Even More on the Stimulus

By John Conway | February 3, 2009 7:09 pm

I’m sorry, but I cannot seem to get this stimulus package off my mind. For my whole life I have watched the federal government bounce along with a few hundred billion dollars of non-military discretionary spending, give or take. Mostly take – this portion of the federal budget is the part most under pressure, year to year. Of course the largest portion of federal spending goes into servicing the national debt, and into Medicare and Social Security. But I digress.

Now, under extreme economic duress brought about, ultimately, by the collapse of the housing market and with mortgage-backed securities added as an accelerant, the economy is in free fall. The government is seemingly on the verge of an absolutely massive, $900 billion spending spree, most of which is for the sorts of discretionary spending that would have taken years, or decades, to happen. If ever. It’s among the most extraordinary things I think I have seen in my life.

Many in Washington appear to be very, very, nervous about doing this, but just about all are convinced that the government needs to do something, whatever it can, to avert what would amount to a very long, deep economic depression. Opinions abound, and there is a lot of crazy stuff being said on both sides. A lot of it comes down to the old partisan bickering about how the Dems want to tax and spend, and all the Repubs want is to stop spending and cut taxes (though all they did when in power was cut taxes, for corporations and the already rich, and dramatically increase spending). There has been a lot of noise about this or that item in the various versions of the bill, with detractors invariably questioning its “stimulatory” value. (For example, check out what the GOP thinks is non-stimulatory here.)

So what’s the best thing for the government to spend money on? Where does one get the best bang for the buck? Lost in the main stream media discussions has been any mention of the velocity of money. If the government spends a dollar on something, how likely is it that it will be spent again, and again? How likely is it to generate revenue? Create jobs? Increase GDP?

If money has velocity, then its mass must be its value. The product of the two is the momentum of the economy. And, as good physics students, we all know that to change momentum you need a force. That, I assume, would be prices: the less the price the more likely you are to spend it, increasing the velocity. But, then, the lower the price the more value the money has – here the analogy with Newtonian physics breaks down. It’s non-linear.

Over at MotherJones.com there is a very interesting, if short, article by James K. Galbraith. But even more interesting is the graph accompanying it:

bang-for-the-buck.jpg

They say this comes from Moody’s Economy.com, though I have not found it yet…I am not a subscriber. It purports to show the economic return enjoyed for each type of dollar spent, though I am not quite clear on just how economic return is defined.

Anyway, taken at face value this graph would seem to squelch definitively the incessant chant for tax cuts, and give strong motivation for spending on infrastructure and the economic safety net. Come on, MSM, cover this story! Galbraith’s main point is that the government ought to be taking a much longer view, and I think that at least part of the $900 billion stimulus does exactly that: the portion devoted to research and development can lead to the sorts of new technologies that will truly sustain the next economic expansion.

I would love to see added to the graph above a bar corresponding to federal support for basic scientific R&D. Even if you just figure that if you give a professor money she spends it all on hiring a postdoc, how does that impact the economy? One of my main worries is that all the science money in the stimulus package will go to “one-shot” big-ticket items, when what we need is people, too. But that kind of money is not represented by a one-off stimulus, but a sustained year to year program of spending on science. What we need is a long-term increase in federal spending on science. A long term commitment, in other words, reflecting basic science policy.

Indeed, also lost in the discussion has been this: just what the hell is the federal budget for 2010? Ordinarily, the administration’s budget request would be rolled out the second week of February or so. Like, next Monday. Not to mention that there would usually be a State of the Union address; all we know for the past 10 days is that Obama will address Congress some time in mid-February. If I were him I would like to do it after passing the stimulus package…

We do live in interesting times.

  • http://www.right-thinking.com Mike

    I think he’s got his graph upside down. Just on the subject of tax cuts, there is a well-established progression of efficacy in stimulating the economy that is inverted from what he has. Food stamps and unemployment benefits are about alleviating suffering, not stimulating economies. No one ever built a factory out of foodstamps.

  • http://www.right-thinking.com Mike

    PS – I suspect this data comes from Keynsian models. Those numbers look way too precise. Actual empirical research (see Mankiw’s blog) suggests tax cuts are slightly more efficient, but there is a lot of debate about this.

  • Steve Peterson

    “Well-established” where?

    Food stamps can’t be put in a bank and saved or used to pay down debt. They get spent — employing grocers, truckers, and farmers — who then have more money to purchase items of their own.

