Stimulus Packages: Edwards, Clinton, Obama

I think Paul Krugman has got this one wrong. He writes:

Responding to Recession - New York Times: John Edwards... driving his party’s policy agenda... has done it again on economic stimulus: last month, before the economic consensus turned as negative as it now has, he proposed a stimulus package including aid to unemployed workers, aid to cash-strapped state and local governments, public investment in alternative energy, and other measures. Last week Hillary Clinton offered a broadly similar but somewhat larger proposal. (It also includes aid to families having trouble paying heating bills, which seems like a clever way to put cash in the hands of people likely to spend it.) The Edwards and Clinton proposals both contain provisions for bigger stimulus if the economy worsens....

The Obama campaign’s initial response to the latest wave of bad economic news was, I’m sorry to say, disreputable: Mr. Obama’s top economic adviser claimed that the long-term tax-cut plan the candidate announced months ago is just what we need to keep the slump from “morphing into a drastic decline in consumer spending.” Hmm: claiming that the candidate is all-seeing, and that a tax cut originally proposed for other reasons is also a recession-fighting measure — doesn’t that sound familiar?

Bear in mind that I don't yet believe that the case for a fiscal stimulus is strong--although I may change my mind in a month or two, depending on how the data flow looks. The principal organization for successful stabilization policy is the Federal Reserve. Congress and the president have a role to play only in two situations: first, if monetary policy has shot its bolt and cannot do anything more--and we are far from that point--and second, if the Federal Reserve has been caught flat-footed in the wrong policy position, 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.

From this perspective Obama's plan looks pretty good:

Obama stimulus package emphasizes quick cash in hand: a $250 tax credit to 150 million workers to offset the payroll tax paid on the first $8,100 of earnings. He urged a further $250 tax credit per worker if employment declines three months in a row. He also would give a one-time, $250 payment to Social Security recipients who would not benefit from the tax credit, followed by another $250 payment if employment declines three months straight. The immediate relief would cost $45 billion, plus another $45 billion if the economy weakened...

The plan is clean: there is no place for lobbyists to hang ornaments on it--which means that quick passage is possible. The first $45 billion of checks could be cut and sent out with this April's tax refunds. It meets Elmendorf and Furman's http://www.brookings.edu/~/media/Files/rc/papers/2008/0110_fiscal_stimulus_elmendorf_furman/0110_fiscal_stimulus_elmendorf_furman.pdf requirements that a fiscal stimulus be timely and temporary. It does not do so well on "targeted"--it doesn't do a great job at making sure the money gets to people who will spend it and thus boost aggregate demand--but this is at least partly offset by its simplicity, which is indeed essential if we are going to get the timely and the temporary right.

John Edwards's and Hillary Rodham Clinton's plans look, to me, likely to be less effective. Consider Hillary Rodham Clinton's:

Talking Points Memo | Clinton offers economic stimulus plan: a $30 billion housing crisis fund to help states and localities deal with the fallout of foreclosures... ease the effects of vacant properties with anti-blight programs and helping local housing authorities buy and rent out vacant properties. Setting a 90-day moratorium on subprime mortgages of at least five years, or until housing lenders have converted mortgages into loans families can afford. The proposal also would increase the portfolio caps at Fannie Mae and Freddie Mac. Providing $25 billion in emergency energy assistance for families facing rising heating bills.... Providing $10 billion to extend unemployment insurance for those struggling to find work while supporting families. Providing $5 billion in energy efficiency by doing such things as giving tax credits to encourage purchases of low emission vehicles and efficient appliances windows and other clean technologies. She also proposes funds to train and put to work people making public buildings more energy efficient...

