Economic Stimulus Plans: Why I Like Barack Obama's Slightly More

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Paul Krugman praises John Edwards's and Hillary Rodham Clinton's proposed stimulus packages, and criticizes Barack Obama's. I think Paul has got this one wrong.

Bear in mind that I don't yet believe that the case for a fiscal stimulus is strong--although I may well change my mind in a month or two. Congress and the president have a role to play in stimulus only if monetary policy has shot its bolt--which it has not--or if unemployment is rising rapidly and it is important to get cash quickly into the hands of people who will spend it and so keep the rise in unemployment from being as large. We are not there yet--at least I don't think so--but we may be there in three months.

And from this perspective the Barack Obama plan looks pretty good to me: it cuts a lot of identical $250 checks to people many of whom would spend it, and so boost employment. The checks could be in people's hands by April.

By contrast, the John Edwards and Hillary Rodham Clinton plans--well, a $30 billion housing crisis fund... anti-urban blight programs... helping local housing authorities... mortgage moratoriums... heating assistance... $5 billion in energy credits to encourage purchases of low emission vehicles and efficient appliances... funds to train and put to work people making public buildings more energy efficient...

These are all worthy. But this is not a bill that can be passed quickly--the housing provisions, at least, are one of those things where the devil is in the details of the drafting and where quick, clean passage and implementation is almost impossible. The proposal is not Obama's: we are going to stimulate demand by cutting a lot of identical checks via a refundable tax credit--a thing that the government can do well and quickly. And this, I think, matters a lot. A stimulus bill is likely to become a lobbyist-pleasing Christmas tree, ineffective and destructive. Obama's plan seems to me to have the best chance of avoiding that fate--if he could sign Pelosi and Reid up to move a clean, focused bill.

John Edwards and Hillary Rodham Clinton might respond that these stimulus packages are political rather than policy documents--acts of campaigning rather than acts of governance--and they are right, up to a point.

Comments

[Neal]

So what does $250.00 buy today--most of that would be eaten by energy and higher food prices in a matter of a week of two.

I don't think there is anyway you can replace the money injected into the economy from real estate inflation with $250 checks to consumers. A minor sum of money like that will not inspire the same grandiose spending that the "wealth effect" did. And, how will the investment bankers and hedge funds be able to multiply these checks as they did with the mortgage funding mechanisms?

Obama, like many others, still does not get it. This crisis is not a small thing--it is the arrival of much postponed consequences. It is the consequence of globalization, the loss of American preeminance politically, socially and economically, deficit spending personally and governmentally, years of belief that you could get something for nothing and that living like a millionaire was the right of all, all capped by an unprecedented period of financial speculation.

The final straw was the real estate inflation that was leveraged 10 to 25 times by investors into the biggest financial bubble ever, all balanced on the back of a borrower that ultimately couldn't even be bothered to try to fake the proper financial documentation. It was an inverted pyramid of funny money, eventually crushing the ant that supported it all, and breaking all that was the pyramid.

The "wealth effect" was most noticeable in how the money was spent. Instead of sheet vinyl on the floor, there was tile or stone. Instead of formica countertops, it was granite. Sub-zero appliance became relatively commonplace. Instead of just going to a beauty shop, the whole spa, salon and massage culture was born. It was OK to spend $4.00 for a coffee. Plastic surgery became essential for all people. Families ate out far more than they ever did. It was not enough of a vacation to go camping for a week. Cars became bigger and bigger. Houses got bigger and bigger. Concierge services abounded.

All of these new services and goods employed a greater proportion of people. Few people noticed that private sector, non-healthcare employment grew in only in those fields that ARE going to be cut back as people spend less. The economy as a whole, became more and more dependent upon irrational, non-essential spending. This has guaranteed that any downturn will be magnified beyond the point of the slowdown and carry over much longer than initially thought.

I'll cash my $250.00 check, but it will be gone prestty fast.

[Matthew G. Saroff]

I actually posted about this on my blog, and I argue for direct employment programs.

We have a desperate need to fix our infrastructure (hoe many more bridges do we need to have fall down), and we need a lot of work on alternate fuels.

Additionally, the velocity of the money from wages will likely be higher than the money from a refund.

[save_the_rustbelt]

Likely any of these plans would be too late.

Combining direct employment and infrastructure would require getting contracts in the pipeline last year, so it is probably too late (the government cannot make direct hires and fix infrastructure, the work is too complex and requires considerable capital assets). If we start now we could have some contracts on line by late 2008 and then into 2009.

