Tuesday, July 21, 2009

Debate w/ the Ambrosini Critique...

Will, an opponent of Obama's fiscal stimulus, over at the Ambrosini Critique writes :
Given we haven’t seen deflation so far, fiscal stimulus is a hedge against it. Once stimulus finally comes on line, if the economy is in a deflationary spiral, it will help get it out. Of course, we all trust that if that contingency doesn’t come to pass, the spending will be quickly unwound. Right? Right!?
I then pointed out that, once we take into account what is going on at the state and local levels, there really isn't all that much stimulus left to "unwind". Perhaps 1 to 1.5% of GDP. (Or perhaps even closer to zero, if state and local budgets continue to worsen...) In addition, some of the spending earmarked for next year is in increased food stamps, medicare funding, and welfare payments in addition to infrastructure. And Intrade is now predicting that unemployment will be above 10% for the whole of next year, which implies that things like food stamps won't have been wasted. In any case, by the end of next year, most of the stimulus money will have been spent. And the stuff that gets spent after that is still likely to happen before the economy gets back to full employment, even if the recession is already over now.

He then writes, in the commments:
Also, I’d like to hear a theory for why “infrastructure spending a year or two from now” policy is better than monetary policy in a liquidity trap. If you say that it increases inflation expectations because of concerns the Fed will monetize debt, you have to give up on the “stimulus” aspect of such policy and all the hullabaloo about multipliers was wasted breath/typing. Otherwise, I’d really like to hear a story that suggest “infrastructure spending a year or two from now” increases aggregate demand today.
I've got a fuller response under his post , but the gist of my points are 1) changing the fiscal stimulus debate to one where debating whether the infrastructure getting spent two years from now (which is just a small part of the stimulus) is shifting the goalposts of the debate a bit. See the post below on how Pennsylvania is not paying its workers this month... Had the ARRA fiscal stimulus been larger, as I and many others argued for, then states would not be paying millions in IOUs right now, and would not have enacted billions in spending cuts and tax increases which have already taken effect. One thing which always bothered me about fiscal stimulus opponents (see David Brooks extreme confusion below, and he is one of the most intelligent conservatives and fiscal stimulus opponents around) is that they have largely been innocent of any knowledge about state and local tax hikes/spending cuts, such as the $3.1 billion in cuts in NYC for FY 2010, which actually began three weeks ago. So, while stimulus opponents always whine about the small stuff that's coming in two years, I have yet to here them argue for drastic spending cuts that are already in effect. This is for two reasons: The first is that "stimulus skeptics" such as David Brooks are fabulously ignorant of what is going on around them, particularly what is going on at the state and local level. The second is that arguing for spending cuts and tax hikes in the middle of a recession is much more difficult to argue, and sounds ridiculous on its face. So, they are just picking fights they can win.

OK, but what is different about now vs. normal times, when we can rely on the Fed? Well, all PhD students should know this stuff cold, but the basics are that, in general, running budget deficits are inflationary. Usually, inflation is bad, and the Fed will respond by raising interest rates to slow down the economy. Now, however, we actually want to create inflation! And unlike normal times, the Fed will not react by increasing interest rates, at least not anytime soon. Yes, the "stimulus" may replace some actions by the Fed of just creating assets out of thin air, and then buying stuff (Tbills, agency debt, mortgage-backed securities... called quantitative easing, or QE), but then again, all of that "other stuff" including QE has failed to prevent a dramatic rise in unemployment. Part of the difficulty is, of course, that the Fed doesn't have much practice using QE, which is probably why the Fed failed in taming this recession and has been unable to stop the bleeding in the labor market, going on 18 months now... And part of the reason why this is so tricky is that most of the QE the Fed does just goes right in to banks' excess reserves... Holding Tbills and holding cash are basically the same thing in the eyes' of banks. This implies that you'd have to do loads and loads of QE to have the same effect as a rate cut in normal times...

And, to the extent you believe that the Fed's powers have not diminished one iota with the lower bound, then you must believe that the Fed has been utterly negligent. Yet, few conservative economists (other than Scott Sumner) have really been berating the Fed for not doing enough, however... I am more critical.

OK, and I'm getting sick of the stimulus topic. Its importance pails in comparison to the Health Care debate!


  1. Moving goal posts... No, because the "stimulus" package we got is just that... infrastructure spending a year or two from now. Transportation, Medical IT, energy projects, and education-related construction are about 1/2 of the expenditures and most of that doesn't happen for years. But the timing on the aid to states isn't much better. 2/3rds of that aid will happen in 2010 and 2011.

  2. Um, more than 1/3rd of the ARRA -- $288 billion, is tax relief, and that will all come in the next 18 months. The housing and car tax credits have already spurred demand. (I think you meant FY2010 which isn't the same as 2010.)

    Another $144 billion (combined with the above already makes more than half) of the aid to states will mostly all come in the next 18 months.

    Here is the timeline -- which is actually going to get sped up some. http://www.cbo.gov/ftpdocs/99xx/doc9989/hr1conference.pdf

    The estimates for total spending -- tax cuts plus infrastructure spending -- in the next 18 months comes to about $628 billion/$787 billion... Less than $100 billion of a $787 billion stimulus comes more than two years from today...

    Why so much of the tax cuts and aid for states was destined to take place next year is a complete mystery to me. It is a dire mistake which someone should be fired for.

    But arguing against the stuff that will come in two years is not arguing against the heart of the stimulus...