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What wastes money in stimulus?

The Obama administration has dropped the idea of a payroll-tax holiday. They're interested in making the R&D tax credit permanent, but that's more of an effort to aid long-term innovation than short-term growth. The Bush tax cuts are going to be the major tax issue going into the fall, but that's only because they're expiring and that's forcing Congress to do something (or decide to do nothing), not because anyone really thinks they're a great stimulus measure.

It's worth saying why this is. Our definition of waste in government spending is something like "a project that doesn't seem worthwhile to me." When Tom Coburn and John McCain released their list of wasteful stimulus projects, the first item was "$554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens." Assuming the description is right, it seems dumb, right? Why does a closed service center need new windows?

But from the point of view of stimulus, that project wasn't wasteful at all: We paid people to replace windows, we paid window-makers to produce glass, and we put $554,763 of new demand into an economy that was operating far below its potential. Here's what would be wasteful: Giving me a payroll-tax cut. Or, as the Bush tax cuts would have it, a break on my income taxes.

I'm a young, single worker. I don't have many expenses. I'm currently saving money. If given a tax cut, I will save every cent of it. My tax cut will create no new demand in the economy. It will not employ new workers or buy new things. I will, in other words, waste the entire thing. If you want to create jobs and stimulate economic activity, you'd be much better off hiring people to replace the windows in a vacant storefront than giving me a tax cut.

By Ezra Klein  |  September 6, 2010; 2:07 PM ET
 
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Comments

Hey there lucky ducky, not everyone is a young single worker with a cushy gig and able to save each month. FWIW, I'm sorta a lucky ducky too, I can save each month but I still lie awake at night worried for my future as my hair turns gray.

It really hit home for me last night talking with a dear friend who drove up from her "semi-retirement" home down south using the last 50 bucks in her checking account to do so. She's living paycheck to paycheck as her retirement plants were shot to hell when the economy imploded. We lamented the fact that she did not come up more often but she cannot afford to do so. You betcha giving her a payroll tax holiday would put money into her local economy as differed projects could be considered and she could spoil the grandkids some more.

Posted by: HokieAnnie | September 6, 2010 2:46 PM | Report abuse

@HokieAnnie - but Ezra is talking about using stimulus efficiently. No doubt some money used on a payroll tax holiday WILL go to people who will use it to stimulate the economy. But a lot of it won't, meaning it's an inefficient use of money if your goal is to stimulate the economy. Just about all of the money spent replacing windows WILL be spent, however (spent on glass, spent on labor, etc). Thus, almost all of that money goes back into the economy, where much of a payroll tax holiday will just saved and hoarded.

Posted by: literroy | September 6, 2010 3:19 PM | Report abuse

I don't think your personal anecdote can be used as an argument. Different people will do different things. For me, I'd use it to pay off the credit card debt I built up during my brief period of unemployment over the summer. I'd imagine that many others may also use it to pay down debt. Although its good for us as individuals, this also won't stimulate the economy very well.

We have a ton of infrastructure projects that need to be done. Fixing bridges, roads, sewers, electrical grids, etc. We also have a lot of people unemployed with those skills due to the housing bust. Every time they get paid, they'll buy something (and pay someone else). The multiplier should be pretty good. We can also borrow at extremely low rates, and with the disinflation (and threat of deflation) we're seeing, there isn't an inflation risk either.

This will help the economy now, and will give us a better infrastructure for our future. It won't pull workers from the private sector. Nor will it "crowd out" private investment (as they're not investing anyway). The increase in aggregate demand may even cause a "crowding in" effect. And, its hard to imagine a set of circumstances more favorable from an interest rate and inflation standpoint.

This really could be a great opportunity for America and instead we're just digging ourselves deeper into a hole.

Posted by: Nylund154 | September 6, 2010 3:30 PM | Report abuse

Maybe paying people to dig ditches and fill them in again would help the economy. But it is not as good as finding useful work for them to do. Failing that just giving them money is better because there is a chance they might find something useful on their own if they weren't busy doing make-work.

Posted by: MrDo64 | September 6, 2010 3:35 PM | Report abuse

From the point of view of stimulus, that project WAS wasteful. It did not create a consumer demand but merely provided an artificial and temporary payment for labor and energy usage. Then, the government complains that companies don't hire, borrow, and expand. Government make-work is not sustained demand.

Posted by: kitchendragon50 | September 6, 2010 4:10 PM | Report abuse

This is so obvious that we know there is no loss of communications here. Just that the Republicans want to win the next election and will do what ever it takes. That should be expected.

What is curious is that people believe them.

Why?

Posted by: GaryEMasters | September 6, 2010 4:27 PM | Report abuse

Why was the center closed?