These are all worthy causes--things that the government should be spending more money on. 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. Funds to train and put to work people making public buildings more energy efficient--well, those aren't timely. 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. As Stan Collender wrote last Thursday:

Christmas 2008 May Be Coming Early For Lobbyists | Capital Gains and Games: A tax lobbyist friend told me yesterday that he's gone into the economic stimulus business. In response to my inquiring look that begged for more information, he said that I'd be surprised how many industries and professions have tax reductions that they want in any economic stimulus package that is considered this year and are looking to him to come up with arguments that confirm they will, indeed, be stimulative. In other words, even though it hasn't yet been introduced, the economic stimulus that has become all the rage in Washington these days has already become a Christmas tree with everyone and anyone who has something they want to do trying to reframe that proposal in terms of its positive impact on the economy. In case anyone hasn't noticed, this includes the White House, with the president all but saying that the reason the economy may be slowing is because of uncertainty about whether the tax cuts enacted during his administration will be extended when they expire in 2010. None of this is suprising. Even though its chances of being enacted are small, an economic stimulus bill may be the only thing that actually moves through the legislative process this year. In lobbyist parlance: it may be the only train leaving the station in 2008. But no matter how good the messaging, loading up the bill with a variety of provisions is one of the things most likely to lead to its demise. It will be too big, too political, too expensive, and take far too long to debate and pass.

The best way to keep a stimulus bill from becoming a lobbyist-pleasing ineffective and destructive Christmas tree in which a lot of the money goes to people who won't spend it and a lot more to people who shouldn't get it is to keep the legislative vehicle simple and clean. Boosting employment in the short term by cutting a lot of identical checks by April if we need to is something congress and the IRS can do. And Obama's plan seems to me to have the best chance of doing that--if he can sign Pelosi and Reid up to move a clean, focused bill.

John Edwards and Hillary Rodham Clinton and their staffs--they don't seem to have grasped that governance is best when you ask congress to do things that are within its competence, and ask the administrative branch to do things that are within its competence. They 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

[shah8]

Good luck pushing that one. I was over at The Agonist trying to push what the post just said.

A great number of people truly aren't digesting what Obama's actually proposing. They pay attention to his conservative campaign, and not to his actual policy proposals, which tends to be considerably more liberal/progressive in the pragmatic sense.

To some extent, this is Obama's fault, and I think Obama fully intends for this to be so. His tax ideas are quite fully focused on decreasing the regressiveness (in both time and money) of the tax code, which is a lot more controversial than some of the conservative independents that support Obama now truly wish for.

[bigTom]

I can't help but thinking that candidates talk about shortterm stimulus plans is irrelevant. They won't have any real say in whatever plan is implemented until after the period is question has passed.

Looked at in that light, talking about plans for recovering from a potentially longlasting downturn would seem more sensible. For a longer term stimulus, I would hope that the public return on public stimulus investment would be an important consideration.

[slomike]

Didn't W suck us into this whirlpool with a $200 check? Obama's simplistic notion validates and magnifies this nonsense. We need to wipe out tax cuts and INCREASE tax amount to somehow claw our way up and, hopefully, out.

[shah8]

Well, slomike, one of the big problems with the economy right now is the sheer regressiveness of the american system. Everybody below essentially the top 5% or so of households in terms of income has seen their paycheck's power grow less and less.

Reversing the low income to high income redistribution would go a long way to helping the economy improve. It is my impression, though I am not sure, that Obama wishes to make his plan partially revenue neutral by increasing the cap on SS taxes.

Just because Bush abused tax cuts doesn't mean that tax cuts are necessarily a bad plan.

[Craig Nelson]

I'd give the advantage to Krugman -- and DeLong. Reading DeLong's description of Obama's plan, the first thought was maybe Krugman was right to criticize the all-purpose tax cut, but terribly careless not to mention Obama's $250 rebate proposals. Except on rereading Krugman's op-ed he did comment favorably on Obama's proposal, just said it seemed like a response to his opponents and could have been more effectively targetted. Bad Brad. DeLong does point out that Obama's plan is free of extraneous doodads and so can be passed more quickly. Good Brad. It also has the advantage of resembling the earlier fiscal stimulus so Mitch McConnell might let it be voted on or have some fancy explaining to do. I'm not sure it's fair to ding plans of both Edwards and Clinton for being impractically complex by discussing the plan of Clinton.