The last really direct employment was the CETA program of the late 70s, and it was the biggest cluster mess in the history of social programs.

[Neal]

For perspective, during the period of the real-estate inflation, consumers extracted, on the average, about $90B of "wealth" per quarter (think 360 million checks of $250.00 every quarter). This does not even begin to address the trillions of dollars of financial instruments that were additionally built on the the back of mortgages and refinances.

[Cranky Observer]

Perhaps better would be to start by requiring the financial services entities to post honest accountings of where they stand. The amount of hogwash concerning exposure and profitability is staggering; Calculated Risk had an excerpt from a Citicorp conference call where an analyst was asking why the dividend was being lowered! If that isn't making decisions on false information I am not sure what qualifies.

Cranky

[Matt]

Brad is on the mark, 100%

Government, or the monopoly of the federal legislature, is very highly correlated with the large corporate wealth just to the left on the X axis. It is never the case, in a monopoly legislature, that actions can be taken counter cyclical. The federal legislature has, in general, the same cyclical problem as the monopoly central banker.

The idea of just shifting the redistribution formula a bit, for a time makes a whole lot of sense. I would further Brad's proposal by making this redistribution adjustment more regular, and semi-independently of the federal legislature.

We need, in terms of government reform, to break up the government peak in the X axis; including, move the income redistribution function somewhat outside the federal legislature. It will still be cyclic, but at least making large government structures somewhat independent mixes up the spectrum, less allignment, fewer recessions.

[Majorajam]

Further to Brad's point, my nanny values $250 much more than I do, making this a progressive plan, contrary to Krugman's disparaging claim that it isn't.

Honestly, I don't follow why Professor Krugman has taken up such a vendetta against Barrak Obama. If it's because of the unfortunate remarks about social security, surely he should be pleased that Obama has changed his rhetoric in response to the criticism. If it's for his differing view on health care mandates, (i.e. when penalties should be imposed- before or after getting sick), surely this is not a big enough discrepancy in position to justify the vitriol. Anyone have a beat on what gives here?

[Don Pedro]

You beat me to it! I wrote my own comments comparing the three candidates' proposals at Economists for Obama:
http://econ4obama.blogspot.com

[Brooks]

Per MSNBC.com: "The mantra among Democrats and many economists is that any stimulus bill should be timely, temporary and targeted toward people most likely to funnel the money right back into the economy. As such, some Democrats are suggesting limiting tax rebates to lower-income and middle-class families and people with children."

While, I would prefer to see any stimulus be monetary (because it's more timely and based more on economics than politics), the above criteria for tax cuts for immediate fiscal stimulus seem to make sense (although increased government spending would raise aggregate demand and be even more stimulative on a dollar for dollar basis vs. ANY tax cuts). But based on those criteria, what would be ideal? Answer: cutting payroll tax rates (the employee portion, with no change to employer portion), particularly if done progressively to limit the tax cut either to those earning only, say $30,000 annually or to income up to that level (the former being more stimulative on a dollar for dollar basis because it will be more targeted to lower-income earners who will spend more of it -- and just to make it even more efficient in that regard, the number of dependents could be factored in as well). Many lower-income earners pay little or no income tax (labor or cap gains), so even income tax cuts targeted at lower incomes would not provide immediate stimulus as efficiently as what I am suggesting (unless perhaps done via some huge expansion of the Earned Income Tax Credit, with which I'm not very familiar, so I'm not sure).

But why won't we use the most efficient vehicle, per my suggestion? Answer: Because we are unnecessarily and nonsensically fixated on a dedicated tax structure for SS and the resulting projections of levels of "solvency" of SS, which has no real, inherent significance in economic (or mathematical) terms. Even if for some reason people want to keep a dedicated tax structure (meaning all THOSE tax revenues are dedicated to SS AND no OTHER revenues can go to SS, at least for now), ok, just do what I'm suggesting anyway (if a tax cut is to be used at all). SS will then become less "solvent". So what? Whatever level of SS spending we wish spend, we will, regardless of which taxes fund SS in the future. It's all one big pot of money, people. How much we raise via taxation, how much we spend and on what is completely up to us. Yet again, this bizarre fixation with SS "solvency" gets in the way of an ideal solution to a problem.

Someone please make my day and tell me you understand what I'm saying and see the validity (or of course, tell me if I'm wrong in some way -- with a clear, logical explanation).

