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Where Budget Constraints Actually Bind

January 31st, 2009 . by economistmom

Almost all state governments don’t have the luxury that the federal government has of being able to continually live beyond its means.  Take California’s situation, which is particularly strained.  From a CNN-Money story (emphasis added):

Suffering from both a $15 billion budget deficit and a multi-million dollar cash shortfall, California is days away from not having enough money to cover all of its bills.

Starting on Sunday, state controller John Chiang plans to delay sending state tax refund checks, payments to contractors and disbursements to counties and agencies that provide social services. He estimates that the state will be at least $346 million short in February.

“Rather than helping stimulate the economy, withholding money from Californians will prolong our pain and delay our economic recovery,” he said. “Individuals who already are vulnerable will be hit hard.”

Gov. Arnold Schwarzenegger and legislative leaders are behind closed doors trying to hammer out a solution to the state’s mid-year budget crisis and a projected $25 billion gap for 2009-2010. The governor has proposed draconian spending cuts in virtually every department, as well as hefty tax increases, to close the widest deficit in its history.

California is not alone in its budget troubles. Some 46 states face budget shortfalls, forcing them to slash funding for many services. But California is the largest state in the union, and its problems are particularly severe. Its deficit totals more than 35% of its general fund…

The state’s fiscal troubles largely stem from its heavy reliance on personal income taxes. This revenue stream dries up when recessions hit and unemployment soars. California also never fully recovered from the dot-com bust earlier this decade, which led to big budget problems at the time. So the state didn’t have large reserves to fall back on when the bottom fell out of the economy…

On top of its economic troubles, the state is also coping with a near shutdown of the nation’s government bond markets, which had allowed it to borrow to cover its short-term debts. This fall, the state was only able to borrow half of what it needed to see it through the fiscal year.

The lack of access to the bond markets prompted the state in December to suspend funding for more than 2,000 infrastructure projects, leaving many people and businesses without much-needed work.

And because of California’s financial woes, credit rating agencies are taking a dim view of the state. Moody’s warned in mid-January it might downgrade California’s general obligation bond rating because of its budget and liquidity problems. If this happens, it will become even costlier for California to borrow

Some relief may be coming California’s way. The state stands to receive billions from the $819 billion stimulus package that just passed the U.S. House of Representatives.

The state could get as much as $63.4 billion, some 12.3% of which could be used to balance the budget, according to the Center for American Progress. Some $3.6 billion could go for highway construction and transit improvements, restarting some of the projects currently idling. California will also receive billions to pay for education, Medicaid and other benefits.

Schwarzenegger, however, says the state must still work out its own budget problems.

“I always make it clear that we will not use that money to bail us out, because we have to bail ourselves out,” he said in a speech this week. “I think we have to be careful not to look at them [the federal government] as the savior, but to just look at them as the icing on the cake.”

Note that California’s budget woes are just a smaller version of the federal situation.  They’re forced to live by balanced budget rules, so the federal government–without such constraints–can bail them out.  And the federal government should help the states during a time when being forced to run balanced budgets is dangerous for the short-term economy.  But this means the debt isn’t paid down, it’s just shifted.  And even if California (like other states) intends to (or must) eventually “work out its own budget problems” and get back to living within its means, what will force the federal government to work out its own problems, if constraints will still not bind as we emerge on the other side of this recession?  Who will bail out the federal government–besides those foreign investors whose governments are now trying to get them to stop saving so much of their money?

Bruce Bartlett Worries About Haste and Waste, Too

January 30th, 2009 . by economistmom

I can’t help but point to more agreement between me and Bruce Bartlett, as demonstrated in his Forbes column today (emphasis added):

One element that is common to all recessions is a significant decline in aggregate spending in the economy. This would include consumption and investment spending by businesses, households and governments. Countercyclical policy primarily consists of raising any type of spending; all is equally valuable in terms of countering a recession. Nor does it matter for countercyclical purposes whether the spending originates in the private sector or the public sector. Spending is spending and the goal is to raise its total amount.

Since spending drives short-run growth, saving is necessarily bad. This is why federal budget deficits are stimulative. The deficit is essentially negative saving. If the funds raised by federal borrowing are used in a way that stimulates additional consumption or investment, then this will have a positive effect on near-term growth.

But in the long run, saving is critical–it finances investment, which is the wellspring of growth. Ultimately, saving and investment must be equal. Although foreign saving can be imported to finance domestic investment, this only works for a time because the returns to such investment will accrue to foreigners and Americans will not be enriched. It’s better if domestic investment is financed through domestic saving

[I]t’s a fallacy to think that increases in asset values are the same thing as saving. They are, from the point of view of the individual, of course, but not for the economy as a whole, because no additional resources have been created out of which to bring forth new productive capacity. That only happens when there is foregone consumption out of current output.

