The Fundamental Fiscal Error
I think when the history of the current crisis is written much of the blame will be placed on the sharp fiscal contraction of state and local governments, which offset almost all of the fiscal stimulus at the federal level. I think economists will view this as a preventable error equivalent to the Fed's passive shrinkage of the money supply in the early 1930s. See the links in my Fiscal Times column.
Addendum
I know perfectly well that states operate under balanced budget requirements. I don't blame them for operating pro-cyclically. I just think with the benefit of hindsight more of the February 2009 stimulus should have gone into state aid. Every penny of that aid would have prevented fiscal contraction on a dollar-for-dollar basis, thus providing substantial net stimulus to the economy as a whole. I think a lot of the tax cuts provided no stimulus whatsoever.
Ezra Klein comments here.
Good links, but ignores the fundamental
No surprise that Govt spending is procyclical (though it helps when you deliberately elect to undertax/overspend from 2003-2008), but ignores the basic problem:
48 (iirc) states require a Balanced Budget. In good times, those are achieved by selling of assets--er, privatization, which is (I am told by economists) A Good Thing--and "borrowing" from pension funds, which will then be taken permanently in Bad Times. (The Greenspan Commission Model, as it were.)
It's more difficult to pretend money is fungible when less of it is coming in. Especially when the bag of tricks has been used in good times.
The proof of Keynesian economics is the state of the States: the recovery driven solely (on a net basis) by private companies during a drop in AD (not related to the business cycle so much as Malpassian confusion of housing with Quick Assets) has produced exactly what one would expect: lethargy at best.
But the reason the recovery has been based solely on private investment is that the states (1) spent their rainy-day funds during the good times and (2) are constrained at precisely the time they need access to credit.
It's not a fiscal error; it's a legal one with fiscal implications.
Stimulus Has Worked
I think your observation is probably correct. As far as I'm concerned the stimulus package has been a huge success. However, a combination of several factors have kept the public at large from coming to a similar conclusion.
First, every Republican politician and commentator in the country has been telling the public the package was a failure for almost two years now.
Secondly, most people don't seem to understand how the stimulus works. I guess they figure if they didn't get a check it didn't help them. Of course this nonsensical, but it is nonetheless how many people think. I have tried to explain the way in which the money increases aggregrate demand to several critics of the package, but all I get in return are blank stares of confusion.
Finally, because unemployment didn't instantly return to what it was prior to the financial crisis, many people have concluded the stimulus package isn't working. The fact that unemployment might be even higher were it not for the stimulus package seems to be something people have trouble comprehending.
State Budget Cuts
Bruce
Hi, my name is Ben Husch with the National Association of State Budget Officers. I wrote the report you mentioned in your column. If you or any of the CG&G cast have any questions on it or the coming problems in the state fiscal world please feel free to shoot me an email.
Im a big fan of you guys and read your posts everyday.
-Ben
A significant portion of the
A significant portion of the ARRA was devoted to helping out the S&L gov'ts and w/o it we would have already seem massive numbers of teachers, police, firefighters etc laid off. Unfortunately those funds are now drying up, and the deficit hawks are preventing any efforts to replenish them. This is NOT the time for austerity, which will only weaken the economy and lead to lower tax evenues at all levels of gov't. The infliction of economic pain will not do much good, and is mostly advocated by those who already have very secure jobs and are unlikly to be affected by a slowdown.
Unfair
I think this is an extremely unfair view. Most state and local governments can't run deficits, and with revenues strained by the recession, simply can't raise revenues without raising taxes. This might balance the books but in itself in anti-stimulative.
(Captcha = "in joke"... maybe that explains the column?)
A little physics?
You know, when I look at the unemployment chart x versus t over the past two years, it looks like nothing so much as a classical first-year physics problem. At the beginning of the recession, the unemployment level x(t) went into a literal free fall---there was a constant negative external force -F, producing a negative second derivative x'' that quickly transformed what had been a near-constant unemployment level x(t) into a decline.
When you look at the January/February 2009 point on the t axis (right around the passing of the stimulus package), however, the second derivative x'' suddenly flips from negative to positive, corresponding to the sudden flipping -F -> +F of the external force to an equal and opposite positive value. (It's a beautiful inflection point.) But since x' was so negative at that time, it has taken until the last few months---about a year in all---for x' to cross zero and become positive again, and for x(t) itself to stabilize.
What this looks like to people on the ground, however, is that unemployment has consistently been getting worse nearly this entire time ("Under Obama the unemployment rate has continued to rise!"), and that the stimulus has been a failure. But to anyone with a freshman-level course in Newtonian physics under his or her belt, it looks just like it was supposed to look. It literally looks like a system that was in free fall for an extended period and that about a year ago experienced a sudden and dramatic turnaround of the external force.
Bruce-- do you think it's fundamentally impossible for the public to grasp certain (crucial) economic concepts that require a modicum of differential calculus? If so, then what's the point in even trying to convince them?
Wow, I'm impressed. You
Wow, I'm impressed. You really have left the conservative ideology, at least accepting it whole without thinking about it beyond soundbites.
"preventable" in what sense?