I'll go out on a limb here and say if this comment thread goes past 26 comments, I and many other readers won't be able to see comments 27 to N.

[Joen]

Why is printing $250 dollars checks considered "fiscal" stimulus? It is plain old monetary policy, as close to a helicopter drop as you can get in reality.

[Student]

But what about providing assistance to state and local governments?

Most states don't have the luxury of running a deficit if thier revenue drops during a recession.

That means they will either have to cut spending or raise taxes, both of which could nullify Obama's tax break.

[eRobin]

The CBPP has a good take on what to do if a stim package is needed.

[Dave]

Are Elmendorf and Furman advising any of the Democratic candidates?

[Jon Biggar]

Same old, same old. If stimulating growth in the economy is good for the short term, then it's good for the long term too. A good size cut in the corporate income tax rate, would do the trick better.

[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).

[Craig Nelson]

Brooks:

I think your distribution plan is great because it taps an already existing distribution system and provides a stimulus which begins expeditiously and offers a sustained tail wind toward a recovery. Coming through a paycheck, it should feel more like wages than a windfall which may decrease the tendency to save an unusually large proportion. Cannot the distribution plan be uncoupled from your other proposals?

A plan which includes all SS income would still reduce the regressiveness of the SS tax. Such a plan would be less than optimal economically, but would provide benefits to the largest number which is politically advantageous. This is not to advocate such a plan, just to say the SS withholding method seems better than a "Your one Happy Tax Rebate Day check is in the mail" policy, independently of the whether the rebate is flat or progressive. Also, although the money is distributed through a reduction in SS withholding, this is no reason to have it come out of the SS reserve. The Treasury still issues the same number of treasury bonds to the SS trust fund, the employer just sends a smaller check to the Treasury and larger checks to employees. Please don't play on the tracks, the third rail is live.

[Mike Fladlien]

If we need the stimulus now, why doesn't Bush just copy Obama's plan and make a difference in the economy when we need it? That would be the best policy.

[Steve Smith]

Concerns about the lack of such a scheme being targeted could be addressed by putting in a provision to recoup the amount in next year's tax. Then that recouping could be subject to filtering by income level: those under a certain level of income would not have to pay it back.

This would work regardless of whether the SS or income tax is used as the method to inject the money into the economy. The relative merits of those two are hard to balance out. (A little of each might be a good compromise.)

[Brooks]

Craig,

Thanks. Sure, we could use payroll tax rate cut(s) as the vehicle without making it as progressive as I suggest, but if the purpose is immediate stimulus and efficiency in terms of stimulus per dollar lost to the Treasury, I would think we'd want to make it as progressive as possible so the highest portion is immediately spent (although I recognize that including more of the middle class enhances political appeal and chance of passage).

As for the "third rail", if I'm understanding you correctly, I'm not addressing the politics of the issue. I'm just saying what I think is a sensible approach to policy choices and what I think optimal policy would be. I realize that both sides of the SS debate (those who seek to cut benefits/eligibility or privatize it and those who resist any such moves) are exploiting an invalid premise for their own ends, and that invalid premise is that the degree of SS "solvency" is somehow relevant to these policy choices (it's NOT), but I really wish everyone would just start making sense on the issue, acknowledge that this "solvency" is irrelevant and start debating these policy choices in a sensible, analytically valid way based on math, economics, and our values/priorities. WE decide (more or less) how much money we want to raise via taxes, how much we want to spend overall and how much on what, and how much we want to improve our long-term fiscal outlook (reduce our fiscal imbalance). This "solvency" amounts to basing policy positions on how much money is in one of our pockets vs. the other, and it's extraordinarily silly, not to mention harmful.

As for

[Brooks]

Craig,
The last "As for" was just a typo. I had finished my thought already.