Saving and deficits aren’t the only economic factor that have different long-run and short-run effects. In a recession, monetary policy needs to be expansive, but in the longer run, it will be inflationary. In the short run, government spending is stimulative, but in the longer run, an increase in the size of government retards growth…

For these reasons, we need to be very careful about enacting measures that are justified only by current economic conditions but are potentially disastrous if maintained for too long. Therefore, it’s critical that all stimulus measures be temporary. It would be a great mistake to use an emergency to justify a permanent expansion of government. Unfortunately, this is inevitable…

It is a certainty that some, perhaps much, of the spending being initiated as stimulus will be just as wasteful. That will be true even if there are no earmarks in the legislation, because when decisions are made in haste without proper vetting, waste is inevitable.

There are also tax cuts contained in the stimulus package. Although these will have an impact on the economy more quickly than increased spending, they are poorly designed for stimulative purposes. The Tax Policy Center found that none of the provisions deserve a grade of A, even with a rather generous grading standard. Overall, the tax cuts get a grade of C+ in terms of stimulus. Economist Steve Entin says they aren’t justified as supply-side measures, either.

Thus we see that evaluating stimulus measures depends critically on the time frame. It’s not a contradiction to support increased government spending today while at the same time holding that an increase in the size of government is ultimately bad for growth…

OK.  Where I think I part ways with Bruce on this, is the presumption that a larger government has to mean a low-growth economy (or a bad government).  I have to think that larger can be consistent with better, because I think it’s inevitable that government as a share of our economy will grow over time.  (With the baby boomers in retirement, I don’t see how spending on Medicare and Social Security as a share of the economy can do anything but rise over time, even if we manage to reform the programs to make them more sustainable.)  I think the federal government could spend more efficiently and less wastefully, for sure–if policymakers have the will to do it.  And I believe the notion of “better” government goes beyond a government that solely promotes the traditional measures of aggregate economic growth–but one that produces a fairer distribution of resources among households, and a more sustainable mix of resources.  There are still many things that government can do that the private sector cannot, even over the longer run–not just right now when the private sector seems paralyzed and unable to do any of the consumption.  To digress into economist lingo, I believe a lot of the “possibilities” for our economy depend on the government doing its (public-goods) part to expand that production possibilities frontier, and on government policy to help steer our economy to the point on the frontier that maximizes social welfare.

Where Haste Is Not Necessary and Waste Is Not Justified

January 29th, 2009 . by economistmom

Concord’s number one complaint about the House-passed recovery plan:  not that it increases the deficit by $816 billion or so over the next ten years (most, but not enough(?) of it, over the first two years), but that so much of that represents spending on longer-term initiatives that shouldn’t have to be deficit financed:

President Obama has stated that the economic recovery legislation “is not just a short-term program to boost employment. It is one that will invest in our most important priorities like energy and education, health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st Century.” These are important goals, yet the budgetary calculus for longer-term fiscal investments is fundamentally different from that of short-term stimulus…

The “spend out,” or budgetary cost, of the various proposals matter, but they should matter in terms of how the costs compare with the benefits. With short-term stimulus, the costs of deficit spending should be compared to the benefits on GDP and employment. With longer-term investments, whether deficit spending is justified depends on whether the longer-term economic benefits of such spending outweigh the longer-term costs. And with deficit financing of those longer-term initiatives, those costs include the adverse effects of deficits on national saving, the costs of debt service that will be incurred with compound interest, and the risk to the short-term stability of the U.S. economy from increased borrowing…

“Fiscally-responsible deficit spending” need not be an oxymoron. In the current debate about how to best engineer a strong and sustainable economic recovery, fiscal responsibility in the short run targets deficit-financing to only the most effective anti-recessionary policies. Over the longer term, fiscal responsibility means investing wisely in projects that will contribute positively to economic growth–and being willing to pay for those worthwhile projects over time. On both fronts, policymakers should not confuse the size of our economic problems with the benefits of various policy options. Cost is a poor measure of effectiveness.

The current temptation to throw federal money “out the door” as quickly and energetically as possible is perhaps understandable as a demonstration that the federal government is doing all it can for the American people in response to the economic crisis. But haste may make for a lot of waste, and many proposals being considered as part of the recovery plan are clearly designed to promote economic growth for the longer term, where haste is not necessary, and waste is not justified.

