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Two stimulus talking points that are wrong

We're going to be fair and balanced here. You sometimes hear Democrats say, or imply, that stimulus will pay for itself by generating economic growth. I've heard some economists refer to this as "the liberal Laffer curve." It's not true. As I've written before, a fairly optimistic version of stimulus accounting would go like this: One dollar of stimulus gets you $1-$1.50 of economic activity. 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. It doesn't pay for itself.

But you also see conservatives say, as they are in this comment thread, that high unemployment rates prove that the stimulus didn't work. As Louisp3 puts it, "12.4% unemployment in CA. The stimulus is working?"

The question is not where unemployment rates are today. It's where they'd be without the stimulus. If California would've been at 16 percent unemployment without the stimulus, then the stimulus might well have worked. The fact that unemployment is bad now doesn't mean it couldn't have been worse, and it doesn't mean that stopping it from being worse isn't a policy accomplishment.

As it is, the firms that try to estimate these things for private-sector clients -- so they have an incentive to get it right -- say that the stimulus created about 2.5 million jobs. Then there are a lot of non-job creation activities, like funding Medicaid costs in the states and actually building a bridge, that the stimulus also funded. You can quibble with those estimates and argue about the program's design, but the fact of high unemployment rates can be used to argue for either a bigger stimulus or a smaller stimulus, and that's because the absolute level of unemployment doesn't tell you anything about the stimulus. The question is what the level would've been in the absence of the policy. This graphic from the New York Times tells the story well:

stimulusestimates.jpg

By Ezra Klein  |  July 1, 2010; 3:00 PM ET
Categories:  Stimulus  
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Comments

Ah to be a conservative and live in a non-falsifiable world!

Posted by: AZProgressive | July 1, 2010 3:09 PM | Report abuse

And, as Colbert would say, because the market is always right, and Moody's is a publicly traded company, then their projections must also be right. So the market says the stimulus worked!

Of course, then the market also says that Paul Krugman is right and the U.S. isn't bankrupt - http://krugman.blogs.nytimes.com/2010/06/28/the-invisible-bond-vigilantes-continue-their-invisible-attack/

Could it be that the market has a Liberal bias?

Posted by: AttentionDeficit | July 1, 2010 3:15 PM | Report abuse

Reality has a liberal bias

Posted by: fuse | July 1, 2010 3:18 PM | Report abuse

Facts have a liberal bias sometimes.

Posted by: mschol17 | July 1, 2010 3:18 PM | Report abuse

LOL!!! "Projections" could also show that unemployment would have been lower with LESS money spent.

Posted by: JakeD2 | July 1, 2010 3:23 PM | Report abuse

@JakeD2: "LOL!!! 'Projections' could also show that unemployment would have been lower with LESS money spent."

Would you mind showing us the economic data/model to confirm that?

Posted by: moronjim | July 1, 2010 3:34 PM | Report abuse

"As I've written before, a fairly optimistic version of stimulus accounting would go like this: One dollar of stimulus gets you $1-$1.50 of economic activity. 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. It doesn't pay for itself."

Yes, but as I've said before, you absolutely don't want to forget investment value, building a road does more than just increase current economic activity. For decades it increases GDP by making it take less time to get to work, etc. The same is true of spending on alternative energy, basic scientific research, education, etc. A good investment, although it may not pay for itself right away, can much more than pay for itself over the longer run, and due to long established in economics pure free market problems (externalities, asymmetric information, etc.), there are many many high social return investments that the free market will underprovide that the government can make.

I'm sorry, know you're under pressure to look "balanced", but it's so important if possible to not be misleading to look that way.

Plus, let's be very clear on your statement, "One dollar of stimulus gets you $1-$1.50 of economic activity" – a dollar of stimulus spending gets you perhaps $1.50 of GDP – that's a net gain to GDP, even if the government only gets a fraction of that back in taxes.

Posted by: RichardHSerlin | July 1, 2010 3:38 PM | Report abuse

"But you also see conservatives say, as they are in this comment thread, that high unemployment rates prove that the stimulus didn't work. As Louisp3 puts it, "12.4% unemployment in CA. The stimulus is working?""

I would phrase it as "high unemployment rates prove the stimulus didn't work as advertised".

Posted by: jnc4p | July 1, 2010 3:41 PM | Report abuse

"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. It doesn't pay for itself."

I don't understand this....aren't you only assuming that the economic impact lasts just one tax cycle...

Also, are the costs of not extending benefits included? (i.e. foreclosures, credit card defaults)

Posted by: Mazzi455 | July 1, 2010 3:45 PM | Report abuse

jnc4p:

Good point

moronjim:

Not at all (would you mind lending me $10,000 to pay my economic "expert" to so testify?).

