More Right Wing Anti Stimulus Nonsense

Well maybe not seeing it is Alice Rivlin former President Clinton’s budget director.

In testimony before the House Budget Committee yesterday, Alice M. Rivlin, who was President Bill Clinton’s budget director, suggested splitting the plan, implementing its immediate stimulus components now and taking more time to plan the longer-term transformative spending to make sure it is done right.

“Such a long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away,” said Rivlin, a fellow at the Brookings Institution. The risk, she said, is that “money will be wasted because the investment elements were not carefully crafted.”

And she isn’t alone, here is Douglas W. Elmendorf, director of Congressional Budget Office,

Time and again, in all types of federal programs, a noticeable lag has occurred between sharp increases in budget authority and increases in outlays. On the basis of such experiences, CBO expects that federal agencies, along with states and other recipients of that funding, would find it difficult to properly manage and oversee a rapid expansion of programs to expend the added funds as quickly as they expend the resources provided for their existing activities.

Lags in spending stem in part from the need to draft plans, solicit bids, enter into contracts, and conduct regulatory or environmental reviews. Spending can be further delayed because some activities are by their nature seasonal. For example, major school repairs are generally scheduled during the summer to avoid disrupting classes, and construction and highway work are difficult to carry out during the winter months in many parts of the country.

Brand new programs pose additional challenges. Developing procedures and criteria, issuing the necessary regulations, and reviewing plans and proposals would make distributing money quickly even more difficult—as can be seen, for example, in the lack of any disbursements to date under the loan programs established for automakers last summer to invest in producing energy-efficient vehicles. Throughout the federal government, spending for new programs has frequently been slower than expected and rarely been faster.

Must be another right wing hack.

Elmendorf also provides some criteria for effective fiscal stimulus. Here is the short version,

  1. Timing: the stimulus should occur during the recession.
  2. Cost Effectiveness: We should get something for this stimulus.

Are those two criteria all that outrageous? I don’t think so. I don’t want to spend nearly a trillion dollars to find out, in the end it did nothing and even worse that is was a pork laden boondoggle.

And here is Elmendorf on the size of the stimulus,

As the Congress considers fiscal stimulus legislation, one important issue is the appropriate amount of stimulus. One way to calibrate the amount of stimulus is to attempt, through fiscal policies, to completely close the gap between actual and potential output. Given the size of the gap currently projected by CBO, achieving that goal would require stimulus on an overwhelming scale.

Such a huge package could be undesirable for at least three reasons. First, in addition to fiscal stimulus, monetary and financial policies will probably be used to help bolster the broader economy. Second, increases in near-term budget deficits can have negative consequences for the long-term fiscal imbalance, especially if some of the stimulative policies become permanent (even if they were initially intended to be temporary). Finally, it may be difficult in practical terms to scale up stimulus spending and tax cuts to an arbitrarily high level.

In other words, we could scale back parts of the fiscal stimulus currently being considered, or at least put them off. Trying to rush the legislation through will likely result in bad legislation with lots of money being wasted and it probably still wont do much good in regards to the current recession. By the time most of the money is released the recession will likely be over (i.e. 2010). When the recession is over and the economy is starting to expand there is less need for fiscal stimulus and monetary policy may be the best policy tool at that point.

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. PD Shaw says:

    I’m more persuadable on some form of stimulas than say . . . Steve, but then I read craziness like this:

    California’s share of direct spending in the package has been calculated at $21-plus billion, and Jed Kolko, an economist for the Public Policy Institute of California, told an economic seminar in Sacramento Monday that about $14 billion of that could underwrite state education, medical care and other spending programs over the next two years.

    It’s one thing to talk about the pros and cons of various stimuli and crafting good legislation. The states appear ready to move money around so effectively the money is going somewhere else entirely.

    http://www.sacbee.com/walters/story/1575448.htmlLink

  2. Steve Plunk says:

    This whole mess is the strongest argument for tax cuts over stimulus spending I’ve seen. Tax cuts would have an effect even before they are implemented, they are given to people who will know how to spend the money, and the multipliers are actually greater than 1.

    Why is this, the bank bailouts, and pretty much everything to do with money so difficult for Washington to get right?

  3. just me says:

    I am not a fan at all of the stimulus bill. Personally i would rather do nothing at all, and ride it out than spend this kind of money when half of it looks like pork, a fourth of it looks like liberal pet project spending bills (and any of the items in either of these two categories might have merit just not in a stimulus bill) and the last quarter-and I am being kind here-has at least some tangental relationship to possibly stimulating the economy-and I am not even convinced that last quarter is necessary.

