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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. 

2 Responses to “When Stimulus Is Not Very Stimulating”

  1. comment number 1 by: Chuck

    What is the calendar date that the prescient seers at CBO are promising for the recession’s end?

  2. comment number 2 by: economistmom

    Well, by the end of 2010 they show us back to positive real GDP growth, although unemployment (as lagging indicator) is still forecast to be higher in 2010 than in 2009. http://www.cbo.gov/budget/econproj.shtml
    I think it’s that the bulk of the proposed spending won’t actually be spent until after 2010, which makes it likely to be too late to be considered effective “stimulus.” We have to broaden our notion of what “recovery package” means, which is fine, as long as we also broaden our notion of how we should pay for such spending.