A Second Stimulus Makes No Sense

The following graph from the Congressional Budget Office shows the projected output gap between actual and potential GDP with and without stimulus spending, i.e., the American Recovery and Reinvestment Act (see full CBO presentation). The CBO presentation highlights the implementation lags of fiscal policy, and illustrates why a stimulus package that stretches over 2 or 3 years seemed justified given that the CBO expected the GDP output gap to persist for longer than one year. Projections have only 24% of the money being disbursed in fiscal year 2009, 74% disbursed by the end of FY 2010, and 91% disbursed by the end of FY 2011.

click to enlarge

Source: Congressional Budget Office

Given the back-loading of spending, and the realization that the recovery is not taking hold as quickly as most would want (except possibly by politicians up for re-election next year and looking for an election year boost), this is creating a problem now for both the administration and Congress. On the one hand, quicker, and more front-loaded stimulus seems warranted, yet data such as that provided by the CBO has been used to justify the huge delayed spending in coming years. Therefore, if the projections are correct, then patience is in order, but something tells me that is not going to fly as unemployment nears 10 percent.

So how do you speed things up? As outlined by the CBO, you could waive environmental reviews, award contracts without competitive bidding, or simply not dole out money by jurisdictions, but instead give money to those who can most efficiently spend it (shovel-ready project). The first one is a non-starter given the environmental shift of the current administration, the second is going to be difficult given the criticism that no-bid projects received in the last administration, and the last one is simply unacceptable to anyone in Congress - given their parochialism and the fact that it actually makes some sense (and of course, you need shovel-ready projects on a rather large scale - most are probably already funded).

So on the short-term, what needs to be done? The quickest way is through changes to taxes. This could come in rebates (which are relatively quick in non-tax months, but also somewhat ineffective when people are scared and the savings rate is increasing), or through lowering withholding (currently tried with the middle class, but not having the desired effect). This leaves suspending some income taxes for a period of time, or lowering income taxes on everyone, including the wealthy and corporations. Suspension is difficult to sell given the state, or perceived state, of social security and medicare needs, not to mention the growing deficit (even though lower rates can bring in higher receipts), while reducing taxes on corporations and the wealthy is anathema to most of those currently in power.

The limited real and political choices available has now caused the discussion to come full circle - back to considering another stimulus. I forget - what was that definition about doing the same thing again and expecting different results? If President Obama is not able to convince the American public and Congress to be patient, we may find out the answer rather quickly.

Comments

[Dave Wrixon:]

Barking at the Moon!

Jul 13 03:56 PM

[Moon Kil Woong:]

We already tried tax rebates. That was the First Bush Jr. inspired stimulus plan along with TARP. Sadly, people only remember TARP due to it's epic failure even though the stimulus was a failure as well.

The simple fact is stimulus is pretty inefficient and the bill Congress passed is even more so since it is merely a spending bill cloaked as a stimulus package the same way Bush Jr's stimulus was a discounted ticket bribe to taxpayer funland and a thanks for voting for me last election and not streaming too much over TARP.

Don't expect too much save the government becoming an even bigger component of GDP. The CBO is expected to revise down it's economic projections later this year. Strangely, they will most likely be about the same as their projections for the economy without stimulus from before. Fancy that. Although they will draw a new lower line to try to make stimulus look effective, don't believe the hype.

Jul 13 06:17 PM

[morph366:]

It's a while since I've seen this argument from your piece being used - "even though lower rates can bring in higher receipts".

Trickle up economics would be a very hard sell in this political climate!

Jul 14 02:15 AM