Consensus emerges that the stimulus is working

Posted by AzBlueMeanie:

The New York Times reported on Saturday that dispassionate economic analysts have reached a consensus that the stimulus package, messy as it is, is working. New Consensus Views Stimulus as Worthy Step:

The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama’s promise to “save or create” about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers.

“It was worth doing — it’s made a difference,” said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.

Mr. Gault added: “I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus.”

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the “jobless recovery” under way as wary employers hold off on new hiring.

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[Overly optimistic] assumptions in turn contributed to producing a package that if anything is too small, analysts say. “The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded,” said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.

While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.

“There should have been more direct federal spending that would have added to aggregate demand,” he said. “Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending.”

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Among Democrats in the White House and Congress, “there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument,” said Mark Zandi, chief economist of Moody’s and an occasional adviser to lawmakers [including John McCain's presidential campaign].

Even so, “the stimulus is doing what it was supposed to do — it is contributing to ending the recession,” he added, citing the economy’s third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. “In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus.”

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Much federal infrastructure money has gone not to new job-creating projects but to finance existing plans, which otherwise would be unaffordable to states.

So the stimulus has not “supercharged” transportation construction as was hoped, said Charles Gallagher, an asphalt company owner, speaking for the American Road and Transportation Builders Association, but it has nonetheless been “a welcome Band-Aid” to offset state cuts.

“Many contractors across the nation have been able to sustain, if not add to, their work force,” he said.

That sort of impact is what makes federal aid to state governments rank high in economists’ reckoning of the stimulus value of various proposals. Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody’s, and general aid to states carries a $1.41 “bang” for each federal buck.

Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.

By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody’s. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses’ net operating losses (21 cents).

Economists said Republicans’ recent proposals to rescind unspent money would be a mistake.

Before the usual suspects start huffing about how we can't afford to rescue the economy from the next great depression, Nobel Prize economist Paul Krugman (who consistently has argued that the stimulus package was too small and that we need another stimulus package focused on job creation) offers this Fiscal perspective:

It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington. The economy remains in deeply dire straits: here’s long-term unemployment:


Yet the respectable thing, all of a sudden, is to claim that we can’t possibly afford to spend any more money on job creation.

History says differently. Here’s a comparison of debt/GDP levels, actual levels for several countries (OECD for Belgium, IMF for the rest), and projected levels (from the IMF) for the United States. (Note that these are for general government, i.e., including state and local, so they’re higher than the numbers you usually read).


Yes, we’re going fairly deep into debt. No, it’s not unprecedented. Other advanced countries have been substantially deeper in debt without either defaulting or having runaway inflation — and some of those countries have historically had weak governments (Belgium because of the linguistic divide, and Italy because it’s Italy).

I’d be a little more forgiving of the nonsense if all the people screaming about the deficit were sincere. And some are. But many, if not most, are perfectly happy to incur huge unfunded liabilities for the wars they want to fight, and/or to eliminate inheritance taxes for the heirs of multimillionaires. It’s only deficits incurred to help working Americans that get them all moralistic.

Anyway, the point is that the economy desperately needs more help — and yes, we can afford to provide it.

0 responses to “Consensus emerges that the stimulus is working

  1. Doesn’t anything about thinking that interest rates should be negative set off any warning bells in your head?

    That among other reasons why I think that there should be no Federal Reserve in the first place.

  2. See Paul Krugman’s blog for the charts and get a paper bag for your hyperventilating.


    So, a lot of the fear about a surge in interest rates seems to be motivated by supposed parallels to the situation in 1994, when there was a big spike in rates. Then as now there was a large “carry trade” motivated by the spread between long rates and short rates; when the long rate started to rise, there was a balance sheet squeeze that caused a stunning, albeit short-lived spike.

    OK, a couple of points. First, the 1994 interest spike was in fact a bond elbbub — that’s an inverse bubble. Once the panic subsided, rates went right back down.

    Second, the squeeze took place against the background of a very strong economy — one that was adding jobs at a clip we can only dream of today. So a sharp rise in rates was a lot easier to justify. In fact, one measure of the strength of the economy is that the interest rate spike barely dented job growth.

    So does 1994 carry lessons for today? Well, I guess everything does. But the differences were large — and 1994 does not offer an example of bond vigilantes derailing a recovery: despite the vigilante attack, growth just kept on rolling.

    You should also see

    The madness of the inflation hawks

    Wow. Matthew Yglesias catches David Ignatius worrying that the Fed may not have enough political support in its efforts to raise interest rates and fight inflation. As Matt correctly notes, this is a remote issue — unemployment is high, inflation is low, and the Fed has no business raising rates any time soon.

    This really can’t be overemphasized. I like to use Glenn Rudebusch’s estimate of the Taylor Rule — a rule relating interest rates to unemployment and inflation — that appears to track past Fed behavior. The chart below shows the rate predicted by the rule versus the actual rate on 3-month T-bills (I’m using that rather than the target Fed funds rate for trivial computational convenience).: [chart]

    The Fed has been up against the zero lower bound since the beginning of 2009, roughly when unemployment rose above 11 percent; right now the Taylor rule says that the Fed funds rate should be minus 6.7%.

    So why should the Fed even be thinking about raising rates any time soon? We’re not likely to see 7% unemployment for years — and by the time we do, inflation will probably be even lower than it is now. I’d add that the Fed really should be raising its inflation target, meaning an even longer pause before it raises rates.

    Monetary tightening shouldn’t be on the agenda for a long, long time.

  3. Those industries and groups and even individuals who benefit from government spending are going to say that the ARRA stimulus was successful or is successful.

    There are plenty of people in America that are hurting. I continue to doubt that one more government program is the solution.

    As for runaway inflation, the problem is staring us in the face if you know where to look for it.

    Gold was about $800 an ounce a year ago and is about $1,150 an ounce now. I don’t want any more inflation.