Matt Yglesias

Summers: Stimulus Targets Output, Not Employment

I noted some time ago that in designing the American Recovery and Reinvestment Act the Obama administration essentially chose to get as much bang-for-their-buck as possible in terms of GDP rather than trying to maximize employment. Alex MacGillis had a good piece over the weekend in the Washington Post that started with the idea of a WPA-style direct employment program and eventually gets into the larger philosophical dispute complete with Lawrence Summers explicitly endorsing the output-over-employment approach:

“I think we got the Recovery Act right,” Larry Summers, the president’s chief economic adviser, said in an interview. “The primary objective of our policy is having more work done, more product produced and more people earning more income. It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.”

On reflections, I think there are tons of practical problems with anything other than a very limited effort to do something WPAish. But there are alternative ways of doing employment targeting. Ryan Avent points out that European governments, operating in a political context with more of a tradition of active labor market policies, have done more to directly support employment. The Economist did an interesting overview of this action and offers a chart to show it’s largely working:

The question is whether these kind of measures retard needed restructuring in a way that will ultimately create a drag on European economies as we move toward recovery. In a relatively brief or shallow recession, I think Summers would definitely be on the right side of this argument. In a longer recession, though, there’s a case to be made that the loss of job skills and labor market attachment that’s involved in a period of prolonged unemployment will create a bigger drag effect than anything that might be involved in delayed restructuring.

Politics and Public Works

Paul Krugman wonders why we don’t just do direct public works like in the WPA:

You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.

So why aren’t we doing this? Politics, of course: government is the problem, not the solution, even when it is, you know, the solution, and cheaper than running things through the private sector.

Possibly the best way to think about this would be as an alternative to the repeated extensions of unemployment insurance payments. Instead of saying to people whose UI benefits are about to expire “just kidding, here’s an extension” we could say “you’ll keep getting checks but you need to show up at such-and-such a place and pick up trash in parks.” This would be somewhat more expensive than a UI extension—you’d need to pay for garbage bags and supervisors—but it would have less of a disemployment effect than UI extensions and we’d also get cleaner parks in the bargain. It’s a little bit perverse to be paying people to do nothing when there’s work that could use doing.

But a problem modern advanced economies have in advancing this sort of scheme is that the people already working in the public sector don’t want to be squeezed out by facing competition from quasi-unemployed engaged in public works schemes. In other words, the key stakeholders on various different sides of the equation prefer the inefficient choice of just cutting checks—it involves less debt for the “centrists,” less competition for public sector unions, and less arduous demands on the unemployed.

Obama, “Credibility,” and Fear of Failure

In the course of an exchange yesterday with Rich Yeselson about the deficit and the prospects of more stimulus, Marc Ambinder wrote:

Telling Democratic leaders and the White House to ignore Evan Bayh’s pleas for deficit reduction just isn’t going to work. In general, my sense is that the White House does not believe that Obama has the credibility to make the argument that government has to spend even more.

I’m not really sure why Obama would lack the credibility necessary. His job approval split is at 50-41 and has been basically stable at that level for a couple of months. That’s not the best job approval rating in the world, but it’s pretty good.

But does “credibility” really matter? Probably not. Insofar as the issue is that Evan Bayh doesn’t want to vote for more debt, then the question is whether he can be persuaded on the merits. I, personally, find Christina Romer and Larry Summers pretty persuasive. But as far as I know, they’re not actively trying to persuade anyone because the White House is afraid that if they try to persuade key legislators they might fail. That’s circular. There seems to be some feeling that the President has an obligation to act like he’s a Prime Minister and not bring proposals to the floor unless he’s sure they can pass, even though he doesn’t have a Prime Minister’s ability to coerce people into voting for his bills. But that’s not how our system works and there’s little reason to believe that trying and failing would somehow turn out much worse than simply refusing the try.

Graduating During a Recession Has Big, Long-Lasting Negative Consequences

Over the summer, there was a tendency for rising senior interns to ask me if I had any advice for someone set to be graduating into the face of a horrible recession. Unfortunately, the best advice I can think of is “hope the United States rapidly becomes more committed to equality and social justice” because the empirical evidence is that you’re screwed. Peter Orszag at the OMB Blog reminds us:

The chart below illustrates this effect: a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value.