    Unemployment benefits go to people who would otherwise likely have to cut back on cost of living expenses — so they’re more likely to spend it and get that money back into the economy and circulating.

    High-end tax cuts get put in banks and the money gets sat on, doing little good to an economy where the main problem is that everyone including the banks is sitting on their money and nothing is moving.

  • http://www.gedankenexperiment.dk Anonymous Snowboarder

    Well if they count everything we will be approaching a 4, yes FOUR, trillion dollar federal budget. The first $1T budget was in 1987. $2T came in 2002. $3T came in, your choice 2006,07,08 as much of the war spending was not ‘on budget’. Tack on $900 B and we are at $4T. Note that 30 years ago, in 1979 the budget was about $500B.

    This year federal spending will be close to 28% of GDP. The prior, non-WWII peak was 23.5% in 1983. And to put these in perspective, in 1930, Federal spending was 3.4% of GDP, in 1950 15.6%. Is the problem really that the government is now
    spending too little?

    There are two problems at the moment. Unsustainable spending on entitlements and the prevailing need “to do something”. We all know about the first. The second though is left in the dustbowl of history – FDR (and Hoover before him). Contrary to
    popular belief, the massive post 1929 crash / depression time spending did little to
    change the picture. They were also suffering from the ‘we have to do soemthing’
    problem. While there was an initial rebound in the economy in 1934-36, things
    tanked again in 37 and 38 with unemployment going back to 1934 levels. Spending
    however increased 6% in 1930, 8% in 31, 20% in 32, 42% in 34 and 28% in 1936.
    There is no clear link between the massive increases in spending and resultant
    changes in gdp and employment.

    ps – after looking up all those numbers I may have to put this on my own blog too!

  • http://www.math.columbia.edu/~woit/wordpress Peter Woit

    It’s worse than that. Lost in this discussion is not only the 2010 budget for next year, but the 2009 budget for the rest of this year:

    http://blogs.sciencemag.org/scienceinsider/2009/02/congress-puts-o.html

    What a way to run a government….

  • Interested

    I do not know nor have I determined what is the budget for US Dept of Small Business Administration. But free or low fee 1-2 hours business classes run by Small Business Administration Entrepreneur Center [SMA Entrepreneur Center] foster the growth of small businesses, the mom and pop business and are a backbone of the economy. In good times and in tough times, small businesses are a backbone and key component of the economy.

  • John

    Very true, Peter – amidst all this we are still operating under a continuing resolution which set the spending level at last year’s. The stimulus is over and above whatever Congress decides to spend in the usual 13 bills…or an omnibus as we had last year…which *could* cut funding, perversely.

  • John

    Hey Anonymous Snowboarder: just how big should the stimulus be? Doing nothing is pretty scary: http://www.economy.com/mark-zandi/default.asp?src=economy_homepage

  • Interested

    errata “SBA not SMA”

  • http://sep.stanford.edu/sep/jon/ Jon Claerbout

    Stimulus? Inject liquidity with interest-free loans to tax payers in proportion to the taxes they have already paid. The silent majority hates it when Washington grabs money from one interest group and passes it to another.

    Let the taxpayers decide what to do with their quick new cash, pay off a credit card, pay down the mortgage, save it in a bank, invest it in a market, or spend it in Detroit or in Alabama. OK, somebody might buy some plastic stuff from China. So what? Who needs a “multiplier” for a politically neutral program that can be scaled up fast?

    JK Galbraith’s chart on Mo Jones is politically motivated. Macroeconomics has no predictive powers.

  • Low Math, Meekly Interacting

    I’m totally on-board with the need for better-funded basic research, but, as you say, that’s a long-term shift in priorities. As such, it’s not really what a stimulus package is all about, is it? The stimulus is like a shot adrenaline straight to the heart to revive the patient, such that there’s something viable left to nourish better over the long term with that improved diet of research.

    What I worry about is that this point is rapidly being lost among the party in power. I’m generally a progressive, but I must agree with the minority at times about the conflation of short and long-term priorities. Let’s face it: Our transportation infrastructure is in dire shape, our water and waste treatment infrastructure is not much better, schools are in shambles, several banks are about to collapse, our biggest manufacturers are on the verge of near concomitant failure, home values are deep underwater…it just goes on and on. The whole point behind this trillion-dollar madness, so I thought, was that if we don’t blow a serious wad on immediate job-creation and consumer-cash infusion now, in the future the state of our R&D will be the least of our worries.

