Category Archives: Stimulus

Net Worth is Down and that May Explain Why Stimulus Wasn’t Particularly Effective

This week saw the release of the Federal Reserve’s Survey of Consumer Finances. The news isn’t good. Median net worth fell 38.8 percent from 2007 to 2010. Predictably, the unhealthy diagnosis has occasioned a healthy dose of political posturing. For its part, the White House was quick to note that “the entire decline in household wealth took place before President Obama came into office” and that total wealth “has risen every year since he came into office.”

E21, in turn, pointed out that it was a little odd for the White House to emphasize the aggregate numbers rather than the median:

The claims made by the White House are disingenuous (at best) because they ignore the median U.S. household and focus instead on the increase in overall wealth, which has largely come from gains in the stock market. The White House is essentially saying that we shouldn’t worry about the plight of the typical family because Warren Buffett’s stock holdings have gone up in value by tens of billions of dollars since March 2009. The focus on aggregate household net worth is extremely comical when compared to previous statements made by the President and others in his Administration about the country’s lamentable concentration of wealth and income in the hands of a “fortunate few.” Someone should ask President Obama if this means we needn’t worry about income disparities anymore because total household income is up nearly 20% on an inflation-adjusted basis over the past 10 years?

Framing aside, there is an important policy implication of such a large fall in net worth. Richard Clarida of Columbia University explained this point way back in March of 2009:

There is a second reason while the bang of the fiscal package will likely lag behind the bucks. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time, as households rebuild their balance sheets the old-fashioned way – by boosting their saving rates.

In our working paper last fall, Veronique and I explained this point further:

The current recession has resulted in an unprecedented collapse in net wealth. In other words, it is a deep “balance sheet”‖recession. But with personal wealth diminished and private credit impaired, some economists believe that stimulus is likely to be less effective than it would be in a different type of recession. This is because consumers are likely to use their stimulus money to rebuild their nest eggs, i.e., to pay off debts and save, not to buy new products as Keynesian theoreticians want them to.

The White House is interested in escaping blame for the collapse in median net wealth. That’s understandable; that’s what White Houses do. It is harder to escape from the policy implications of a balance sheet recession.

Is Government the Solution?

It was thus salutary that Douglas Elmendorf, the widely respected director of the Congressional Budget Office, told a congressional hearing last week that 80 percent of economic experts surveyed by the University of Chicago’s Booth School of Business agreed that the stimulus got the unemployment rate lower at the end of 2010 than it would have been otherwise.

That’s E.J. Dionne writing in today’s Washington Post. This sort of statement is all too common: “There is consensus on stimulus. All economists agree it is unquestionably beneficial. If anything, the 2009 stimulus was too small. Case closed. Move along.” This is not a fair representation of the scientific view of stimulus.

Let’s start with the Booth School survey. Every week, the Booth School’s Initiative on Global Markets polls an ideologically diverse group of about 40 economists on a particular issue. The surveys are fascinating; I read them every week. On February 15, they put two statements to the panel and asked them to respond. The first statement reads:

Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

It is true that, of those surveyed, 51 percent agreed and 29 percent strongly agreed with this statement. Some of the comments from those who agreed with this statement are telling. Anil Kashyap of Chicago for example wrote, “But this is an incredibly low bar.” And Darrell Duffie of Stanford wrote, “Subsidizing employment leads employment to go up, other things equal. Adverse impacts through growth incentives might take time.” These statements (and others) suggest that perhaps the question was overly-narrow.

Thankfully, IGM probed further. They asked the economists to weigh in on a second statement:

Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.

This time, when the economists were asked about the longer-run, total effects of stimulus, they were much more equivocal. Less than half agreed or strongly agreed with the statement, 27 percent were uncertain, and the rest either disagreed or had no opinion. A number of respondents noted the uncertainties involved. Nancy Stokey of Chicago summed it up nicely, writing, “How can anyone imagine this question is answerable, given the current state of economic science?”

Amen. In my testimony last February before the House Education and Workforce Committee, I wrote:

There are many things on which economists agree (e.g., few dispute the merits of free trade or the long-run fiscal problems with our largest entitlement programs). Unfortunately, there is very little consensus among economists on government’s ability to jumpstart a sick economy.