Posted by: JakeD2 | July 1, 2010 3:48 PM | Report abuse

could doesn't mean did.

Posted by: obrier2 | July 1, 2010 3:58 PM | Report abuse

@JakeD2: "LOL!!! 'Projections' could also show that unemployment would have been lower with LESS money spent."


They could -if they did- but they don't.

Posted by: Patrick_M | July 1, 2010 4:08 PM | Report abuse

@RichardHSerlin

Serious question for you about multiplier effect:

Since fiscal stimulus generates economic activity in more direct means (e.g. good produced, + paychecks for workers building bridges) than tax cuts (which stimulate spending & private investment) do most multipliers adjust for the fact that much consumption is of foreign goods? E.g if consumers spend their $100 tax rebate on a Samsung TV at Wal-Mart, which was selling it at a margin of .001% then doesn't that just send the tax cut to S. Korea, but fool people into thinking we've meaningfully increased GDP?

It's all probably more nuanced than I really understand, but I'm wondering if those sorts of considerations are "Baked into" multiplier figures economists & politicians cite.

Posted by: AttentionDeficit | July 1, 2010 4:14 PM | Report abuse

Ezra Klein's lack of basic mathematical understanding astounds. If the spread in GDP growth is 2% due to the stimulus then the stimulus will easily pay for itself over time. Economic growth compounds and tax revenue is taken in over time. A $900 billion intervention that increases a $14.59 trillion economy by 2% over the baseline will easily generate the future tax revenues to pay for itself. This is just confusion over a simple mathematical identity.

And it is nothing like a "liberal Laffer curve", which was a falsifiable claim that decreasing marginal tax rates would result in an increase in economic growth whose net result would be revenue neutrality. This was a empirically falsifiable hypothesis that proved to be spectacularly wrong.

Posted by: adamwri | July 1, 2010 4:34 PM | Report abuse

The above assumes that the $900 billion intervention will not result in significant inflation which is, of course, our current situation.

Posted by: adamwri | July 1, 2010 4:37 PM | Report abuse

What's the answer to all my rightie friends who always say the jobs created by the stimulus "were all government jobs" and/or temporary jobs and/or just jobs to keep state workers who vote "Democrat" (as they say)?

Posted by: famattjr | July 1, 2010 5:32 PM | Report abuse

"What's the answer to all my rightie friends who always say the jobs created by the stimulus "were all government jobs" and/or temporary jobs and/or just jobs to keep state workers who vote "Democrat" (as they say)?"

There are two answers.

Answer #1 is the stimulus was largely composed of targeted tax cuts designed to help private employers create jobs on their own. So your "rightie" friends are wrong to start with.

Answer #2 is that public sector jobs are not designed to be the end-all of stimulus spending. When the government puts someone to work, that person then has an income, which he or she spends in the private economy, thereby stimulating demand for private sector goods and services. That spending stimulates the private sector to put people back to work to meet the growing demand, thereby helping the whole private economy back on a self-reinforcing path of growth.

Posted by: Patrick_M | July 1, 2010 5:44 PM | Report abuse

force them to go through with a real filibuster to prevent unemployment extension/state aid

Posted by: jackjudge4000yahoocom | July 1, 2010 6:02 PM | Report abuse

"Ah to be a conservative and live in a non-falsifiable world!"

Like what, claiming the stimulus helped because (get ready for the non-falsifiable claim) unemployment could have been higher without it?

"Ezra Klein's lack of basic mathematical understanding astounds. If the spread in GDP growth is 2% due to the stimulus then the stimulus will easily pay for itself over time. Economic growth compounds and tax revenue is taken in over time. A $900 billion intervention that increases a $14.59 trillion economy by 2% over the baseline will easily generate the future tax revenues to pay for itself. This is just confusion over a simple mathematical identity."

That sounds like a free lunch. There ain't no such thing. Assuming a $900 billion stimulus package lifts GDP by 2%, what happens when the stimulus ends? Spending then declines by $900 billion, and GDP falls 2%. At least according to people like Paul Krugman, who say that lower spending helped trigger the 1937 recession. Krugman thinks that cutting the deficit from 5% of GDP to 2% of GDP saw growth collapse from 5.1% in 1937 to -3.4% in 1938.

If giving a person a dollar causes them to spend it and generate $1.50 of GDP, once you stop giving that person a dollar that extra $1.50 of GDP is no longer generated. Growth went away, but the debt stays to play. Not only do you no longer have stimulus, but now you have to make interest payments - small negative stimulus packages if you will. The present value of these interest payments, if rolled over forever, is $900 billion.