And today, the Congressional Budget Office sent a letter to Senate Budget Committee Chairman Kent Conrad suggesting that efforts to increase the “haste” of infrastructure spending will (unfortunately) likely also increase the “waste” of it:

Actions that Could Accelerate Spending

CBO has not analyzed the various programs in detail in order to identify the specific steps that might be taken in each case to speed up spending. Some possibilities for accelerating spending in infrastructure and other grant programs include changing federal standards and requirements by:

  • Waiving requirements for environmental and judicial reviews;
  • Allowing contracts and grants to be awarded outside the normal competitive bidding process;
    Waiving maintenance-of-effort requirements for state and local governments; and
  • Changing the way funds are distributed. For example, spending for some education programs might be sped up if the federal government used formulas instead of competitive processes to distribute funds. In the case of transportation projects, it could mean waiving formulas and instead giving priority to those grantees that are able to get to contract most quickly.

Some funds for infrastructure projects might also be spent more quickly if recipients were:

  • Offered financial incentives for work completed within one to two years of enactment;
  • Given deadlines for obligating funds;
  • Given the authority to “pre-award” contracts (that is, award contracts before all of the currently required approvals and certifications are obtained); and
  • Allowed to self-certify compliance with certain standards (federal agencies would then review paperwork and documentation after projects have begun).

States also have contracting and other requirements for carrying out infrastructure projects, however, and changes in those standards might also be necessary in order to accelerate spending. One option might be to make the receipt of federal funds contingent on such changes.

Making such changes to accelerate federal spending could have other consequences, however. Undue speed could result in: errors in planning, design, or contracting that might result in poor performance, legal challenges, or increased project costs; unanticipated environmental impacts; or the undertaking of projects that are of little value but that can be started up quickly.

OMB Director Orszag to the House Chairmen: Fiscal Responsibility Still Matters, Even Now

January 28th, 2009 . by economistmom

President Obama’s Office of Management and Budget Director, Peter Orszag, sent a letter to the leaders of the committees of jurisdiction on the House economic recovery bill yesterday.  I haven’t been able to either find a copy posted anywhere on the internet, or figure out how to post the pdf file on my own here, but here are a couple key passages (emphasis added):

[T]he President urges you to pass a final bill that has at least 75 percent of the funds spending out over the next year and a half (the rest of fiscal year 2009 and fiscal year 2010).  At the same time, the recovery package should include those provisions that have been shown to provide the most effective support to the economy…For example…direct spending…[which] provides the largest “bang for the buck”…[combined] with other particularly fast-spending components (such as middle-class tax cuts [and low-income assistance programs])…[which will] enable us to meet our spend-out goal while also providing the most effective support to the economy possible over the next year and a half…

[W]e need to recognize that focusing only on the short term is part of why the economy is in such dire straits today.  That is why as we address the pressing demands of lifting the economy out of recession, we must also look to the future and begin the process of reinvesting in priorities like clean energy, education, health care, and infrastructure so that the United States can enhance its long-term growth and thrive in the 21st Century…

Finally, we need to recognize that this recovery and reinvestment plan is an extraordinary response to an extraordinary crisis.  It should not be seen as an opportunity to abandon the fiscal discipline that we owe each and every taxpayer in spending their money–and that is critical to keeping the United States strong in a global, interdependent economy.  Although it is not feasible to avoid any spillover whatsoever of the recovery package on out-year spending, the Administration believes that the package should minimize such effects on out-year spending as much as possible.  Furthermore, the President is committed to paying for any of the temporary tax cuts included in the recovery plan that he would like to make permanent, and will detail the manner of doing so in his budget submission.

Moving forward, we need to return to the fiscal responsibility and pay-as-you-go budgeting that we had in the 1990’s for all non-emergency measures.  The President and his economic team look forward to working with the Congress to develop budget enforcement rules that are based on the tools that helped create the surpluses of a decade ago.  Putting the country back on the path of fiscal responsibility will mean tough choices and difficult trade-offs, but for the long-term health of our economy, the President believes that they must be made.

Peter R. Orszag, Director, Office of Management and Budget, January 27, 2009.

This letter suggests to me that the Obama Administration is hoping that the “final bill” will do better than the House version up for vote today, regarding both the timing of its deficit spending (more needs to be within the first two fiscal years), and the effectiveness/”bang per buck” of its policies (more direct spending and household assistance, fewer business tax cuts).  It also suggests to me some misgivings on the part of the Administration on how political “compromise” (or more accurately, “getting everyone on board”), combined with our operating in “crisis” mode, seems to be producing a package which demonstrates that “haste makes waste.”  I think that deep down the Administration’s economic team is worried that this is already slipping out of their control, no matter how well-reasoned and calm their President remains. 

