Monday, February 9, 2009

What I want to know about the stimulus bill

Here's what I want to know about the stimulus bill, apropos of Obama's outrage about congressional Republicans' opposition/resistance to it: Why almost a trillion dollars, right now?

I have very little confidence that people have actually figured out whether this thing is going to work. Now, that doesn't mean it's a bad idea -- maybe we should try out a gamble even if it might very well not work, because that'd be better than doing nothing.

But why don't we find a middle ground where we spend some of it -- say, 100 billion dollars -- then study what effects it's having and decide what to do next?

Full disclosure, I don't really know what I'm talking about. If there's some reason it has to be done this way, then please explain why in the comments. I'd be curious to hear why I'm wrong. [UPDATE: A commenter has taken me up on this.]

This piece shows how much money we spent on other major projects. For instance, the Marshall Plan to rebuild Europe after World War II cost the equivalent of $115 billion in today's dollars. In other words, we could start out spending a historically enormous amount of money, while still spending just a tiny fraction of the $800-billion figure.

I was thinking about this after watching Megan McArdle's hour-long rant against the stimulus:

I especially like how she takes down the idea of economists as experts. Key points:

(1) Economists have never tested their theories that supposedly support the stimulus, because it would be impossible to do so. Any historical parallels are too different from the current situation. So there are too many confounding variables to be able to draw a scientific conclusion.

(2) Even if McArdle is wrong about that, the way economists could prove her wrong would be to make specific predictions about what effect the stimulus will have, and stake their professional reputations on it. She says none of them will do that.

Ah, but they talk about this paper, which does make predictions. Isn't that a counterexample? Well, I don't think so. Are those economists really going to accept any personal consequences if their predictions turn out to be wrong? I assume they'd say either that unexpected contingencies got in the way, or the stimulus wasn't enacted in the exact way they would have liked. And sure enough, the paper savvily includes this paragraph, loaded with caveats:

It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.
Translation: "Don't blame us if it doesn't turn out the way we said it would."

Of course, if the stimulus is enacted and has fantastic results, you can bet they'll say, "See, we told you it would work."

Karl Popper said people who claim to be scientific but don't make falsifiable predictions are engaging in pseudo-science. So, isn't economics a pseudo-science?

And if a pseudo-science is the main authority for people's belief that the stimulus is a good idea, then we should be a lot more cautious than we're being. A trillion dollars -- which, as Sen. Mitch McConnell correctly pointed out, is more than the amount you'd spend if you spent a million dollars a day from the supposed birth of Jesus to now -- just seems like way too much money to blow in one shot on a wild gamble.

Oh, one other slight problem:

UPDATE: Bellwether alert! "If the Dems have lost JAC on this, they've lost the country."


Unknown said...

The argument is the economy is facing about a $2.7 trillion dollar gap in demand right now, compared to what you would expect if the economy was running at full employment (about 4.5%). And since interest rates are now at 0%, the Fed has shot its wad on monetary policy and the ONLY thing left right now is Government.

So $800 billion (not a trillion) is not going to cover the $2.7 trillion dollar gap, but it might cover some of it. How much is the government losing in tax revenues on that $2.7 trillion in lost output? About $800 billion or so.

The US GDP is about $14 trillion a year (and shrinking fast!). The stimulus program is over several years. Let's assume it's over 3 years. So that's about $260 billion a year. That's less than 2% of GDP. If you really want to do a stimulus plan of $100 billion over 3 years, you are talking about a stimulus plan equivalent to 0.25% of the economy. That's meaningless. Even 2% stimulus only covers about 40% of an economy shrinking 5% a year.

Also, while the cost is $800 billion, that money is injected into the economy. That pays people's salaries - who in turn pay taxes. If they were unemployed, they'd be collecting unemployment, food stamps, foreclosing on their home which propagates the housing slump, etc. So the increase in tax revenues because of the stimulus plan should be substantial, which will partially cover the costs. It also prevents a future government outlay in unemployment benefits, etc. But they idea is to do it quickly and shock the economy into a permanent state of higher output.

Also - a large part of the stimulus program was supposed to be aid to the states, to cover their shrinking revenues. Without that, states will start laying off workers as well. So in addition to the private sector laying everyone off, you will have the government laying off people too.

