links for 2009-06-07

Fiscal Stimulus: Second Round

The Wall Street Journal picks up my draft call for more fiscal expansion:

Making the Case for Another Fiscal Stimulus: Although President Obama’s $787 billion fiscal stimulus is still working its way through the pipeiline, Berkeley economist — and former Clinton Treasury official — Brad Delong makes the case for another round. In a draft of a letter he says he may send Obama next week, he said:

At the end of 2008, when your incoming administration was preparing your recession-fighting strategy, your forecasts were that the recession would bottom out in August of 2009, with a peak unemployment rate of 7.9%. The unemployment rate in May was already 9.4%. 10% unemployment this year is a nearly foregone conclusion. 11% unemployment — a recession twice as deep as the one your incoming administration was forecasting at the end of 2008 — is not unlikely …. Even had the fiscal expansion plans of your administration not been cut back by roughly a quarter in their employment-generating effectiveness by the Congress, fiscal stimulus plans that appeared to be adequate and appropriate at the turn of the year now appear to be inadequate. Compounding the problem of inadequate fiscal expansion at the federal level is the problem of inappropriate and substantial fiscal contraction at the state level...

Delong’s proposal:

  • Seek from the Congress for authority to guarantee the debt of states that, in response to the current recession, (a) seek to conduct their own state-level fiscal expansions, and (b) devise plans and strategies for the long-term repayment of the debt the federal government guarantees that the Secretary of the Treasury certifies as prudent and sustainable.

  • Seek an additional $500 billion of federal aid to states for the federal fiscal year that begiins Oct. 1, 2001, to be distributed per capita and conditioned on their maintaining effort at the provision of public services — on their not repeating the mistake of Herbert Hoover of cutting government employment and spending in a downturn.

But then the WSJ hints that I am yet another self-interested lobbying group:

Delong, of course, works for the state university system in California, where Gov. Arnold Schwarzenegger and the state legislature are struggling with a colossal budget deficit.

I reply:

Making the Case for Another Fiscal Stimulus - Real Time Economics - WSJ: report offensive comments email [email protected]: Brad DeLong wrote:

Truth to tell, the possibility that an additional round of fiscal expansion targeted at aid to the states might trickle down and help pay for my forthcoming master bathroom renovation literally never crossed my mind over the past week…

What did cross my mind was (a) memories of Paul Krugan last fall warning about this, (b) running the numbers on the deterioration of the forecast over the past six months, (c) Peter Schrag’s recountings of Sacramento politics over lunch, and Gene Smolensky’s and John Ellwood’s repeated pointings-out that California is only the worst case as far as fiscal contraction by state governments are concerned, and (d) my eighteen-year-old Michael’s summer job, which involves going to California budget conference committee hearings and taking notes…

Brad DeLong