More on the Stimulus Package

On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:

• The big arguments against the stimulus package are two:
  • It will become a destructive lobbyist Christmas tree
  • It will increase the deficit and yet fail to stimulate the economy
• We appear to have dodged the bullet on the first argument
• The second argument is incoherent because:
  • The U.S. government is not going to go bankrupt
  • Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
  • But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe:
    • Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving--in which case it is a zero.
    • Or that it will be effective as a stimulus--in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
    • But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent

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Comments

[rea]

Much the same reasoning, of course, would support legislation to have the government issue me a check for 100 billion or so.

Why not, if the government won't go bankrupt? And I would either spend the money, or save it, so it would either be effective as a stimulus or increase the national savings rate. . .

[Cranky Observer]

> Much the same reasoning, of course, would support
> legislation to have the government issue me a check
> for 100 billion or so.
>
> Why not, if the government won't go bankrupt? And
> I would either spend the money, or save it, so it
> would either be effective as a stimulus or increase
> the national savings rate. . .

For my part _I_ will swear on a vat of Klingon bloodwine that if the $100 billion stimulus is given to _me_ instead of rea that I will spend at least $99 billion of it and save no more than $1 billion.

Cranky

[R. Stanton Scott]

Hasn't globalization--and especially our dependence on imports for most consumer goods--made this sort of stimulus much less effective? How many non-Walmart jobs will this create in the US?

[William Smith]

Wow. Nice argument...wasn't he important in government for a reason?

[Daniel Shaviro]

Brad - Summers is wrong on both macro and micro grounds.

1) The two types of savings effects that he identifies are not symmetric because their time frames are different. If I deposit a $500 check in the bank rather than spending it immediately, feeling $500 wealthier but not immediately buying more things, I may still increase my spending gradually. Suppose the time frame over which the largesse affects me is 5-10 years. The result is next to no economic stimulus, but within a few years $500 less national saving.

2) Writing people checks increases economic distortion because it is in effect a lump sum spending levy that will likely end up being financed with distortionary taxes. True, the handouts relate to past income tax liability, which depends on past work and savings decisions. But they are handed out after the fact and ostensibly won't be repeated except in unpredictable special circumstances. And while in theory one could finance them with extra lump sum taxes, as a matter of political economy that is unlikely to happen. So we are increasing the likely economic distortion imposed by the fiscal system if we do it without getting effective stimulus.

[Neil B.]

Maybe instead of giving some people money, reduce some of the worthless (to them at least) costs they incur from Banks and Credit providers, by enforcing or making new laws/regulations about interest, late fees, and especially the execrable (and violative of the spirit of contract law) outrage that debtor can't specify which account (e.g., the one with the *higher* interest rate) to assign payments too.

[Daniel Shaviro]

Oops, let me add one more point to my prior comment. Summers is too glib about the U.S. government not going bankrupt. We are headed towards a huge fiscal policy sustainability problem which can be very disruptive. Default is only the far end of the curve but by no means the only bad part, nor does it differ by more than degree from various politically realistic kinds of implicit default (which in fact could come pretty close to it in their adverse impact on the economy as a whole or various detrimentally relying individuals). Barring effective stimulus, this package makes the problem $145 billion worse. Every little bit hurts.

[pgl]

Are we sure that the Christmas tree effect is now dead? Also - are we sure that this stimulus package will avoid backloaded stimulus which will reduce national savings in the out years? I'm with you if your two key political assumptions hold, but I still don't trust the decision makers in DC not to screw this up.

[Cranky Observer]

Thanks for bringing the comments up from the first version of this post.

Now, a serious question. 60 million households * $600 = $36 billion, right? Should be within 1/2 order of magnitude anyway.

Now in reality, broken down into $600 chunks most of this money IS going to be spent at Wal-Mart or Target, and most of that will be on non-US goods. I understand Fallows' argument that the creative middlemen skim off a lot of the retail price before it gets to China, but that isn't an overly self-supporting activity either IMHO.