I suggest you read Krugman's blog.

I like this post:

Also, the Stimulus program Bush passed last year (100% tax cuts) cost $168 billion a year. Never heard any conservatives complaining about the cost of that.

So if $168 billion was too small, why are you proposing a stimulus package that is about one-third the size on an annual basis?

Unknown said...

Wow. If you spent $5 a day from every day Jesus was born until today - you wouldn't even have my own personal net worth.

John Althouse Cohen said...

Thanks for the points and links. I'll add an update on the homepage.

I'm still skeptical, though, and I don't assume that Paul Krugman gets everything right. According to Megan McArdle in the clip I embedded, there are Pulitzer Prize winning economists who are against the stimulus. When Krugman went on his crusade to convince liberals that Obama's candidacy had to be stopped because of his evil health-care plan, I lost respect for Krugman's sense of perspective and priorities.

A couple things:

Also, the Stimulus program Bush passed last year (100% tax cuts) cost $168 billion a year. Never heard any conservatives complaining about the cost of that.

But I don't think the only legitimate participants in this debate are "conservatives" vs. people who favor the stimulus. Sure, you can isolate a group of people and call them "conservatives" who by definition didn't complain about Bush's stimulus, but I wasn't particularly in favor of Bush's stimulus, so that's not convincing to me.

Similarly, in the blog post you link to, Krugman basically says: aha, the conservatives at the Washington Post didn't complain about the Bush tax cuts, and those cost a lot of money too! Well, even if that's a valid critique of WaPo (and I don't know if it is -- they endorsed Gore, Kerry, and Obama for President), why does that matter to me? The argument is that we should think of the Obama stimulus as resembling Bush's policies? For many people, this is not exactly a favorable comparison.

So if $168 billion was too small...

But this seems like the classic debating move to explain away an ineffective policy: "The problem is it didn't go far enough!" That can be used to justify about any bad economic policy. Bush's tax cuts weren't effective? They didn't go far enough! The Iraq war wasn't effective? We didn't go far enough! Communism failed? It didn't go far enough! See how this kind of reasoning can become mind-numbing?

Also, even if I accept your premise that the government is capable of rescuing the economy by doing something-akin-to-Bush's-stimulus-but-bigger, that doesn't automatically mean Obama's stimulus is a good idea. The stimulus is going to cost more than $5,000 per taxpayer. It's not obvious to me that the stimulus bill (most of which isn't tax cuts) is going to be more effective than if you just spread the wealth around by giving a huge gift of direct government benefits to every man, woman, and child in America.

Unknown said...

What would you do with $5000 if you got a check from the government?

I would save 100% of it and put it in the bank. And the banks aren't lending. So it would just sit there, not creating any stimulus. In fact, because of the economic situation, I'm saving a hell of a lot more than I usually do, and spending less, even though I have enough money in cash to live off of for a good three years. I don't think my behavior (saving) is any different than a lot of Americans. And granted - people saving more is good in the long-term. But in the short-term, it creates a downward spiral in the economy.

So at least for my portion - I can guarantee that it would do nothing for the economy, at least in the short-term.

Now if the government builds a bridge, the example Krugman likes to gives, the economy is bigger. GDP increases. Because we built a bridge. And that is a component of GDP. If you give the money to the food stamps program, and there are more people who need food stamps now, they will spend it - on food. If you give it to unemployment benefits, they will likely spend it - because its their only source of income.

Now a combination of tax cuts and spending is not too bad. It's 42% tax cuts don't forget - that's a lot. And part of it is money to the States - which will prevent States from having to raise taxes. So hopefully the government spending will cause jobs to be created and the economy to grow, and that will make some of the economic stats look a little better. And if people have more money in their paycheck - they'll feel a little better too, and they might spend more if job losses slow down or stop.

That's the idea.

This is not really some wing and a prayer idea. It's elementary economics.

John Althouse Cohen said...

I would save 100% of it and put it in the bank. And the banks aren't lending. So it would just sit there, not creating any stimulus.

Are intangible psychological effects irrelevant?

Also, I'm not sure you're representative. You say you have enough money to live comfortably for three more years. Most Americans don't. If you have that much of a cushion, yeah, it's easier for you to save money that comes out of the blue.