The long-term effect isn’t just a residual of low first-year wages: the author suggests that poor job match, lower prestige placements, and fewer opportunities for training and promotion also play a role. Other researchers have found similar effects: Oreopolous et al find persistent wage effects for Canadian college graduates; Bowlus and Liu find persistent wage effects for high school graduates moving directly into the work force, and other studies assess how the macroeconomy affects impact newly minted MBAs and economics PhDs.

Fifteen years later! If you’re graduating from college this spring, you’ll be sitting around at the age of thirty-five still suffering from the fact that Susan Collins, Olympia Snowe, Ben Nelson, and Kent Conrad decided to make the stimulus bill stingier in order to better bolster their credentials as preening centrists. When thinking about short-term inflation-unemployment tradeoffs, this sort of thing is crucial to keep in mind. Inflicting a high unemployment rate on the population has incredibly punitive and deleterious long-run consequences for young people.

Tax-Side Stimulus

Looks like the powers that be are finally starting to try to frame additional economic stimulus measures, specifically a tax credit to incentivize new hiring:

One version of the approach, to be unveiled next week by the Economic Policy Institute, a labor-oriented research organization, would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). Employers would receive a credit worth twice the first-year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary.

“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. “But it’s a pity that this wasn’t done a year ago.”

This seems like an okay idea to me, but dollar-per-dollar I don’t see any real reason to think that this relatively complicated scheme is in any real way preferable to just temporarily reducing payroll taxes. Among other things, a new jobs tax credit is somewhat pointlessly asymmetrical between creating incentives to reduce layoffs and creating incentives to hire new people. It also seems to me that it would be desirable to do something that can be seen as offering help to almost all families, rather than to something so narrowly targeted.

It also strikes me that some old-fashioned public works schemes could do some good here. There are cracked sidewalks in the United States of America and roads with potholes in them. There are also unemployed people who until recently were involved in the building trades. Is it really so impossible to hire those people to fix the potholes and the cracked sidewalks? This seems like common sense to me.

Accepting the Loss

The more we learn about how we wound up with a too-small stimulus the more I wonder about the slightly odd aversion of American presidents to accepting legislative defeats. After all, in our system of government it’s just a fact that you can only enact the legislation that congress is prepared to enact. Given that we don’t expect presidents to have views that are identical to those of the median legislator, and especially given the rise of the de facto supermajority rule in the Senate, it should be expected that the policy preferences of the White House will substantially diverge from those of the pivotal members of congress.

So would it be so terrible for the President to just say, “I’m glad congress passed this bill and I’m signing it because I think it would help the economy, but the considered judgment of the Council on Economic Advisers and the rest of the staff is that we could use hundreds of billions of dollars of stimulus over and above what Ben Nelson and Susan Collins were prepared to vote for?” Why is it felt necessary for the president to pretend to believe that what congress will pass is the same as what the country needs? It seems to me to create a weird confusion about who’s responsible for what. We’ve got Paul Krugman blogging about “Obama’s Anzio” instead of “Kent Conrad’s Anzio” or whatever. It’s just not the case that the White House gets to make domestic policy unilaterally.

Fiscal Policy Calvinball

Tyler Cowen endorses this from Arnold Kling:

From the Recalculation perspective, the economy needs to shift resources out of some sectors and into others. The government is either (a) permanently shifting resources from the private sector to government or (b) temporarily shifting resources from the private sector to government. If it is doing (a), then we are not facing mere temporary deficits but permanent increases in government spending, and eventually we will have to figure out how to pay for them. If it is doing (b), then the Recalculation problem isn’t really being solved. Instead, at best the government is redistributing the pain from the reallocation process out of the present and into the future. People who otherwise would be unemployed can find temporary work on government projects, but when those projects expire they will go back to being unemployed. This is what makes the fiscal exit strategy so problematic.

