Why Isn't The Stimulus Stimulating? LAGS
The problem is that Obama was always much too optimistic about how quickly stimulus spending could have an effect. As I warned in a January column, it takes far more time for it to impact the economy than most people think. Moreover, not all government spending is necessarily stimulative, and the parts of the stimulus package that provide real stimulus are among the slowest to come online.
According to CBO Director Douglas Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending. Even at the end of fiscal year 2010, we will have spent only 47% of the highly stimulative spending. By the end of fiscal year 2011, more than a quarter of the stimulative spending will still remain unspent.
Some years ago, I did a study of every anti-recession program in the postwar era. I found that they invariably impacted on the economy too late to really help. There were many reasons for this. First, economists were slow to see a recession coming and often didn't see one at all until we were already well into it.
Then it took time to convince policymakers to do something and get legislation enacted. By the time a countercyclical program was signed into law, the recession was always over. Consequently, the stimulus stimulated when the economy was already on the upswing. The result was that these programs stimulated inflation more than they stimulated jobs and growth.
Many years ago John Maynard Keynes warned against using public works for stimulus for precisely this reason--they are too hard to reverse once the need for them has passed. With many economists already warning about inflation coming back in the near future, the ultimate legacy of the stimulus bill may be to make it harder to tighten fiscal policy when it will be needed.
Bottom Line: Most of the fiscal stimulus spending will likely impact the economy when it isn't really needed, i.e. after the economy has already started to recover. If we have positive economic growth yet this year in the third (.60% real GDP) and fourth quarter (1.9%) like economists are predicting (WSJ survey, see chart above), and 2.6% real GDP growth next year, the fiscal stimulus will be stimulating an economy in recovery, i.e. an economy that doesn't need stimulus.
As Bruce Bartlett points out in in this article, there has not been a successful stimulus package since WWII that actually provided stimulus with the correct timing. Because of the lags associated with: a) recognizing the economy was slowing down, b) designing and legislating a fiscal stimulus program, and c) waiting for the fiscal stimulus to have an impact on job creation, etc. there has never been a successful fiscal stimulus, at least in terms of successfully impacting an economy at the time when it is most needed.
Posted @ 7:20 AM Post Link
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27 Comments:
In your last paragraph, I believe you meant to say there has NOT been a successful stimulus package . . . .
Call me a skeptic, but I believe we all know the real purpose of the stimulus and most domestic Obama administration programs is to stimulate the growth of government; and believe the economy will eventually take care of itself (and if it doesn't, blame Bush). In that regard, the stimulus is performing exacting as planned. As Rahm Emanual said, paraphrasing, never let a good crisis go to waste.
If you replace an old bridge with a new one, you maintain the status quo. It's like maintenance. There is no growth. But if you build a bridge to new offices or factories, then you have growth. Unfortunately, the stimulus is maintenance at best. It is also a bail out for Democrat states in bankruptcy.
As I warned in a January column, it takes far more time for it to impact the economy than most people think.
Hmmm, well, this must be why the Democrats were in such a hurry to vote for it, even skipping over the troubling and time concsuming "reading" of the bill before hand.
Then there's the bit about the "highly stimulative spending" being pushed out to 2010 and the end of 2011. Aren't those election years? Just asking.
Aren't those election years?
You hit that one right out of the park.
The extremely liberal Senator Gene McCarthy had a solution: Give the President standing authority to act in times like these to avoid 'shutting the barn door after the cows have left'. Also, McCarthy was funny and smart as hell!!!
"Some years ago, I did a study of every anti-recession program in the postwar era. I found that they invariably impacted on the economy too late to really help"...
Well its not like there isn't a history for this situation: FDR's policies prolonged Depression by 7 years, UCLA economists calculate
"McCarthy was funny and smart as hell!!!"...
'Smart' Norman?
Hmmm, I'm curious as to why you say that...
Recognition lag, decision lag, effect lag: I learned about those in my first Macro course in 1991. It's funny that our politicians haven't learned it nearly two decades later. If they time the policy wrong, we get inflation.
Then again, our politicians are almost all LAWYERS for God's sake! Why should we expect them to know anything about economics. We hired a 14-year lecturer in Law to fix an economy and fight two wars. That's like hiring an accountant to repair the foundation of your house.
I'd rather have an auto worker in Congress than a damned lawyer. At least they worked for a living. And I hear they're available for the job next year.
