Effects of the Stimulus Package: Felix Salmon Is Uncharacteristically Wrong

From Felix Salmon (Why I’m unconvinced by calls for a second stimulus package):

Let me try to hazard an answer to that. Start with the guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of spending too much paled in comparison with the risks of spending too little. And because the effects of government spending on GDP and unemployment are hard to predict with any accuracy, there was a strong case that a monster $800 billion stimulus bill was in many ways the prudent course of action.

Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would. This is a useful datapoint — and one way of looking at it is to conclude that the stimulus was so big that the last few hundred billion dollars have had virtually no positive effect at all. And that any extra stimulus would similarly achieve very little...

Ummmm.... No.

Jared Bernstein and Christy Romer constructed extremely crude estimates of the delta-effect of the stimulus package on the economy by taking when they thought the different components of the $787 billion would be spent and how long it would then take for the government spending to have an impact on the economy.

Their estimate is that we saw the effect of $0 (zero) (none) (nada) dollars of the stimulus package on the economy in the first quarter, that we saw the effects of only $14.5 billion in the second quarter, and that we are about to see the effects of $38.6 billion now in the third quarter as the effects of the package ramp up to their peak in the fall of 2010, when we will see $82.1 billion of stimulus spending hit the economy.

To say that what happened in the second quarter means that "the last few hundred billion dollars have had virtually no effect" is like sticking your toe into the ocean and pointing out that your hair is still dry...

Comments

[Tony Petroski:]

But this illustrates one of the many reasons that the Keynesian stimulus plans don't work: the timing is always off and is chosen for political purposes. At the very time that the "stimulus" is supposed to help, i.e., 4th quarter of '08, 1st and 2nd quarters of '09, virtually nothing is spent save for a few signs on the highway announcing that the stimulus package is responsible for fixing potholes. The stimulus really kicks in about election-cycle 2010 in time to prop up GDP numbers in nominal terms largely reflecting inflation. Thus the "counter-cyclical" Keynesian plan does nothing during the worst of the downturn and then throws fuel on the fire once the economy is starting to recover.

These political realities are part but not the only arguments against these "stimulus" plans.

Jul 13 08:46 AM

[Dave Wrixon:]

Maybe, but because so many thought like Alex it has had an impact, because so many anticipated improvement those delusory green shoots actually appeared. Of course they won't last anymore than this shambles of an initiative will have a meaningful impact. But Obama and Summers are correct in advising patience. They need to have Congress in a desperate frame of mind to sanction their next act of complete madness.

Jul 13 08:49 AM

[willynill:]

Brad, you seem to be agreeing with those who say the recovery will take as long as the FDR "solution" or the Japanese "lost decade(s)".

Jul 13 08:56 AM

[John Galt:]

If you are saying that the 787 stimulus plan hasn't been given a fair chance yet, and is acting according to plan fine, but then why was Obama saying that we must pass this spending bill BEFORE CONGRESS EVEN READ IT ( and debate it) or else we may never recover?

Where is the transparency? If you want to spend big money, let's be honest and let's look at the pro's and cons. Make your argument, don't try and scare and bully people into doing what you want and especially don't do that with so much at stake.

Jul 13 10:47 AM

[Prudent Man...:]

What it says to me that when BHO was yelling "crisis" from the tree tops and emphasizing that the phony "shovel ready projects" were going to keep unemployment under 8 % he is stupid or was lying but, in all probability, both.

The elegantly shallow one has made a politically ignorant mistake of over-promising while in office. His "cult" is not important now as he is expected to do something he never had to do: put up or shut up and he won't shut up.

The buck stops with BHO and he can't defend the net as he is incapable of defending the nation.

Jul 13 11:05 AM

[User 428615:]

The bubbles were 12 years in the making, give the stimulus 12 to 15 months before it's judged. I think it's on the right track, though faster payout and a bigger initial infusion would be better if

Jul 13 11:24 AM

[Schweizer:]

The $787B is spread to the states and is only helping to offset the deficits the states have due to loss of tax revenue. It is not stimulative. It is just spending on things long planned. No new jobs will result but some jobs are lasting longer but will end when the $787B is exhausted.

SP500 will be below 500 as little of this spending is impacting companies or consumers.