So what would be the difference if that $36 billion were handed out in a chunk to the states with a requirement that it be spent on either durable infrastructure item replacement, say, or as grants to local electric cooperatives who will use it to install at least 10 MW of wind turbines. Or something similar. I realize the lead time would be higher but heavy industry could start ramping up pretty fast if the purchasing cycle was driven quickly.

Cranky

[Noah Yetter]

The initial premise is false. As Tyler pointed out with more style and nuance at MR, the argument against the stimulus is that /the government should not attempt stimulus, at all/. As much as I will enjoy depositing $1200 in my home-buying fund, this is simply not a proper function of government (indeed, where would one find justification for such in the Constitution?). It promotes an attitude of childlike dependence on the state and the notion that all problems can be solved with the judicious application of policy.

[rea]

"where would one find justification for such in the Constitution?"

In Art. I, Sec. 8--the bit about spending to promote the general welfare.

"It promotes an attitude of childlike dependence on the state and the notion that all problems can be solved with the judicious application of policy"

That's like saying that living on a planet promotes a childlike dependence on gravity. The government can't help but manage the emoney supply--the only question is whether the government will do it well or badly.

[Altoid]

We're all missing the real point of the giveaway- er, rebate. Follow me on this. We know that when people get a windfall, they tend to pay off debts, right? So they'll treat this as a windfall and pay down some debt.

Now that debt forms a good part of the sea of paper out there that no one knows the value of because it's a higgledy-piggledy hodge-podge of sub-prime, prime, and who knows what.

True, the stimulus amount is a drop in the bucket compared to what Atrios calls the "big sh*tpile." Still, it's a hefty cash infusion that will make that debt look a whole lot better in short order.

Ergo, what this stimulus package *really* is, is a rescue package for the bad paper, and hence for the bond insurers and rating agencies and banks. Nicely disguised as government largesse for you and me, and arriving in a nice fresh envelope with a note personally signed by g w bush his very own self. Almost has the touch of rove in it, it's so neat.

[malcolm]

My problem with the package is precisely that the effect on national saving is zero with imeffective stimulous. The government borrows more so that future generations will have to pay for the fact that the present generation will get to save more and reduce its debt. The intergenerational equity issue is ignored by Summers' clever ruminations.

[jerry]

Cranky, as I am sure you are aware, CALTRANS got I-510 back and working in 30 days, by incentivizing the contractor to get the job done as quickly as possible (while still maintaining quality.)

I think that was one exemplary contractor, but I think a similar approach would do wonders with much of our infrastructure.

[Robert Waldmann]

I hate to disagree with my PhD supervisor for whose extraordinary patience and flexibility concerning the composition of my committee, I am eternally grateful, but 2008 is not the very last year in human history.

If people save most of their rebate checks, there will be a small effect on consumption in 2008 when it may be desirable. However, that is not the end of the story. They may incorrectly believe that they are richer in 2009 etc when high demand at roughly full employment will crowd out investment. I would guess that a poorly designed stimulus package will cause a small long lasting increase in consumption which will end when the chickens come home, that is when the treasury stops rolling over the debt or wehen the value of t-bonds is inflated away whichever comes first.

Summers is assuming people are rational and, therefore, to the extent people aren't liquidity constrained Ricardian equivalence holds. Money to the liquidity constrained is good as they will spend it all soon. Money to the non liquidity constrained will have no effects at all (as they know it is not really wealth) so it will do no harm.

If people are not liquidity constrained but are dumb, they will spend out of their pseudo wealth for decades. This is not good.

Note his argument implies that the deficit is no problem ever. Something which neither he nor you believe.

However, it is a bit shocking (not really) that DeLong and Summers slip into assuming that people are rational except when they are writing noise traders papers.

[Andrew Samwick]

Ditto to Malcom's point. My kids have not authorized me to use their credit cards for a consumption binge.

[Ken Houghton]

What Robert Waldmann Said.

If you really want to provide a long-term stimulus for the U.S. economy, use that $150MM to buy body armor for the U.S. soldiers in Iraq. This will reduce their brain and body injuries, and allow them (when they return--I said this was a LONG-term plan) to actually contribute to society, instead of providing the largest pool of neurological experiments since motorcycle helmet laws were enacted.

[asdf]

grtr