[Brooks]

FYI Everyone (unless everyone's already seen it), see Table 1 in this document for comparison of stimulus options: http://www.cbo.gov/ftpdocs/89xx/doc8916/01-15-Econ_Stimulus.pdf

[Craig Nelson]

Brooks,

You're welcome. I only meant that while a stimulus mechanism could be delivered by and based upon SS withholding, it would be better to emphasize that the plan in no way affected the SS trust fund. There are many Henny-Pennies and many Norquistian baby-in-the-bathtub drowners in Congress, so it's best to keep their arguments irrelevant to the issue. Thanks, for linking the Econ_stimulus pdf; I saw the table linked on DeLong's main page, but it's nice to have more. The SS-withholding holiday scores only medium on timeliness in the table since it is spread over months, but that has advantages since the stimulus duration adjusts to the length of the recession.

[Brooks]

Craig,

Yes, I assumed that's what you meant re: how some are using their projections of a lack of SS "solvency" to seek cuts or changes to SS. My point is that SS "solvency" is irrelevant to whether or not we should cut SS benefits or eligibility, or make changes to the program. This "solvency" is just a function of the current SS FICA tax rate, which we can raise or lower as we wish to provide "solvency" at whatever spending level we choose, and for that matter nothing would stop us from beginning a policy of using other tax revenues to fund SS. So "solvency" is just an irrelevant fabrication of our current funding structure and the particular tax rates we currently have. It has no rational relevance to our policy choices, but both sides are either missing that point or are pretending to miss it so they can use it in pursuit of their agenda: one side claiming a lack of long-term "solvency" as a justification for cutting or changing SS, and the other side claiming total or near total "solvency" as an argument against cutting or changing SS. Both sides are using completely bogus, nonsensical arguments. The only question is which individuals and groups know that and are being disingenuous and which are simply too conceptually-challenged to get it.

Just a note re: the stimulus issue, I just want to say again that my strong preference would be to leave fiscal policy out of the economic cycle management business and let the Fed deal with that -- they are more likely to get the timing closer to right (in terms of timing of decision, implementation, and, ultimately, economic effect) and will base decisions much more on economics than on politics (as opposed to the politicians).

[Andrew Waldron]

HERE IS A LITTLE QUESTION I HAVE THAT I CAN'T FIND THE ANSWER TO?

I have been seeing alot of commercials with Sen. Clinton where she talks about her new plan to fix the foreclosure mess-- that is, freezing interest rates, etc. I absolutely think something needs to be done and, of course, only democrats can solve the problem. The republicans answer would probably be to bomb the banks....

Anyway, thinking as lawyers do, I just cant understand how Hillary's plan would be Constitutional.

In order to "freeze interest rates for five years" (contrary to the language of the lawful contracts that borrowers signed), I assume Sen. Clinton would seemingly propose some new law to be passed in Congress. (It would be scary to think any President could alter the terms of private contracts with an Executive Order....[don't give Bush any ideas])

As I see it, the problem for Sen. Clinton is that U.S. Constitution Article 1, Section 8, gives the federal government only limited powers and by my reading, rewriting the terms of private contracts is not one of those powers. Indeed, even for the states which have far greater power in regulating contract law, the U.S. Constitution (Article 1, Section 10) states that "No State shall . . . pass any law . . . impairing the obligation of Contracts." Sen. Clinton's plan to wholesale freeze interest rates for five years, ex post facto, and contrary to the terms of lawful contracts, seems to me to be a power the federal government does not have.

In any event, Sen Clinton's plan would violate the Fifth Amendment to the United States Constitution which provides, in part, "No person shall . . . be deprived of life, liberty, or property, without due process of law." Rewriting seemingly millions of loan agreements, would clearly deprive the lenders with their contract rights without "notice and an opportunity to be heard."

Am I missing something here? Can anyone tell me how Sen. Clinton's plan would pass legal muster?