The degree of disagreement over stimulus is evident when you look at the literature on the “government purchases multiplier.” The multiplier measures the amount by which an economy expands when the government increases its purchases of goods and services by $1.00. If the multiplier is larger than 1, it means that government purchases multiply or stimulate private sector economic activity. If it is between 0 and 1, it means that purchases displace or crowd out private sector economic activity. And if it is less than 0, it means that government purchases crowd out enough private sector economic activity to offset any increase in public sector activity.

In my testimony, I showed the following sample of recent estimates. Each bar shows the high and low-end estimate of a particular study.

As I wrote in February:

Note that there is a wide range in the estimates both across and within studies. If the optimistic scenarios are correct, an additional $1.00 in deficit-financed government spending spurs $2.70 in new private sector economic activity. But if the less-optimistic scenarios are correct, then an additional $1.00 in spending destroys $3.80 in private sector activity.

This misses some of the recent data. In a recent paper Valerie Ramey of UCSD, for example, uses: “a variety of identification methods and samples,” and finds that “in most cases private spending falls significantly in response to an increase in government spending.” She finds that while government spending does bring down the unemployment rate, “virtually all of the effect is through an increase in government employment.” Note that this is entirely consistent with the first IGM statement. In other words, one can believe that stimulus harms the private sector and is costly in the long run, but still think that it might have boosted (government) employment for a time. This is hardly a ringing endorsement of stimulus.

For more on this topic, see Garett Jones’s excellent (February) post here or Veronique’s post here.


Addendum: Vero responds to Dionne’s column, adding links to lots more research on when multipliers might be large or small. And Russ weighs in here, calling for more humility. Read and bookmark both posts.

When Taxpayer Dollars Are Used to Advocate for More…Taxpayer Dollars

Back in 2010, I noted that government spending can beget further spending. I cited research by Russell Sobel and George Crowley which shows that when the federal government transfers money to the states (as the stimulus bill did), the states tend to increase their own future taxes after the federal money goes away. They found that for every $1.00 the feds send to the states, states increase their own future taxes between $0.33 and $0.42.

Image by scottchan

It recently came to my attention, however, that little-noticed aspects of the 2009 Stimulus and the 2010 Affordable Care Act go even further: they fund advocacy on behalf of further state and local government spending.

Here is the story:

The stimulus bill set aside $650 million for the Department of Health and Human Services to spend on “evidence-based clinical and community-based prevention and wellness strategies.” The idea was to encourage state and local governments to adopt policies that get people to stop smoking, to eat better, and to get exercise.

HHS used the money to create a new grant program called Communities Putting Prevention to Work (CPPW). According to the CPPW website, it features “a strong emphasis on policy and environmental change at both the state and local levels.” (emphasis added).

Grants can go to local governments or to non-profits. You can see a list of approved grantee strategies here. Many of the strategies seem to be regulatory in scope (e.g. media and advertising bans for cigarettes, bans on branded promotional items, etc.). A number are also focused on getting state and local governments to spend more money. For example, they suggest efforts to get money for “hard-hitting counter-advertising” against tobacco. Or for “safe, attractive accessible places for activity” such as “recreation facilities, [and] enhance[d] bicycling and walking infrastructure.” They also call for “Reduced price[s] for park/facility use” (which, of course, means increased taxpayer support).

Interestingly, the Affordable Care Act doubled down on these activities. “Phase Two Funding” for CPPW was buried in the ACA.

It seems more than a little unseemly to have federal taxpayers bankroll an advocacy campaign like this. How would progressives feel if federal tax dollars were spent on a campaign to get state governments to cut taxes and regulations? Or how about a taxpayer-financed campaign to promote awareness of the Economic Freedom of the World index or the Freedom in the 50 States Index? Studies suggest, by the way, that economic freedom is associated with improved health outcomes (see Exhibit 1.16 of the EFW on p. 24). So maybe such a campaign would qualify for a grant under the program?

The True Cost of the Columbia Pike Trolley: Priceless

A proposal to build a trolley car system on Columbia Pike in Arlington, Virginia continues to provoke strong reactions from residents. The County Board estimates it will cost between $214 million and $261 million to build and between $19.5 million and $25 million to operate and maintain.

As the PikeSpotter calculates, that’s $200 million more to build than the next best option: an enhanced bus line. Why the County Board’s push for a $50 million per mile streetcar system?