    I, for one, am growing less and less convinced with each article I read that the stimulus is being targeted in an effective, non-ideological manner, any more than I think for one moment Republican opposition isn’t market-fundy voodoo. In other words, I’m not sure if the bulk of it is remotely stimulatory, and if it isn’t, I’m not sure what the point is, other than grabbing for pork.

  • John

    “Let the taxpayers decide with their quick new cash”…heh. Will they fix the 120-year-old levees that threaten Sacramento? Will they invest in decaying public schools? Will they repair bridges in danger of plunging into rivers? Fund the education and research that will fuel fundamental economic growth?

    I think we know the answer.

  • http://www.jyotirmoy.net Jyotirmoy Bhattacharya

    John: What you need is the ‘multiplier‘, not the ‘velocity of money’. With the stimulus package, what you want to know is how much of additional private spending a dollar of government spending will stimulate. This is independent of how fast money changes hands. Think of a $365 stimulus package: on day one the government mints a dollar coin and spends it on my goods, but I am in no mood to spend so I deposit the money in a bank. The next day the government borrows the $1 from the bank and gets the coin as its loan, and then gives to me in in return for my goods. I don’t want to spend today either and deposit the money in the bank again. And so on for the rest of the year. At the end of the year the dollar coin has changed hands 365 times, so its velocity is 1/365, but the government expenditure hasn’t generated any additional private spending, so the value of the multiplier is just 1.

    As for price as the force which moves spending, my guess is that in the current context consumers’ expectations of their future incomes and liabilities is likely to be a more important influence on how much of their additional income they spend. See the permanent income hypothesis (it is an accepted theory now, but the name has stuck).

  • http://www.right-thinking.com Mike

    “High-end tax cuts get put in banks and the money gets sat on, doing little good to an economy where the main problem is that everyone including the banks is sitting on their money and nothing is moving.”

    I’m not in favor of high end tax cuts, but the recent lamenting that Americans are saving too much and not spending enough smacks of Bush-era consumerism. If the key to this is the liquidity in the banks, than how is people saving money in banks a problem, exactly? The banks are going to loan that money out, not make piles of it and roll around in it.

    Infrastructure sending sounds fine. But if that’s so stimulating, why is the bloated $260 billion highway bill passed just two years ago not stimulating the economy? If deficit spending helps, why is $1.2 trillion in deficit spending not enough? On the flip side, if tax cuts for the middle class are so hot, how come the $150 billion “stimulus” of last summer didn’t work?

    It seems to me that while some spending is good idea, the idea that all spending is good spending has to be false. And if we continue to rack up debts, we risk inflation.

    Far better results could be gotten by reforms that won’t cost the government a penny — like simplifying the byzantine corporate tax system, overhauling financial regulation or removing the perverse incentives that move businesses offshore.

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  • Jason Heldenbrand

    Increased spending into science has perhaps the highest probable return than any other. New technology requires new manufacturing, new specialists, new materials, new retailers.

    You have to understand, most of the things Republicans consider ‘waste’ only sound like it to people who don’t rely on it. A town with an extremely popular waterpark might request funds to repair it. Without those funds the waterpark will fail and the town might wither and die. Meanwhile their tax dollars are no longer taken to the government, their purchases no longer make their way back into the economy. Meanwhile, all the government saw to slash was ‘waterpark’. Money sent back in -any- form into -our- infrastructure will return. Money sent overseas will not.

    Besides, after 8 years of digging our economic grave Republicans have absolutely no room to talk about fiscal responsibility. While in power they could have reigned in Bush anytime they wanted, or proposed their own fixes. They didn’t. Now its up to a new administration to clean up the mess.

  • Joseph

    The source of the chart data seems to be Moody’s economic model. See page 9 of http://www.economy.com/mark-zandi/documents/Economic_Stimulus_House_Plan_012109.pdf

    There seems to be some possibly misleading assumptions behind this chart. For example, how did Moody’s calculate the effect of “making Bush income tax cuts permenent”? Suppose they assumed that *all* taxes would go up in 2009, and then computed the GDP gain at the end of 2009 of “spending” *only* on the Bush income tax cuts. That might amount to a net tax increase with no increase in other spending in Moody’s model — of course that’s going to have a negative return for the economy!