Jul 13 12:17 PM

[Socialism c...:]

The correct (and only workable) stimulus would have been a 787B tax cut for both individuals and business. That would have been a return to taxpayers of their own money, instead of a largesse to the offenders who helped create this mess; that would have helped homeowners who are on the cusp by letting them use more of their own money where they need it most; that would have let employers retain more employees due to decreased cost per head.

But no. Can't have that. Because that would have been a move in the direction of power to the people, instead of moving towards bigger, more-powerful entitlement government which can solve all our problems (tongue firmly embedded in cheek, perhaps irrevocably.)

Jul 13 12:46 PM

[James Quinn:]

Borrowing to get out of a crisis caused by too much borrowing is an assanine solution. Only an academic would think it could work. When it fails, the Crisis will begin.

theburningplatform.com...

Jul 13 01:10 PM

[GeminiAtlas:]

I agree, a much faster and much more efficient path would have been a tax cut. I just read a commentary by the columnist George Will "Tilting at Green Windmills" which cites a Spanish economist who did a study of the unemployment of Spain (18%, the worst in the EU) and spending on renewable energy by the government.
This seems very reminiscent of that. The vastly more inefficient political allocation of capital (vs. market allocation of capital) will just wind up destroying more jobs than it creates. In the study by the econ professor, it says for every green job that was created, 2.2 jobs were not created in other industries. So, I'm looking forward to when these stimuli start to "kick in", I'm sure it will do the trick. Yeah, right... let me get the popcorn and watch the train wreck of job destruction which will continute to unfold. I'm sure Bush, Obama, Paulson, Bernanke, Geithner, Pelosi etc. are giving each other high fives for a job well done.


On Jul 13 12:46 PM Socialism cannot compete! wrote:

> The correct (and only workable) stimulus would have been a 787B tax
> cut for both individuals and business. That would have been a return
> to taxpayers of their own money, instead of a largesse to the offenders
> who helped create this mess; that would have helped homeowners who
> are on the cusp by letting them use more of their own money where
> they need it most; that would have let employers retain more employees
> due to decreased cost per head.
>
> But no. Can't have that. Because that would have been a move in the
> direction of power to the people, instead of moving towards bigger,
> more-powerful entitlement government which can solve all our problems
> (tongue firmly embedded in cheek, perhaps irrevocably.)

Jul 13 01:21 PM

[American in...:]

Tony,

That is just complete rubbish. Everyone knows that Keynesian policies work. What do you think Reagan did? It was deficit spending!!!!

What do you think pulled the US out of the Great Depression? Massive deficit spending by the Federal government.

You guys on the Right are always trying to change reality by repeating obvious nonsense long enough that the less-than-intelligent masses begin to believe it.

You don't have a good grasp on economic history.


On Jul 13 08:46 AM Tony Petroski wrote:

> But this illustrates one of the many reasons that the Keynesian stimulus
> plans don't work: the timing is always off and is chosen for political
> purposes. At the very time that the "stimulus" is supposed to help,
> i.e., 4th quarter of '08, 1st and 2nd quarters of '09, virtually
> nothing is spent save for a few signs on the highway announcing that
> the stimulus package is responsible for fixing potholes. The stimulus
> really kicks in about election-cycle 2010 in time to prop up GDP
> numbers in nominal terms largely reflecting inflation. Thus the
> "counter-cyclical" Keynesian plan does nothing during the worst of
> the downturn and then throws fuel on the fire once the economy is
> starting to recover.
>
> These political realities are part but not the only arguments against
> these "stimulus" plans.

Jul 13 02:14 PM

[Sovestor:]

Both are wrong. The markets will tell them.

Jul 13 02:17 PM

[American in...:]

Ah yes, the Conservative answer to all problems ... tax cuts.

Yes, when the US savings rate is rising you think a tax cut is going unleash consumption spending?

There is no guarantee that tax cuts in a severe recessions are going to be spent. It is a dumb, risky strategy.

Furthermore, get over this naive idea that markets always allocate resources more efficiently.

Markets lead due underinvestment in basic research and public goods such as transporation. Markets also encourage pollution and global warming. Nor can you get justice in the markets or give people equal opportunity.

Markets do not by themselves lead to a social optimum.