CBO: Why Deficits Still Matter, Even Now

January 27th, 2009 . by economistmom

There’s a lot of new analysis on the economic recovery plan from the Congressional Budget Office (CBO) today.  Last night they released their official cost estimate on the bill, where, as explained on the CBO Director’s blog (in Director Doug Elmendorf’s first real post), they find:

In combining the spending and revenue effects of H.R. 1, CBO estimates that enacting the bill would increase federal budget deficits by $169 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period.

In other words, around 64 percent of the total amount of deficit spending will occur between now and October 2010 (or more than a third will occur after then), even as CBO forecasts that the current recession (which began in December 2007) will end sometime in the second half of 2009.  They go onto explain why they believe that government purchases of goods and services will spend out more slowly than direct payments to individuals or tax cuts.

Speed of payout (or the incurring of the costs) does not necessarily correlate with the effectiveness of the policy (the economic benefits), however.  This morning Doug Elmendorf presented CBO testimony before the House Budget Committee, where he well outlined the main “criteria for effective fiscal stimulus”–including “timing” (economic effects during the recession or otherwise weakness), “cost-effectiveness” (economic impact per dollar of cost, or “bang per buck”), “consistency with long-run fiscal objectives” (avoiding persistent deficits–more below), and other considerations such as “who would be helped” (distributional concerns) and “what types of additional goods and services” would be produced (allocation of resources).  Regarding cost-effectiveness, Table 5 in the testimony (page 27) shows the cumulative impact on GDP of various policy options, ranked from most effective to least.  The effect is measured over “several quarters” and per dollar of spending; in other words, it’s a “bang per buck” (or “multiplier”) type of measure.  The policies shown as most effective are purchases of goods and services by the federal government, and transfers to state and local governments for infrastructure–even though these are the types of spending that CBO feels are slower to “spend out” (on the cost side) than are transfers to individuals or tax cuts.  In fact, the “tax-loss carryback” business tax cut provision is listed as the least effective policy in terms of “bang per buck,” even though the “bucks” would be spent almost immediately, in tax year 2009.  (The CBO evaluation of this particular provision seems more pessimistic than the Tax Policy Center’s view–see the TPC’s ”tax stimulus report card.”)

So the “spend out,” or budgetary cost, of the various proposals matter, but they should matter in terms of how the costs compare with the benefits.  In the short term (this period of cyclical “economic weakness”), the costs of this deficit spending should be compared to the benefits on GDP and employment.  In the longer term, whether deficit spending on longer-term initiatives is ”worth it” depends on whether the longer-term economic benefits of such spending outweigh the longer-term costs.  And with deficit financing of those longer-term initiatives, those costs include the adverse effects of deficits on national saving and economic growth, the costs of debt service that will be incurred (the compound interest), and even the risk that what appears to be an unnecessary increase in longer-term deficit spending could threaten the short-term stability of the U.S. economy as well.  As CBO puts it in their testimony (pages 22-23):

Because fiscal stimulus boosts aggregate demand through increases in government spending or reductions in taxes, such policies raise budget deficits in the short term. That effect is desirable for fiscal stimulus because it reflects the increased demand being delivered to the economy. Contemporaneous changes elsewhere in the budget—tax increases or cuts in spending—designed to offset those short-term effects on deficits would serve to reduce or eliminate the stimulative effect.

Those higher deficits, however, tend to slow economic growth in the long term if they are allowed to persist, because they tend to reduce capital accumulation and the upward trend in the economy’s capacity to produce. Given the large projected shortfall of federal revenues relative to outlays in the medium term and long term, any policy designed to provide short-term fiscal stimulus will have to reckon with long-term consequences. Increases in spending and decreases in taxes that are intended to be temporary may be difficult to reverse later. Moreover, even if taxes and noninterest spending return to their baseline levels, the additional debt service from the period of larger deficits will—unless offset by greater fiscal discipline later—crowd out some amount of future growth.

In addition to their negative long-term effects, policies that substantially worsen the fiscal outlook can have negative short-term effects as well. The nation currently benefits greatly from the fact that investors worldwide tend to flee to U.S. Treasury securities in times of trouble. That tendency provides an important advantage in times of crisis, helping to increase liquidity and decrease interest rates. If investors lost confidence in the government’s debt as a safe haven because of deterioration in the long-term fiscal outlook, the U.S. economy would lose that advantage, perhaps permanently.

