Why I'm Unconvinced by Calls for a Second Stimulus Package

Brad DeLong has an impassioned plea for further fiscal stimulus under the headline “Fiscal Policy: The Obama Administration Is Not Making Much Sense These Days”. His basic argument is simple: if the $787 billion package was designed using assumptions which turn out to have been overoptimistic, then surely now that unemployment is heading into double digits a second major stimulus is warranted.

But the problem is that spending trillions of dollars is actually extremely difficult, and it’s even harder if you try to front-load it. Government, by its nature, moves slowly, and I get the impression that the “easy” spending — and then some — was all included in the initial stimulus bill. The “shovel-ready projects” have already been funded, and any extra stimulus might well take years to kick in.

In an efficient market, a credible government promise to invest hundreds of billions of dollars in mass transit and nuclear power and smart electrical grids and so on and so forth would have an immediate stimulative effect: people would start spending now, in anticipation of all those government dollars which are going to arrive in a few years’ time. But we’re in a liquidity crunch, and we’re not in an efficient market, and unfortunately government spending only seems to cause any stimulus as and when the checks are written, if then. (Insofar as they go to companies who are running down their inventories, there’s no stimulus at all.)

I don’t think there’s any doubt that there are diminishing marginal returns to fiscal stimulus plans — which brings me to Paul Krugman’s take on the subject, where he asks how an examination of the marginal costs and benefits of deficit spending could possibly come to the conclusion that stimulus of $800 billion was exactly what was needed.

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.

If there is to be a second round of stimulus, then, I think it should certainly go to areas largely untouched by the first round. I like arts spending; DeLong wants an “aid-to-states-that-maintain-effort package”. But unless and until we can demonstrate that the marginal benefit of extra stimulus spending hasn’t already diminished to something negligible, it does seem fiscally reckless to throw good money after wasted funds.

Update: Commenters rightly say that there’s a limit to how much can be done with arts subsidies. Again, they’re the kind of thing where a little goes a long way, but a lot doesn’t go a lot further.

And Brad DeLong responds, saying that of the $787 billion earmarked in the stimulus bill, only $14.5 billion has been spent so far, and that total will barely exceed $50 billion by October. Which seems to me a good reason why we don’t need to increase the total — we’re having a hard enough time spending the money we’ve already got.

Comments

[Uncommon_Cents:]

$787,000,000,000 / 300,000,000 = $2,623 per person.
$787,000,000,000 / 105,000,000 = $7,495 per household.

They are rough numbers, but I think handing the money out to the people would have been a much better way to go about "stimulating" the economy.

Or, how about an across the board tax holiday for six months?

Jul 13 12:54 PM

[j_remington:]

INFLATED numbers are part of the government's ploy to influence consumer sentiment.

Jul 13 01:30 PM

[CautiousInv...:]

The structure and compostion of the first stimulus package is seriously wanting.

With 13% in the system and 87% to go, it is premature to give even casual thought to a second round of stimulus. And the highly conflicting messages we are receiving from the administration with Tyson saying one thing, Biden saying another and then the president parsing words and finally saying: (to ABC): "There’s nothing that we would have done differently."

The president is saying that had they known unemployment would drift higher they would not had done things differently. Let's leave it at that; with the lack of consensus and obvious confusion within the administration I'm afraid this, along with cluttered thinking, would guide and shape the next round of spending and only leave us further in debt.

Jul 13 01:36 PM

[Sovestor:]

Unconvinced indeed. US does not have enough money to do another stimulus. Who want to continue lending to US?

Jul 13 02:16 PM

[sticktoitiv...:]

Let's just pay people to demolish their house, like burning crops in the great depression.

Jul 13 02:24 PM

[cameroni:]

The real worry is that so little of the stimulus to date has been released and that when it does hit the system where asset values are much diminished we could end up experiencing a very rapid re-flation of the seconomy as those dollars are leveraged through fractional lending. Stimulus to date may already be too much for the system to handle if output and consumption are not aligned. I think the Fed recognizes the risks of too much liquidity entering the system at a later date and so we are now hearing conflicting messages about another stimulus being enacted.

Jul 13 02:24 PM

[Neil459:]

The US does not have any money, its all ours, the people's and we do not have the ability to pay any more health, income, sales, or use taxes.

On Jul 13 02:16 PM Sovestor wrote:
> Unconvinced indeed. US does not have enough money to do another stimulus.
> Who want to continue lending to US?

Jul 13 02:27 PM

[Alan Young:]

I like the part about giving money to artists; it certainly is the antithesis of giving it to banks.

But what about Obama's claim that the stimulus hasn't worked yet because it mostly hasn't been spent yet ("a two-year plan, not a six-month plan"). It seems to me the first step, if you wish to assert that it has not been effective, would be to rebut the most prominent defense.

Jul 13 03:05 PM

[j_remington:]

Short covering is keeping the market afloat for now. Different story next week.

Jul 13 03:05 PM

[conceptwizard:]

The timing on the stimulus is wrong. They usually are, if in fact the recession is over last quarter (I doubt) then the stimulus will hit on an upswing when its not needed. Mostly these stimulus packages are reactive and we are usually in a recession before they even start to plan them.
The release of this money is a separate issue, so far we were averaging about 11 billion a week out the door so thats about 66-88 billion so far. At this pace it will take 71 weeks or approximately 6 years to disperse. WHAT? So I am assuming that they will pick up the pace, the winter months are coming so that will slow things down again for outdoor projects.
So, I don't think it would make much sense to put a third stimulus in place before we have measured the outcome of the first two. Which is not going to be for a while.