Maybe it was because the windows needed to be replaced.

What do you expect from the party that sees no value in volcano monitoring?

Posted by: lol-lol | September 6, 2010 4:58 PM | Report abuse

Because McCain and Coburn called for wasteful stimulus, it makes them wrong, just like it makes government spending on Keynesian stimulus wrong when Obama does it, or any other president or congress-- some of us say all government stimulus is wasteful ultimately because it is unnecessary and doesn't achieve its goal of sustainable economic growth.

Posted by: mdfarmer | September 6, 2010 6:23 PM | Report abuse

You keep saying that saving does not stimulate. Where do you put your saving? Is it in a mattress? If not it probably stimulates. If it goes into a bank it is available to be loaned. If it is invested it provides capital for a business venture. Savings do stimulate. Stocks, bonds, bank deposits, money market etc, they all are channeled into business investment. I don't understand why Democrats are ignorant of the economic power of savings.

Posted by: hfarmer2 | September 6, 2010 7:19 PM | Report abuse

This entry confuses the payroll tax idea.

From what I read, the payroll tax holiday would have allowed EMPLOYERS (not workers) to forgo paying payroll taxes on NEW hires.

The idea is based on Keynes old sticky wages critique of neo-classical economics. Workers are reluctant to lower their wages, and employers refuse to hire employees at their old wages leading to unemployment.

A payroll tax cut would help by making labor 'cheaper.' Employers would no longer be paying employees wages + benefits + payroll taxes, they would only be paying wages and benefits. This would help drive the price of labor to its new equilibrium.

In addition, I think that Ezra is overvaluing the effect of busy work (redoing windows on a defunct convention center) on the real economy.

We could use 30 billion dollars of government money to hire people to do jumping jacks in place for 8 hours a day. This would increase "demand" (GDP) and reduce unemployment, but are people better off?

Certainly the government is not better off; it places no value on the jumping jacks. The people are better off, but, assuming they would rather just get the money instead of doing jumping jacks, they would be even better off with a tax cut equal to 30 billion dollars in their pockets.

Busy work projects that have no value are simply transfers of wealth from the government to citizens (ignoring the effect of future taxation). We might as well save everyone the time and just give them the money.

If the government does spend money on projects, it needs to do so in such a way that the benefits of the projects outweigh the costs associated with the projects.

Posted by: kevinadolph | September 6, 2010 7:20 PM | Report abuse

Is the center now open? Or is it a just a cabin with new windows. Ideally the spending would cause a secondary benefit, such as in a now open visitor center in addition to directly affecting the workers. Otherwise you would have the same efficiency by paying people to dig holes then fill them in.

Posted by: Jenga918 | September 6, 2010 7:39 PM | Report abuse

McCain. He's lazy. He needs to get off the government welfare system. He needs to stop living off his wifes money. He needs to find a real job to open his eyes and understand the world around him.

Posted by: Maddogg | September 6, 2010 8:50 PM | Report abuse

Ezra is correct insofar as stimulus funds that create new jobs for the unemployed would have, by far, the most impact. By that, I mean funds that go directly to new employees who had been unemployed. Putting money into these people's hands will result in the greatest increase in spending that puts demand on other firms to expand and hire. Employing these people also reduces the excess-labor situation that puts downward pressure on the wages and salaries of the employed. Hopefully, these re-employed people would do something valuable--like investments in infrastructure--and something that builds their resumes more than "did jumping jacks."

The least effective stimulus is putting more money into the hands of employers who see no demand for their goods and services that would justify expansion and hiring by their firms. As others have noted, this would feed profits, CEO salaries, and corporate take-overs (which reduce jobs).

Somewhere between is putting money into the hands of the already-employed. Much of this money would be saved or used to pay down debt, neither of which increases demand for goods and services. Some of it would be spent--the lower the income of the recipient, the more likely it would be spent, but even Ezra might buy a new tie.

Posted by: pjro | September 6, 2010 9:03 PM | Report abuse

Answer--

The government generates no money on its own. It must take the money from somewhere. In the private marketplace, were it not for the government demand of the stimulus, there would be one company who would say that it would be apporpriate to pay for windown replacement. The companny, however, because of the demand of the of the stimulus and prospective stimuli, chooses not to spend the money to make the immediate replacement, and allows for the broken window scenario to develop, causing a need for greater repairs in the future.

Congratulations, you have one stimulus job which is defined by a central command/control group completed, and you have one repair job not done which may lead to greater costs in the future. You have the worker hired by the government, and the worker not hired by the private marketplace

Seems rather non-stimulative to me. I think in Las Vegas it's called a push.

