Tuesday, September 14, 2010

The Economics and Politics of Stimulus

James Surowiecki of the New Yorker has a very nice piece on the stimulus in the latest issue.

Here are some excerpts:

When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ” and as simply a “second stimulus”—as if the word itself were a damning indictment. The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical. But in Washington stimulus has become the policy that dare not speak its name.

This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. What’s more, it did so without any of the negative effects that deficit spending can entail: interest rates remain at remarkably low levels, and government borrowing didn’t crowd out private investment.

Politically, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they’re opposed to a new stimulus plan.

I'd argue that this part is not surprising - it was clear to me that this would always be a political loser, without the counterfactual you could always claim it was wasteful spending no mater what the economy looked like at the 2010 elections. I think it was a brave and necessary decision to push forward with the stimulus bill despite its political risks and I agree it has been successful.

But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. The tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping the states avoid layoffs and spending cuts, but politically it didn’t get much notice, because it was the dog that didn’t bark—saving jobs just isn’t as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. But unless you were unemployed this wasn’t something you’d pay attention to.

This is all true, but it ignores all of the high-profile infrastructure projects, adorned with large billboards, that were a major part of the stimulus. So it wasn't all absent of political considerations. In fact, I would suggest that they were trying hard to find the balance between what was most effective economically and what was most effective economically.

He addresses this a bit below:

The stimulus was also backloaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and insured that money would keep flowing into 2010, lessening the risk of a double-dip recession. But it also made the stimulus less potent in 2009, when the economy was in dire straits, leaving voters with the impression that the plan wasn’t working. More subtly, while the plan may end up having a transformative impact on things like the clean-energy industry, broadband access, and the national power grid, it’s hard for voters to find concrete visual evidence of what the stimulus has done (those occasional road signs telling us our tax dollars are at work notwithstanding). That’s a sharp contrast with the New Deal legacy of new highways, massive dams, and rural electrification. Dramatic, high-profile deeds have a profound effect on people’s opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it’s not surprising that the voter’s view is: “We spent $800 billion and all I got was this lousy T-shirt.”

And this, I think, is the best evidence yet of the efficacy if the stimulus - the swooning economy coincides suspiciously with the dwindling stimulus spending. But Surowiecki seems to be trying to have it both ways here - the stimulus was backloaded EXACTLY BECAUSE they were pushing so many big infrastructure projects and it is hard to get them all done immediately. I think it is a little disingenuous to say that the stimulus is unpopular because they focused on what was economically sound and not what was politically popular. If they wanted an effective stimulus that was also immediate, block grants to the states were (and still are) both immediate and have real stimulus effects.

Anyway the underlying message here is that the stimulus was a good idea and probably saved us from a depression. As we have seen in many developing countries once downward momentum starts it can be extremely difficult to stop. The stimulus arrested the fall, now it is time for the private sector to lead the way up and out of the hole we are in.


Jeff Alworth said...

Short comment on the politics. I would argue Obama read this in terms of a four-year, not two-year, window. Certainly no serious economist was telling him that things would be good by now (though he apparently thought they'd be more obviously on the mend). So for the Obama administration, the calculus had to be: what policy will revive the economy within four years? He had the advantage of having all four years of his first term to see improvement, so he could take the longest-possible course.

Playing this for short-term politics and ignoring the economy would have made him a one-term president--and secured his legacy as a failure. By playing long ball, he did the wisest thing he could. Whether even that will be enough remains to be seen. But the politics weren't as wild as all that.

Marvinlee said...

"The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical." Sounds like a perfectly respectable Keynesian policy. The American problem is that it is almost always stimulus time, with only the intensity level rising or falling. We now have an intractable national debt, huge corporate debt, slightly falling personal debt, and enormous trade imbalances. The dollar is decaying daily, our seignorage advantage may weaken as the yuan rises, and we can't sell enough here or globally to keep our labor force near full employment. Maybe a depression would have done more long term good for the nation.