President Obama Acts on Higher Fuel Efficiency Standards

January 26th, 2009 . by economistmom

It’s a good thing for our nation’s economy…. Not as good as a carbon tax, because the CAFE standards use coersion rather than incentives and don’t raise badly-needed revenue, but it’s still a good thing–and even for the auto industry itself.  The story:

NEW YORK (CNNMoney.com) — President Obama set his green plan into action Monday, potentially reversing several Bush-era decisions on global warming and fuel efficiency.

In his first major environmental acts as president, Obama directed his Environmental Protection Agency to review a California application to regulate greenhouse gases and told his Department of Transportation to begin implementing fuel efficiency standards passed last year but not implemented by the Bush administration.

He also pushed for passage of the $825 billion economic stimulus package in the House and Senate. Those bills include money for investments in renewable energy, conservation and a better electric grid.

“No single issue is as fundamental to our future as energy,” Obama said at a White House news conference. “It is time for this moment of peril to be turned into one of progress.”…

Under the Clean Air act, California has long sought to tighten its air quality standards.

To achieve those standards, California would likely require cars to emit fewer greenhouse gases. Currently the federal government does not regulate carbon dioxide emissions - the main culprit in greenhouse gases.

The Bush administration recently denied California’s request saying that new federal fuel standards made stricter rules there unnecessary.

Obama said his administration will review that decision. Any change in policy would likely take months to implement.

“Let me be clear: Our goal is not to further burden an already struggling industry; it is to help America’s automakers prepare for the future,” said the president…

Regardless of what California does, Obama also moved to implement higher fuel efficiency standards passed in 2007.

Those increases - the first in more than 30 years - called for raising the average fuel economy from 27.5 miles a gallon for cars and 22 miles a gallon for trucks to 35 miles a gallon for the whole fleet by 2020.

Obama said the increased standards would save 2 million barrels of oil a day.

That’s about 10% of the country’s total oil consumption, and roughly the same amount the country currently imports from the Persian Gulf.

“This rule will be a downpayment on a broader and sustained effort to reduce our dependence on foreign oil,” said the president.

The new standards, originally supported by Bush, were put on hold during his last days in office, in response to the woes facing the auto industry.

The industry has long opposed raising fuel economy standards. It has argued that the new rules are expensive and unnecessary since is already makes fuel efficient cars…

I don’t think we should worry too much about what these higher fuel efficiency standards will do to the auto industry.  (Perhaps my auto industry friends and relatives will want to argue with me on this; I’m not sure.  But by the way, I don’t think the new rules could be both “expensive” and “unnecessary” (nonbinding?)…)  I believe the federal push for greater fuel efficiency will help to steer the automakers’ production more in the direction of where they need to go to be viable businesses (on their own) in the longer term.  (The automakers are given until 2020 to get up to 35 mpg.)  In the short term, the federal loans are the best immediate effort to keep them alive.  What we don’t want is to have our government rescue the industry while enabling “business as usual.”  The combination of the short-term rescue with longer-term “steering” is just one example of how we’ll have to conduct economic policy over the next couple years–assistance, but with (smart) strings attached.  This is what “fiscally-responsible deficit spending” looks like.

But a carbon tax policy (or higher gasoline taxes) would still do better.  For a comparison, see this recent CBO issue brief, and an earlier one.

Fiscally-Responsible Deficit Spending?

January 25th, 2009 . by economistmom

Today’s lead editorial in the Washington Post worries, as I do, that the current need for a very large dose of fiscal stimulus is being interpreted as a permission slip for fiscal irresponsibility:

…some in Congress and the new administration apparently see the country’s present recession as an opportunity to change the federal government’s spending priorities more generally or simply to reward loyal political constituencies. This is understandable, given that the voters endorsed the Democratic Party and its priorities in November. But it’s risky to make new, multiyear commitments in the middle of a crisis without debate over competing priorities — and without paying for them through some means other than borrowing.

The editorial then explains that the “fiscal irresponsibility” problem is that the notion of “recovery” package now stretches well beyond short-term stimulus, spilling over into longer-term investments territory, yet the appropriate means of financing is still presumed to be deficit financing.  What would we do if we were behaving better in crafting this recovery package? (emphasis added):

Much of the stimulus bill does not really claim to deliver a short-term boost to the economy. Provisions to develop a “smart grid” for electricity and to enhance scientific research, alternative energy development and education seek to boost the economy’s long-term efficiency, and, hence, its capacity to grow. We are sympathetic to the objective, and there might be much to recommend each of the various proposals. But given their cost, and the inherent difficulty of forecasting their impact, Congress should vet them through the normal legislative process, weigh them against other priorities and pay for them.