However, even if growth was lifted by 2% now and forever, you'd still have to deal with the interest payments. But growth won't be lifted by 2% now and forever. The economy's potential output is determined by labor and capital inputs and productivity. The stimulus package mostly lifted consumption, and did little to lift the long run trend growth. All the stimulus package would do is let the economy catch up to trend sooner.

But then there is no evidence you even get the 2% of GDP growth in the short term. All you have are a bunch of models which assume stimulus works. For all we know, fiscal stimulus led to tighter monetary policy which offset it.

"And it is nothing like a "liberal Laffer curve", which was a falsifiable claim that decreasing marginal tax rates would result in an increase in economic growth whose net result would be revenue neutrality. This was a empirically falsifiable hypothesis that proved to be spectacularly wrong."

And yet it is correct - the Laffer curve says that at 0% tax rates, taxes = $0, at 100% tax rates taxes = $0, and the maximum is in between. The Bush tax rates were below this maximum, and so tax cuts reduced revenue. In the 1920s, rates fell from over 70% to 25% (60% to 25% at $100,000/yr). From 1924 to 1928, income tax receipts rose 65.3% and tax from those over $100,000/yr more than doubled.

http://www.cato.org/pub_display.php?pub_id=3015

Posted by: justin84 | July 1, 2010 7:31 PM | Report abuse

"They could -if they did- but they don't."

They actually do. The Administration projected 9% unemployment in absence of the stimulus. With the stimulus, we actually got 10.1%.

Of course, this projection is tossed aside because 'we aren't able to tell how rapidly the economy was deteriorating' (really, in Jan 2009 they low-balled the estimate?), but 'we can use computer models which show how the stimulus would work by taking $X billion from millions of individuals and businesses and giving it to set of individuals and businesses, all the while not knowing how the Fed would adjust monetary policy in response.'

The fact is that all recessions end, and while typically big recessions have big recoveries, this recovery is a bit of a whimper. Roughly 60% of the GDP 'growth' was merely firms no longer slashing inventories. Final sales (GDP-inventories) grew by 1% from 2009Q2-2010Q1, which is even slower than 2001Q4-2002Q3, despite the fact that the 2001 recession actually saw GDP rise and we didn't have a huge hole to climb out of.

By the way, you can't really trust very complex models. Banks, insurers and rating agencies used complex risk models which told them RMBS weren't particularly risky, so banks loaded up and ratings agencies slapped AAA ratings on them.

As Arnold Kling put it "...my criticism of macroeconometric models is that the degrees of freedom belong to the modeler, not to the data. In Bayesian terms, the weight of the modeler's priors is very, very high, and the weight of the data is close to zero. The data are essentially there just to calibrate the model to the modeler's priors."


http://econlog.econlib.org/archives/2010/02/macroeconometri_1.html

I'll bet you none of the above models take into account the Fed's reaction function. The Fed is targeting inflation. In my model, I would specify the Fed offsetting any stimulus which lifted medium-term inflation more than 1% off target via tighter policy. But since that would be a very complex method of getting a computer to show my priors, I'll just state them - more or less, the stimulus didn't create any addional aggregate demand the Fed wouldn't have wanted to create on its own, by the Fed's estimation.

Posted by: justin84 | July 1, 2010 7:54 PM | Report abuse

Damned if you do...Damned if you don't.

If the unemployment rate was 5% right now, Louisp3 would be telling you how the stimulus was a waste of money, because we clearly didn't need a stimulus with such a low rate of unemployment..

Posted by: zosima | July 2, 2010 2:12 AM | Report abuse

Klein is still wrong when he says his resulting $1.50 generates $.50 tax revenue. It's not gross that's taxed as income, but net. After that, how can anyone countenance anything the girl says.

But further, as usual, Klein misrepresents the salient argument. It isn't that in the short term massive government spending won't have an impact. Of course it has an impact. The point is that massive government spending to prop up the economy massively drags out or kills the long term recovery. All that borrowed money has to be recouped from somewhere, and there is little incentive to work hard to pay someone else's massively stupid bills. No matter how much lipstick is troweled on the pig, the pig is still a pig. The housing market still has to shake out, and no amount of larding up the housing GSEs with debt and accounting gimmicks can change the fact of too many houses at prices that too few can afford. If the bust isn't allowed to run its economic course, then we will have bust for a decade or more, which is exactly how it's starting to look. Had the government stayed out of the mess, the economy might have already recovered, or at least have begun a long term recovery, and not the chimerical one gassed about by the Big O.