[Matt]

Paul's judgment might be right as to the relative merits of the various stimulus plans. (I tend to agree with Brad: simple and unadorned is better, to make quick passage possible.) But the conclusion of his piece is simply a personal swipe. The tone of the now several articles in in this anti-Obama vein has also been strikingly personal. These have not been among his better articles.

[roublen]

IMO you're overlooking a couple of very important points. One point of a stimulus bill is to inject some cash into the economy, which Obama's bill does most apolitically.

But the other purpose of a stimulus bill is to make sure that, in general, the people who are most hurt from the recession get the most help from the simulus. That means unemployment benefits, housing crisis fund, etc.

The last purpose of a stimulus bill is to ensure that the hit to the government finances is minimized. This is why you want the stimulus bill to include public infrastructure projects *which you would eventually have to do anyway*, like clean energy, preventive health care, etc. If the stimulus bill is going to soak up some quantity of government spending, you want it to be money as well spent as possible.

The last point is somewhat less important, but point #2 (using stimulus to minimize the real human suffering of a recession) is very, very important. If Obama's stimulus program doesn't include anything on unemployment benefits, or anything addressing the bursting of the housing bubble, and this represents Obama's considered views and is not an oversight or bad policy advice, then Obama's economic views really are less progressive than Edwards or HRC.

[anne]

The problems with Barack Obama begin with attacking Social Security, then proposing a plan for broadening health care insurnace that will make achieving universal insurance impossible, gobbling up any peace dividend from Iraq by adding 100,000 soliders to our forces and posting our forces through the Middle East if they are taken from Iraq. Then, there is the idea of attacking Pakistan.

Obama's fiscal stimulus is tepid, and will just leave the coming President that much more work to do to gain funds for needed social programs. Where is the concern from Obama for the terrible pain being felt by African Americans who were sold the most costly mortgages in numbers completely out of proportion with other groups? African Americans asset accumulation is being gravely threatened, and where is the concern?

I am not pleased.

[anne]

http://krugman.blogs.nytimes.com/2008/01/15/stimulus-never-mind/

January 15, 2008

Stimulus? Never Mind
By Paul Krugman

If this * Times report is at all right, Republicans will hold any attempt to help the economy now hostage to yet another try at making the Bush tax cuts permanent — thereby, among other things, crippling future possibilities for health care reform. I suspected that's what would happen, but thought that maybe, just maybe, the GOP would be sufficiently scared by the prospect of a nasty recession in an election year that it would back off. Guess not.

Just a reminder: here's the evidence on which Republicans base their faith that making the Bush tax cuts permanent is absatively, posolutely, essential to prosperity:

[Chart]

Rereading this, I think I could have been clearer. The only way anything useful will get done by way of stimulus in the next few months is if both parties agree not to demand anything that would tie the hands of the next president and Congress — that means no long-term spending plans from the Dems, no long-term tax cuts from the GOP. And it seems that the Republicans are already making it clear that they won't play it that way; they're trying to hold any help for the economy hostage to their agenda, which is exactly what happened 7 years ago. **

* http://www.nytimes.com/2008/01/15/washington/15policy.html

** http://www.nytimes.com/2001/03/28/opinion/28KRUG.htm

[Majorajam]

Roublen you miss the point. The best way to guard against the ill effects of a recession- which fall disproportionately on the poor, middle and lower middle class- is to avoid one, hence a stimulus package. And the key to the efficiency of a stimulus package is timeliness. It takes much less stimulus to affect the path of economic activity at an inflection point than in the midst of a recession.

By that calculus and for the reasons articulated by Brad here, the Obama plan is the most efficient and effective plan offered by the three candidates. It is therefore, in my estimation, erroneous and counterproductive to label that plan as 'not progressive' because it does not strive to achieve aims outside of the stated purpose of the bill at a cost of efficiency, practicality and unintended consequences to that purpose, (the last point of course referring to the huge and empirically observed opportunism of special interests in the crafting of such kitchen sink bills- see that of 1993).

[Majorajam]

anne,

You have a right to your opinion, but you should know that all three candidate's Health Care plan's achieve greater health care coverage through private insurance companies. Of these plans, Obama's is the one without the mandates, making it the least attractive to the insurance companies. In any case, as you will see in the general, Republicans will disagree with your viewpoint that this will prevent universal health care (presumably you're referring to government run single payer), as that's exactly how these bills will be painted and legitimately viewed by at least the GOP base (and, it has to be said, the insurance and drug industries), no matter which candidate is nominated.