Like a lot of criticism of the Obama administration’s fiscal policies, I think this would benefit from some closer engagement with the actual provisions of the American Reinvestment and Recovery Act. I don’t, for example, really understand how this critique applies to either the tax cut provisions or the state fiscal aid provisions of ARRA. These are, however, by far the largest elements of the bill:

Of the remainder, a very large portion consists of temporary expansions of social safety net programs to help take care of the most vulnerable. Again, the economic logic of this seems to me to withstand Cowen’s complaints—there’s no evidence that needed economic restructuring involves getting people who’ve lost their jobs to go without food or basic health care. And even if it didn’t, the humanitarian logic of an expanded safety net during a period of high unemployment is unimpeachable.

What we’re left with then, it seems to me, is a relatively narrow disagreement about a minority of ARRA funds. It’s useful to have an argument about that stuff. The “race to the top” education money, for example, strikes me as sound public policy that has relatively little to do with economic stimulus and was just smuggled into the bill because the White House likes the idea. And on down the list. But the policy as a whole is what it is.

Meanwhile Cowen repeats his earlier complaints that “current GDP measures and projections aren’t picking up how well the stimulus is or isn’t working.” There are, of course, longstanding criticisms of GDP as a measurement of economic success or failure. And those criticisms have a lot of truth to them. But I don’t understand why it would make sense to suddenly drop GDP as a metric for this specific purpose—especially in the absence of any viable alternative proposal. The shortcomings of GDP are well-known, as are the arguments for sticking with it anyway. Nothing I can see about the financial crisis has suddenly made it a more inadequate measurement. Meanwhile, as Ryan Avent says this whole thing seems to involve inventing a brand new macro theory to specifically deal with the current recession.

What If TARP Had Passed the First Time?

I love historical counterfactuals, but I think I’m not buying this one from James Suroweicki:

What if Congress had passed the TARP bill the first time around, instead of voting it down on September 29th? While it’s certainly true that Lehman’s failure provoked a global panic, and in the days immediately after it went under we saw credit markets start to freeze up, stock-market sell-offs, and the like, it’s also true that the news that the U.S. government was working on a toxic-asset bailout plan for the banks actually did stabilize the markets. By Friday, September 26th, for instance, the S&P 500 Index was trading only slightly below where it had been before Lehman went under. At that point, it seemed, investors were reasonably confident that the government’s actions would bring some order to the chaos in the system.

That confidence disappeared, obviously, on September 29th, when the House of Representatives voted down the TARP. The S&P fell nine per cent on the 29th alone, and in the weeks that followed kept plummeting, falling almost twenty-five per cent in the next month, even though Congress did pass the TARP the second time around. In effect, the House’s failure to pass the TARP demolished investors’ confidence that they could rely on the government to act, and massively amplified the sense of panic that Lehman’s failure caused. This doesn’t necessarily mean that voting against the TARP was a bad idea (although I think it was): if you think government bailouts of big financial institutions are a mistake, then this was not a bill you could support. But I think it’s inarguable that the vote against the TARP did make things significantly worse in the markets. And I think it’s plausible that had the bill passed on the 29th, much of the chaos that followed over the next couple of months could have been averted.

I think it’s pretty clear that there’s no good case on the merits for having voted “no” the first time and then “yes” the second time. Nothing was gained by doing the flop, so this alternate reality would be all upside with no downside. Still, I think the basic reality is that there were large real losses. A lot of individuals and a lot of firms were making financial decisions that were predicated on false ideas about the value of real estate assets. When both the extent to which people were mistaken about those real estate prices, and the extent to which broader economic trends were predicated on those ideas became clear, some kind of substantial downturn became essentially inevitable.

I think a better counterfactual concerns the timing of the stimulus. What if ARRA had passed in late September when it became clear that massive stimulus would be necessary, or at a minimum in early November when it became clear that politicians who believed massive stimulus would be necessary would be governing the country by February? Instead, we had the three month transition period during which the economy just deteriorated. Faster stimulus wouldn’t have prevented the recession from happening, but it certainly might have made it shorter and somewhat shallower.

At Least One Cheer for Rational Expectations

Robert Frank takes on the argument from rational expectations against a stimulus bill:

[Lee Ohanian's] argument, and that of stimulus opponents generally, thus boils down to this striking contention: As the government spends borrowed funds, consumers will start to realize that the resulting debt spells higher taxes in the future, which will lead them to curtail their current spending. Those cuts will offset increased government spending, leaving no net stimulus.