According to advocates, the Pike Transit proposal will relieve area congestion, spur economic activity and promote environmental sustainability.

However, residents from all sides of the political spectrum appear to disagree with the County Board. Arlington Yupette says the Pike Transit plans are “elitist” and intended to drive out middle class and working class residents by driving up rents. The end result: the “Clarendonization” of South Arlington. Some point to the need for resources to be directed to the overcrowding in county schools. And still others highlight the high likelihood of such projects becoming boondoggles.

Given the anecdotal lack of popular support expressed by area residents, why are officials persisting? Public finance holds a key. Should the county go ahead and commit to build a rail line here is how it will be financed. Thirty percent of funds will come from the  New Starts/Small Starts federal grant program and 14 percent from the state of Virginia. The remainder is to be provided by Arlington and Fairfax Counties.

Is this fiscal illusion at play? The Small Starts Program will provide up to $75 million if the local government provides a match. County Board officials are confident that Arlington and Fairfax can foot $140 million (Arlington will pay 80 percent of that) with the state of Virginia kicking in a further $35 million. Because a chunk of the cost of building the rail line can be externalized, that is, passed on to state and federal taxpayers, it looks like a bargain…at least for a fleeting moment. It’s still about $170 million dollars more than what it would cost to add more buses.

And there are more complications that arise from mingling federal, state and local dollars as noted by the Sun-Gazette. Virginia is a right to work state. Are union employees required to work on the rail line since the project will receive federal dollars? If yes then the increased labor costs will make the project even more costly to the county. (Lieutenant Governor Bolling believes Virginia state law trumps federal law in the matter.)

While new estimates continue to push the costs higher, at least one Arlington County Board member is undeterred by fiscal considerations, “This is a project that has the most potential to help us achieve our environmental goals and livability goals. We think it will have a very high return.”

That is, the costs of building the streetcar line are concrete, and the returns are mired in the counterfactual.




It Isn’t Easy to Count Stimulus Jobs

Image courtesy of chrisroll

The 1603 program gave $10.7 billion to 5,098 businesses for 31,540 projects, according to the Treasury Department. Recipients were generally reimbursed 30% of their costs after projects were finished.

Those businesses claimed on federal applications that they created 102,883 jobs directly. But the Journal found evidence of far fewer.

About 40% of the funding, $4.3 billion, went to 36 wind farms. During the peak of construction, they employed an average of 200 workers apiece—a total of roughly 7,200 jobs.

Now, those projects employ about 300 people, according to the companies and economic development officials. Their parent companies employ many more, both in the U.S. and abroad.

This is from a lengthy and fascinating story by Ianthe Jeanne Dugan and Justin Scheck on the front page of today’s Wall Street Journal. Keep in mind that this is only focusing on what Frederick Bastiat would call “what is seen.” There is an unseen side to stimulus spending which is the degree to which it crowds out or crowds-in private sector economic activity.

Michael Greve on American federalism and pensions

In a recent series of blog posts (h/t Arnold Kling), Michael Greve of AEI discusses the parallels between current American federalism and the trajectory that Argentina followed last century. Essentially, decades of “cooperative federalism” and trillions in transfer payments from the federal government to the states has put us on the course of ruin. This long-running arrangement has set the stage for the $4.5 trillion in unfunded pension liabilities owed to public workers, Obamacare, and ultimately an Argentinian future.

States rely on federal spending to implement the federal government’s policy agenda – most notably in the Medicaid program. Greve makes a provocative comparison: Medicaid is a “fiscal pact” similar to the arrangements between Argentina’s federal and state governments.

Federal transfers come with fiscal illusion. There is the incentive to overspend on the state level. And indeed we have seen the greatest growth in government on the state and local level since the post World War II period.

When states end up in trouble they can reasonably expect a bailout from the feds (ARRA is not the first bailout, nor is it likely to be the last). But what happens when both parties are broke?  Might pension liabilities accruing in the states be filled in with a soft bailout (e.g. an education spending package which can be applied to pay for benefits).  Alternatively, we might see an Argentinian-inspired solution: roll the pension obligations of troubled states into a federal corporation. In Argentina’s experience the federal pension corporation found itself with obligations several times larger than projected leading to a devaluation of the payout to retirees.