    Personally-I would rather do nothing, and have written my congressman in a futile attempt to get him to vote against it, but he is a march in step with the democrats democrat, so I don’t think my letter will work, but at least I did something.

  4. I don’t think we’ll be out of the recession by 2010… so there.

    If we’re very, very, very lucky we’ll hit bottom by this fall and then we’ll face 2-3 years of zero growth with maybe some more downturns during that time.

    The entire banking system needs to be rebuilt almost from scratch. Bankruptcies will accelerate this spring as will job loses.

    What is your view on the stimulus package if your rosy assumptions about this being just another minor recession don’t pan out?

  5. SavageView says:

    Perhaps we could just rename it the Iraq Simulus Plan, in which case it would get 100% OTB support. Certainly, there was no opposition from these ranks when were borrowing funds of this magnitude for redeveloping downtown Bagdad.

  6. Steve Verdon says:

    I don’t think we’ll be out of the recession by 2010… so there.

    CBO disagrees.

    Do you have a forecast? What data are you using? How have you specified your model?

    If we’re very, very, very lucky we’ll hit bottom by this fall and then we’ll face 2-3 years of zero growth with maybe some more downturns during that time.

    So you are predicting a recession so severe it can be classified as a depression perhaps on par with the Great Depression. I don’t share your pessimism.

    The entire banking system needs to be rebuilt almost from scratch. Bankruptcies will accelerate this spring as will job loses.

    Implicit in this is that the current banks/financial institutions pretty much need to fail. They need to write-down their toxic assets at the very least and re-organize. Funny, I always got the impression this was what you were trying to avoid.

    What is your view on the stimulus package if your rosy assumptions about this being just another minor recession don’t pan out?

    Heh, looking at the data this recession is looking like 1981…I’ve noted that before. So ascribing this view to me is incorrect.

    Oh and one last thought, if the recession is going to be this bad (I’m assuming your predictions are taking into account the fiscal stimulus we are about to get) there is no reason to rush things. A go slow and do it right approach, at the very least, is called for. Given your pessimistic views.

  7. tom p says:

    Ya know, I have given up on trying to understand the economics of the present situation (sorry steve, but I read you, and then I read someone who totally contradicts you… who am I to believe?)(I throw up my hands and apply a little common sense, hardly perfect but it is the best I can do)
    I read you Steve, and then I read this at TPM, where it is said: “Mark Zandi, a Republican economist who advised John McCain’s presidential campaign, has been stressing this point for months. Zandi’s research showed a corporate tax cut delivering $0.30 in real GDP growth for every $1 invested, an alternative minimum tax patch delivering $0.48 for every $1 invested, and a regular tax rebate delivering anywhere from $1.02 to $1.28 for every $1.
    Compare that to aid to state governments, which Republicans have roundly criticized: $1.36 for every $1 invested. Infrastructure spending delivers a whopping $1.59 in GDP for every $1.
    But it’s not just Zandi making this point. The Congressional Budget Office — you know, the guys with the incomplete stimulus report that Republicans absolutely loved last week — deemed last year that corporate tax cuts are “not a particularly cost-effective method of stimulating business spending.”

    Truth is, if we are going to spend this money, I feel like we should spend this money here, where it will create american jobs. Tax cuts? We have been doing that for almost 30 yrs. and what have we got? A trillion dollar deficit? At least if we spend this money on infrastucture, we get a dividend. A tax cut will give us an extra $150 bucks a month which will go to China. (and no, don’t even get me started on capitol gains tax cuts, common sense says that is a joke)

    I may be an idiot, an uneducated idiot, but it is not for lack of reading, it is for lack of a persuasive argument.

  8. Steve Verdon says:

    Tax cuts? We have been doing that for almost 30 yrs. and what have we got? A trillion dollar deficit?

    Tax cuts are not the reason for the looming budget deficit for 2009. That would largely be due to the recession. One would have to make a rather strained and convoluted argument on how tax cuts caused the mortgage mess that led to the financial sector melt down.

    Oh, and Obama’s plan is chock full of tax cuts…well tax relief.

    And one last point, spending on things like mass transit and railroads…it wont be timely. Maybe it is a good thing all on its own, but as a stimulus measure it fails because unless Bernard is right and this recession lasts almost as long as the Great Depression, it will be too late to help bring about the end of the recession.

  9. just me says:

    <emOh and one last thought, if the recession is going to be this bad (I’m assuming your predictions are taking into account the fiscal stimulus we are about to get) there is no reason to rush things. A go slow and do it right approach, at the very least, is called for. Given your pessimistic views.