Although there may be people who would actually spend less now to hedge against uncertain future tax bills, it’s unlikely that you know any of them. As behavioral economists have been saying for decades, that’s just not the way most people act. Hardly any consumers even know how big the national debt is, much less how it will affect future taxes.

This is all true, but it’s worth noting that the conclusion doesn’t follow even if we stick to strong rational expectations. As Brad DeLong says “Increased nominal government spending financed by future taxes is crowded out by a reduction in nominal private consumption spending if and ony if what the government spends money on is a perfect substitute for what private consumers spend money on.” And of course that’s not true.

Bobby Jindal’s Newfound HSR Enthusiasm

When last we met Louisiana Governor Bobby Jindal, he was trashing his reputation for intelligence and seriousness about public policy with this nonsensical attack on trains and volcano monitoring as wasteful:

JINDAL: While some of the projects in the bill make sense, their legislation is larded with wasteful spending. It includes $300 million to buy new cars for the government, $8 billion for high-speed rail projects, such as a “magnetic levitation” line from Las Vegas to Disneyland, and $140 million for something called “volcano monitoring.”

Now my colleague Lee Fang observes that Jindal seems to love trains:

The AP reported earlier this month that Gov. Bobby Jindal’s (R-LA) administration is planning to request $300 million dollars from the federal government to develop a high-speed rail between Baton Rouge and New Orleans. The trains, which would run at about 79mph, would be part of a larger Gulf Coast rail plan with top speeds of 110mph. Much of the money, however, comes from the Recovery Act, a stimulus measure Jindal not only opposed, but recently called a failure.

I haven’t looked at this issue in detail, but on the face of it a Baton Rouge to New Orleans line actually does sound to me like a wasteful project. We’re talking about connecting the 46th largest metro area in the country to the 67th largest, which suggests that there are a lot of city pairs that ought to be higher priorities. Compare that to Chicago (number three) and Milwaukee (number 39) or consider that the state of Florida contains four separate metro areas (Miami, Tampa, Orlando, Jacksonville) that are all larger than New Orleans. According to Google, the drive between these cities only takes an hour and a half. You could imagine this working, and of course if the state of Louisiana has some vision for it I wouldn’t want to discourage them, but as a use of federal money this strikes me as pretty low down the list of rail projects I would want to fund.

Obama’s Behavioral Economics Working a Bit Too Well

The first thing I thought when I read that only 18 percent of Americans say the stimulus plan “has done anything to help improve their personal situation” was that people must be confused. The tax provisions of the Obama stimulus plan have, without question, put more money into the pockets of everyone who has a job. That’s a lot more than 18 percent.

But then I remembered something else. Traditionally tax cuts have been relatively ineffective as stimulus measures. But the Obama team decided that some insights from behavioral economics could resolve this problem. The way to resolve it, however, was to make it so that people didn’t notice their taxes were being cut by just slightly reducing the amount of money that’s withheld from your biweekly paycheck. Consequently, you wind up with just a bit more cash in the old checking account than you were expecting and become inclined to spend the money. Which is all to the good, except when the pollster comes calling.

That said, even in crass political terms it makes more sense to focus on effective policy than on poll results. Voting behavior is strongly influenced by objective economic factors. Right now, despite the fact that the recession seems to have bottomed-out, conditions continue to be very poor. If bad conditions persist through the fall of 2010, then lots vulnerable House incumbents are going to lose. And if bad conditions persist into 2012, then Barack Obama’s re-election campaign will fail. But if things turn around, then the skies will start looking brighter for incumbents.

Christina Romer Makes the Case for ARRA

Via Tim Fernholz, a speech by Council of Economic Advisors Chair Christina Romer in which she vigorously makes the case that the American Recovery and Reinvestment Act is having a positive impact on the economy. I think the clearest way of making the point is in this chart where she disaggregates the contributors to growth:

The role of the Recovery Act is clearest in state and local spending. Sharp falls in revenues and balanced budget requirements have been forcing state and local governments to tighten their belts significantly. But, state and local government spending actually rose at a healthy 2.4% annual rate in the second quarter of 2009. This followed two consecutive quarters of decline, and was the highest growth rate in two years. No one can doubt that the $33 billion of state fiscal relief that has already gone out thanks to the Recovery Act is a key source of this increase.

