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Stimulus counterfactuals

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Jon Cohn asked some lefty economists to imagine a world in which we'd passed a $1.5 trillion stimulus. What, he wondered, would be different? How much better off would the economy really be?

It's a good question, and I think one of the political problems right now is that the Obama administration didn't get the counterfactual into the conversation early enough: They decided to call $800 billion pretty much what they wanted rather than a downpayment on what they needed.

So it's left to the blogs. Cohn gets two economists on the record. Dean Baker, president of the Center for Economic and Policy Research, says that a rough calculation would just multiply the impact of the actual stimulus by two: "The Congressional Budge Office estimates that the stimulus added 1.7-4.5 percent to GDP and that it lowered the unemployment rate by 0.7-1.8 percentage points. If it were twice as large, assume GDP growth in the 3.4-9.0 percent range and the drop in unemployment in the range of 1.4 -3.6 pp. In other words, the unemployment rate today would be between 7.7 percent and 8.8 percent." He also thinks there's some chance it would have "kicked off self-sustaining growth with a bigger round of investment coming on board and maybe even some real wage growth."

Larry Mishel, president of the Economic Policy Institute, agrees that more stimulus would've meant more jobs. Maybe as many as 5 million of them. But he also sounds a cautious note we were hearing back in 2009, too: "Though the economy needed that size stimulus, I’m not sure there were good vehicles for executing such a stimulus," he says. "I’m not sure I would have wanted to double the tax cuts, and it wasn’t possible to double much of the investments and get them underway in this time period. We could have given states more relief. And, we could have extended the time period of much of the stimulus elements--unemployment insurance, investments, state relief, etc.--so we wouldn’t need to renew than now."

I'd make one further point: You could certainly imagine a stimulus package that was more politically effective than the one we passed -- even if it was less economically effective. A payroll tax holiday and a doubling of Social Security checks might've done less to help the economy and make needed investments, but it would've been more visible to most of the country, and it would've created a larger political constituency in favor of the program.

As it is, you can make a good case that the stimulus will change America in important and beneficial ways, but it's equally clear that lots of people won't notice those changes happening, or know who to attribute them to once they're done. How many folks are seriously going to walk into a doctor's office in 2011, see a new computerized records system, and think to attribute it to the American Recovery and Reinvestment Act of 2009?

Photo credit: Ryan McFarland/Zieak.

By Ezra Klein  |  September 3, 2010; 8:50 AM ET
Categories:  Stimulus  
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Next: August jobs report: 54,000 jobs lost; unemployment rate hits 9.6 percent

Comments

Well a payroll tax holiday seems like a no-brainer. Just borrow the money instead of taxing it. Its absurd how strong our financial position is, Tsy is selling 3 month T-bills at 0.015%, its actually cheaper to borrow than to print Greenbacks Abe-Lincoln style (due to the 0.025% interest on reserve payment rate).

Lets see almost $900 billion in FICA payroll taxes ($200 billion for Medicare, the rest for Social Security), that's a big stick. Need more stimulus than that, expand Medicare coverage to, well, everyone (that would redirect hundreds of billions in premiums to more productive uses). There you go, all the stimulus you need and we didn't even have to leave the Social Security Act.

At this point, however, Tsy should tie FICA tax collections to the U3 unemployment rate. Reduce FICA taxes by U3 x 10, adjust it monthly when DOL releases the employment figures. So this month at 9.6%, FICA taxes would be cut by 96%, if we get to 7% U3 unemployment, payroll taxes are cut by 70% and so on. This lets you wind down the deficit spending as economy improves, in order to reduce inflationary pressure. It would also let you dramatically hike, double even, FICA baseline rates to "fund" Medicare for All painlessly. There's no reason to fully fund anything with taxes until economy reaches maximum employment, so by the U3 x 10 formula (adjusted up or down monthly), even doubling FICA wouldn't take out as much as current taxes do until unemployment is cut in half. As for the revenue hole between full employment taxation and expenditures((30% even at 3% unemployment), that's why God invented the carbon tax.

Posted by: beowulf_ | September 3, 2010 11:55 AM | Report abuse

Sorry for the surplus zeroes in the percentages above, they should be 0.15% T-bill rate and 0.25% IOR rate. And after "carbon tax", I neglected to add, "and Okun's law too". :o)
http://en.wikipedia.org/wiki/Okun%27s_law

Posted by: beowulf_ | September 3, 2010 12:00 PM | Report abuse

I don't think it's as hard to spend money on good projects as Klein seems to think. My local government has a backlog of problems a mile long, including a bridge that washed out in a big flood this summer that will cost us $1,000,000 to replace. There are surely hundreds of thousands of such things all around the country.

Also, if one takes a look a look at NSF, NIH, and any other the other scientific funding agencies, the grant success rate is abyssmal. We could put several tens of billions into these agencies over a couple years and still they would be rejecting most applicants.

If worse comes to worse, just helicopter drop a few million into the coffers of any of the thousands of good charities out there, and ask THEM to spend the money within a year. I am sure that won't be much of a challenge.

Posted by: brickcha | September 3, 2010 4:24 PM | Report abuse

I don't think it's as hard to spend money on good projects as Klein seems to think. My local government has a backlog of problems a mile long, including a bridge that washed out in a big flood this summer that will cost us $1,000,000 to replace. There are surely hundreds of thousands of such things all around the country.

Also, if one takes a look a look at NSF, NIH, and any other the other scientific funding agencies, the grant success rate is abyssmal. We could put several tens of billions into these agencies over a couple years and still they would be rejecting most applicants.

If worse comes to worse, just helicopter drop a few million into the coffers of any of the thousands of good charities out there, and ask THEM to spend the money within a year. I am sure that won't be much of a challenge.

Posted by: brickcha | September 3, 2010 4:27 PM | Report abuse

that time article is brilliant. reminds me why I voted to obama in the first place.

Posted by: SnowleopardNZ | September 4, 2010 4:57 PM | Report abuse

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