Posted by: msoja | July 2, 2010 10:20 AM | Report abuse

Sounds like you guys are real brains yourselves. I am not a mathematician or a statistician but it does not take one to figure out my company closed because of imports from other countries. The prediction that American jobs were being shipped out would have an affect on the economy was well known even in the sixties when I was still in grade school. Cheap labor, and fewer taxes, for profits became the goal of our American industries.The thing is whether or not America is benefiting enough from countries who are bringing their business into the U.S. Americans are the worlds greatest consumers.We love our gadgets and we love to spend money. Without jobs that provide good standard of living wages that put the money in our hands to purchase we cannot buy or consume anyones products. Industries that are to greedy for profit to recognize the benefit of providing those wages have caused the unemployment crisis, and it is a problem that cannot be fixed by any goverment stimulas package, Putting Americans back to work is the only way to stop the recession. Addressing and correcting the problems that caused the recession will prevent further unemployment.Our goverment is not alone in the unemployment delemma. Our American industries play a role in the structure of this economy, as well as the banks, and investment companies on Wall Street.Government stimulas is not a long-term answer to the recession no matter what kind of statistical charts you are using to weigh the data. Good business for the companies seems to be bad business for the economy.Perhaps the world's businesmen should have an economic summit with the world's economists to help solve some of our economic problems.

Posted by: raholden2004 | July 2, 2010 4:35 PM | Report abuse

--"I am not a mathematician or a statistician but it does not take one to figure out my company closed because of imports from other countries."--

Someone else was willing and able to do your company's business better than your company could do, and for less money.

Now you've got to ask yourself the question: To what extent did government regulations and taxes price your company out of global competitiveness?

Posted by: msoja | July 2, 2010 9:27 PM | Report abuse

Every other day you read about how much money the CEO's make who work for some of these large industries. It is more money then some of us drawing unemployment will see in a lifetime. However they were pretty smart to dodge taxes, and increase profits by going out of the country.I guess from where I stand it is hard for me to sympathize.I do know that I repaired the work that was brought back from other countries before it could be put on the shelves of our buyers. They may have done it for less but they never did it better then the American workers I worked with. They are other factors responsible for the economy then high taxes imposed by the goverment.

Posted by: raholden2004 | July 2, 2010 10:03 PM | Report abuse

--"I guess from where I stand it is hard for me to sympathize."--

Yup, surely. But people is people. The foreign worker has cares and ambitions to match your own, and there is a certain hubris in certain American sectors that carries a price tag that may not always be justified. And buggy whips come and go. And life itself is beset with the vagaries of chance and/or the fruitions of other's actions beyond one's control.

It may be that one government policy or another could have helped you or your business in particular, but that in no way justifies the utilization of such force. Your gain would come out of others' hides. The best arbiters for these things are free peoples trading freely.

Posted by: msoja | July 2, 2010 11:31 PM | Report abuse

Ezra said,"The question is where would we be without the stimulas." I sympathize with the foreign workers, and children being used in the foreign sweatshops. Not with companies that pay millions of dollors to CEOs, who advise them to take jobs out of the country that Americans need. The stimulas is helping to keep our economy from hitting the bottom right now, but it cannot last forever.America was founded on the free trade system, but should it not be fair and balanced?
"And life itself is beset with the vagaries of chance and/or the fruitions of other's actions beyond one's control." This is a mouthful, but I don't believe much in chance, and the fruition of others actions's are definitely beyond my control. However greed is in the control of the gluttons who gorge themselves.

Posted by: raholden2004 | July 3, 2010 4:44 PM | Report abuse

--"[G]reed is in the control of the gluttons who gorge themselves."--

The worst fat cats are all in Washington, or late of that address. The Clintons. The Gores. The Obamas.

Yes, they're not "greedy" because they mouth the proper platitudes.

You're entirely too worried about other people's money. Your life is your own. If you want to throw it over to federal control, don't come complaining when the feds do you wrong. They always have, and they always will. If nobody ever told you that before, or you didn't realize it on your own, tough. It's an obvious fact of life.

Posted by: msoja | July 4, 2010 12:37 AM | Report abuse

No,msoja, I am worried about my money which I will soon run out of if the stimulas does not pass. Tomorrow should tell the tell of whether or not the unemployed workers will be hung out to dry.And by the way it was some of my tax dollars that helped bail out those fat cat bankers, and the automobile industry.This made me part of their solution,and raised my status which gives me the right to worry about "their money" Also I believe this discussion has drifted way off from the two points discussed in the above article.However I would like to comment that you seem very negative about the unemployed and our federal goverment.

Posted by: raholden2004 | July 4, 2010 6:52 PM | Report abuse

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