She also presents comparative international data showing that countries with larger stimuluses have done better relative to pre-existing forecasts. As Tim says, ARRA “is doing exactly what economists thought it would, even if the policy wound up being executed in an economic environment that was much worse than expected.”

Peru Experiencing the Benefits of Sound Public Policy While We Suffer for Bush’s Mistakes

Palacio Legislativo in Lima, Peru (wikimedia)

Daniel Gross offers an interesting look at Peru, a country that’s weathering the recession fairly well thanks to sound policy:

In the latter half of 2008, being a poor, export-dependent, commodity-producing country set you up for a vicious downturn. But Peru has weathered the storm, in large part because President Alan García, an old leftist turned center-leftist, and the Peruvian central bank have proved adept at a set of capabilities notably lacking in the United States in recent years: sound fiscal and financial management. Fearful of a return of hyperinflation amid rapid growth, Peru’s central bank raised interest rates throughout 2008. Instead of spending the foreign currency that piled up on its books ($32 billion at the end of 2008), the government saved it. In 2008, Peru ran a $3.3 billion budget surplus.

And so, when troubles came, it was able to respond in textbook fashion. In December 2008, García announced a stimulus program, promising to boost government spending by $3.2 billion, and to take up to $10 billion in further measures. The total of $13 billion in promised stimulus doesn’t sound like much, but that’s equal to about 10 percent of Peru’s GDP. (By contrast, the big stimulus package Congress passed in February was about 5 percent of U.S. GDP.) The central bank’s 2008 vigilance against inflation left it with plenty of room to cut rates. So far this year, it has reduced the benchmark lending rate from 6.5 percent to 2 percent.

Peru’s economy took a hit in the first half of 2009 but never stopped growing. This even though commodity-exporters tend to get hammered by recessions even when they d>o everything right, and even though stimulus efforts tend to be less effective in small countries (more “leakage” of funds outside your borders) than in large ones. Recall that the United States could have been in a position to do this were it not for the fact that George W. Bush was a very bad president and a shockingly large number of bad members of congress from both parties chose to embrace his terrible ideas about public policy.

Had we left taxes where they were when Bush was inaugurated and refrained from invading Iraq, we would have been running substantial budget surpluses and done a good deal to pay down the national debt. Thus, when a big recession hit we would have been in a position to do a stimulus program that was much larger than the American Reinvestment and Recovery Act (meeting liberal objections to ARRA) while also keeping our debt-to-GDP ratio lower than it is (meeting conservative objections to ARRA). Millions of currently unemployed people could, instead, be employed.

Stimulating Employment in Tennessee

Phil Bredesen (wikimedia)

When it comes to economic stimulus there’s a bit of an inherent tension between trying to use the money efficiently and trying to maximize the number of jobs created. The Obama administration’s main idea has been that stimulus funds should be used on well-designed programs and projects, rather than just spewed around in potentially wasteful ways and make-work jobs. But I think there’s a decent case to be made that this is the wrong way to go.

Tim Fernholz observes that Phil Bredesen, the conservative Democrat governor of Tennessee last seen doing his best to dismantle Medicaid, is offering us a glimpse of the other path, as detailed in this New York Times story. It’s easy to make the more WPA-like approach look good, it’s faster and more effective at getting people to work. But it’s also easy to make it look bad, as it involves some public expenditures on projects (”the milkshake place near the high school”) whose value isn’t necessarily clear.

US Unemployment Benefits in International Context

Gary Burtless has an interesting paper reviewing the social safety net measures in the American Recovery and Reinvestment Act. If you read the paper you’ll see that even though these elements of ARRA have gotten less discussion than the state aid and infrastructure elements, boosts in safety net spending are actually the largest segment of ARRA spending. For blogging purposes, though, I really just wanted to reproduce this chart showing how relatively stingy unemployment benefits are in the United States:

In addition to being relatively stingy, unemployment insurance in many ways fails to protect people from the most salient economic risks. Older workers tend to earn more money than younger workers, in part because over the years they’ve acquired sector- and firm-specific skills that their younger colleagues lack. When they get laid off, however, these skills become devalued and even when recovery comes it’s often difficult to get a new job that’s as remunerative as the old one. This, in turn, encourages the political system to focus a lot of preservation of the status quo which winds up reducing long-run growth potential. Gene Sperling’s idea of comprehensive wage insurance would help solve this issue and do a lot of good.

