh, er, uh……..Michael. And if you were a business owner, would you hire people if you knew govt spending was a just a brief spike benefitting your business???

  16. Wrong, customers pay the benefits, since they provide the revenue that employers later pay in taxes.

    Apparently, as an employer I am entitled to customers, and what’s more I am entitled to customers that I can freely pass on any and all tax burdens, with a little bump to maintain my margins as well. Who knew?

    Anyway, double plus wrong. Customers pay their invoices for products and services rendered, or at least I hope they do. Customers do not pay my taxes, salaries, utilities, benefits, COGS, interest on loans, etc, etc, etc. Jumpin’ bejesus, have any of you experts every actually run a company? Or even accounts payable or accounts receivable? Next I suppose you’ll tell me that the government is paying for my gas since I’ll be buying gas and I’ll be getting a tax refund check this year — assuming of course that California hasn’t set yet another trend.

    Some people really do seem to think that taxes can be raised indefinitely without any deleterious effect. Amazing. I wish I could fall for this kind of magical thinking. It would make the government cheese we are all going to have to depend on soon so much tastier.

  17. Michael says:

    Uh, er, uh……..Michael. And if you were a business owner, would you hire people if you knew govt spending was a just a brief spike benefitting your business???

    Of course not, that was my point. For any action to actually bring the economy back, it needs to be self-sustaining after the initial stimulus. Giving a one-time injection of money to people to spend won’t necessarily accomplish that.

  18. odograph says:

    Yes, I live in California, and I do believe the windfall revenues during the dot-com years were sucked down and spent when the should have been considered unusual and banked.

    And my recollection is that Arnold came in during the dot-com aftermath. I was in the process of retiring from a dot-com, getting a new passport, and at the federal building were all those folks registering to “run” in the recall election.

    See Figure 4, here. Spending per capita peaked 2000-2001, darned if that doesn’t coincide with the dot-com bubble.

  19. Steve Verdon says:

    Of course not, that was my point. For any action to actually bring the economy back, it needs to be self-sustaining after the initial stimulus. Giving a one-time injection of money to people to spend won’t necessarily accomplish that.

    You just, after a fashion, figured out Milton Freidman’s permanent income hypothesis, or at least an implication of it.

    The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, PIH states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations.

    […]

    The key conclusion of this theory is that transitory changes in income do not affect long run consumer spending behavior.

  20. odograph says:

    BTW, my “figure 4” above shows a re-expansion of spending in 2006-2007, I would expect that a good part of that is the “automatic” spending that comes in any downturn. Increased social service costs, unemployment, etc., etc.

  21. Michael says:

    You just, after a fashion, figured out Milton Freidman’s permanent income hypothesis, or at least an implication of it.

    It took an economist to figure that out?

    Ok, so giving money directly to people who are supposed to immediately spend it won’t stimulate the economy, we agree on that. So your opposition to the package is, what, in the specifics?

  22. Steve Verdon says:

    Arnold came in after the energy/electricity crisis in California.

  23. Steve Verdon says:

    Ok, so giving money directly to people who are supposed to immediately spend it won’t stimulate the economy, we agree on that. So your opposition to the package is, what, in the specifics?

    Actually it will stimulate and there are two possible outcomes.

    1. The extra spending induces people and firms to spend more/expand production, thus “jump starting the economy”.

    2. People see the extra money and save it or pay down debt. This has little simulative impact.

    Which of these two effects dominates will determine the success/failure of the stimulus package. Hence the question of who gets the money. Ideally you want to give it to those who will spend it vs. saving it.

    Further, there are timing issues as well. If the stimulus takes a year to get into the economy you might the recession is already over and all that extra spending is no considered inflationary by Fed who will raise interest rates to clamp down on inflation.

    Then there all the things economists have learned from the public choice school of thought in economics. The government is gearing up to spend an unprecedented amount of money in a short time. You are the CEO of a large corporation…do you:

    A. Call in your lobbyists and have them get to work on securing a chunk of that money before your competitors do?
    B. Review the lunch menu?
    C. Call it an early day and have your secretary book you a 1:45 tee off time at the country club?
    D. Call in your secretary for a quickie on the couch in your office?

    You can select multiple answers if you like, but to get it right your answer must have at least one of the above and the one that is correct.

  24. Drew says:

    I’m thinkn’ A through D, yeah. Maybe we skip B. Otherwise, yeah.