Network News

X My Profile
View More Activity

Stimulus isn't free

One thing I should say amid my stimulus advocacy is that spending stimulus dollars is very smart, but that doesn't mean it's free. There's no "stimulus Laffer curve," as one budget expert put it to me. The basic math, if you think stimulus works, looks something like this:

One dollar of stimulus gets you $1-$1.50 of economic output. That gets taxed at between a quarter and a third. So even if you take the highest stimulus impact ($1.50 per dollar of borrowing) and the highest tax rate (around a third), that's still only about 50 cents of tax revenue on each borrowed dollar. That's not to say it's not worth doing: The point of stimulus is to stimulate economic activity and give people jobs, not instantaneously replace itself in the government's coffers. But it's not a free lunch. It's just a fairly cheap and nutritious lunch.

By Ezra Klein  |  June 14, 2010; 12:14 PM ET
Categories:  Budget , Stimulus  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Worst-of-both-worlds fiscal policy
Next: One cost BP should not have to pay

Comments

This understates the case a little. Yes,
you don't get all your money back straight away. But if the stimulus is spent on projects that will increase GDP in future, then it generates a stream of extra future tax revenue which can be predicted and, if you feel like it, accounted for as a net present value.

Undoubtedly doing the math is tricky. But I'm quite confident that stimulus spending on projects like commuter rail and cash
for caulkers are a good deal. And we really ought to get started on the $100B or so needed to build a robust electricity grid that could transport power from the windy northwest and sunny southwest to the cities of the east coast.

Posted by: richardcownie | June 14, 2010 12:35 PM | Report abuse

Freedom costs a buck o five.

Posted by: cbaratta | June 14, 2010 1:04 PM | Report abuse

Quite so. There are few, if any, free things in life. The relevent question is if you're better off paying for them or going without and saving the money. As has been ablely pointed out here and elsewhere, some further stimulus right now is probably worth it, though once the economy recovers we'll want to reign in spending.

Posted by: MosBen | June 14, 2010 1:34 PM | Report abuse

"But if the stimulus is spent on projects that will increase GDP in future"

Which is an "if" of gargantuan proportions.

But, in general, I'm prone to agree: infrastructure spending can "till the fields" where the next money trees will grow. Imagine our economy today without the powergrid and the Interstate System or GPS. There's a huge market built just around the GPS system.

"then it generates a stream of extra future tax revenue which can be predicted and, if you feel like it, accounted for as a net present value."

Not if you "mark-to-market". But it's hard to argue that any stimulus is going to have a predictable net value, and predictions that overshoot the reality are going to be seen as evidence that the programs failed. So it may be wise to avoid predicting the results of stimulus programs. At least in public.

@MosBen: "some further stimulus right now is probably worth it, though once the economy recovers we'll want to reign in spending."

The other thing about that is that if spending is stimulative you don't particularly need to reign it in (although you may). That is, it should continue to pay for itself and a little more besides. If it is actually of stimulative value. Which I'm not sure how much of current spending is.

But I suppose something is better than nothing.

Posted by: Kevin_Willis | June 14, 2010 1:50 PM | Report abuse

You've left out some of the other cost savings generated by stimulus spending - such as lower expenses for unemployment benefits, medicaid, and SNAP - as well as the interest costs associated with financing the deficit (which are very small, but the point of the exercise is to illustrate that the true, long-term cost of stimulus spending is substantially below the headline cost). Robert Pollin estimates that a single unemployed person increases the federal deficit by about $90K per year (presumably before they become a 99er), so these additional cost savings are substantial, even if they don't fully cover the cost of unemployment-reducing spending.

Posted by: rwclayton7 | June 14, 2010 2:15 PM | Report abuse

Between the gobbledegook writing, and the assertion-without-reference economic fog style, that's a masterpiece, Klein.

I love that, "The basic math, if you think stimulus works, looks something like this." What's the basic math look like if you don't think stimulus works? There's another math somewhere for that? That's what your wonk is worth.

And this, "One dollar of stimulus gets you $1-$1.50 of economic output," must fall under the Perpetual Motion Machine of Miracle Economic Elixers. If it really worked like that, we wouldn't be in this recession, would we? In fact, if it worked that way, the private sector would be falling all over itself to invest in those odds. It's like the minimum wage argument that falls apart when someone asks why we don't pay everyone $100 an hour, so we can all be rich.

And, as far as I know, bestowing a stolen or inflated dollar on someone, who turns it into $1.50, doesn't make a taxable income of $1.50, so Klein's entire thrust is ridiculous on the sum of its ridiculous parts.

