The Stimulus Projects
Christina Romer and Jared Bernstein, incoming CEA Chair and incoming economic adviser to Joe Biden, have released a briefing report on what they think the Obama stimulus proposal will do. In a single graph:
The obvious question looking at this is: Why not try for more? But I’m just a humble blogger. Paul Krugman, however, is both a humble blogger and a Nobel Prize winning economist and he wonders why not try for more?
From a political point of view, there are too things I like about this release. One is that it doesn’t overpromise. One of the biggest risks facing progressive politics at the moment is that we inherit a deteriorating situation, take action that ensures things get “bad” rather than “terrible,” and that get blamed by the public and the right for creating a bad situation. To that end, it’s important not to make unrealistic promises about what you’re proposing. Romer and Bernstein are clearly saying he that even if this works, we’re going to get to a bad place.
The other is the impact of this on congressional politics. Tim Fernholtz says: “one thing I do expect is for Democratic members of congress to look at that graph above, consider their reelection prospects, and wonder if maybe they ought to make the bill just a bit bigger so that unemployment line will drop just a bit lower as voters head to the polls.”
I’d say that’s a good thing and not necessarily something the Obama camp is opposed to. Nothing I’ve heard on the record or off the record from the Transition indicates that they have some kind of dogmatic opposition to a larger stimulus. What they have is a proposal. A proposal made up of a number of component sub-ideas. And they’ve said—repeatedly—that they’re open to additional ideas for more things to do from congress or from outside.
34 Responses to “The Stimulus Projects”
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January 10th, 2009 at 1:44 pm
I’m assuming that there isn’t, in fact, a plan which just returns unemployment to where we’d like to be by Q3 2009, and that a ‘going for more’ type plan may have more additional downsides than are revealed by merely thinking about Dem prospects in 2010 Congressional elections. But maybe I’m wrong.
January 10th, 2009 at 1:55 pm
I wonder if we’re not seeing a layoff panic right now with businesses sacking more people than they need to, so that in a few months they’ll have to hire some new people to fill the gaps they’re creating. I’ve seen this happen at individual companies where I’ve worked so it is possible. If that’s the case, there will be some improvement in the emplpoyment numbers soner rather than later– but we still run the risk (which this graph doesn’t seem to demonstrate) of a long jobless recovery with unemployment staying higher than we’d like for years, as after the ‘91 and ‘01 recessions.
January 10th, 2009 at 2:15 pm
Won’t conservatives look at this and say, hey if we’re gonna be in the same place in 2014 regardless of stimulus or not, why not save money and don’t do any stimulus? Maybe I’m looking at this wrong.
January 10th, 2009 at 2:16 pm
I would be interested if anyone could tell me why in 2014 under both approaches the unemployment rate converges. I assume 5% is the point of full employment but I don’t see why, given what the recovery plan proposes, these will be the same number.
January 10th, 2009 at 2:17 pm
I’m generally in the “more is more” camp with respect to stimulus. I want to see it as large as possible. On the other hand, I keep seeing data pop up here and there that at least gives the appearance that, despite plenty of assertions to the contrary, things could be a lot worse — and we’re really nowhere near the conditions prevalent during the Great Depression. The graph, for instance, predicts an unemployment rate of a tad over 9% without a stimulus package. Unemployment very nearly reached 11% in 1982 — during a so-called “normal” (albeit pretty rough) recession. So, again, put me down for as much stimulus as possible, but I’ll candidly admit to suspecting we may not really need a gargantuan package at the end of the day — but instead we have a golden opportunity to use this downturn as an excuse to take care of some much-needed, long-neglected priorities.
January 10th, 2009 at 2:21 pm
Won’t conservatives look at this and say, hey if we’re gonna be in the same place in 2014 regardless of stimulus or not, why not save money and don’t do any stimulus?
There’s more to an economy than the unemployment rate alone. There’s the labor force participation rate. There’s median wages. There’s the poverty rate. There’s real GDP per capita. There are plenty of other indices as well. The point is, you can never get lost time back. The person who drops out of college in 2009 for lack of funds will likely see a drop in income that lasts a lifetime. The child who needlessly suffers from poverty in 2009 will contribute in some small way to a lessening of national well-being for all of us. Etc. Etc.
January 10th, 2009 at 2:28 pm
#3. The faulty logic with your hypothetical conservative argument is that this plot does not project government revenues. The difference between the curves will create a huge difference in government revenues. In other words, if the curves are accurate, then federal deficits may be higher without the stimulus than with the stimulus.
If I’m reading the paper correctly, the report says that there will be approx a 2 trillion dollar per year difference in GDP during the periods of greatest difference between the curves. That should translate into a large difference in tax revenues, but I don’t know how much.
January 10th, 2009 at 2:31 pm
Is a weak program like this worth the trillions in debt it will create, that will burden the economy for years? It seems to me it’s either go all the way or just provide good unemployment compensation until we work off the credit crunch and the debt bubble. Why don’t they provide information that shows how the overall situation ends up in both cases. Unemployment and GDP seem to be the only measures economists see as important, or the only ones they know how to calculate. What will incomes look like in 2015, what will be the standard of living, how will the debt affect government spending and taxes, etc.
January 10th, 2009 at 2:41 pm
and what were economists’ predictions ten years ago ?
January 10th, 2009 at 2:43 pm
Continuing reasoning from above …
Obama has said that we are looking to about a 1 trillion dollar deficit in the forthcoming year or more.
My guess is that, using his economists’ projections, the deficit will be about 1 trillion/year with or without the stimulus. So, the projected national debt in 2013 is about the same. There are 2 important differences:
1. Differences in suffering during the recession. People without income and jobs will suffer.
2. Difference in preparedness for the future. Since the recovery plan builds infrastructure, its more likely that with the plan implemented the economy and the society will be vibrant in the years following 2013.