As regards the stimulus, as I have noted, its timing can be more important than its size. Obama's plan can clearly be far more timely, as Brad has noted, and this would mean that Obama's compassion for those impacted by this downturn is amply demonstrated by the greater bang of (job saving) stimulus for each federal dollar spent (whereas he could've taken Clinton or Edwards position and thrown in all manner of items that will not be effective as stimulus, and hence will not save the jobs of the downtrodden, but do make for good campaign rhetoric). Perhaps that assuages some of your angst?

[Jesteramos]

Well this is mere comparison of REALITY as against to JUST political gains.

OBAMA's plans goes for the REALITY because it can be easily done and the people with benefited from this. While Edwards and Clinton has this "so-called" plans for the people but actually it is meant to be for their own political gains. By giving this plan to the public they are expected to be voted, and after that what's next? Controversy, irregularities, and maybe another anomaly in the government run by the Democrats and not by BUSH-CHENEY! that is a big shame in this democratic campaign.

To CHANGE the system of flaws. We must understand this "so-called" plans. And study every aspect. IS it for the benefit of all American people, It can be implemented right away, Whom can be affected in this plans.

Democrats urges as to be more vigilant on what they actually saying in the public. OBAMA is for the people and none other. Obama is for change that we can believe in..And indeed we are FIRED UP! Yes we can change this system.

[The Raven]

Obama's bill is another compromise with the hard right...and it may be the best you poor hominids can do.

[Michelle]

Nice to read this confirmation of my thoughts on Krugman's piece. I don't have any preference as between the actual short-term stimulus measures proposed by the three. The other stuff - the ambitious long-term projects - well, yeah, they are great. One can find many of these in all of the candidate's various economic, energy plans, etc. That's really where they belong. These stimulus plans that came out were supposed to be the candidate's answers to a potential immediate downturn. So, yeah, short-term is the key here. That's what Obama's plan is CALLED: short-term stimulus. So to my mind, the fact that he has the integrity and discipline to limit himself to short-term measures, knowing full well that he has already called for the investment in clean energy infrastructure as part of his overall energy and economic plans, is of a piece with the clean way that Obama has campaigned and governed, and with the honest and transparent way that he will govern. As Obama is fond of saying: "I won't be a president who tells you what you want to hear, but a president that will tell you what you need to know." Sure, we all love to hear about clean energy infrastructure, but it doesn't belong in a short-term economic stimulus package. I've said this before: Obama's downfall (if there will be any) isn't that he is an empty suit or that he is too glib. It will be that he is too wonkish, too straightforward and honest, not willing to say stupid things to score political points. I always loved Al Gore for this quality. And well, Gore has always struggled with politics. Obama is a unique case, as he has other qualities to compensate, but still he doesn't seem to have the willingness to throw precision to the winds and just say what people want to hear. I wonder if he can succeed on our dumbed-down national stage with this approach.

[shah8]

Man, I simply don't get the whole right-wing arguments. I thought his plan was rather subtle...Doing things like making it easier for everyone to get the housing deduction, and giving senior citizens that little boost seems quite a bit more truly humane than much of the what the other teams have proposed.

I took his plan as part of a play to undue the increasing regressiveness of the tax situation that has occured since roughly the late Carter years. I think that is very left-wing actually, and well, one of the problems that has plagued this country in many subtle ways *is* that regressiveness of the tax code. Fixing that *is* one of the maintenance things we do have to do...

I don't think he attacks social security. Doing a back door means test is not attacking social security.

[Retrogrouch]

Small checks to individuals, like tax cuts, would simply not have a big multiplier effect. Amounts that small would go straight to credit card companies.

Like most every policy put forth by Obama, it would be ineffective and only serve to convince people that liberal policies cannot help them any more than conservative ones can. Status quo triumphs, and any hope for a true change in American politics dies a slow death in the unity of bipartisan failure.

[kusaka]

Look, what is the difference? America will not vote for a woman and America will not vote for a black man. There is a reason Karl Rove sounds all statesmanlike in talking about Clinton and Obama. He knows very well either has exactly zero chance of being the next President.

[vt codger]

A minor point. I think Obama's plan is more like $250 up front and $250 more if things look worse after a bit. That would seem to work out to about 150 billion dollars in temporary stimulus. Doesn't seem unreasonable. Long term tax cuts OTOH... Sounds irresponsible. I hope that's not really what Obama intends to do. Have to check before I vote. I don't know about anyone else, but I'm a lot more worried about exactly what the money men have perpetrated this time than I am about stimulus. Exactly how much bad paper is there floating around the US and world financial systems? Who holds it? Where is it going to end up? What will the impact be? Why are we worrying about stimulus instead of worrying about the size and nature of the financial problems we face?