Making Sense on the Stimulus

Timothy Geithner announces new recovery measures using existing funds (official photo)

Brad DeLong observes that Obama administration officials being put out there to deny that no further fiscal stimulus is necessary aren’t making a great deal of sense. And of course they’re not making sense because they’re in a political predicament. But I think they’d do better to just admit that:

Congress gave us less stimulus than we asked for last time around so we don’t see any point in making a futile effort to go back to the well; if it looks like Congress is prepared to act then we can start talking about what appropriate action would look like. Until then we’re working with the tools that we have, tools that we think are making the situation much better than it otherwise would be, but recovery will take time.

Trying to demand additional stimulus when the votes aren’t there in congress could do more harm than good. But pretending to believe that what’s been done is adequate is a fool’s game and just invites the criticism that the stimulus hasn’t “worked.”

Stimulus Working as Intended to Plug State Budget Holes, But It’s Not Enough

Clearly the overall national economy is performing worse than all of us had hoped, and worse than the administration forecast in its official projections. This is, naturally, leading to a lot of “stimulus failed” type of talk. But when you bore in and look at it, the stimulus is pretty clearly making a difference for the better. This useful report from the Center on Budget and Policy Priorities demonstrates that stimulus funds are sharply reducing states’ needs for tax hikes or budget cuts. Here’s Virginia, for example:

I think stimulus critics have been remarkably blind to the dynamics here. Certainly conservatives don’t seem like the kind of folks who’d deny that steep tax hikes amidst a recession will make things work. But tax hikes are, obviously, one way to plug a hole in state budgets. And sharp state spending cuts have the same pro-cyclical impact. I’ve heard people say that the problem with stimulus is that it ignores the need for the economy to make structural adjustments. But huge state budget cuts don’t make structural adjustments easier, they simply increase the quantity of structural adjustments that are needed. And the biggest impact of federal stimulus spending has been to reduce the need for such cuts. And yet if you look at any of these state pie charts what you see is that stimulus money, though helpful, has not been adequate to fully plug the hole. The result is a situation, not only the situation prevailing during the Great Depression, when it’s not clear that the public sector is providing much if any overall stimulus when you account for state and local budgets. What we can say is that absent federal stimulus, overall fiscal policy would be sharply pro-cyclical at the moment plunging the country into deeper recession.

Bad Journalism I Can Sort of Believe In

Obama-McCain by county, with sizes distorted to reflect county population.

Brad Heath did a USA Today article yesterday headlined “Billions in aid go to areas that backed Obama in ‘08″. The insinuation of the piece is that the stimulus bill’s funding streams are being artfully manipulated or something to disproportionately direct resources toward Obama-loving constituencies. As Conor Clarke notes, this is basically nonsense:

And about that factual content: The Heath piece basically says (1) counties that voted for Obama get more money than counties that voted for McCain; (2) pretty much all of this money “has followed a well-worn path … guided by formulas that have been in place for decades and leave little room for manipulation.” There is no theory presented for how the spending could have been manipulated.

The article concludes by noting that “From 2005 through 2007, the counties that later voted for Obama collected about 50% more government aid than those that supported McCain, according to spending reports from the U.S. Census Bureau.” Yikes! Either that completely destroys the premise of the article, or this pro-Obama conspiracy runs far deeper than even USA Today can imagine…

The secret to the riddle seems to be that areas that benefit from federal spending formulae tend to support the Democrats. Not as a result of short-term fluctuations in voting patterns or federal spending levels, but as a structural element of American politics.