The plot does not take into consideration the impact on changes in infrastructure on economic strength. If this is added, the two curves should diverge.
January 10th, 2009 at 2:57 pm
Is there any reason to take this graph seriously. Any economic projection that goes out to 2014 is pretty much meaningless. No one knows what course the recession will take. Publishing a graph like this is intellectually fraudulent because it implies a level knowledge that no honest economist would claim.
January 10th, 2009 at 3:06 pm
I think the Obama team wants to go bigger, but is content with letting further increases come from Congress as they expand the stimulus package (and yes, this will include pork). Obama wants to make sure at least a good chunk goes towards tax cuts, which are politically popular and go into effect much faster than infrastructure spending. And he’ll want to make sure some specific programs are included, so they’ll go into the first draft. But beyond that, it shouldn’t really matter where the money goes as long as it gets spent. I predict the final version passes in February and is over $1T.
January 10th, 2009 at 3:30 pm
The money for the stimulus has to be borrowed. This will likely crush the Treasury market. Now the gigantic borrowings of last spring and fall didn’t crush the Treasury market but they did crush the credit market. To a large extent all the Treasury borrowing crowded out other borrowers and made the credit crunch much worse.
For all sorts of reasons which have been well telegraphed and are at heart political and for all sorts of reasons that are logical about markets, this time if the Treasury comes to market with a trillion worth of bonds in a short time there will probably not be enough takers at anything near reasonable rates. Rates could spike. If long dated Treasuries go to 4% no big deal. However they could go to 8% or more. A disaster. Or the auctions could fail. Meaning there were not enough bidders at all. This would amount to the technical bankruptcy of the US Treasury. Technical and thus symbolic only but the soundness of the US Treasury is the foundation of the entire world economic system. At least US Treasury securities are the worlds benchmark financial instrument against which all others are judged.
If the auctions fail the Fed might have to buy them directly. Meaning monetize. The result of this is hard to predict since the Fed has started monetizing the purchase of mortgage backed securities and the market yawned. If it happens this time however the political wolves are likely to come out. It could be ugly.
Perhaps I am wrong about all this. Great. I hope so.
January 10th, 2009 at 3:40 pm
MikeF,
I think you (and to a large extent, Mr. Yglesias, as well) are projecting a bit too much. Why do you keep thinking that what Obama really wants is a Krugman-sized stimulus plan?
You know why I think Obama wants a piddling stimulus package? Because that’s what he asked for!
Everything else is mind-reading, and probably a silly exercise.
January 10th, 2009 at 3:47 pm
Nordy, could be – of course I don’t know for sure. But judging from the usual behavior of Congress, I think it unlikely that Obama’s plan will make it through unchanged. Just noticed that Ambinder thinks so too, for what it’s worth.
http://marcambinder.theatlantic.com/archives/2009/01/its_time_to_play_oddsmaker.php
and if his predictions are correct, then presumably the price tag will rise a good bit.
January 10th, 2009 at 3:50 pm
Perhaps I am wrong about all this. Great. I hope so.
I gave up my crystal ball when the USA crashed the world economy and the flight to quality went to US treasury bonds. That doesn’t really make a bit of sense, but all I can take away is that markets are stupid things. The problem seems to be that the flight to quality has no other options. They don’t call it the dismal science for no reason, and it seems we can bullshit our way out of this. That’s what I hope anyway.
January 10th, 2009 at 4:14 pm
You can be stupid and win. Why is microsoft exchange server the default corporate platform? It’s not because it’s a great product, it’s because no one is going to fire you for deploying it. If it blows up once in awhile, no one is going to question you on why you picked that as your app. That’s what is going to hold the U.S. as an economy to invest in. It’s scary but I bet it works.
January 10th, 2009 at 5:55 pm
“Why not try for more?”
Because that will just postpone the reckoning and make it even worse when it inevitably happens, as Greenspan postponed the reckoning from the Clinton Bubble.
January 10th, 2009 at 6:53 pm
Why is microsoft exchange server the default corporate platform? It’s not because it’s a great product, it’s because no one is going to fire you for deploying it.
They really ought to start firing people! Ever since I’ve been working at Microsoft Exchange-based workplaces, I’ve had no end of grief.
January 10th, 2009 at 9:15 pm
I don’t know who Tim Fernholtz is, but I’ve got him pegged as somebody who’s awfully optimistic about Congressional Democrats.
My prediction is that they’ll take the proposal, ask “But what do the Republicans want?”, split the difference in advance, and then start the negotiations from there.
January 10th, 2009 at 10:51 pm
Rapier (13) has identified the problem. If you do too much and run the deficit and debt too high, then the Chinese and others stop lending and the everything really goes to smithereens.
Might be time to start thinking what an IMF recovery plan for the US would look like.
January 11th, 2009 at 10:16 am
rapier and Robert Bott,
While as recently as q3 last year I would have agreed with you, I no longer do. We will not face any severe consequences of issuing lots more debt.
We do not need to borrow to fund the spending. Ask yourself where those U.S. dollars originally came from that we would be borrowing.
In any case, with the 30y yields at all time lows in anticipation of issuing about $750B more debt than expected next year, we are really not in a place where we have to worry about people not buying our debt. The last treasury auction was 2.5X over subscribed – in other words, behind every person who actually got a note, 1.5 people didn’t get anything. This is not the sign of a country with issues about who will buy the debt.
And even if yields were to double to get interest in U.S. debt, we would be financing at under 6% long term. These are great rates.
March 11th, 2009 at 4:50 am
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If you have to do it, you might as well do it right
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