Saturday, January 24, 2009

Another Reason Fiscal Stimulus Won't Work: LAGS

WASHINGTON POST -- Less than half the money dedicated to highways, school construction and other infrastructure projects in a massive economic stimulus package unveiled by House Democrats is likely to be spent within the next two years, according to congressional budget analysts, meaning most of the spending would come too late to lift the nation out of recession.

A report by the Congressional Budget Office found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by Oct. 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended.

For example, of $30 billion in highway spending, less than $4 billion would occur over the next two years. Of $18.5 billion proposed for renewable energy, less than $3 billion would be spent by 2011. And of $14 billion for school construction, less than $7 billion would be spent in the first two years.

From Bruce Bartlett's Wall Street Journal article "If It Ain't Broke, Don't Fix It" (12/2/1992):

This follows the pattern of postwar countercyclical programs: All were enacted well after the end of the recession. They exacerbated inflation, raised interest rates and made the next recession worse.

Bartlett documents the fiscal stimulus plans that were passed in response to the recessions 1948-49, 1957-58, 1960-91, 1969-70, 1973-75, and 1981-82, and shows that: a) in each of the six recessions, the fiscal stimulus legislation wasn't even signed into law until the end of the recession at the earliest, and in some cases wasn't passed until a year after the recession ended, and b) in all cases the fiscal stimulus plans took effect well after the recessions had ended.

MP: There has been a lot of debate lately about the effectiveness of stimulus plans, and the size of the multipliers, etc., and most of that debate probably assumes that the timing of the stimulus is perfect. But what if the timing isn't perfect, due to the long legislative lags designing the policy and the long lags before the policies actually take effect? In that case, even if some of the multiplier effects work as intended, it's still possible the policy will fail, and will actually destabilize an economy that has already recovered from a recession.

In other words, unless fiscal stimulus is timed perfectly, it will fail to stimulate the economy. Given the reality of legislative and effectiveness lags, perfect timing is impossible. Given that reality, fiscal stimulus policy won't work due to the problem of lags, regardless of any multiplier effects.

See Greg Mankiw's related post about fiscal policy lags here.


At 1/24/2009 9:36 PM, Blogger wcw said...

"Our analysis indicates that at least 75 percent of overall package (including its tax component and the other spending provisions that were not analyzed by the Congressional Budget Office) will be spent over the next year and a half (the rest of fiscal year 2009 and fiscal year 2010)."

- Peter Orszag, OMB

PDF here

MJP, maybe you should stick to making shit up about prediction markets. A lot of your readers probably don't have a trading background. But all of them can read.

At 1/25/2009 3:45 AM, Blogger Plamen said...

wcw, I have a background that is both trading and economics, and I am with Prof. Perry - want to challenge me? I happen to have a college friend who works for the OMB, and can testify (and does so readily) that it is staffed by incompetent, politically connected morons who "analyze" data in basic Excel spreadsheets by projecting forward historical rates, adjusting up or down by (my friend's words verbatim) "scratching where it itches". Not one (again, not my words) person with a background in econometrics where those estimates come from. Maybe you should stick to trashing analyses you know about?

At 1/25/2009 8:05 AM, Blogger bob wright said...

here is Greg Mankiw's list of some of the prominent economists who disagree with the spending stimulus.

At 1/25/2009 2:42 PM, Blogger wcw said...

Plamen, that's fabulous. Could you click through to MJP's post on 1992 vs 2009 and explain basis risk to him? Thanks in advance.

As for incompetent, politically connected morons, I give you Peter Orszag. Me, I am assuming the GWB years drove this class of thinker away from the executive branch, and that your friend's analysis used to be right. Whether enough of the Bush lackwits have burrowed into OMB to ruin it forever, I can't say. Still, when the guy in charge is a person with a background in econometrics, I think twice about uncritically passing along the critique.

Mankiw's a smart guy, but like fellow smart guy MJP, he seems to let ideology blind him now and again. This would seem to be one of those times.

At 1/25/2009 3:44 PM, Anonymous Anonymous said...

For the 8-9 Trillion dollars the Congress and the Fed have pumped into this fiasco since last summer the Government could have sent a check to every man,woman and child in the country for 25 -30 thousand dollars. Now I'm not saying that would have been a wise thing to do, but it certainly would've had much more of an impact toward resolving the problem than the ignorant nonsense they have been doing. The negative consequences of such an act would probably be quite severe, but so will the consequences of their continued blundering, an d we'll have to face them without the benefit of seeing any of the cash.

At 1/25/2009 5:10 PM, Anonymous Anonymous said...

"Our analysis indicates that at least 75 percent of overall package ... will be spent over the next year and a half..."

And what a binge it will be:

-$1.5 billion to help local communities build and rehabilitate low-income housing using green technologies.
-$500 million to rehabilitate and improve energy efficiency at some of the over 42,000 housing units maintained by Native American housing programs
-$10 million for "rural, high-need areas to undertake projects using sustainable and energy-efficient building and rehabilitation practices"
-$50 million for the National Endowment for the Arts
-$400 million for "ready-to-go habitat restoration projects"
-$2 billion to provide child care services for an additional 300,000 children in low-income families
-$650 million to continue the coupon program to enable American households to convert from analog television transmission to digital transmission.
-$400 million "to put more scientists to work doing climate change research"
-$600 million for satellite development and acquisitions, including climate sensors and climate modeling.
-$300 million to provide rebates for people who purchase Energy Star products
-$600 million for the federal government to buy brand new energy efficient cars
-$400 million for state and local governments to buy brand new energy efficient cars
-$2.4 billion for carbon capture demonstration programs

etc, etc, etc ....