Posted by: PALADIN7E | September 6, 2010 9:29 PM | Report abuse

Ezra makes a very good point about stimulus. We should not confuse economic stimulus with targeted safety nets. He points out the paradox of thrift implicit in giving currently productive, balance sheet positive workers a tax break. Government demand is real demand, primarily filled by the private sector. The feds did not make the windows and likely paid a private contractor to install them. This certainly qualifies as stimulus. It helped pay someones electric bill.

Posted by: lsignor | September 6, 2010 9:59 PM | Report abuse

Hi pjro,

I think you mis-characterize a payroll tax cut for new hires as putting money in the hands of employers. They would have to hire additional employees in order to claim the savings.

Demand is not the only thing that firms look at when deciding to hire, they also look at costs. They weigh the costs and benefits of hiring new employees.

You can encourage firms to hire either by increasing the benefits of the worker, or lowering the cost of hiring workers. A payroll tax cut lowers the cost of new workers.

You didn't touch on sticky wages, keynes, etc. so I will leave that alone.

You mention that hopefully government will spend money on valuable things, but the example ezra site (windows) is a project with no value. You can 'employ' workers to do pointless busy work, or you can just give them the money. On the whole, it is better to just give them the money.

If the project does have value (where the benefits outweigh the costs), then I agree it's something that the government might want to spend money on. Projects for the sake of projects, however, are fruitless.

And for the most part, the stimulus seems to be projects for the sake of projects...

Posted by: kevinadolph | September 6, 2010 10:22 PM | Report abuse

--"If you want to create jobs and stimulate economic activity, you'd be much better off hiring people to replace the windows in a vacant storefront than giving me a tax cut."--

Well, that's pretty moronic, even for you, Klein, but if that's the way you feel, why don't *you* find an abandoned building and hire a couple of hardy lads with your own soon to be allegedly wasted (if you ever read the comments under your own posts, you'd know you'd been corrected on that issue several times) savings? Why you feel compelled to want to force all your fellow citizens into performing such similar idiocies as you describe is beyond me. Why don't you take your own money and throw it something resembling that which you call "stimulus" and see what a thrill it gives you? And maybe, just maybe, it'll somehow dawn on your what abominable idiocies your inclinations are built of.

Posted by: msoja | September 6, 2010 11:14 PM | Report abuse

WOW ! Didn't you know that was WPA was about? You give people money to paint say the Coit Tower Murals in San Francisco and then they buy paint and brushes and the those people spend and on it goes. It is called the multiplier effect! Hence the word stimulus Who cares if the place is closed we need to put people to work! As for the payroll tax the majority pay all year long Ezra you however see it stop in the fourth quarter anyway so you already get the holiday wake up and see the real world!

Posted by: keirandcee | September 7, 2010 12:29 AM | Report abuse

Interesting example. Ever hear of the broken window fallacy?

http://www.investopedia.com/ask/answers/08/broken-window-fallacy.asp

In the example Bastiat used, the window would actually be placed in an operating shop - so this example is arguably quite worse. Not much different from paying one set of workers to dig holes in the ground, and another set to fill them up.

Okay, I get it. Keynesians are in power. Let's grant all the Keynesian assumptions. Wants are unlimited. Why buy useless things?

Posted by: justin84 | September 7, 2010 12:30 AM | Report abuse

Thanks, kevinadolph, I appreciate the very thoughtful comeback, but I don't entirely agree with you. First, a tax cut to a business for new hires would have little impact if the business has no reason to hire. Most businesses today say they would hire if they thought the demand exists and would exist. They don't. Many have record profits that they are stashing away, precisely for this reason. Hiring implies costs, even if the government reduces these; and the benefits of hiring don't accrue without the demand. Creating the demand, on the other hand, would result in much hiring by businesses without having to make hiring less costly for them. Of course, there's nothing wrong about making it less costly for them, after addressing the shortage of demand.

Second, I agree that it is better to just give money to the unemployed than to have them hired to do jumping jacks or truly worthless work; it is NOT better than hiring them to do worthwhile work, even if the costs outweigh benefits. In addition to creating new customers-with-jobs for businesses, the newly hired gain experience valuable to them and to firms. Both the individuals and firms also see hope for the future, affecting their behaviors. (I won't get into suicide rates and mental health, or other sociological issues, for the unemployed, but unemployment takes a huge long-lasting toll).

Bottom-line: if you want spiraling re-employment, hire or pay firms to hire to do something productive. No guarantees, but it's the fastest/surest route, imho.