And this is exactly the message the very wise Alice Rivlin (former director of the top government budget agencies, the Administration’s OMB and the Congress’ CBO) put forth in her testimony before the Senate Budget Committee last week:

The anti recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy. The distinction is not that these longer-run investments are less needed or less urgent…

Since a sustained program of public investment in productivity-enhancing skills and infrastructure will add to federal spending for many years, it must be paid for and not simply added to already huge projected long-term deficits. That means either shifting spending from less productive uses or finding more revenue…

I understand the reasons for lumping together the anti-recession and investment packages into one big bill that can pass quickly in this emergency…But there are two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer run spending is not offset by reductions or new revenues.

(Bob Reischauer’s testimony from the same hearing makes very similar arguments.)

And today’s front-page story in the Washington Post (by Philip Rucker) provides several more observations on the fiscal irresponsibility that is apparently seeping into the recovery package:

1.  House Republican Leader John Boehner fails to see there can be ineffective tax cuts as much as ineffective spending:

“Unfortunately, the trillion-dollar spending plan authored by congressional Democrats is chock full of government programs and projects, most of which won’t provide immediate relief to our ailing economy,” House Republican Leader John A. Boehner (Ohio) said yesterday in his party’s response address.

Boehner spokeswoman Antonia Ferrier described the White House proposal as “just another unfocused, runaway bill loaded with slow and wasteful Washington spending on every conceivable goal.”

2.  Representative Chris Van Hollen (a Democrat) admits that getting bipartisan “compromise” always means adding provisions the other side wants (but you don’t like) in order to get them to accept what you want (but they don’t like):

“I think there’s been a real effort to include proposals that have strong bipartisan support,” said Rep. Chris Van Hollen (D-Md.), citing a renewable energy proposal he developed with Rep. Zach Wamp (R-Tenn.) that is included in the stimulus package. “That doesn’t mean that Republicans will support the overall package, but I think it will be difficult for them to argue that it does not include provisions that they think are effective in strengthening the economy.”

3.  A tax policy expert admits that a lot of the tax stuff is assistance (to businesses and ultimately shareholders) rather than stimulus (the clue being the reference to “windfall”):

A bonus for businesses in Obama’s plan is a provision that would allow them to carry back their losses into taxes filed for the previous five years, which would produce a windfall, said C. Clinton Stretch, a tax expert at Deloitte Tax LLP. “That puts cash very quickly in the hands of businesses, which are, by definition, struggling,” said Stretch, a contributor to Democratic campaigns.

4.  The President himself admits this is not just your father’s old stimulus; this is about longer-term investment, too:

“This is not just a short-term program to boost employment,” Obama said. “It’s one that will invest in our most important priorities — like energy and education, health care and a new infrastructure — that are necessary to keep us strong and competitive in the 21st century.”

and

5.  Harvard economist (and former Bush Administration Chairman of the Council of Economic Advisers) Greg Mankiw raises the lack of consideration of what the benefits are–as I have described it, the confusion of the size of the problem as having anything to do with the size of the benefits of the policies proposed to address the problem: 

[E]nacting an array of spending programs can be risky, said N. Gregory Mankiw, a Harvard University economist who served as chairman of former president George W. Bush’s Council of Economic Advisers. “Fundamentally, you’ve got to look at these things item by item, and my fear is that since there’s this push to do something so fast — which makes sense, given the crisis — there won’t be a careful vetting to make sure that each item passes a cost-benefit test,” Mankiw said.

It’s probably too late for the opinions of deficit hawks (Concord, Alice Rivlin, Bob Reischauer, the Washington Post editorial board, etc.) to stop this loaded-up train (accelerating fast out of the station down the track of fiscal irresponsibility), but if I can fantasize about an emergency detour, it would take that train back onto a more fiscally responsible track in any one of three ways: (i) a larger fraction of this deficit-financed package would be directed toward policies that are most effective as short-term stimulus (the immediate “bang per buck” would be improved); or (ii) the total (deficit-financed) package would be scaled back to just the parts that we’re able to define as true (truly effective) short-term stimulus; or (iii) the longer-term investment parts of the recovery package that are expected to provide benefits only after the recession ends would be paid for (not deficit financed).

Fairer Grades for Fairfax County?

January 24th, 2009 . by economistmom

Here’s an update on the grading-scale issue I posted about a few weeks ago.  This story in today’s Washington Post even quotes a classmate of one of my daughters; both of my teenagers attend James Madison High School in Vienna, VA (part of the Fairfax County Public Schools system):

Sydney Sampson, 16, was getting ready for school at 5:30 a.m. yesterday when her father told her that the Fairfax County School Board had voted to abandon the tough grading policy that thousands of parents and students had rallied against.