  • Sili

    squelch definitively the incessant chant for tax cuts

    HAH!

    Do you really believe that? When has facts and reality ever come in the way of the Republan politic of lining the pockets of one’s chums? I’m no USAnian, but I do prefer “tax and spend” to “spend and spend”.

    Now if we could get rid of the incessant box ticking and middle management we’re incumbered with over here in the name of ‘quality control’, then we might even get to spend that money sensibly. I have long ago learned that ‘quality’ in the mouth of a politico means ‘quantity’. Wankers.

  • John

    Thanks, Joseph, for the link to Zandi’s analysis. In there he tells us that the numbers in the chart in my post represent the one-year dollar increase to GDP for every dollar spent, based on Moody’s macroeconomic model.

    One can quibble with the model assumptions, but it is hard to imagine that it is so wrong that it could turn a 30-cent-return on corporate tax cuts into a net positive return. So, yes, Sili, I really do believe that if people were educated about this, the argument in favor of tax cuts would be squelched, definitively.

  • http://www.gedankenexperiment.dk Anonymous Snowboarder

    @John – thanks for the comment on my blog. I’ve posted a reply, but will cross it here too:

    Zandi is just one of many economists who have spoken on this subject and as others have noted, his group has put out some debatable stats about the effects of different spending/tax changes. In particular, if money is fungible, why would a person treat increased unemployment benefits differently than a tax rebate check? He claims the tax check would be put towards paying down debt and yet claims that people will spend any income support they get very quickly. Its difficult to have this both ways unless the income support is greatly in excess of the tax credit.

    Here are a few conflicting views:
    http://online.wsj.com/article/SB123258618204604599.html
    http://www.politico.com/news/stories/0109/18068.html

    and a full page ad/list of those economists who think its not so good:
    http://www.cato.org/special/stimulus09/cato_stimulus.pdf

  • Brian

    @ Anonymous Snowboarder

    “In particular, if money is fungible, why would a person treat increased unemployment benefits differently than a tax rebate check?”

    I’m no economics expert – perhaps nobody is – but maybe the person on unemployment is more likely to be in such dire need that he has no option but to spend the money just to provide basic necessities such as food and rent, whereas any tax rebate check I get will go straight into the bank, and the money will stay there for quite a while. I will probably just have more money in the bank the second before I die, after which, of course, I will no longer maintain possession of it.
    Quite frankly, I’m not even sure what we mean by “stimulate the economy.” Do we mean raise the GDP, create more economic activity, increase the production and delivery of goods and services? If the GDP rises and the median income declines, will we say that the economy has improved?

  • http://critterscrap.blogspot.com Jerry Critter

    No company or corporation has built a factory because they have received a corporate tax cut. They built new factories because the demand for their product has increased. The demand come first.

  • a grad student

    One other thing..if the source of the graphic is this chart: http://www.economy.com/dismal/graphs/blog/mz_012208_1t.GIF

    then it only relates the one year $ change/return in gdp which is how the graphic should be labeled

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  • Matt A

    Once again this blog shows a complete lack of basic economic understanding.

    The graph shown is for the “economic multiplier”, ie. for every $1 invested how much return we see in long run GDP. However, I have never seen any type of multiplier analysis even close to what the graph is showing. For example, extending unemployment benefits has a multiplier of 1.63? Numerous studies have shown extending the duration of unemployment benefits only increase the unemployment rate (that’s even in my Econ 101 textbook, though I doubt many of the commentators on this site own one).

    Tax cuts stimulate the economy for two reasons: 1) you are providing works with more incentive to work harder, therefore you increase worker productivity and 2) workers will simply have more money to spend/save/invest as they see fit. For example, Christina Romer (Obama’s new chair of the Council of Economic Advisers) found an economic multiplier of 3 for tax cuts:

    http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

    If Obama had such a smart choice for (some of) his economic advisers, why on earth did he outsource the writing of this stimulus package to pelosi and the house democrats?

    On a final note, the problem with huge outlays in government spending (such as this stimulus package) under the auspices of “stimulating the economy” is that everyone makes the case that their own special interest has the “best bang for the buck” for spending .. accordingly you guys all argue $1 invested in science and technology by the government is the best way to grow the economy .. maybe you’re looking out for your own tax payer funded jobs ;-)

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