This is just one potential scenario. But, Greve’s main point is well taken. For reformers (of all ideological persuasions) who insist block grants will restore federalism‘s balance of power and fiscal discipline, think again. “Devolution” was much talked about in the 1990s as a means of restoring federalism but as implemented, it did nothing of the sort. The transfers keep coming just in different forms. Greve’s (Buchanan-based analysis) concludes it is not that cooperative federalism is broken, it has never been tried. 

Will The States Really Increase Net Spending If We Send Them More Money?

Ezra Klein writes:

[N]ot all “temporary stimulus spending” is the same. The theory behind a temporary payroll tax cut, for instance, is that it gives Americans a bit more money to spend. But that only gets the economy moving in a significant way if Americans are sufficiently interested in spending that money. The argument against a temporary tax cut is that Americans know it’s temporary and they know that they will eventually have to pay for this sort of spending and so they save the tax cut rather than spend it.

In contrast, Klein believes a new proposal by Senator Reid would lead to more net spending. That’s because instead of channeling the money to taxpayers who might save it, the Reid proposal would channel it to state and local governments who will surely spend it.

The problem is that John Taylor and John Cogan have convincingly shown that in the last stimulus, despite Keynesian hopes, the state and local governments didn’t use the extra money to increase their net spending. Instead, they used it to decrease borrowing.

In other words, the federal government borrowed and transferred hundreds of billions of dollars to the states which used the money to reduce their own borrowing, largely offsetting the federal increase in borrowing. In the end, little if any new purchasing power was created or advanced through time.

It isn’t clear to me why we should expect anything different this time around.

A Nobelist on Fiscal Stimulus

Tyler Cowen and Ira Stoll both link to an interview of new-Nobelist Thomas Sargent by Art Rolnick of the Minneapolis Fed. Here is the Nobel Laureate on fiscal stimulus:

In early 2009, President Obama’s economic advisers seem to have understated the substantial professional uncertainty and disagreement about the wisdom of implementing a large fiscal stimulus. In early 2009, I recall President Obama as having said that while there was ample disagreement among economists about the appropriate monetary policy and regulatory responses to the financial crisis, there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.

In my view, economic journalists have largely dropped the ball on this one. From the Wall Street Journal on left, most journalists seem to take the President for his word when he claims widespread agreement on the merits of fiscal stimulus. I think it is pretty difficult to read a sampling of fiscal stimulus papers from the last 5 to 10 years and find anything that resembles a consensus.

Even in the face of more recent academic critiques, the Administration seems to have dug in its heels. A top Administration official recently told Roll Call that the new stimulus plan “will indisputably add to economic growth and add to job creation.”

Hopefully Mr. Sargent’s recognition by the Royal Swedish Academy will shed some light on the rather significant “disputes” among macroeconomists regarding fiscal stimulus.

By the way, Tyler calls this interview, “the single most readable link” in his post and “the best introduction to Sargent on policy and method for non-economists.” I agree. Sargent has some very interesting and cogent things to say about the moral hazards of government deposit insurance, the link between the generosity of unemployment benefits and Europe’s problem with long-term unemployment, and the relative merits of the formulaic balanced budget rules of the Maastricht Treaty compared with the simple and “unspoken” balanced budget rules that reigned during the gold standard era. Indisputably interesting stuff.

The Political Economy of Infrastructure Stimulus

Economists have long recognized the value of infrastructure. Roads, bridges, airports, canals, and other projects are the conduits through which goods are exchanged. In many circumstances, private firms can and should be allowed to provide this infrastructure. But in other cases, there may be a role for public provision at the local level. But whatever its merits, infrastructure spending is not likely to provide much of a stimulus.

That is my colleague, Veronique de Rugy, and me. In our latest working paper, we examine the macroeconomic literature on infrastructure stimulus. In my view, the most significant problems with stimulus have less to do with macroeconomic theory and more to do with its real-world application. Lawrence Summers, an eminent Keynesian famously noted at a Brookings event a few years ago that:

Fiscal stimulus is critical but could be counterproductive if it is not timely, targeted and temporary.

In the real world, it seems that most stimulus—especially infrastructure-type stimulus—fails one or more of these tests.

The bottom line: even if it did work in theory, the political apparatus seems incapable of implementing Keynesian stimulus in the ways that Keynesians want them to. That seems to explain why Lord Keynes himself grew skeptical of the policy tool. Near the end of his life he wrote:

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

Here is Veronique on our piece.