The Stimulus Fallacy: The Problem Is Who the Money Was Given to

I’m not a big a big Krugman fan. Not that he isn’t an excellent economist but he usually seems more interested, or at least as interested, in pushing a political agenda rather than one grounded in economics.

Having said that, I found this Op-Ed in the NYT Tuesday, pretty interesting. I think he’s made some cogent arguments the past few days about concentrating too much on the deficit and this column continues that meme.

The one thing that I do quibble with is his contention that the first deficit was too small. He’s made this argument before, always with the claim that most economists agree with him. A list of those in his corner from him might be instructive.

But to the point, a lot of the commentary that I’ve seen suggests that it’s not a size problem with stimulus so much as it is one of execution. The stimulus was captured by the political class and directed towards those projects which would provide the maximum return in reelection cash. To the extent the Obama administration was a co-conspirator in this heist, they deserve not a little bit of blame.

That’s the reason that I’ve argued before that any new stimulus needs to be directed towards broad tax relief — a suspension of all or part of the payroll tax for instance. Anything to take the ability to direct the expenditure of money away from members of Congress on both sides of the aisle as well as the administration.

The problem isn’t that there wasn’t enough money handed out, it’s who it was handed out to.

Comments

[Graham and Dodd Investor]

The best stimulus package would probably be a public works project. Repair our creaky infrastructure and create jobs at the same time.

2009 Nov 24 11:45 AM

[conceptwizard]

By the time Barack Obama was elected president in November 2008, the U.S. was mired in seemingly endless wars in Afghanistan and Iraq, and the worst recession since the Great Depression was picking up speed. In order to prevent total disaster, the Bush administration ended its eight years of catastrophic misrule with a flourish, by allocating over $700 billion in financial system bailouts to cover the bad loans the banks had been making since Greenspan gave the housing bubble the green light.

It is now November 2009. Since Barack Obama was inaugurated in January, unemployment has soared from 7.9 percent to 10.2 percent. A few hundred billion dollars were allocated for “stimulus” purposes, but most of that went to pay unemployment benefits and to keep state and local governments from laying off more employees.

A fraction has been distributed for highway improvements, but largely through the bank bailouts the federal deficit has been running at an annual rate of $1.5 trillion, by far the largest in history, with the national debt now topping $12 trillion, not including unfunded liabilities. Ironically, those Americans who still have productive jobs continue to grow in efficiency, with productivity up over five percent in the last year.

2009 Nov 24 11:53 AM

[bob adamson]

We armchair quarterbacks tend to have perfect 22/22 hindsight vision. We tend to discount the hard truths that by the fall of 2008 the threat of economic chaos reigned in a way never before had been envisaged and that the agencies of the various global governments were at sixes and sevens on what, in detail, was to be done, who should do various things and what authority each had to act. While there is no doubt that personal political considerations compounded these problems, we are fortunate that stability was achieved and deflation forestalled to the extent that these goals were achieved in the circumstances. However, the proper measure is what was possible and not what is perfect in determining what now should be done.

The new President has only been in office since February and the transition to a new administration and the checks and balances between the executive and legislative branches of government and between the Federal Reserve and those two arms of government all affect the speed and coherence of the capacity to respond domestically. A similar speed and coherence issue exists on the international stage and in coordination between the Federal and State governments.

All this is not to say that the problems described by Tom Lindmark are not real. There are two ways in which we can focus on these problems, however. One is simply to find fault and the other is to propose concrete ways of moving forward now. It is natural for most of us to engage in a mixture of these two approaches but, arguably, we become part of the problem rather than the solution insofar as our primary focus isn’t on moving forward.

2009 Nov 24 02:02 PM

[Augustus]

The bailout package was passed by a vote that included the large majority of Obangye's party and was crafted by Barney and Chris. IIRC, OBangye even voted in favor. While on the campaign trail he announced that he would only vote in favor if the "Taxpayer's were Protected." The Dems finger prints were on ever piece of it, including the nonsense earmarks they included. For the Dems now to disavow responsibility is re-writing history.

On Nov 24 11:53 AM conceptwizard wrote:

> By the time Barack Obama was elected president in November 2008,
> the U.S. was mired in seemingly endless wars in Afghanistan and Iraq,
> and the worst recession since the Great Depression was picking up
> speed. In order to prevent total disaster, the Bush administration
> ended its eight years of catastrophic misrule with a flourish, by
> allocating over $700 billion in financial system bailouts to cover
> the bad loans the banks had been making since Greenspan gave the
> housing bubble the green light.
>
> It is now November 2009. Since Barack Obama was inaugurated in January,
> unemployment has soared from 7.9 percent to 10.2 percent. A few hundred
> billion dollars were allocated for “stimulus” purposes, but most
> of that went to pay unemployment benefits and to keep state and local
> governments from laying off more employees.
>
> A fraction has been distributed for highway improvements, but largely
> through the bank bailouts the federal deficit has been running at
> an annual rate of $1.5 trillion, by far the largest in history, with
> the national debt now topping $12 trillion, not including unfunded
> liabilities. Ironically, those Americans who still have productive
> jobs continue to grow in efficiency, with productivity up over five
> percent in the last year.

2009 Nov 24 04:01 PM

[untrusting investor]

Wait till you see where unemployment insurance premiums and related payroll taxes are going to get to in 2010 and 2011. Somebody has to pay for these and employees and employers will see large increases. Just saw a comment by a small business owner that sees payroll tax increases going up so much he cannot afford to bring back the 1/2 staff layed off, even if business does pick up, as he needs to conserve cash to pay for increased costs next year.

2009 Nov 25 12:28 AM