[shah8]

Ok, I keep looking for it, but can someone point me towards the long term tax proposal, I can't seem to find it.

[piotr]

Can one explain why stimulus is a good thing?

As far as avoiding recession or loss in jobs is concerned, it is a paltry amount of money in the scale of 10 trillion economy, so it makes no sense without "multiplier effect". With an open economy, it is not clear that the "multiple results" will materialize in USA. Drop in the exchange value of the dollar was much more "stimulating" from that point of view.

As far as making the recession less painful, that this is also a paltry amount unless it is targeted. Frankly, I do not care about having 250 dollars from the government, because I view it in the same way as a check one can get in the mail from a bank with small print "cashing this check means your approval of the terms of the loan blah blah". The money has to be borrowed and as a taxpayer, I am the collateral. The only difference is that my signature is not needed -- even I do not cash my stimulus check, my portion of the debt will go up. But as the bottom half of the income distrbution gets something like 20% of the income, concentrating stimulus on them will give relief that is proportionally 5 times larger. And then it is not so paltry.

Summary: fast and simple stimulus may be ineffective.

Last thing: preventing recessions is a bit like suppressing forest fires. Detritus should be somehow removed from the forests and the economy, e.g. non-sustainable prices of housing. Ameliorating effects of a recession may be similar to having controlled fires.

[Majorajam]

Carol,

Obama's plan together with his support for ARM reset freezes is similar in size to the Edwards and Clinton plans. I furthermore fail to see how you could justify injecting the word 'Republican' into your criticism, unless it should be read as a mindless rant. Republican plans for stimulus are effectively ideologically driven permanent rich enriching tax cuts, which are bad not only bad for stimulus but budget bursting, (although they don't hurt come fundraising time). Obama's plan is none of these things, and as Brad has pointed out, also the most practical, sensible and cost effective.

Your numbers are pretty wacky otherwise. 30 some odd percent of people filing a return last year didn't pay any federal tax- people with too low an income and/or combined with too high a dependant burden. Cutting these people a check is a very sensible way to provide them relief, (and I trust you are aware that people actually in such a situation do not scoff at $250???). Of course that is not the main purpose of a stimulus package in the first place. The main purpose is to counteract the contractionary feedback of recessionary forces, thereby averting or blunting the impact of a recession, thereby saving jobs and livelihoods that will be impacted otherwise. Real bleeding people as you'd have it, that would do better, not simply for the extra money in their pocket, but for the effects of the plan on the economy. And all of that gets back to the reason why Obama's plan is the most sensible.

Meanwhile, giving everyone making less than $100K a $5000 check would, even if it didn't apply to each earning member of a household, be a deficit busting, outrageously large package (not to mention quite a windfall for many people doing just fine for themselves). Assuming a very generous proportion of households filing returns are making more than $100K, you're still looking something like half a trillion dollars. Any plan on that foolish magnitude would likely throw the bond market a fit which in and of itself would be counter-stimulative.

Bottom line, I suggest you read up on the host of this blog before you discount his recommendation so swiftly, (and read up on economics before you start writing about it so stridently).

[Colin Danby]

Anne you might find this

http://www.prospect.org/csnc/blogs/ezraklein_archive?month=01&year=2008&base_name=obama_and_health_care_in_illin

interesting in light of your health care concerns. Your moral vision in the points you raise is acute as always, but your assessments of Obama seem uncharacteristically ill-tempered.

[SoftwareEng]

The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker's wages haven't even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home - that phantom equity has now evaporated.

In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.

Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.

[Brian]

I see no reason that this shot in the arm will do any long term good for the US economy. The federal government should use that money to pay off its debts, improve our foreign relations with the middle east, bolster the dollar, and get to work instead of waisting time patting themselves on the back for saving the US economy with cash payouts during an election year. It is similar if in order to pay my extra heating bills in the winter I went to get another credit card to cover the bills instead of working to increase my salary.

[SoftwareEng]

The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker's wages haven't even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home - that phantom equity has now evaporated.

John Maynard Keynes –
• If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
• Aggregate consumption depends mainly on the amount of aggregate income.
• Consumption – to repeat the obvious is the sole end and object of all economic activity.
• We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
• Capital is not a self-subsistent entity existing apart from consumption.
• Consumption is directly tied to the level of employment.

Proposed Program
• 2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
• Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
• Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
• Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
• Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
• A nationalized health care system for all U.S. citizens.
• An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
• Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.