“I started doing a little happy dance around my room,” the Madison High School sophomore said.

Sydney, who gets mostly A’s and takes two Advanced Placement courses, said the school system’s current grading scale does not show what Fairfax students “are capable of.” She hopes the new policy will better showcase her academic achievements when she applies for college. Her dream since age 4 has been to go to the University of Virginia, she said.

Her enthusiasm for the change in policy was shared around the county. Students and parents have been lobbying for years for the change, citing intense competition for spots at select colleges. On Thursday night, the board relented.

The decades-old policy set the bar for earning an A at 94 and the bar for passing at 64. Most school systems use what is called a 10-point scale, under which scores between 90 and 100 earn an A. At those schools, 60 often is a passing score…

A day after their decision, School Board members were considering how to implement the policy while maintaining the district’s high academic standards.

Thursday’s vote did make some things clear: There will be a new grading system in place by September, and it will be based on a 10-point scale, which means that 90 to 100 percent will result in an A. The scale also will include pluses and minuses.

What remains undecided is whether A-minus would start at 92 or 93, for example, and whether the score required to pass a class will change. This question is likely to inspire more debate. Many board members are uncomfortable with lowering the bar for a passing score.

The School Board asked Superintendent Jack D. Dale to study variations on a 10-point scale and report back by the end of March.

Many students will see an immediate change: an extra GPA point for Advanced Placement or International Baccalaureate classes. Currently, the increase is a half-point. Their recalculated GPAs will be included in transcripts that schools send to colleges every February.

The board also approved a half-point boost for honors classes, but that change will not take effect immediately. School officials plan to review courses offered throughout the county to uniformly define honors classes…

The question mark I place after the title of this post reflects the opinion of my oldest and over-achieving daughter, who because she’s been able to get A’s on the tougher grading scale, feels that the mandated grade inflation now cheapens or devalues her academic currency–i.e., those A’s already on her transcript.  Personally, I think this better levels the academic playing field between Fairfax County schools and the rest of the country, making comparisons across the school districts easier for college admissions committees (and boosting the relative ranking of Fairfax County students).  What my daughter’s really complaining about is that the grading scale in the A range will no longer be refined enough to pick up the fact that as someone who was able to get A’s when the bar was set at 94, she’s better than the students who will move into the A range with the bar lowered to 90.  I think distinguishing between the lower A’s (the new 90-94 range) and higher A’s (the old 94+) using an A- grade might provide some comfort to the already-A students.  And A+’s anyone?  (If that would even work on a 4-point GPA scale.)

Bruce Bartlett Worries About Not-So-Stimulating Stimulus, Too

January 23rd, 2009 . by economistmom

In today’s Forbes, Bruce Bartlett seems to worry, as I do, that a lot of this so-called “stimulus” won’t really stimulate the economy anytime soon–and if that’s the case, that the choice to deficit finance that spending isn’t such a good idea (emphasis added):

The failure of rebates has shifted the focus to public works and other direct spending measures as a means of stimulating aggregate spending. A study by Obama administration economists Christina Romer and Jared Bernstein predicts that the stimulus plan being debated in Congress will raise the gross domestic product by $1.57 for every $1 spent.

Such a multiplier effect has been heavily criticized by a number of top economists…The gist of their argument is that the government cannot expand the economy through deficit spending because it has to borrow the funds in the first place, thus displacing other economic activities. In the end, the government has simply moved around economic activity without increasing it in the aggregate.

Other reputable economists [Paul Krugman, Brad DeLong, and Mark Thoma] have criticized this position as being no different from the pre-Keynesian view that helped make the Great Depression so long and deep…

I think the critics of an activist fiscal policy are forgetting the essential role of monetary policy as it relates to fiscal policy. As Keynes was very clear about, the whole point of fiscal stimulus is to mobilize monetary policy and inject liquidity into the economy. This is necessary when nominal interest rates get very low, as they are now, because Fed policy becomes impotent. Keynes called this a liquidity trap, and I think there is strong evidence that we are in one right now.

The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap…if much of the stimulus doesn’t come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue…

Thus the argument really boils down to a question of timing. In the short run, the case for stimulus is overwhelming. But in the longer run, we can’t enrich ourselves by borrowing and printing money. That just causes inflation.