That said, this is the sort of thing that I’m glad people are looking into. Politicians obviously are cognizant of the fact that measures may or may not direct funds to their supporters. But it would be nice to see it done in a less sloppy manner. For one thing, though the press likes to talk a lot about who’s the president and who might be president, when it comes to the details of domestic policy the authority lies almost entirely with congress. Obviously, there’s substantial overlap between the areas that voted for Obama and the areas that elected a Democratic member of congress. But you’d probably get a more enlightening result if you specifically zeroed in on the congressional issue. Or maybe even looked at particular members of congress. Is what was done unusually favorable to David Obey’s constituents relative to other plausible opportunities? What was the impact of the changes forced by centrist senators?

Maximizing GDP or Maximizing Employment

Here’s a good point from Mark Thoma and Pavlina Tchernevna about fiscal stimulus. If what you want to do is increase the budget deficit by some amount to decrease unemployment, the most efficient way to do that on a dollar-per-dollar basis is to spend the funds employing the unemployed people on public projects of some kind. But though this is a highly efficient way of getting people into jobs it’s not at all the most efficient overall allocation of the money. But that in turn means that if you spend a lot of time and energy trying to design your stimulus to be efficient in the sense of getting real value for your money, that you almost certainly won’t be getting the most employment bang for your buck.

A stimulus designer, in other words, faces a choice at the margin between maximizing GDP and maximizing employment. And when constructing ARRA both congress and the administration tended to choose GDP. Over time of course GDP growth will lead to employment growth. But as we know, there are substantial lags in this process and perhaps a case to be made that it makes more sense to do things the other way ’round. Certainly one concern I have with regard to the tangible infrastructure projects that ARRA is funding is that the administration’s zeal to avoid anything that looks like “waste” is itself creating a wasteful level of delay and waste-monitoring, when it would make more sense to just plunge ahead and get projects out the door.

Don’t Cry for Mark Sanford, Argentina

The truth is Mark Sanford went to Buenos Aires.

The Mark Sanford quasi-disappearance story gets weirder:

Gov. Mark Sanford arrived in the Hartsfield-Jackson International Airport this morning, having wrapped up a seven-day visit to Buenos Aires, Argentina, he said. Sanford said he had not been hiking along the Appalachian Trail, as his staff said in a Tuesday statement to the media. [...] Sanford, in an exclusive interview with The State, said he decided at the last minute to go to the South American country to recharge after a difficult legislative session in which he battled with lawmakers over how to spend federal stimulus money. [...] When asked why his staff said he was on the Appalachian Trail, Sanford replied, “I don’t know.”

In fairness to Sanford, I took a flaky last-minute poorly-planned solo trip to Iceland (photos here) in the summer of 2005 so I don’t find it inconceivable that this is all on the level. That said, it’s obviously strange behavior for a governor. The larger issue with Sanford, however, continues be that “difficult legislative session” in which he decided to jeopardize the well-being of South Carolina’s students and unemployed workers in order to bolster his national cred with the hard right.

Mass Transit Stimulus

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One of the most effective possible uses of stimulus funds would be to cover gaps in the operating budgets of mass transit systems. The downfall in state and local tax revenue is forcing transit cutbacks across the country that have both a direct contractionary impact and also make it harder for people to live their lives and conduct their business. But currently stimulus funds can be used only for new capital projects rather than for operating costs. So you can have bus drivers being laid off even as new construction workers are hired.

Friday, Pete DeFazio (D-OR) and 26 other House members launched an initiative to try to change that:

Passenger rail and bus advocates are pressing conferees on the war supplemental bill to include a Senate-passed provision that would allow public transit agencies to spend some of their stimulus dollars on operating expenses, instead of capital improvements. The language in the Senate version of the bill (HR 2346) would let transit agencies use as much as 10 percent of their funding from the economic recovery law (PL 111-5) to fend off personnel and service cuts. Transit received $8.4 billion total in the stimulus.

Pat Garofalo argues at the Wonk Room:

Since one of the goals of the stimulus was to preserve jobs, it makes little sense to prevent cities from saving the jobs of transit employees, particularly as more and more people are turning towards public transportation. Hopefully, Congress makes a better decision this time around.