As Rush pointed out, the stimulus is designed to grow government, not our economy.
Imagine if they had just cut the payroll tax for 6 months. Would have been instantaneous and directed toward productive means.
Excellent report from the professor, even if he is employed at public expense, with a publicly financed health care package.
A couple hundred years ago (and decades before Robert Miller went to school), when I was in college, even a liberal econ prof I had conceded quickie tax cuts were a better stimulus method than "jumping spending around."
I sure hope the economy is turning positive. I see real estate borroming in SoCal, but retail spending is weaker than Republican resolve to balance the federal budget.
Oh, Benny, you must've missed the lesson on Liquidity Traps. That's the excuse liberals have now for not cutting taxes during a recession.
"I know! Let's raise taxes. That way we can raise more money so we can spend it so people will have more money to spend and there will be more jobs." - any liberal.
QT's view is spot on and look at where the money is going (states with contested elections and please spare me the distribution equation argument).This is politics where no deal is to small or on the level.
Robert-
Yu are right. There is some truth to the sentimnt that the wealthy might not increase spending given a tax cut, although even if they bank the money, it would probably help some bank somewhere lend money.
Still then, why not tax cuts for the middle-class, which will spend most of it?
You are right: Liberals never ran a business, never risked their own capital.
Sadly, more and more "conservatives" in Congress are just lawyers who also never ran a business.
I keep saying: Third Party.
I think Robert Millar got an "A" in his economics class.
Mac,
Anon. 9:19 should be credited with spotting the stimulus spending co-inciding with election years. Have to agree that stimulus is the usual beltway pork barrel politics.
Funny how the players may change but the game continues much the same.
BTW, for Dr. Perry: This week's Los Angeles Business Journal has nice story/charts on house prices and sales rising in LA County.
Huge market; evidently the bottom has been passed.
Repairing infrastructure was a good idea and a lot of stimulus funds have been directed at projects that were in the pipeline.
"Stimulus" has allowed a speed-up of these projects which are occuring nationwide this summer.
The sickening part of this is the pork projects inserted by Congress for bizarre projects and studies as well as transfer payment schemes. You all are probably reading about local wasteful pork debacles but here is one notable in this locale. Rep. Jim McDermott is requesting $250,000 for window sill replacement at the very upper crust Rainier Club in Seattle.
I think a more effective approach would have been to allocate critical and planned projects half the stimulus funds. The other half should have been argued about for new fast-track projects to improve transportation and communication over a three month period.
The grab for humongous amounts of money without debate should be stopped by the White House. This does not seem to be likely because the political base loves the largesse. Thus they party on.
anon brings up an interesting point: "It is also a bail out for Democrat states in bankruptcy"...
Courtesy of USAToday: Billions in aid go to areas that backed Obama in '08
Let's not forget those supposedly 'shovel ready jobs' Obama mentioned...
The People's Cube has a thought on that: Grave Diggers
Shovel-Ready for Socialized Medicine
I agree with gettingrational. Spending on infrastructure was probably long overdue. The problems with that sort of spending are cost overruns, cronyism in awarding contracts, and misrepresentation of the need for projects.
No bigger example of such waste was ever bigger than the 10 years of misallocated spending on flood abatement by the city of New Orleans. The Corps of Engineers completed their projects. The city did not.
Given that the majority of states voted for Obama, I'm not surprised they're getting the lion's share of money, but there's no doubt the spendulus was heavily laden with pork.
On Interstate 80, the state of California has seen fit to purchase a sign stating that construction was funded by ARRA, yet there's still not a single construction vehicle on site. Maybe they were abducted by aliens.
On another front, here it comes:
The CRE Meltdown
Fitch: Major loan defaults contribute to record US CMBS delinquencies in June
Moody's: Aggregate US CMBS loan delinquency rate reaches 2.67%
Just when you thought it was safe to go back into the market...
U.S. monetary and fiscal policies have generally improved in smoothing-out business cycles, including long-wave business cycles (e.g. preventing a deep depression in the 1970s). Also, a quick and massive Creative-Destruction process can take place in a mild recession (i.e. 2001).
One writer here made mention of it and I will expand on it. The purpose of the "stimulus" has nothing to do with the economy or even the "infrastructure" in my opinion. It has to do with redistributing income and making government bigger. It has to do with making sure every single slacker is taken care of so they will vote democrat. People talk about "infrastructure" but who can define it. How about we truly reform the government school system, or social security, or medicaid, malpractice lawsuits, tort reform, etc., etc., all of which are "infrastructure" as much as any dam bridge.