The trick is to front-load the stimulus as much as possible while putting in place policies that will tighten both fiscal and monetary policy next year. As terrible as our economic crisis is right now, we don’t want to repeat the errors of the past and set off a new round of stagflation…

Where I’m not exactly (or yet) with Bruce is where he concludes that the case for tax cuts as stimulus may be stronger than most experts seem to think.  I think we have to worry just as much about wasting money through ineffective, deficit-financed tax cuts as through ineffective, deficit-financed spending, and I’d hate to see the CBO critique of the slowness of infrastructure spending be misinterpreted as an endorsement of tax cuts as a more effective option.  There may be better ways for the government to both spend the money quickly and actually create a decent number of jobs–or at least better assist those forced to deal without jobs–that for both effectiveness (bang-per-buck) and fairness concerns should be put ahead of tax cuts on the list.

As I said in my post yesterday, I think that if the deficit-financed spending we’re talking about is not going to be very stimulative in the short term (i.e., within the 1-2 years when the economy’s in recession)–either because it’s too slow or too poorly targeted or otherwise ineffective in encouraging immediate consumption–then however worthy the spending, the deficit financing of such spending is probably not justified.  Costs still have to be weighed against benefits–and not just against the size of the problem we’re trying to treat.

At Wednesday’s (1/21) Senate Budget Committee hearing with Alice Rivlin, Bob Reischauer, and Rudy Penner, the Senators heard testimony from all three witnesses consistent with this message.  I’ll post more on that hearing soon.

When Stimulus Is Not Very Stimulating

January 22nd, 2009 . by economistmom

I’m a bit concerned that despite the new President’s assurances, we could be headed for a not-so-smart economic “recovery” package.  From today’s Wall Street Journal (story by Greg Hitt and Naftali Bendavid), emphasis added:

WASHINGTON — As President Barack Obama’s $825 billion economic-recovery package began making its way through Capitol Hill, congressional budget analysts suggested a key plank of the plan may not provide as big a near-term lift for the economy as expected.

The nonpartisan Congressional Budget Office projected less than half of the $355 billion that House Democrats want to spend on highways, bridges and other job-creating investments is likely to be used before the end of fiscal 2010. The CBO said the balance would likely be spent over the next several years, after the recession is projected to end

So, my question is, if most of the deficit-financed spending will occur after the recession, is the deficit financing justified?

A couple paragraphs later:

“There’s some real concern about the high cost of it versus the jobs created,” said Michigan Rep. Dave Camp, the senior Republican on the House Ways and Means Committee…

Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi, said the CBO report creates a “false impression” by not taking “into account the fastest-spending provisions of the bill”

“Fastest-spending” doesn’t necessarily mean most stimulative though.  This hints at the (backwards) notion that the cost of the policies is a measure of the effectiveness, i.e., benefits, of the policies.  It actually reminds me of how the Bush Administration (for all eight years) talked of the “benefits” of the Bush tax cuts–by referencing the budgetary cost of the tax cuts given away, rather than any evidence of the real economic benefits of the tax cuts.

Appropriations Committee Chairman Obey then repeats this notion:

House Appropriations Committee Chairman David Obey (D., Wis.) said the CBO, in its report, “conveniently focused on the areas of the bill that are traditionally the slowest spending,” rather than tax cuts or spending on health benefits, which put money in people’s pockets right away.

While there’s clearly a need for more government assistance for the unemployed, there’s a distinction between the speed at which assistance can be provided, versus the effectiveness of such provisions in stimulating additional economic activity (immediately boosting GDP).  Even if you can get money in the hands of households quickly, they cannot be expected to go out and shop with most of it.  And given that, such assistance–although providing badly needed help to those without jobs–would do little to create jobs.

And then the story tells us that the CBO analysis is prompting the Democrats to replace a harder “stick” (penalty) with a looser “carrot” (bonus)–adding to the cost of the package where it seems to lack the (at-least-speedy) benefits:

The bill initially gave states 90 days to spend money on infrastructure projects or risk losing the funds, but the CBO concluded that states couldn’t move that fast. Democrats have replaced that provision with a new one that would give states a bonus if they spend the money within 120 days.

And the concluding quote, from Chairman Obey again.  Can you spot the flaw in his logic?  (Hint: think cost-benefit analysis and the missing word below)…

Mr. Obey said the bill had more spending safeguards than any legislation he has seen in his four decades in Congress. “I’m sure none of you are happy with the cost. Neither am I,” he said. “But the cost has to be measured against the size of the problem, and the problem is immense.”

There’s a huge difference between just throwing huge money at a huge problem and intelligently designing a policy to most effectively tackle that huge problem. 

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