fiscal stimulus
The main point of Laura Tyson's op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure.
But she makes a simple arithmetic error in the title, "Why We Need a Second Stimulus." In fact, what she's arguing for is not the second but the third stimulus. As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling. The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy. They shouldn't be running away from it now.
Why does it matter what number stimulus this is?
Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:
- Extending the tax cuts would be a good way to stimulate the economy.
- Allowing the high-income tax cuts to expire would hurt small businesses.
- Making the tax cuts permanent will lead to long-term growth.
- The Bush tax cuts are the main cause of the budget deficit.
- Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.
I recommend the whole thing. You can look through nearly 6 years of my blogging and not find a single post in support of these tax cuts. Whatever is left of them should be allowed to expire, and Congress should make its tax policy changes in a deliberate fashion.
Of the five myths that Bill discusses, I continue to find the first to be the most frustrating. Here's what Bill says about extending the tax cuts as a means of fiscal stimulus:
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In a post last week, I remarked that, "In the world of fiscal policy, you could have left the planet for a year and not missed a beat." The post repeated my criticism, made frequently over the last 30 months, that there is a better way to deal with downturns than becoming mired in discussions of temporary, ad hoc stimulus plans.
But in the world of supply-side economics, you could have left the planet for much longer and not missed a beat. The latest quote making the rounds is this one, from Senate Minority Leader Mitch McConnell:
In the world of fiscal policy, you could have left the planet for a year and not missed a beat. Charles Wallace, of AOL's Daily Finance column, quotes his interview with me as follows:
But Andrew Samwick, a professor of economics at Dartmouth College, says the proposed stimulus of about $80 billion is too small to do much good. He adds that unemployment benefits aren't the most efficient way to stimulate the economy.
"You're giving them money, but they're not giving you anything in return," Samwick says, rejecting the argument that unemployment benefits are usually spent immediately and thereby sustain the economy. "There's no virtue in spending money -- the government could do that directly," he says.
Samwick says he'd like the government to commit to a long-term spending plan costing hundreds of billions or even trillions of dollars to address the country's infrastructure needs, such as developing a smart grid for electricity distribution.
"All of those things use material that has to be produced, which means it creates jobs, or it creates new opportunities for people, where it creates employment as well," Samwick says. "Why is that not better than just giving the money to the states to compensate them for their own budget challenges or the unemployed?"
I am less concerned about who will succeed outgoing OMB Director Peter Orszag than what the new budget director will do. We face an unusually high unemployment rate of 9.7 percent and ridiculously low interest rates, even out to 30 years. Cheap credit and idle resources present a great opportunity to borrow and spend, particularly for things we know we need.
I have long been a fan of countercyclical government investment. In January 2008, I proposed a better way to deal with downturns and a budget that plans for the future as a means of substantially increasing our infrastructure investment at the most opportune times in the business cycle. At the time, I was trying to push back against calls for "timely, targeted, and temporary" measures that would widen the deficit without building anything of lasting value. While that phrase has fallen out of fashion, the sorts of policies being discussed -- like the patchwork of relief programs that died in the Senate last week -- are the same old stuff. It is a sign of how poorly our system of governance works that we cannot even plan for something that we have been enduring for two and a half years.
My column from yesterday's Roll Call explains why...starting in 3 weeks...the dismal budget situation in the states is going to make the job of budget policymakers in Washington much more difficult.
States Point Way for Budget; Will Policymakers Listen?
June 8, 2010
The start of the federal fiscal year was changed from July 1 to Oct. 1 when the Congressional Budget Act was signed into law in 1974. This was a momentous change for federal budget policymakers who had to figure out what to do with the “transition quarter” — the three months between the end of the old fiscal 1976 and the beginning of the new fiscal 1977. But the new start date meant little for the states, and few changed their fiscal year as the federal government did. As a result, in about three weeks, fiscal 2011 will begin in 46 states.
The Free Exchange blog at The Economist posted yesterday about "the stimulus that should have been." The complaint -- too little infrastructure spending:
It's even more frustrating that this is so when one considers that substantial infrastructure investments will be necessary in any case, as stimulus or not. And it's outright maddening when you recall that massive economic slack and falling resource prices, thanks to the recession, would allow a given dollar of infrastructure spending to go a long way indeed.
But there was felt to be a limit to which money could be allocated to the infrastructure cause, based on shovel-readiness; if too few projects could take advantage of the available funding while the economy was still weak, then that funding would make for poor stimulus and could be better used elsewhere.
There is no use crying about it now. After all, it's not like anyone proposed serious alternatives to firing money out of a cannon while blindfolded (a.k.a. timely, targeted, and temporary) as a way to stimulate economic activity. Two years ago, where were the people proposing a better way to deal with downturns or a budget that plans for the future by taking such a long-term view of infrastructure investment?
So what should our elected officials do about it today?
Over at FT.com, my friend Clive Crook has a well written piece on the fiscal stimulus and the debate over it success and failure.
The key to the post is its focus toward the end on the aftermath of the stimulus -- the deficits and debt that will be left when the economy has recovered.
This is not a new topic, of course. Congressional Republicans have been raising it for months as a reason not to like what the Obama administration proposed and Congress adopted.
But Clive's post is not a recital of the GOP talking points on the stimulus. The fact that he devotes about 40 percent of his thinking and writing to the next rather than the current issue is significant. Clive is an intellectual leader and this is the kind of subtle revision in the public debate that often indicates the situation has changed and its time for the discussion to move on.
CAUTION: You might not be able to stop yourself from singing the same song to yourself all day after reading my column from today's Roll Call.
More Stimulus and Less Deficit: Together Again
July 14, 2009
By Stan Collender
Roll Call Contributing Writer
For those of you who aren’t old enough to remember, and for everyone who hasn’t seen the smash Broadway musical “Jersey Boys,” Frankie Valli used to be the lead singer of a group called the Four Seasons. When the three other members of the group stopped performing, Valli hired new singers to fill out what was called Frankie Valli and the Four Seasons. One of that group’s national tours was called “Together Again” even though they had never really been together before.
Do we need a second stimulus? Bruce Bartlett says not yet. Paul Krugman says yes. Donald Marron reminds us how to count to three. For my two cents (before multipliers, that is), the word stimulus is completely unhelpful -- it has come to mean spending money we don't have on stuff we don't need, just for the sake of spending it "quickly." From December of last year:
If I had my druthers, the word "stimulus" would be expunged from public discussion, along with "bailout" and "rescue." These words convey the idea that, because we have so mismanaged our economic and financial affairs, we are somehow able or entitled to conjure up additional funds out of thin air to fix our problems.
