The Obama Fiscal Boost: A Note
Paul Krugman writes:
Romer and Bernstein on stimulus - Paul Krugman Blog - NYTimes.com: Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of... the... American Recovery and Reinvestment Plan would accomplish.... Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics....[I]t [is] hard to evaluate the reasonableness of the assumed multipliers. But... the estimates appear to be very close to what I’ve been getting.
[T]hey do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7.... They have the plan raising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so average over 2 years, again not much difference. So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.
One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010... the CBO estimates an average unemployment rate of 9 percent for 2010.... Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.
If I were in the Obama White-House-to-be right now, I would announce that we would be using CBO numbers as our baseline for everything, and focus on providing analytical input to CBO so that its numbers are as good as possible. Doug Elmendorf is honest and reliable and will do his best. And if there is no daylight between the administration and CBO, that is one fewer way that the David Brookses and the John Boehners and the other bad actors can confuse the gullible, lazy, and dishonest among reporters and commentators who do so much to degrade the level of the policy debate.
I agree with Paul that this fiscal boost plan is too small, but I do want to admit that doing this well is harder than it looks. The tax-cut part does not look terribly effective as a stimulus--it is a step toward compensating for higher income inequality and a political play to make it more likely that Republicans will lose politically by trying to block the package rather than a significant boost to employment. Thus I do not think you would want to make the tax-cut part larger. And it is hard to find a lot of additional spending projects that can be ramped up quickly and do a lot of good--relatively soon in that endeavor the short-term fiscal multiplier falls below one. They are trying their best.
Nevertheless, I agree that there best is almost surely not enough. I also believe that conventional monetary policy is tapped out, and unconventional monetary policy is of doubtful efficacy. So I am in favor of doing something else on the banking/finance side. My favorite idea right now is that of nationalizing Fannie Mae and Freddie Mac completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up--and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.
So at the moment my preliminary judgment of the Obama fiscal boost is that it is a good first bid, but that the administration ought to be doing a lot more.