Posted by: pjro | September 7, 2010 1:06 AM | Report abuse

Temporary spending is just that, temporary. I am in the industry of manufacturing. The company I work for is afraid to hire as we received a small up-tick for the summer. Obama's taxation against big business is holding companies hostage from hiring. Unwritten rules stifle hiring. Obama's approach is tax business including small business. More tax is not the answer. This is what a stimulus package will do. Someone has to pay for it.

Today, I heard of a new stimulus to build roads/bridges. I would rather see tax cuts for big and small business. Permanent tax cuts will encourage hiring. It is the free market that will encourage job growth and turn the economy. Yes, there was also talk of a temporary tax cut for 2011 on growth and hiring expense, but companies will not take that on as they know down the tunnel is a hit on every employee they hire i.e. taxation and expense of the Health Care Bill. It is like a fish taking the bait, what seems free just might get you hooked into something that you just do not want.

Posted by: USAFvetINgr | September 7, 2010 7:47 AM | Report abuse

"The government creates no money on its own," eh?

Yet you're posting this on the Internet, which resulted from government funding of ARPAnet. You're using electricity that was most likely provided by '30s electrification projects. You may even use interstate highways, national parks, the police, the fire department, and so on.

States and the federal government are great at helping to build infrastructure. Micromanaging it, not so much. But as Minnesotans like me are aware, infrastructure is vitally important to people, to business, and to the future in general.

Posted by: stonedone | September 7, 2010 8:59 AM | Report abuse

"But from the point of view of stimulus, that project wasn't wasteful at all"

Sure it was, per Bastiat, etc. It was not the most efficient use of the money, thus it was wasteful compared to the most efficient use.

If Klein had extra money to save, wouldn't he save it by buying Treasuries and thus help to fund our deficit expansion?

Posted by: staticvars | September 7, 2010 9:18 AM | Report abuse

You forgot one thing Ezra: You put your money in the bank for almost no returns. The bankers get your free money to play in the stock market and make millions in bonuses. If their bet fails, your taxes will bail them out! So a payroll tax helps someone-just not you!

Posted by: ns3k | September 7, 2010 9:37 AM | Report abuse

--"WOW ! Didn't you know that was WPA was about?"--

The WPA was that thing that prolonged the Great Depression, right?

Posted by: msoja | September 7, 2010 10:42 AM | Report abuse

From the point of view of stimulus, that project WAS wasteful. It did not create a consumer demand but merely provided an artificial and temporary payment for labor and energy usage. Then, the government complains that companies don't hire, borrow, and expand. Government make-work is not sustained demand.

Posted by: kitchendragon50 |
------
You forgot that the demand collapsed in the Financial Crisis and housing bubble fiasco forcing the government to provide a push for the demand but the other side has to push it along and they aren't.

Considering the fact that we, as a nation, have created a hole for ourselves by borrowing for the last 30 years.

Posted by: beeker25 | September 7, 2010 10:45 AM | Report abuse

Love the tag line, Economic and Domestic Policy, and Lots of It. Truth in advertizing would require the line be changed to read, Economic and Domestic Policy, and Quantity Trumps Quality.

When an uncecessary project of close to $900k is decribed as stimulative merely because people made windows, sold them and installed them, where is the NEED that justifies spending it where it was spent? Now if there were a federal courthouse with a leaking roof and drafty windows, using $900k to fix those problems would be stimulative. Wasting it on unnecessary nonsense is the antithesis of economic stimulation.

This guy shouldn't even be issued a checkbook. He makes Eejit Dionne look like a learned economist by comparison.

Posted by: buggerianpaisley1 | September 7, 2010 12:25 PM | Report abuse

It's not wasteful to spend a half a million dollars putting windows on a closed building? Really? Wow. This Krugman/Keynesian Koolaid is some pretty strong stuff.

Did it not ever occur to you, Ezra, that there might be a few thousand better, more productive ways to spend that half a million? Like food stamps or charging stations for electric cars? Sheesh. At least the supply siders let taxpayers flush their own money down the toilet.

Posted by: bgmma50 | September 7, 2010 1:48 PM | Report abuse

Ezra you ignorant sl_t....

If you simply took the same money for an y one of these boon doggles and gave it as a tax break to the businesses who are making money hand of fist---the looser money would almost immediately translate into more and more exploited business growth opportunities that would expand the overall tax base of our economy. Thta has been the sercte to America's 250+ year legacy of overwhelming growth.


The government can never spur as much growth as the most profitable businesses can--the only exceptions would be in cases when our economy was infrastructure-limited, which is most certainly not the case today.

In the modern age, Bill Gates & Microsoft can growth the economy far more per dollar invested than Obama and Pelosi ever will!!!


FACT!

Posted by: FastEddieO007 | September 7, 2010 9:58 PM | Report abuse

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