On Jul 13 01:21 PM GeminiAtlas wrote:

> I agree, a much faster and much more efficient path would have been
> a tax cut. I just read a commentary by the columnist George Will
> "Tilting at Green Windmills" which cites a Spanish economist who
> did a study of the unemployment of Spain (18%, the worst in the EU)
> and spending on renewable energy by the government.
> This seems very reminiscent of that. The vastly more inefficient
> political allocation of capital (vs. market allocation of capital)
> will just wind up destroying more jobs than it creates. In the study
> by the econ professor, it says for every green job that was created,
> 2.2 jobs were not created in other industries. So, I'm looking forward
> to when these stimuli start to "kick in", I'm sure it will do the
> trick. Yeah, right... let me get the popcorn and watch the train
> wreck of job destruction which will continute to unfold. I'm sure
> Bush, Obama, Paulson, Bernanke, Geithner, Pelosi etc. are giving
> each other high fives for a job well done.

Jul 13 02:19 PM

[American in...:]

You need to stop cheap anti-intellectualism.

The last thing you want to do in a recession is encourage aggregate demand to fall.

Your advice was the exactly the same advice - do nothing - that led to the Great Depression.


On Jul 13 01:10 PM James Quinn wrote:

> Borrowing to get out of a crisis caused by too much borrowing is
> an assanine solution. Only an academic would think it could work.
> When it fails, the Crisis will begin.
>
> theburningplatform.com...

Jul 13 02:20 PM

[Hot Richard:]

Ummm...this is nuts. Stimulus doesn't work. It sure doesn't work when you stimulate failed companies. It really doesn't work when you stimulate using borrowed and stolen funds. It absolutely doesn't work when you fork over a dollar of pork for every dollar of stimulus. It seriously doesn't work when you never ask for any kind of ROI, reporting, or tracking of the funds.

It is like giving a hobo a million dollars to open a tanning salon after his tanning salon went out of business because no one is tanning and then also giving your wife a million dollars for "consulting". Oh, and the two million was taken from the food bank for orphans and a brilliant cancer research group.

"Git'r Done!" needs to be replaced with "Let'r Fail!"

PS: I wouldn't say it is "uncharacteristic" at all.

Jul 13 03:50 PM

[Hot Richard:]

OH! So now tGD was caused by government doing nothing!! I only wish they had done nothing!

"Your advice was the exactly the same advice - do nothing - that led to the Great Depression."

Jul 13 03:55 PM

[Hot Richard:]

"Furthermore, get over this naive idea that markets always allocate resources more efficiently. "

OK, Central-planning guy. Free Markets are the most efficient allocators of resources. Relax, though, we haven't had free markets in the USA and we're moving further away quickly. You "win" (and by "win" I mean lose resource allocation competitiveness).

"Markets lead due underinvestment in basic research and public goods such as transporation. Markets also encourage pollution and global warming. Nor can you get justice in the markets or give people equal opportunity."

Governments lead to underinvestment in basic research and public goods such as transporation. Governments also encourage pollution and global warming. Nor can you get justice in the government or give people equal opportunity. Fixed it.

"Markets do not by themselves lead to a social optimum."
Government does not by itself lead to a social optimum. That is freedom's job.

Jul 13 04:03 PM

[Mayer Amsch...:]

Guys, this comment stream is terrible. We have to separate government spending to prop up banks from "stimulus". The "stimulus" did nothing, it was the gov't saying, directly, that they're going to print as much money as it takes to prop up the banking sector, therefore making a deflationary crisis (everyone flee to cash) less likely and therefore inflation more likely. So of course risk-taking is going to increase. The stimulus is totally separate.

Jul 13 04:04 PM

[James Quinn:]

The Federal Reserve being too loose with monetary policies during the 1920's is what led to the Great Depression. After 8 years of Keynsian stimulus, unemployment was still 18% in 1939. Intellectuals created the models that destroyed Wall Street. John Meriwether just lost investors more billions.


On Jul 13 02:20 PM American in Paris wrote:

> You need to stop cheap anti-intellectualism.
>
> The last thing you want to do in a recession is encourage aggregate
> demand to fall.
>
> Your advice was the exactly the same advice - do nothing - that led
> to the Great Depression.

Jul 13 04:38 PM

[Whippet:]

Yep- that's what they taught me in the Ameriken Publik Skools as well. If you're in Paris for your kids, I commend you... Fortunately, I learned how to read and think despite the heavy doses of bromides.