[SandmeyerPRwire]

Many Americans are pessimistic about the economic outlook for the next 12 months, and more of them favor Barack Obama based on their perception and expectation that he will be more likely to improve the economy if he is elected president. The burden will clearly be on an Obama presidency to deliver meaningful improvement -- it’s not just a large majority of Democrats (72%) who have positive expectations of Obama; so, too, do many Independents (a plurality of 39%) and even some Republicans (15%).

Currently, 42% of Americans overall expect the economy to worsen over the next 12 months, while 39% expect it to improve and 19% expect it to stay the same. If Obama were to win, 44% of respondents overall expect the economy would improve, while only 32% have the same hopes for John McCain.

The findings come from a survey of 1,000 American registered voters and are part of a major international study completed among representative population samples in 21 countries among 10,392 respondents. Conducted by Market Probe International on behalf of Porter Novelli, the survey was designed to gauge current sentiment among Americans on the key issues of today, including the global economic crisis, the role of government in the economy, the upcoming U.S. Presidential election and perceptions of the U.S. around the world. In the random and representative sample of 500 men and 500 women, self-declared Democrats comprised 35%, Republicans, 29%, Independents, 23%; the rest declined to declare political affiliation.

The survey asked which candidate respondents preferred; 51% preferred Obama, 39% preferred McCain and the rest had no preference.

Obama enjoys higher expectations from the registered Democrats polled (72% of them believe the economy would improve under his administration, 18% say it will stay the same, 10% think it will get worse) than McCain receives from registered Republicans (59% say he can improve the economy, 29% think nothing will change, 12% say the situation will worsen).

At a time when the economy is the biggest issue for Americans, expectations of improvement are higher for Barack Obama. A clear majority (62%) of Americans overall expect Obama to win the Presidential election, while just 20% expect John McCain to win and 18% don’t know. Despite Obama’s warnings to his party not to become overconfident, 86% of self-declared Democrats are expecting an Obama win. In fact even among self-declared Republicans, only 42% see a McCain victory while 35% expect Obama and 23% don’t know.

The economy is not the only issue on which American voters see more upside with Obama than with McCain. Obama is more widely expected than McCain to bring about improvements in other matters of concern to Americans as well.

“Across other key issues of concern to Americans, there appears to be a clear perception as well as expectation that things are more likely to improve if Barack Obama wins the election than if John McCain wins. If the McCain team is unable to sway expectations in the final countdown to the election and American voters continue to hold their current impressions on the merits of the candidates issue by issue, it’s hard to imagine that large numbers of them will suddenly change their minds,” says Tuong Tuan Thong – Managing director of FTA Research & Consultant Vietnam.

“The findings of the global pulse poll demonstrate that the U.S. Presidential election is being closely watched around the world. Interestingly the survey shows that the rest of the world has a clear expectation as well as preference for an Obama victory----to an even stronger degree than among registered voters in the US. It would appear that the McCain team faces an uphill battle in trying to convince Americans and citizens of the world that he can effect positive change more so than Obama. Thus the McCain campaign needs to consider focusing on addressing the key issues of the day and demonstrating that his proposed programs will bring about improvement more quickly and/or more effectively than Obama .” said Alan Appelbaum, President of Market Probe International and Board member of GlobalNR. “With concerns about an economic downturn spiraling, global companies as well as governments have the opportunity along with the significant challenge to demonstrate leadership and to create growth that will bring about and sustain prosperity,” he added.

About the Survey
The survey was conducted by members of the independent global research consortium GlobalNR in conjunction with Porter Novelli. The same survey with minor variations was conducted in 21 participating countries including the United States. According to Alan Appelbaum, one of the founding members of GlobalNR and President and CEO of New York–based Market Probe International: “At this crucial time in American politics and in the world economy, my GlobalNR partners and I, as independent researchers thought it was very important to measure perceptions and expectations impartially and globally among nationally representative population samples, with comparability between countries. All aspects of the research were carried out in accordance with procedures established by the American Marketing Association, the Market Research Association and ESOMAR, so we are confident that we have a realistically accurate representation of opinions in the countries we’ve surveyed.”