Worries and Options
Paul Krugman notes that the economy is falling fast and it may be difficult to bring stimulus to bear all that rapidly:
Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
This is one reason why I think it’s important for a stimulus package to have a heavy element of aid to state and local government and related agencies. The federal government contains a lot of automatic stabilizers (spending keeps going even though revenues fall) that should act as stimulus, but those stabilizers are offset by the pro-cyclical nature of state and local budget practices. A federal promise of aid will forestall state and local budget cuts, and thus allow the automatic stabilizers to work. All that can be mobilized on a rapid time scale. Somewhat similarly, the federal government could pledge funds to transit agencies in order to finance fare cuts rather than the contractionary combination of fare hikes and service cuts that we’re currently looking at. Add “a few tens of billions” worth of shovel-ready infrastructure projects, and you might be getting somewhere.
But beyond that, it does seem that it’s important to not just say “conventional monetary policy can’t do any more, so we need to rely on fiscal policy” and hope for the best. My understanding is that there’s such a thing as “nonstandard monetary actions” that the Fed can undertake to try to produce monetary expansion. I won’t try to pretend to really understand what those are or how they work, but it seems like an important and potentially promising line of inquiry and I will hereby commit to reading something about it later.
30 Responses to “Worries and Options”
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December 4th, 2008 at 10:44 am
Of course, we now know by experience that if you just scream loudly over and over that something big needs to be done immediately, the current administration & all of Congress will just hand hundreds of billions of dollars to whatever Wall Street companies are being gifted at the moment, no questions asked.
So you have to be careful about how you discuss the immediate threat unless you want there to be less and less and less money left by the time anyone’s talking about rational solutions.
December 4th, 2008 at 10:53 am
The non-standard monetary actions are things like having the Fed accept mortgage back securities as collateral on loans and buying commercial paper. In other words, its what the Fed has been doing for a year and a half, and its not near sufficient.
But consider this: according to that Moody’s chart that shows the bang-for-a-buck from different forms of stimulus, the most efficient way of stimulating the economy is an increase in food stamps. So why not 1) raise the limit on food stamp eligibility to 400% of the poverty level while 2) giving every recipient household the maximum benefit for a household of that size? You’d need to scale back the benefit as you approach the 400% of poverty ceiling (to avoid a high effective marginal tax on income at that level), but you’d suddenly be spending a lot more than the $30B or so we spend on food stamps now. And you’d be getting a multiplier of at least 1.7 – higher that state and local gov’t or infrastructure. I’m not saying we shouldn’t do those things too, and in a big way, but we need a lot of stimulus fast, and nothing works better than having Uncle Sam pay for dinner.
December 4th, 2008 at 11:05 am
You could start reading by going to this speech by Bernanke about “Quantitative Easing”.
If I understand it correctly, instead of just buying short term treasuries, the fed starts buying longer term bonds and non-treasury securities to bring down long term interest rates. Usually they are just purchasing short term treasury bills to manage the short term interest rate.
The fed is already doing a lot of this. Does it seem to be working? Maybe but it doesn’t seem like it is enough. Is there even more “creative” monetary policy? Maybe but I’m not sure what that would be. Buying IOU’s directly from individuals? Issuing credit cards?
December 4th, 2008 at 11:14 am
Does printing a whole bunch of new money count as a plausible nonstandard monetary action? I really hope so, but mostly because I get paid in a foreign currency these days.
December 4th, 2008 at 11:37 am
It absolutely does Neil. But if you are being paid in pounds or euros it looks like you are going to lose out a bit since they are both dropping their way-too-high interest rates.
December 4th, 2008 at 12:00 pm
Apropos of Rich C’s comment, I think a married couple with one child making 70k (which if four times the poverty rate) would resent receiving food stamps, which carry a big stigma. I think the advantages of food stamps could be gained by providing a stimulus in the form of a sort of universal gift certificate (i.e. a form of currency that banks, including credit card companies, cannot accept); you could also pretty finely calibrate the timing of the stimulus by having the currency expire after a certain period (so, depending on what you think would work best, you could have them all expire in a year or you could pay people quarterly with certificates that expire in four months).
December 4th, 2008 at 12:16 pm
MY has a plan for everything. That is what makes reading him so funny. He cannot seem to appreciate that the world is a product of many thousands of generations’ worth of evolutionary adjustments, compromises, and innovations that he could not possibly hope to know about…nor can he imagine that there is any situation—no matter how remote or complex—that his own little mind cannot improve.
December 4th, 2008 at 1:26 pm
The current crisis in the financial system is an ideological Chernobyl of cognitive dissonance for the “free marketer,” antigovenment glibertarian type and the right wing.
They made a half-hearted attempt to blame the government and its modest program from the 70s to get banks to be not-so-prejudiced in their lending practices (i.e. blame the blacks) but it didn’t really work. So now they’re dealing with raging free-floating cognitive dissonance.
December 4th, 2008 at 2:08 pm
Are there any organizations advocating for this? There are some important services being cut in Massachusetts, and I’d like to be able to write a letter as part of a campaign rather than on my own.
December 4th, 2008 at 9:18 pm
So, Krugman is finally waking up to the fact that Obama has been pulling everybody’s leg about creating or saving 2.5 million jobs in 24 months through infrastructure investments? It’s about time!
All these big, exciting “infrastructure” projects that Matt loves to fondle in his dreams won’t employ anybody other than environmental impact consultants, historical preservation consultants, and other paper pushers for years. Look at the Big Dig in Boston or the linkage of the DC Metrorail to Dulles, which has been in planning for 40 years and now might get finished within the next 7 (if all goes according to plan).
What Obama does know how to do is waste money Mayor Daley style — you put an extra shift on filling in potholes and call it “infrastructure.” And make sure the pothole jobs go to guys working for your campaign contributors.
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