Jul 13 03:05 PM

[Dave Wrixon:]

Isn't that kind of how we got into this mess?


On Jul 13 12:54 PM Uncommon_Cents wrote:

> $787,000,000,000 / 300,000,000 = $2,623 per person.
> $787,000,000,000 / 105,000,000 = $7,495 per household.
>
> They are rough numbers, but I think handing the money out to the
> people would have been a much better way to go about "stimulating"
> the economy.
>
> Or, how about an across the board tax holiday for six months?

Jul 13 04:15 PM

[billddrummer:]

On Jul 13 12:54 PM Uncommon_Cents wrote:

> $787,000,000,000 / 300,000,000 = $2,623 per person.
> $787,000,000,000 / 105,000,000 = $7,495 per household.
>
> They are rough numbers, but I think handing the money out to the
> people would have been a much better way to go about "stimulating"
> the economy.
>
> Or, how about an across the board tax holiday for six months?

I could have used the cash for consumption. Instead it went somewhere else.

Where I've got no clue.

Jul 13 04:18 PM

[Dave Wrixon:]

I think the big question is whether or not there is a finite point beyond which the US government cannot create more money out of thin air? Is it just possible beyond a certain limit that the debasement of the currency accelerates beyond the rate as which new money can be created, thereby rendering everyone poorer for each new dollar that is created?

It is a bit like Cosmic theory. Some believe the Universe will expand forever. Other believe that it will implode like a reversal of the Big Bang. Unlike the Cosmic question the dollar issue will be resolved very soon. Perhaps Obama will demonstrate that in the rarefied atmosphere of Washington the Laws of Economics can be suspended. History is, however, against him.


On Jul 13 02:24 PM cameroni wrote:

> The real worry is that so little of the stimulus to date has been
> released and that when it does hit the system where asset values
> are much diminished we could end up experiencing a very rapid re-flation
> of the seconomy as those dollars are leveraged through fractional
> lending. Stimulus to date may already be too much for the system
> to handle if output and consumption are not aligned. I think the
> Fed recognizes the risks of too much liquidity entering the system
> at a later date and so we are now hearing conflicting messages about
> another stimulus being enacted.

Jul 13 04:25 PM

[robert.b.fe...:]

Can we just put the unspent portion of the stimulous back in the treasury? So far the only things being stimulated are labor unions and politicians. The only green shoots are green backs shooting off of the printing press.

Jul 13 04:49 PM

[davidbdc:]

I think that we have to wait to see the result of the stimulus spending. We also have to ask why borrow more money to prop up a GDP number that was propped up in the first place (with borrowing that shouldn't have happened in the first place).

Also, What is the great thing or two that is coming out of the 800 billion stimulus? Are we going to have a new electrical grid that makes solar, wind, water power generation feasible on a large scale? Are we going to have a new distribution system in place to permit natural gas or electric powered cars around the country? Are we restoring all bridges to a safe state that will support the infrastructure requirements of the next 25 years?

I'm ok with government doing things - as long as they actually mean something. Borrowing and spending money to achieve whatever is nonsense. We are wasting our future generations opportunities to allow people to live to a current standard of living that they "deserve" and feel entitled to.......a sad state of affairs.

Jul 13 04:50 PM

[Moon Kil Woong:]

Hmmm yes, it would be humorous to see them try to float those bonds. Well I am sure Bernake would be happy to buy them all up if the Treasury would loan him enough to expand his balance sheet again? But what good would that do really? Thus you see our cracked fiscal dilemma quite vividly.

Jul 13 05:34 PM

[cameroni:]

Thank-you concept Wizard. I think you spelled it out well. The conflict is all about timing and big money infused into the economy at the wrong time just spells trouble. That is why I am buying Gold. That is why we all need a little precious metals security for insurance against the predicted but not-yet-apparent damage of too much stimulus.


On Jul 13 03:05 PM conceptwizard wrote:

> The timing on the stimulus is wrong. They usually are, if in fact
> the recession is over last quarter (I doubt) then the stimulus will
> hit on an upswing when its not needed. Mostly these stimulus packages
> are reactive and we are usually in a recession before they even start
> to plan them.
> The release of this money is a separate issue, so far we were averaging
> about 11 billion a week out the door so thats about 66-88 billion
> so far. At this pace it will take 71 weeks or approximately 6 years
> to disperse. WHAT? So I am assuming that they will pick up the pace,
> the winter months are coming so that will slow things down again
> for outdoor projects.
> So, I don't think it would make much sense to put a third stimulus
> in place before we have measured the outcome of the first two. Which
> is not going to be for a while.

Jul 13 06:13 PM

[jstratt:]

Unless I read the economy wrong we will have another stimulus. That seems clear from history with the belief that a few million extra jobs makes a difference in the depth of our depression.

The BRIC countries take a different view and that is the source of their dollar concerns.

My only opinion is I wish the 1st stimulus was more than political pork sausage.

Jul 13 08:31 PM

[Gregor Macd...:]

It's intriguing, however, that both you and Brad have the same throwaway line in each of your posts: "the economy has done much worse than anybody thought it would."

That's just not true, and, understandably neither you nor Brad spend anytime pursuing any quantification of the assertion. It's a kind of hanging chad of logic in both of your essays, that appears unimportant at first, but, actually weakens both pieces quite alot.

Jul 14 12:58 AM

[Maxe Paul:]

Surely it would be wise to let the first stimulus work it's way through the system, which will take 2 to 3 years IMO.

People have such a short term approach, it's been 6 months people? WAKE UP AMERICA stop this short term-ism that got you into trouble in the first place.

Jul 14 11:34 AM