Tag Archives: ARRA

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.

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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.

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. 

ARRA-induced Accounting Errors in N.J. School Budgets

Sloppy accounting in New Jersey’s school districts triggered by ARRA funds is the subject of ongoing monitoring by the state’s Department of Education. Acting Education Commissioner Rochelle Hendricks says only half of the school districts that received funds properly accounted for “jobs saved” one of the Administration’s key measures’ of stimulus performance.

Interestingly, GAO’s most recent assessment of the stimulus in the states shows that a majority of ARRA’s education funds were used for job retention, a goal that conflicts with education officials’ intent of improving schools and teacher performance.

Why the Federal Government Shouldn’t Use the States to Implement Fiscal Stimulus

[C]hannelling the stimulus package through state governments exposed it to agency costs, free-riding problem, and political expediency. As a result, the stimulus has failed to meet its objectives at the state level. The lesson is that fiscal stimulus should be conducted centrally.

That’s Robert Inman, writing over at Vox. He summarizes forthcoming research with Philadelphia Fed economist Gerald Carlino (I don’t believe the draft is on line yet). They find:

[A]n income multiplier for federal transfers to states of only 40 cents for each dollar of federal aid even after 20 quarters.

He also sums up his solo paper on states in fiscal distress:

ARRA’s assistance was largely distributed as a per capita transfer. Projected fiscal deficits did lead to more assistance, but ARRA covered at most $0.25 of each dollar of projected state budgetary shortfalls. The other important determinant of ARRA funding was whether the state’s Senators had membership on an important congressional committee making fiscal policy. Controlling for state population, deficits, and committee membership, the state’s rate of unemployment at the time of passage had no statistically significant impact on the level of assistance.

These results largely corroborate Veronique deRugy’s work.

Resurrecting the New Deal in Perry County, Tennessee

While many cities and municipalities are still seeking approval on projects that propose to use federal stimulus money, a Tennessee county has used a different model to attempt to employ as many of its citizens as quickly as possible. The New York Times details the county’s efforts to put stimulus money to work in an area where unemployment levels recently exceeded 25 percent.

Rather than waiting for big projects to be planned and awarded to construction companies, or for tax cuts to trickle through the economy, state officials hit upon a New Deal model of trying to put people directly to work as quickly as possible.

They are using welfare money from the stimulus package to subsidize 300 new jobs across Perry County, with employers ranging from the state Transportation Department to the milkshake place near the high school.

Given the constraints of the American Recovery and Reinvestment Act, Perry County may be maximizing the potential of these federal dollars to lower current unemployment rates.  The Tennessean reports that the immediate effects of this program have been successful:

The centerpiece of an innovative job-creation program has put 300 residents to work temporarily, including 200… who are employed in the private sector, working at the local country club, insurance offices, hardware stores, trucking firms and the Subway sandwich shop.

What sets this program apart from other stimulus-related ones around the nation is that workers’ wages and benefits are paid directly by federal funds. It is the only stimulus initiative in the country like this, at least on this scale, according to federal Health and Human Services officials.

Aside from the local benefits of rapidly spending its ARRA allotment, the Perry County model is likely a better attempt at effective discretionary fiscal policy than has been witnessed in places that have yet to begin spending their stimulus money. A standard critique of discretionary fiscal policy is that is has long lags before taking effect, meaning that changes in taxing or spending in response to changes in the business cycle are likely to exacerbate, rather than smooth peaks and troughs in the business cycle. If it is possible to create spending programs that minimize these lags, Perry County has likely done just that.

As with other programs using stimulus funding, however, seeing success in Perry County’s unemployment reduction relies on a short-term view of economic heath.  The jobs funded by ARRA will likely disappear once these funds run out and public support for job creation wanes.  A local television news station explains:

The jobs are only temporary and will end a year from September. County Mayor John Carroll says the jobs are just a bandage: stopping the bleeding, but not a permanent fix.

Federal spending in places like Perry County has the potential to help people weather the current recession, but it may do more long run harm than good. Many manufacturing jobs that were once located in America are now outsourced to places where they can be executed more cost-effectively, but this trend does not require federal support to artificially create jobs for low-skilled domestic workers.

Instead, for long-term economic health, former manufacturing centers need to allow the private investment to direct their labor pools toward their new comparative advantages.

Why Recovery.org is moving faster than Recovery.gov

An interview with the CEO of Onvia, the private company that tracks procurement spending, and is currently one of the leading repositories of how stimulus dollars are being spent on the local level.

Two things worth noting: they are making their ARRA spending data free to the public, at recovery.org, and they coined the term “transparency barrier,” the informational wall between the federal and state and local governments.

Centralized Confusion

For the first time in our nation’s history federal grants are the dominant source of revenue for state and local governments.

Implications: erosion of local control and increased spending at all levels of government.

Things to watch in the coming months and years: what happens to your local tax bill. In theory, aid is meant to lessen the need for localities to find revenues to balance their books. But one  possible outcome of intergovernmental aid is that it creates fiscal illusion,  inducing a permanently higher demand for spending on the part of the recipient government. When the money retreats the new spending brought with it, does not.

But while spending of this intensity and magnitude centralizes the provision of  government it does not bring with it centralized or clear reporting. An interesting but, perhaps not too surprising, corollary to fiscal dependency.

Congress really doesn’t know what happens to federal money once it flows to local government. States and localities have separate procedures for budgeting. This  flows from federalism -the very thing the presence of aid undermines. But once states and localities accept the aid it is difficult to understand why they resist efforts at a centralization of budgetary reporting.

There is fiscal illusion with aid.  And, there is also the stubborn (and illusory) insistence of  autonomy  (see: the Illusion of Home Rule) once that money becomes institutionalized in budgets.

Yesterday, the House Committee on Science and Technology held a second hearing on stimulus accountability. On the expert panel, was the CIO of a technology company that tracks procurement spending. His testimony describes this ”transparency barrier,’ on how federal funds are ultimately spent.  That barrier is very high up in the reporting chain.

The provisions of ARRA do nothing to illuminate this. Reporting requirements stop at the state/city level. There are no requirements for local reporting or tracing ultimate recipients – contractors and subcontractors.

In other words, if you want to know how stimulus dollars are being spent in your town, better to read your local newspaper, than the federal budget.

State budgets and the stimulus

As the American Recovery and Reinvestment Act (aka the Stimulus Bill) moved out of the House of Representatives yesterday, Eileen Norcross and Frederic Sautet released a new paper questioning the long-term ramifications of this package on states’ budgets.

While federal grants may provide temporary relief for state budgets, the size and scope of the proposed spending will worsen already-distorted state and local fiscal practices while creating perverse incentives inducing greater public spending with scarce state funds. By fracturing the link between those who benefit (local constituencies) and those who pay (federal taxpayers), ARRA reduces government accountability on all levels and ultimately erodes local control over policy by imposing federal solutions on local problems.

Instead of attempting a short-term fix of amplifying the grant system through an emergency stimulus package, the federal government should work to make state and local governments accountable for their own spending decisions. This means reducing states’ and localities’ reliance on federal funding for local priorities and allowing local activities to be addressed by the appropriate mechanisms: state and local governments and the private and philanthropic sectors.

Also of interest, the Wall Street Journal has a breakdown by state on each of four proposed spending categories: aid to states, school and college modernization, job training, and transportation and infrastructure.

Finally, Nicole Gelinas has some analysis of last-minute changes to the House-approved package as they relate to state and local infrastructure investment.