Some thoughts on the Obama Stimulus Package

 This was hard to put together because the charts were PDF so please excuse the appearance.

 The report, The Job Impact of the American Recovery and Investment Plan, has been  released as a PDF file and the link to it can be here. The report contains a table that shows how their estimate of how the recovery will work. One thing to note is that the composition of the jobs is such as to provide employment at the lowest-paid level (in service industry jobs) as well as for skilled professionals. See below the Krugmann commentary:

 

 

 

 Even though Obama has yet to take office, there is considerable unease about his economic program. As Jacob Heilbrunn writes in today's Huffington Post, the response of the Senate's leadership to his presidency is troubling:

Something has gone deeply awry when Obama has to threaten to issue a veto on Tuesday to Democrats, warning that he will not allow them to prevent him from using another $350 billion in bailout funds. It's amazing that the Democrats, who rolled over for George W. Bush for much of eight years, including passing his prohibitively costly tax cuts early in his first term, have now suddenly found the courage to oppose a president who comes from their own ranks.

Envy? Bitterness? Whatever the reason, it's a PR disaster as well as an ominous portent for future relations with the Obama administration. It would be a sad irony if some leading conservative intellectual Obamacons, disgusted with the turn that the GOP took in the past election, turned out to be more sympathetic to the president-elect than his own party.

Paul Kruggman has responded to the President-elect's statement that he wants to hear ideas about “how to spend money efficiently and effectively to jump-start the economy.” Krugmann, like many other progressive bloggers, is concerned that the package is to small to do the job. In his discussion, he references the Romer and Bernstein report on the probably impact of Obama's plan. I will include some of their conclusions following a few excerpts from Krugmann's opinion-piece:

First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?

...snip...

Right now the investment portion of the Obama plan is limited by a shortage of “shovel ready” projects, projects ready to go on short notice. A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now — but if he waits too long before deciding, that window of opportunity will be gone.

...snip...

Now, economic forecasting is an inexact science, to say the least, and things could turn out better than the report predicts. But they could also turn out worse. The report itself acknowledges that “some private forecasters anticipate unemployment rates as high as 11 percent in the absence of action.” And I’m with Lawrence Summers, another member of the Obama economic team, who recently declared, “In this crisis, doing too little poses a greater threat than doing too much.” Unfortunately, that principle isn’t reflected in the current plan.

Clearly the kind of dialogue initiated by Obama is going to be important in the future. While Nobel-winner Krugmann is more like to win Obama's ear than progressive bloggers, I believe that the current debate among progressives about the programs needed to turn the country around is important. One very positive feature of the incoming Administration is precisely the release of the Romer-Bernstein document. That kind of transparency in government represents a signficant change. The deeper and more informed the public debate of these all-important policies is going to be crucial to Obama's getting the support he needs to face down an entrenched , if increasingly unpopular, Republican opposition.

 Effects of the Components of the Recovery Package on Jobs in 2010Q4 

Mining                                               26,000

Construction                                    678,000

Manufacturing – Total                      408,000

Wholesale Trade                                158,000

Retail Trade                                       604,000

Information                                          50,000

Financial Activities                           214,000

Professional and Business Services  345,000

 

 

Component                                            Total Effect Direct Effect Indirect Effect

Energy                                                          459,000    305,000    153,000

Infrastructure                                                377,000    236,000    142,000

Health Care                                                  244,000    166,000     78,000

Education                                                      250,000    166,000      83,000

Protecting Vulnerable                                    549,000    140,000     409,000

State Relief                                                   821,000    442,000      379,000

Making Work Pay                                        505,000    0                 505,000

Tax Cut

Business Tax                                                 470,000    0                   470,000

Incentives

All Components                                          3,675,000   1,456,000     2,219,000

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Comments

A recent NBER paper by economists Andrew Mountford and Harald Uhlig, who find that deficit-financed tax cuts have a larger multiplier effect on the economy than deficit-financed spending.

“We find that a surprise deficit-financed tax cut is the best fiscal policy to stimulate the economy, giving rise to a maximal present value multiplier of five dollars of total additional GDP per each dollar of the total cut in government revenue five years after the shock. . . . Furthermore, we find that deficit spending weakly stimulates the economy, that it crowds out private investment without causing interest rates to rise, and that it does not cause a rise in real wages.”

Or, this flavor, which shows the impact per each dollar spent of various government actions:

Stimulus types compared

 

Why we continue to fund the NBER, which took almost a full year to figure out we have a "recession,"  is beyond my understanding.

The Bush WH, early in their tenure, pushed to have the first recession "officially" start during the Clinton years, even tho the initial date assigned was several months into the Bush years.

That apparently didn't stick too well.