    Exactly.

    While there may be a good argument for some kind of stimulus to be made, I am not buying that we should toss all sorts of crap into a bill and pass it quickly while crossing our fingers and hoping it helps.

    I wasn’t a fan of the TARP stuff and am even less a fan of it now, and I don’t see the need to rush. A bad bill passed quickly saddles the nation with debt for generations, while a good bill passed slowly with more thought put into it still may not be a good bill, but hopefully it won’t involve throwing nearly as much money at it in the hopes that something in it works.

    I am convinced this is not going to be a pretty recession, I am just not convinced it is an emergency that required the government borrow over a trillion dollars to stop it.

  10. Truth is Steve.. no one has a “model” that has any real plausibility. We are in garbage-in, garbage-out mode right now. If you start off with a model that assume that a recession will look like past recessions (which is actually a plausible starting point), you get an outcome that predicts something like a past recession. That is all the “models” used by CBO and the like have.

    What I am saying is that we have never, in my lifetime, seen a situation like this. We are a year-plus into the slow-down and the bad news seems to be accelerating, when in the past we should be seeing the light at the end of the tunnel. In the past, we still had all sorts of counter-cyclical measures available — including deficit spending and interest-rate cuts — whereas now, we’ve already largely shot our bolt on both (I am a stimulus skeptic at this point because I think the we’re at the point where balooning the deficit further may actually hurt our recovery more down the road).

    At this point, our entire financial sector is shot. It is only, and I mean only, being propped up because people are assuming some sort of government bailout. Otherwise, the fact is, Citi, BoA, etc are insolvent. You can’t move commercial paper without government involvement.

    Ultimately, we’re going to need to spend ourselves out of this mess with stupid deficit-inflating stimulus packages and then we’re going to have to suck it up and inflate our way out of the fiscal constraints that result. We’re essentially going to wipe out the entire savings of the middle class. And that is, unfortunately, the best case scenario.

  11. Steve Verdon says:

    Bernard,

    You really must have a short memory.

    …why are Americans so gloomy, fearful and even panicked about the current economic slump?

    ..The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. “Never in my adult life have I heard more deep- seated feelings of concern,” says Howard Allen, retired chairman of Southern California Edison. “Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble.” Says University of Michigan economist Paul McCracken: “This is more than just a recession in the conventional sense. What has happened has put the fear of God into people.”

    …U.S. consumers seem suddenly disillusioned with the American Dream of rising prosperity even as capitalism and democracy have consigned the Soviet Union to history’s trash heap. “I’m worried if my kids can earn a decent living and buy a house,” says Tony Lentini, vice president of public affairs for Mitchell Energy in Houston. “I wonder if this will be the first generation that didn’t do better than their parents. There’s a genuine feeling that the country has gotten way off track, and neither political party has any answers. Americans don’t see any solutions.”

    Source

    Yes this is shaping up to be a bad recession, but get a frigging grip man.

    Ultimately, we’re going to need to spend ourselves out of this mess with stupid deficit-inflating stimulus packages and then we’re going to have to suck it up and inflate our way out of the fiscal constraints that result. We’re essentially going to wipe out the entire savings of the middle class. And that is, unfortunately, the best case scenario.

    I think this is the policy that will be pursued, but I think it is going to far, far less effective than many people think. In fact, I suspect it will likely be detrimental.

  12. No, I don’t have a short memory. And that fact that people have panicked in the past does not mean that anyone who is gloomy today is necessarily wrong.

    At some point, I’d love someone to actually address the issues I keep raising, specifically:

    (1) The confluence of economic crises that is largely unprecedented in modern times. This is simply not a normal business cycle recession.

    (2) The fact that we’ve already used up the traditional tools of fiscal and monetary policy, to no avail.

    (3) The challenge of what looks like a complete collapse of the financial sector (or do you think that they will also recover without government intervention?).

    I think our kids will be better off than we are. But I also think that on the whole, we’ll be a little worse off in 10 years than we are now, and that we should be thinking of a recovery starting in 2012-2014 rather than 2010.

    And, btw, that is what is motivating the GOP lawmakers to vote against stimulus. They get it. They know there is no point in voting for the package because if it works, they won’t get credit for the recovery. So they are trying to distance themselves from it in the hopes that the economy continues to tank and then they can blame the Democrats for their failed response. It is actually a smart policy, and likely to be work, not because the Democratic response is so bad but just because the recession is likely to be deeper and longer than most people realize.