Do you mean in the sense that state and local governments could have been better managed before the crisis? Or that the fed could have passed more stimulus directed toward state and local budgets? Or something else?
Any stimulus that props up
Any stimulus that props up the public sector can NOT work today --- according to the Keynesian theory that itself underlies/justifies such stimulus.
A Keynesian stimulus is based entirely on the "marginal propensity to consume". Which in turn is based on the relative income/etc of the recipient of such stimulus compared to the provider of stimulus funding.
However, unlike during the 1930's; the public sector is a much much larger portion of the economy. Thus a marginal subsidy to it requires a much larger proportional penalty/taking from others than back then.
Far more important, the public sector has a significantly higher income than the private sector as well. In every single state - and nationwide -- at the state level of government and even more so at the federal level. Let me repeat that. Stimulus money in today's world is actually a subsidy of higher income people by lower income people. Not much different (except in scale and pay differential between the two) than the bailout of Wall St millionaires.
The only reason the stimulus appears to be "working" for now is because the giant slush fund of free money being provided by the Federal Reserve (to precisely those people who are also benefitting from bailouts/subsidies) is "taxing" everyone else via inflation rather than directly. And yes -- real inflation is far higher than the BS statistics being produced by the govt. Those BS statistics are benefiting hugely from the decline in housing prices -- which is NOT a price decrease that helps anyone - but which conveniently is offsetting the increase in prices of goods that people actually repurchase and the decline of the dollar relative to "stuff".
Not surprisingly not ONE Keynesian economist is mentioning this. Of course, not one of them foresaw the crisis beforehand either so it shouldn't be a surprise that they are stuck on stupid out of habit.
Whaaaa?
jfree: "unlike during the 1930's; the public sector is a much much larger portion of the economy."
So what? Saving a teacher's job is saving a teacher's job. And that teacher's income is still used to, well, consume other stuff. That's the same stimulus regardless of how large the public sector is. A saved job is a saved job.
"Stimulus money in today's world is actually a subsidy of higher income people by lower income people."
Well, conservatives like pointing out how lower income people don't pay income taxes, so it's hard to me to see how lower income people are overly subsidizing the stimulus (actually, it's coming out of borrowing). The overall taxation system turns out to be pretty flat, so it would seem to me that the eventual cost is pretty evenly distributed as a percentage of income.
>>>>So what? Saving a
>>>>So what? Saving a teacher's job is saving a teacher's job. And that teacher's income is still used to, well, consume other stuff. That's the same stimulus regardless of how large the public sector is. A saved job is a saved job.
You assume that the money to save that job is - what - picked off a tree with no cost? A free lunch? No. It is taken from someone else (with on average a lower income and thus a higher rate of consumption). Read Bastiat and the "broken window" fallacy -- http://bastiat.org/en/twisatwins.html
>>>>it's hard to me to see how lower income people are overly subsidizing the stimulus (actually, it's coming out of borrowing).
They are subsidizing the stimulus via their inability to get a job now. Banks are using their capital to buy government bonds to boost their reserves. The federal borrowing itself is eating up the capital that would otherwise be available. So you can forget about those banks providing working capital to small businesses. Who, by the way, are the source of virtually all job creation in the US and have been for decades.
The Feds bailed out Wall St and, indirectly, their customers (generally big companies and big government). The cost of that was to kill small businesses. Quite deliberately. Again, see Bastiat.
Whaaaa? Part 2
jfree: "You assume that the money to save that job is - what - picked off a tree with no cost? A free lunch? No. It is taken from someone else (with on average a lower income and thus a higher rate of consumption)."
I never assumed it was a free lunch. But it comes out of borrowing, which will need to be paid back--likely through higher taxes on the wealthy. To say it is taken from those with lower incomes assumes that they pay "higher" taxes (either as a percentage of income, which is unlikely, or through absolute amounts, which is false).
"They are subsidizing the stimulus via their inability to get a job now."
No, many of people who have jobs would be jobless without the stimulus. And those without jobs are getting extended unemployment benefits which would otherwise have run out long ago. And they're spending that money to keep other people employed.
"The federal borrowing itself is eating up the capital that would otherwise be available."
Banks have capital. Availability is not the problem. They're not lending out of fear. Lack of private investment is the problem. And that's why the government has to step in to keep the economy from collapsing.
Sounds to me like someone's ideology is overriding the facts here. Anyway, it remains inconsequential whether or not the job saved is in the public or private sector. A job is a job.
Bells in yer Bastiat.
"See Bastiat" for those "BS government statistics, money picked off of trees", and the Feds deliberate attempts to "kill off small businesses". jfree. See Orsen Wells for the Marsian Landing in Jersey.
"The federal borrowing itself
"The federal borrowing itself is eating up the capital that would otherwise be available."
No, it isn't - this is based on a basic misunderstanding of the monetary system, and an inapplicable "loanable funds" model. In fact, the government creates money by spending, and destroys it by taxing. It doesn't go out to bid for some fixed supply of capital.
For that matter, neither does the private sector. Loans create deposits, not the other way around. Banks are always able to make loans to creditworthy borrowers, converting long-term promises to pay into short term negotiable intruments (i.e. bank deposits). Once again, there is no fixed supply of these.