However, the Bushies would likely as not have applied as much pressure as possible to ensure that the NBER didn't announce the start of the last recession until well after the 2008 election results (if, indeed, such a thing was ever likely to happen without the pressue -- I don't know, and can't speak to that).

Tony -- I would be interested in your thoughts re: the comment I left in the Schlozman piece.  It may be that there were many other indicators and complicators that lead to this current economic disaster and which may undermine any efforts to recover from it unless those issues are addressed first.

There were actually a number of people that issued many warnings over the years, from those like Chris White and myself, who attempted to warn about financial derivatives almost twenty years ago, to people quite accepted within "The Village," like Nouriel Roubini, Robert Kuttner, Paul Krugman, and Robert Reich.

There are really two problems, in my view. First, is the overwhelming political power and influence of Wall Street and the general corporatist elite. My sense is the financial collapse has hardly even dented the political power and influence of Wall Street and certainly not the general corporatist elite.

Second is the overwhelming dominance of the reigning economic belief structure of neo-liberalism." That's what prompted me to post my diary Why So Little Self-Recrimination Among Economists?

I haven't done more than skim it, unfortunately, so far.  I should have the time sit and digest it this weekend.

Thanks for the response -- esp. the list of additional names.  I'm actually happy that I recognize 'em all. :)

Don't bother reading my piece; you'll get much, much more by going to the original article by Jeff Madrick, How the Entire Economics Profession Failed. Madrick lists a number of specific points that mainstream economists, all worshippers at the alter of neo-liberalism, got wrong.

differences and yet still share some parallels in terms of causes/contributors (or at least believing that they do), how would you approach analyzing potential ways of dealing wth the current fiscal disaster in retrospect with the methods and solutions implemented (or attempted) by FDA?  (This is mostly rhetorical, since that's likely not something that can be answered in a comment, but might require a post or seven...or inclusion in a book somewhere.)

My reply. Yeah right! By which I mean if I had the answers I would be working 40 miles from home (ie in DC). Seriously I've been gobbling up recent books on Roosevelt and the hundred days, and one thing that is becoming clear to me is that Roosevelt was absolutely committed to the right of every American to protection from the devestation wrought by economic down turns such as the Great Depression, to a secure retirement in their older years, and (though he could not achieve it) health care for all--in other words protection from the cradle to the grave. For Roosevelt these were subsumed under his Christian values/

How to get there while protecting the constitutional liberties was a problem. Remember that when Roosevelt came to office Mussolini's "reforms" still seemed attractive to many who would have been happy to have FDR become a dictator and there was the myth that the Soviet planned economy was a success. He resisted these efforts.

Lastly, there was his own confusion about fiscal policy. Interestingly apparently from what I have read, Keynes supported FDR's policies (such as taking the us off gold de facto. and refusing to be part of an international agreement on monetary policy, but he had yet to publish his own ground-breaking analysis. What Roosevelt understand (though apparently not in death) were the traditional fiats against deficit spending. He therefore made several blunders veering in that direction which had a bad effect on the recovery, but over all opted to provide economic stimulus to the economy in the form of the many New Deal programs such as CCC and WPA and AAA etc., financed by deficit spending despite the prevailing views of Wall Street economists.

How does this answer your then and now question.

In my view the specific solutions for today will not be the same as they were in Roosevelt's day. For one thing we still have much of the structure that was put in place during the New Deal, it just has to be revived and renewed (ie financial regulatory agencies, unemployment insurance, social security etc.)

One problem we face today is that som any people are not covered by unemployment insurance, either because they have been out of work too long, or because they are contract workers, temp workers,  or otherwise self-employed. Second, we can no longer postpone providing quality health care for everyone.  Third we have a lot of resources now being squandered in imperialist military ventures which should be used for to foster development  here and abroad.

And there is the knotty problem of globalization. I deplore substituting foreign labor for US labor, because it is a cost saving to businesses (although it is a loss in terms of the real economy).  On the other hand, the transformations taking place in India and China for their populations are giving much more opportunity for a decent life to them. And with the internet etc., the world is more interconnected.

And there is the question of energy, both energy independence and the associated problem of the need for conservation and the development of energy production which will reduce carbon emissions etc.

I would another problem that I see. Roosevelt was first elected in the interregnum between the two world wars. Obama faces the war in Iraq, the war in Afghanistan, worsening relationships with Russia--a true mess. My greatest worry is that he will follow a modified, imperialist"bi-partisan" foreign policy.

So this is a rather long answer, but I would like to say that my thinking on the subject of the New Deal period is that we should not be in a rush to judgement about what Obama's administration will accomplish. I think progressives should definitely keep up the pressure from "the left," but over-reacting to every veer the the "right," and every mistake. Thanks GH for giving me the opportunity to think things through like this.

carol