This Keynesian schlock needs to die a quick death if our nation is to survive in any form. You were correct when you said a drop in aggregate demand is bad during a depression (ceteris paribus). However, something is worse- maintenance of aggregate demand at the expense of everything sane. Moreover, public sector spending is TERRIBLE at producing aggregate demand- it has all the bad externalities of demand-pumping (debt, trade imbalance, resource bubbles and misallocation) with a very low "multiplier" in the economy. The best way? DROP TAXES. Let people keep and spend the money they EARN.

On Jul 13 02:20 PM American in Paris wrote:

> You need to stop cheap anti-intellectualism.
>
> The last thing you want to do in a recession is encourage aggregate
> demand to fall.
>
> Your advice was the exactly the same advice - do nothing - that led
> to the Great Depression.

Jul 13 04:52 PM

[Moon Kil Woong:]

The main effect the "stimulus" package had was the feel good, nobody left behind feeling it generated when it passed. People have already priced in the effects of the stimulus and it is already factored into the market. Anyone thinking they will get a bump when it hits this quarter is gravely mistaken.

Furthermore, I say "stimulus" because looking at the details it is more just a giant spending bill than a stimulus package. Paying and hiring 10% more bureaucrats in every department does not sound like the change we need. Does it to you? Although I must admit it is a bit better than flushing it down the toilet in the Middle East like Bush Jr. did, it is hardly a mentionable consolation prize.

If we get any stimulus, it will be the minor peace dividend as our military comes home from Iraq. It is unfortunate that such an effect will be muted since there are not many jobs laying around for them and some will be offset into Afghanistan.

Gelix Salmon is right. The difference of a few hundred billion means nothing now that we are used to speaking in Trillions. Do I hear two trillion anyone? Two trillion budget deficit? Let's stimulate the value of the Yen and Euro why don't we?

Jul 13 05:28 PM

[margel:]

Well, let us assume that Brad De Long is correct. Well, then what should be the composition of a second stimulus package? How much for tax cuts? infrastructure spending? State government support?

Jul 13 06:17 PM

[Bruce Pile:]

If you take the amount that our deficits are ballooning in the government's battle with the economy and divide it equally in stimulus, every adult in the country would receive over $50000. Shouldn't that eradicate a recession? Maybe a recession isn't the real problem.

Whatever the real problem is, the stock market doesn't seem to think it's being solved. The technicals, which don't have strong feelings either way on stimulus, are turning a good rally into limbo about right where a transition out of bear mode would have to happen. There is one warning signal (see the 7/13 post at my blog) that has only occurred 3 times the last 8 years, all of these in front of the major down moves of the last two bear markets. It is signaling the same thing right now. Nothing is infallible, but this limbo the market has been in for a month has a lot of technical red lights flashing. Hopefully this will pass and we'll get on with the rally to better things.

Jul 13 08:20 PM

[PhillyDan:]

You sir are dead wrong!! Stick to the economy even though you know nothing about that. You know less about our Nations' security. Obama has only strengthened our nation not weakened it like Bush and Cheney. If you like War so much, I suggest you take the place of our young and wonderful soldiers fighting to serve our nation. You dishonor them with your no-nothing comments. No facts, just a dumb wrong opinion.

On Jul 13 11:05 AM Prudent Man CFA wrote:

> What it says to me that when BHO was yelling "crisis" from the tree
> tops and emphasizing that the phony "shovel ready projects" were
> going to keep unemployment under 8 % he is stupid or was lying but,
> in all probability, both.
>
> The elegantly shallow one has made a politically ignorant mistake
> of over-promising while in office. His "cult" is not important now
> as he is expected to do something he never had to do: put up or
> shut up and he won't shut up.
>
> The buck stops with BHO and he can't defend the net as he is incapable
> of defending the nation.
>
>

Jul 13 08:28 PM

[Fitz919:]

The Bush stimulus actually worked, the economy had a sugar rush for roughly 2 quarters and then collapsed. The current stimulus, though many times the size, has no detectable effect, because it flows as a trickle, and isn't going anywhere where it's actually needed. The money could, and should be put to better use....like feeding the unemployed, and underemployed.