Posted by: msoja | June 14, 2010 2:27 PM | Report abuse

@msoja: "And this, 'One dollar of stimulus gets you $1-$1.50 of economic output,' must fall under the Perpetual Motion Machine of Miracle Economic Elixers."

Heh. That's pretty good. Also, ins't a $1 - $1.50 of stimulus better expressed as $1.25? That being said, that seems mighty presumptuous. And also sounds like you'r promising 100% to 150% return on investment not 0% to 50% return on investment (although that's actually the implication). And an average of 25% return on stimulus dollars seems wildly optimistic to me. That was the return on some of those hot internet stocks during the dot-com boom, and you know how that turned out.

"If it really worked like that, we wouldn't be in this recession, would we?"

Oh, thanks a lot, Captain Obvious. You just don't get the whole contemplative nuance of wonkery, do you? This isn't regular government spending, this is special Stimulus Spending. Thus, the rules used for all other government spending does not apply.

Posted by: Kevin_Willis | June 14, 2010 2:43 PM | Report abuse

'Not if you "mark-to-market"' -- Kevin_Willis

It's so hard not to say, what you talking about Willis. Anyways, absolutely if you mark to market.If the market is functioning efficiently. The current market price is supposed to be the NPV (Net Present Value).

The NPV takes into account current and future costs and revenues. And absolutely if you can buy at 50 cents on the dollar (or less) high social return investments of the kind the pure free market will grossly underprovide or inefficiently provide due to long established in economics market problems (externalities, etc., etc.), that's a great deal, and will result in far higher growth over the long run.

Plus, though, econmywide if you can put people to work who would otherwise be idle, that's just more production. There are tons of free lunches. Whenever you do something smarter, more efficiently, you can get more lunch outputs for the same amount of inputs.

Posted by: RichardHSerlin | June 14, 2010 3:48 PM | Report abuse

"It's so hard not to say, what you talking about Willis."

Not only is it tempting (I grew up watching Diff'rent Strokes) it's often a moral necessity. For example, I was not taking into account to NPV (taking into account future revenues), which was how Mark-to-Market made Enron look profitable (booking revenues 30 years into the future) on projects that were hemorrhaging money.

Posted by: Kevin_Willis | June 14, 2010 9:21 PM | Report abuse

Ah, government spending. Somehow people forget just how much of our economy depends on feeding at the government trough. If the government quit spending private enterprise would pretty much die.

You have the Department of Defense buying weapons, building materials, food. Just try closing a base: 'it's bad for business!'. On the other hand I also find it interesting that no one ever discusses what would happen to the economy with significant cuts in our military spending. Yeah, we will save money in the long run but in the short run we would have a significant recession.

Over half our health care expenditures are from one level of government or another. Our roads, our utilities, our educational systems all exist because our various levels of government pay for them. The government pays private enterprise billions for software, contract employees, furniture, buildings and Wisconsin cheese to store in warehouses. We prop up corn and dairy and all sorts of other agribusinesses. We even subsidize hedge fund managers, although that is a special tax break just for billionaires.

My point is: spend the damn money. Borrow it at the lowest interest rates we will see in our lifetimes. Put people to work fixing and building infrastructure. Pay for it with some hedge fund money and a financial transaction tax. Start easing back on ag subsidies and our military spending. No more foreign adventures. It will take a generation or more for those expenditures to get reasonable.

If you think austerity is the answer, read up on Andrew Mellon. Check out how the economy did between 1929 and 1933. Oh, and never, ever let a Republican have control of our economy again.

Posted by: Nat_51 | June 14, 2010 10:06 PM | Report abuse

--"If the government quit spending private enterprise would pretty much die."--

You're confused, Nat (and probably denies the "Socialism" he so aptly documents). The entities depending for their existence on the massive transfer of stolen loot aren't part of "private enterprise". Many of them may appear to be some corrupted hybrid of private enterprise, but in their government-related activities, they're only enterprising via government fiat.

Were the government to suddenly run out of other people's money, and not be able to steal more from future citizens, then private enterprise would flourish like never before. The coming collapse, instead, will demonstrate to just what extent the stupid socialists have succeeded in undermining the greatest economy on the planet.

Posted by: msoja | June 15, 2010 10:21 AM | Report abuse

We've watched Japan spend 20 years trying to revive its economy by bulding roads and bridges. Why anyone would want to imitate that debacle is beyond me. Sometimes you have to let go of theory and take a more reality-based approach to what you're doing.

Posted by: tomtildrum | June 15, 2010 4:02 PM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company