The reality is we are getting poorer as a nation and the more people who are "poor" (always a relative term) will flock to the group who promises this and that.
There are a lot of great people in this country, hardly any are elected to public office.
"Spending on infrastructure was probably long overdue. The problems with that sort of spending are cost overruns, cronyism in awarding contracts, and misrepresentation of the need for projects"...
Hmmm, this begs the question to me at least, what happened to the money in the federal highway trust fund?
"there has not been a successful stimulus package since WWII that actually provided stimulus with the correct timing"...
Well this Obama administration stimulus plan is working as planned...
Grim Milestone... US Deficit Passes $1 Trillion For First Time Ever
Well, all the other "Stimulus" packages aren't like this one. We now have hope and change. Laws of economics and the lessons of history no longer apply.
Just as we knew would happen, this money will just be used for plugging budget deficits and funding wealth transfers. Neither one is stimulative.
Hmmm, this begs the question...
Please learn how to properly use begs the question. 99.99% of people get it wrong.
What happened to the money in the federal highway trust fund?
The fund was used for its intended purpose, albeit probably in a most wasteful and corrupt manner. The fund was depleted in 2008, probably because gasoline consumption declined so much.
Part of the fund was set aside for Municipal Transportation (read, massive waste) and part of it was for leaking fuel storage tanks.
As far as I know, none of the highway fund was for bridges which require serious attention. There are hundreds of thousands of smaller infrastructure projects such as flood abatement, aquaducts, wastewater management, electricity, etc. which are not covered by the Highway Fund.
Believe me, I'm not excusing mismanagement of the Highway Fund. I'm just saying there is plenty of "infrastructure" worth fixing if we actually believed "stimulus" is necessary and effective. I happen to think, as an economist, that government spending is not very effective at correcting recessions. I do believe in the role of government in providing Public Goods.
Too many local governments spend on what they want and then beg for what they need. New Orleans is the perfect example. This has to stop!
We also need to stop subsidizing people to rebuild in damned flood plains! I moved to Illinois during the last big flood. I can't believe we rebuilt again! We should have given New Orleans back to the sea.
re: 'begs the question'...
I never use wiki anything...
Now this I find interesting: "As far as I know, none of the highway fund was for bridges which require serious attention"...
Way back in the late sixties when I was still in high school we had one of those, 'bring dad to school day' so he could explain what he did for a living...
One guy I used to hang with since like the fourth grade, his father did work for the federal highway department and I can recall quite clearly that money from the federal highway trust fund was to be used to build new bridges for new federal highways and repair the federal highways (Texas had a lot of them thanks to LBJ) and the bridges on them...
That was his job as a civil engineer...
"I do believe in the role of government in providing Public Goods"...
Sure I believe it too, Article One - Section 8 - To establish Post Offices and post Roads
One guy I used to hang with since like the fourth grade, his father did work for the federal highway department and I can recall quite clearly that money from the federal highway trust fund was to be used to build new bridges
Oh, so Wikipedia sucks but statements made several decades ago by daddies of 4th grade buddies are authoritative references?
Would you believe the Dept. of Transportation?
Do you not do Google either? Poke around and see if bridges are in there anywhere.
Regardless of whether bridges are in there or not, the issue of whether there is sufficient funding in the Highway Trust Fund for roads AND bridges AND leaking fuel tanks AND municipal transportation throughout the nation is still an open question. Somehow I doubt it.
Sure I believe it too, Article One - Section 8 - To establish Post Offices and post Roads
Oh, just post offices and post roads? I think you missed a lot of other Public Goods in Article I, Section 8.
Wanna have another look?
Do you even know what a "public good" is?
Try using Wiki to look up "public good" right after you Wiki "Begs the Question."
Just because Wiki is sometimes wrong doesn't mean it's always wrong. In both of those articles, the definitions are damned accurate.
If you can't bear to read Wikipedia, then get yourself a good Philosophy book for "Question Begging" and a good Economics book "public goods."
BTW, we are not enemies on runaway, wasteful government spending. I didn't want to spend $787 billion, but if Obama and the Demon Rats are going to do it anyway, I'd better see some gold-plated bridges all over the country by next year!
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