Jul 13 08:59 PM

[Wisdom vs. ...:]

The stimulus spending is not creating capital, and in the long run collecting the taxes and administrating the spending will take more utility OUT of the economy than it puts in. Building interstate highways increases economic utility, but deliberately building highways poorly so they have to be rebuilt continously is bad for the economy in the long run. You & Felix should note that Japan and Europe would have the best economies in the world IF YOU WERE RIGHT. Japan and Europe have been going down the toilet since we pulled the plug on the defense spending in 1990 and the strong dollar in 2000. (Except for France propping up their economy on Iraq's oil fields for the 90's.) You are both wrong, and if you were even paying attention to reality you would perceive it

Jul 13 09:07 PM

[MarkitWacha:]

According to recovery.gov, the government is sitting on approx. 100 billion dollars that were sucked from the Treasury market. That may be chump change to them, but it significantly slows money velocity (M2), as that money would have otherwise been moving around in the capital markets.

I think that this stimulus is acting like a BRAKE more than anything else. Think about it, the money has to be vacuumed up via the Treasury auctions first, then they sit on it, then they spend it. It's the worst possible action. Now, congress and the prez want to do it again on a larger scale still.

This is a harbinger of the worst possible outcome. If they would have done nothing, it would have been better.

Jul 13 11:34 PM

[sethmcs:]

Risk. Risk reduction is how to get money flowing. Reduce risk to zero money flows freely. Introduce risk and the money flow stops. If you are a small business that currently does not pay benefits and the gov't proposes to tax you an additional 8% to provide health coverage to your employees will you hire more employees? If sales are decreasing will you produce more of what you make? If your prospects are uncertain will you invest? Who will lend/invest the money to do it? Spending/investment will be restrained until the risk level is reduced. Will the stimulus work? Eventually it will but so will the monetary stimulus. The lag will result in the unemployment rate going much higher but I would not bet against the American economy over the next three years. People who take risks now when most are unwilling to do so have the potential to reap the highest rewards. On the other hand the definition of risk is events not turning out as expected will result in some failures. This is true of the stock market as well as business opportunities. No one will get rich investing in treasuries or certificates of deposit. As a matter of fact those investment will result in losses. Those who look to Washington to solve their problems will end up broke. The government does not (and cannot) produce value in a tangible sense. The government is a cost just as labor is a cost. The key to creating value is to produce something of more value than the cost. Individual businesses are reducing inventory, labor to align their costs with sales. This is healthly and necessary. Many business that survive will be more profitable and the business cycle will turn as it has many times before. The one catalyst that is needed to move the economy forward is new industry that doesn't currently exist today that improves output. In the 80s it was computers, in the 90s it was the internet. Today what will it be? And who will have the guts to take a risk to make it happen?

Jul 14 12:50 AM

[Dave Wrixon:]

Yep, you ain't seen nothin' yet!


On Jul 13 01:10 PM James Quinn wrote:

> Borrowing to get out of a crisis caused by too much borrowing is
> an assanine solution. Only an academic would think it could work.
> When it fails, the Crisis will begin.
>
> theburningplatform.com...

Jul 14 01:30 AM

[finmah@yaho...:]

Forget about the debt required or deficit or crafty political timing or political earmarks or favored construction projects that are anti global warming such as highways.

The logic that a government issuing checks out on a project basis does not and will not inspire business confidence or increase discounted cash flows beyond the scope of the project, lead to productivity enhancements even with alternative energy, nor could it ever match the scale required to rival the private sector.

The idea is that it will inspire private investment but any company relying upon government support rarely gets investor backing unless it pays a dividend. Add in the impact on the currency and the international investors are clearly more wary.
At the microlevel the multiplier effect is weak or nonexistent. With all these economists we need greater transparency in how markets develop.

Jul 14 09:52 AM

[Eric Baseball:]

Your are incorrect. Neither Hoover nor FDR "did nothing". What they did do prevented economic adjustment and recovery and led to a decade long depression. We are following the same Keynesian script as did the Japanese before us and we are likely to have the same (poor) results.

A good reference is Rothbard's "America's Great Depression."


On Jul 13 02:20 PM American in Paris wrote:

> You need to stop cheap anti-intellectualism.
>
> The last thing you want to do in a recession is encourage aggregate
> demand to fall.
>
> Your advice was the exactly the same advice - do nothing - that led
> to the Great Depression.

Jul 14 10:55 AM

[Gregman2:]

Liquidationist (Mellon) v. Stimulus (FDR). Is it better to let creative destruction unimpeded correct excess? Or, to intervene with stimulus? No one yet seems to be totally clear on which direction to take...albeit most now are agreeing that we are in the Great Debt Deflation.

Jul 14 12:13 PM