Summer’s coming and gasoline taxes are rising. One of the simplest things the government can do to push back on that situation is expand transit offerings. Really fundamental expansion requires capital expenditures and takes time. But increasing the number of bus routes, and the frequency of service on existing bus and rail routes, can be done fairly easily. It just takes money. But it’s a good use of stimulus funds.

Eric Cantor Bashes, Tries to Take Credit for, High-Speed Rail

Extension of the existing Northeast Corridor high-speed rail south from Washington, DC to Richmond, Virginia and then onward into North Carolina is clearly something that would be beneficial to the state of Virginia. Virginia has experience a lot of economic growth in the past 15-20 years that’s mostly been driven by those portions of the state that fall within the orbit of the Washington, DC metro area. There have also been recent, and not especially successful, efforts to leverage the money generated by that growth into enhanced prosperity for other regions of the state. A better approach than much of what’s been done would be to expend funds on building better transportation links between the DC area and other population centers in the state.

That’s exactly what the HSR expansion plan would do, so it’s not surprising to see Rep Eric Cantor (R-VA) trying to hop on the bandwagon (or locomotive, as the case may be):

Yesterday, though, the Henrico County Republican said bringing high-speed rail to the region could further spur economic development, creating as many as 185,000 jobs and bringing $21.2 billion to a region already home to about a half-dozen Fortune 500 companies and 20,000 small businesses.

“If there is one thing that I think all of us here on both sides of the political aisle from all parts of the region agree with, it’s that we need to do all we can to promote jobs here in the Richmond area,” Cantor said.

But of course Cantor voted against the federal legislation that’s making increased HSR capacity possible. Indeed, on Meet The Press he specifically singled-out the HSR provisions for inaccurate, demagogic mockery, repeating the myth that the Recovery Act contained a provision for a “train from Disneyland to Las Vegas” that was an example of the “waste and pork-barrel spending” said to typify the package.

Back in his district, of course, Cantor wants to portray himself as an agent for constructive change in Virginia. But you can’t be a constructive agent for change if you’re busy lying constantly and opposing everything.

Susan Collins and Pandemic Flu

Boy, it sure is great that Susan Collins made sure we didn’t waste any money on pandemic flu preparations in the Recovery Act. That’s moderation I can believe in!

Eurozone Deficits on the Rise

This will come as no surprise, but the budget deficits in the Eurozone are rising in the face of the recession:

The deficit in the 16 countries which use the euro increased to 1.9% of GDP, against 0.6% in 2007, with Ireland’s deficit the highest, at 7.1%. [...] Deficits look set to continue rising. The Commission has forecast that the eurozone’s deficit will reach 4% of GDP in 2009, the highest yet, and 4.4% in 2010.

This is all a bit of a mess, if you ask me. Ireland’s deficit is way too high, but 1.9 percent of GDP on average is way too low considering the extent of the economic downturn. Better policy coordination would have had more stimulative deficit spending in general, but somewhat less in the worst-afflicted areas as other places would be able to help Ireland out, much as Florida and Michigan aren’t totally on their own in America’s recession. But of course that’s tricky to pull off institutionally.

Shiller: We Need More Stimulus, and Clear Targets

Robert Shiller says we need more stimulus and also more bank rescue, and perhaps more provocatively says that what we need to do is set explicit policy targets. One would be a demand target, and one a credit target:

Following this target, aggregate demand should be sufficiently high that firms producing good products at a price the public would want to pay will be able to sell them. And if this target is met, skilled labor willing to work at a wage that makes it profitable to sell such products will be able to get a job.

The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies, but there should be an explicit measure of their success, and until that is reached, the scale and time frame of such policies need to be extended.

Ever since it initially became clear that the administration might have some trouble getting a stimulus bill through congress, the administration has taken basically the reverse tactical approach. They’ve taken as much stimulus money as they can get, and have been declaring the resulting stimulus program to be likely to work. Similarly, on the banking front they’re scrambled to put together the PPIP with funds that they’ve already been giving and have been declaring that program likely to work. In both cases, however, mostly outside analysts who broadly share the administration’s perspective think that the political constraints are forcing them to do too little.

A different take would be to establish targets. We want demand at this level, and credit at this level. Then you could be clear that the measures currently underway will probably help, but are unlikely to be fully adequate. Shiller says “It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.”