The Obama Fiscal Boost: Good First Bid, But Can the Administration Do More?

Paul Krugman writes:

Romer and Bernstein on stimulus - Paul Krugman Blog - NYTimes.com: Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of... the... American Recovery and Reinvestment Plan would accomplish.... Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics....[I]t [is] hard to evaluate the reasonableness of the assumed multipliers. But... the estimates appear to be very close to what I’ve been getting.

[T]hey do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7.... They have the plan raising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so average over 2 years, again not much difference. So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.

One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010... the CBO estimates an average unemployment rate of 9 percent for 2010.... Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.

If I were in the Obama White-House-to-be right now, I would announce that we would be using CBO numbers as our baseline for everything, and focus on providing analytical input to CBO so that its numbers are as good as possible. Doug Elmendorf is honest and reliable and will do his best. And if there is no daylight between the administration and CBO, that is one fewer way that the David Brookses and the John Boehners and the other bad actors can confuse the gullible, lazy, and dishonest among reporters and commentators who do so much to degrade the level of the policy debate.

I agree with Paul that this fiscal boost plan is too small, but I do want to admit that doing this well is harder than it looks. The tax-cut part does not look terribly effective as a stimulus--it is a step toward compensating for higher income inequality and a political play to make it more likely that Republicans will lose politically by trying to block the package rather than a significant boost to employment. Thus I do not think you would want to make the tax-cut part larger. And it is hard to find a lot of additional spending projects that can be ramped up quickly and do a lot of good--relatively soon in that endeavor the short-term fiscal multiplier falls below one. They are trying their best.

Nevertheless, I agree that their best is almost surely not enough. I also believe that conventional monetary policy is tapped out, and unconventional monetary policy is of doubtful efficacy. So I am in favor of doing something else on the banking/finance side. My favorite idea right now is that of nationalizing Fannie Mae (FNM) and Freddie Mac (FRE) completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up--and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.

So at the moment my preliminary judgment of the Obama fiscal boost is that it is a good first bid, but that the administration ought to be doing a lot more.

Comments

[bosun.j:]

Obama isn't going to be able to fix the problems using the same tools that caused them.

Jan 11 07:49 AM

[prudentinve...:]

"So at the moment my preliminary judgment of the Obama fiscal boost is that it is a good first bid, but that the administration ought to be doing a lot more."

We became the world's largest economy by pursuing greater market freedom than others. Countries with socialist "central planning" have failed. Thus, the more we distort the economy with central planning, the less our chance of recovering our waning status as world leader.

Jan 11 08:51 AM

[OhioNative:]

Quote:"We became the world's largest economy by pursuing greater market freedom than others. Countries with socialist "central planning" have failed. "

yes, countries with socialist "central planning" to the extreme, like say the USSR, etc have failed. But there are socialist countries that do just fine, they may not be at 5% or 8% growth, but they are at 2% to 3% growth (Say France, Germany or even the UK). No one is talking about creating a communist country in america. So this "Oh my god its the end of the free market" because Obama wants to spend is a little silly (though the bailout of companies DID impede free market liquidation, which wasnt an Obama thing...though obama and mccain voted for it).

The true issue is Obama wants to spend AND cut taxes AND rely on foreign creditors to finance "public works". This is very dangerous and could very well end up debasing our country's currency (and even hyper-inflation). We as Americans need to finance whatever it is we want to do (like we did coming out of the depression, we paid for all that with high taxation). If we cant pay for this spending with high taxation, then the government needs to shrink and become less of a burdeon, so then taxes can be lowered. There are no free lunches.


Quote: "We became the world's largest economy by pursuing greater market freedom than others. Countries with socialist "central planning" have failed."
We havent pursued "free market freedom" since the 1920s, Regan attempted to change some things, but then he spent up a storm and distorted the market flooding it with money (does a little deregulation here and some tax cuts there count as pursuing free market freedoms when you spend more and make the government bigger?). And every president since then has done the same.

Jan 11 11:24 AM

[Roger Knights:]

Here's what I wish the new administration would do. (I posted this as a comment once already elsewhere on SA, but I may keep posting it until the White House comes around.)

Why can't the gov't. take over where Rex & Co. left off, by offering homeowners a premium (say 15% of the house's current valuation) in exchange for a share of future profits (say 50%) on the sale of the house? This would buffer the effects of the current crunch on the homeowner, allowing him to make his mortgage payments, while being a good long-term buy for the gov't.

As long as I'm in a utopian mood, here's another suggestion. Since the gov't. is throwing money at make-work projects and infrastructure improvements, it seems to me that there's a project that could get under way much faster, with less likelihood of fraud or ineffectiveness than the ones I've been reading about. Namely, the gov't should offer to pay for home-improvement projects for home-owners in exchange for a share of future profits on the sale of the house. This would stimulate lots of economic activity, would upgrade the country's housing stock, would make life pleasanter for home-owners and their neighbors (who'd live in an upgraded neighborhood), and would be a good investment for the gov't. in the long run. It would also be politically popular (assuming it would work).

There are certain desirable-but-fairly-r... home improvements that wouldn’t require skilled labor, such as adding fencing, improved home security, improved home insulation, and improved earthquake protection.

Jan 11 05:25 PM

[Roger Knights:]

Oops: They system changed my "rare" to "r..." for some reason.

Jan 11 05:26 PM

[Crude Oil T...:]

Any benefit the government "stimulus"??? plan could bring has already been baked into the market. The market is always ahead of the curve and right.





stock-market-club.blog...

Jan 11 11:43 PM

[Did U Think...:]

Just by looking at your face I could tell you were a dyed in the wool Keynesian. Do you get something for nothing in everything you do? That's what Keynes was all about, getting something that is worth having without doing the requisite work or feeling the requisite amount of pain. That can happen for quite some time but then it always blows up. We may well be on the verge of that blow up right now.

Jan 12 06:56 PM