Let's not forget the 300 billion dollar welfare program and "Mob Museum" in Chicago. (sometimes you just gotta laugh)

It is, however, a measure of poetic justice that the generation he is bankrupting is the same one that chants adoringly at his rallies.

If only those "Bush lackwits" had known what an easy touch these morons were. Somewhere, P.T. Barnum is smiling.

At 1/25/2009 11:26 PM, Anonymous Anonymous said...

Yes, Anon and others, and those projects all represent new (or sustaining old) jobs and new wages - some of which rebuild the infrastructure - that will be recirculated back into the economy. Better than pissing it away on unemployment benefits and welfare.

I appreciate wcs's input, but MJP doesn't make up stuff. He' s just really selective about what he posts.

At 1/26/2009 12:49 AM, Blogger wcw said...

Mika, please see MJP's comments attached to this post. If suggesting it's somehow realistic that I could transact more Intrade contracts than have ever traded before is not making shit up about prediction markets, then I don't know what is.

I grant, this is the first time I have caught MJP making something up out of whole cloth. His mixed-endpoint comparative-recession charts skirted the line, but I suppose they were accurate, just deeply misleading.

As for Anon5:10, Bush is the one who blew the 4%-of-GDP hole in the budget, not Obama. I'm no Obama fan (much, much too Eisenhower-Republican for my loony-left tastes), but I can see how you'd cheer. Bush blew his hole in the budget to give Paris Hilton and the Walton heirs tax breaks. Anything has to seem like a good idea after that.

At 1/26/2009 5:16 AM, Blogger OBloodyHell said...

wcw, try putting your money where your mouth is:

You can obviously structure it as you please, with the appropriate wording, etc., and I'd suggest an "any amount up to 'x' dollars" rather than a fixed amount, with a minimum to make it worth your trouble.

Then see if you get any takers. If you don't, you get to crow a bit. Of course, you'll be on record and others will be able to throw THAT in your face whether you get any takers or not, if the results are wrong by your offered bet.

Post a link here for us, hey?

At 1/26/2009 6:02 AM, Blogger Plamen said...

wcw, I fail to see how the lack of a tradable instrument for your preferred metric is the fault of Prof. Perry, and he did point you to one possibility. The product you wish for would be an OTC product that Goldman would gladly design for you if you were "big" enough, and 6-months' salary will not do it, and you may not like the pricing.

I am a little mystified about your "the person in charge" statement. I find nothing in Orszag's CV that suggests any interest in econometrics beyond the course requirements of his Ph.D. - his interests seem to be health care, climate, Social security, and taxes. Not one mention of "econometric", "regress/ion", "lag", "predict", "correlate/ion". Paint me brightly unimpressed.

At 1/26/2009 10:03 AM, Blogger wcw said...

OBH, I don't see how a lack of takers is going to show anything. It is, as someone finally noticed, a sucker bet.

Plamen, I'm disappointed. I suggested a sucker bet, and MJP's response was to indicate I could place that sucker bet in a venue where I patently cannot. I mistrust even Goldman would be hard-pressed to price the proposed one-touch option at less than its payoff. However, I am quite sure they'd handle the legal niceties if I brought MJP along as my counterparty.

And not to belabor the point, but the word you chose was background. If that CV doesn't show such a background, why not?

At 1/26/2009 2:48 PM, Anonymous Anonymous said...

The stimulus bill is ... based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the "stimulus" claim is based on something called the Keynesian "multiplier," which is that each $1 of spending the government "injects" into the economy yields 1.5 times that in greater output. There's little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we'd all live in paradise.

Read it all here

At 2/12/2009 12:38 AM, Anonymous Anonymous said...

Forgive my ignorance, but isn't a growing GDP the result of wealth creation, not spending? (Maybe not short term, but long term) Why aren't we focused on creating value added activities that create goods and services that have global value. "Green technologies" can fall in this category IF the amount spent on them is less than the value of the output. Building bridges and fixing buildings don't create a sellable good, they do create jobs, not wealth. They have the potential to reduce operating costs, but not something we use to reduce our growing trade deficit.
By definition this is a recession, but can’t it also be viewed as a correction in public spending? Our saving rate for quite awhile has been zero or negative, and now people are not growing their second mortgages (because they can’t, not won’t) and saving instead; and it’s the end of the world. We must do something about it. A 15% savings rate is typical in most countries except for the US. Maybe it shouldn’t be surprising that we need a stimulus package because we can’t survive without the government getting involved.
What I think this country needs is the ability to produce and sell items the rest of the world wants. We have done so well with innovative technologies; why are we not stimulating that activity? The US a leader in medical research, but are we putting any focus in this area? No, we are planning on trying to suppress the private medical industry because it is perceived as being inaccessible to everyone. When the government gets involved and refuses to pay for the ground breaking (typically expensive) medical treatments, who will be left to develop them? I am sure Congress won’t personally have to deal with this problem, so why should they worry about those who elected them?
Selling natural resources (if we can ever create enough to satisfy our own needs) is another way for us to address the trade deficit, and guess what; it creates jobs. Even if you don’t agree with drilling for oil, it is very big dollar business that our country cannot function without its products. Energy independence is something that will become a greater issue in the future. Without it, we are vulnerable to global instability in a world of growing unrest. What happens to our economy when Iran starts shooting at its neighbors? When OPEC finally gets organized enough to actually reduce production as promised? Why is it wrong to want to be in control of our own destiny?


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