Note: I didn't say give $5,000 to every person. I said we're spending more than that per person on average, and I said we could spread the wealth around. I left it an open question what the best distribution would be. Maybe you should get $100 and a single parent who's struggling to get by should get $10,000.

It's elementary economics.

Well, what I'm saying is I question the very notion that there's something that's properly called elementary economics that can tell us how to fix the problem.

By the way, most economists can't answer a basic question about opportunity costs.

I simply don't believe these people are such experts as they claim or that the field is as scientific as it's supposed to be. Again, it's a pseudo-science, and the so-called experts literally do not know what they're talking about. (Watch the McArdle clip!) That's why they need to gunk up their claims with 100 caveats and escape hatches (see my example in the post). So I'm just not convinced by the appeal to authority or academic theory.

As for your points about welfare (food stamps, etc.), I agree welfare is one kind of stimulus. But what about the concerns that they're using the stimulus as cover for rolling back the 1996 welfare reform? (Mickey Kaus is on high alert.) Remember, I'm not saying I object on principle to each individual component of the bill. I'm not even saying I'm against the bill. I object to the fact that the whole enormous thing is being done all of a sudden without seeming to be fully debated.

I know the point about infrastructure being stimulus. Now, I thought liberals used to have a valid complaint that people were trumpeting the increasing GDP during the Bush administration. Liberals would point out that the mere fact of increased GDP obscures the reality of who it's going to help, and it smoothes over a lot of pain. It seems to me they had a good point, and the increased GDP during the mid 2000s wasn't really so great for the economy in retrospect. You need a stronger argument than "It'll increase GDP" to convince me we should be spending a trillion dollars right now.

Also, as for infrastructure, you realize that what you're talking about is almost exclusively jobs for men, right? Is anyone seriously thinking through whether those are the exact jobs we need most, or do a lot of people just like to think about how much we'll be doing for "infrastructure" and "bridges"? Also, Megan McArdle gives a good explanation in the clip of the many defects with the idea of "Let's build lots of bridges" as a solution.

Unknown said...

The government is not "building a lot of bridges", specifically because they don't want to create jobs only for men. In fact, that's why tons of the stimulus is targeted at areas such as education and health. I think 5% is targeted at pure infrastructure - too low if you ask me.

My argument is that increasing "G" in the economic equations (which equals "government) will increase GDP.

I am not saying that unemployment insurance is the best (although it is quick). But the Democrats are definitely gearing a lot of it towards areas that they favor. School construction, health, etc.

But guess what. They won. Of course they get a bigger say over where to target the money. I think they are being very deferential towards Republicans with a package that is 42% tax cuts.

If it was up to me, I'd be happy to say spend the entire stimulus on cool infrastructure projects, high-speed rails from every major airport to central cities, cool new bridges designed by great architects, etc. But Congress is going to come up with competing priorities, because it's one big committee. Guess what - government is messy. Get used to it.

This is a good article on how big the stimulus plan really is - comparable to the New Deal.

I'm not too concerned about the specific allocation of the money - the point is to get the money out there, and put a break on the downward spiral we are now in.

Not sure what you are talking about when you mention the GDP growth during Bush's reign. You do realize that Bush presided over the slowest GDP growth of any President during the last century, don't you? That's what people were complaining about.

You need to shore up the economy now, or you risk entire aspects of the American economy going belly up. The financial sector. The auto industry. The insurance industry. If you do nothing, then literally they could ALL go bankrupt. And how do you bounce back from that? Those companies won't be here? Can small business really replace companies that make up 20% of our GDP, with all of it's multiplier effects?

I'll tell you who will replace it - Asian companies. And I think that's likely to happen. That's why I moved to Asia. That's why I'm learning Mandarin.

Anyway - what will convince you whether the plan works or not? You might oppose it now, but if the economy is growing by year-end will you change your mind? Or do you think it's just due to bounce back regardless of what the government does?

Obviously it will take several months before it even kicks in. But when the August unemployment numbers come out, pay attention to the jobs report, how many government jobs are created, how the manufacturing indexes are doing, etc. I think the downward spiral will stop and you'll start to see the seeds of a recovery.