The Senate has closed debate on its bill. What have “moderates” wrought? Figures 1 and 2 depict the fiscal impulse arising from Senate and House bills, respectively.
Figure 6: Cost of provisions in Division B revenues, per fiscal year, embodied in HR 1 and HR 1 Senate version, divided by GDP. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009), CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009), and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.
Most pernicious in the “compromise” was the stripping out of transfers to the state. For this, there is no reason in terms of stimulating aggregate demand to limit this component. The propensity to spend would have been the highest out of these funds. And the spending would have occured fairly quickly. Indeed, in so many of the cuts to the original Senate bill, the wrong things were cut. And the wrong things were expanded, including most importantly tax provisions. That expansion in tax provisions is seen in Figure 6.
So, summing up, I can’t see a reason to dissent with Krugman’s assessment of what the “moderates” have given us.
The original plan also included badly needed spending on school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut from the plan, with the great bulk of those cuts falling on precisely the measures that would do the most to reduce the depth and pain of this slump.
Just to remind people, here are the ranges of estimates for multipliers for various types of measures, as provided by the nonpartisan Congressional Budget Office.
Just to remind us all of the stakes involved, take a look again at the vertical axis in Figure 3: it’s the ratio to GDP. This “massive” stimulus bill is pretty small relative to GDP. And in the absence of a cost-effective stimulus bill, we are hurtling toward a negative output gap that — in the post-War era — is of unparallelled proportions, in terms of depth and duration.
Source: CBO, The Economic Outlook, 7 January 2008.Given what data has come out since January 7, I have no reason to believe the outlook is any better than what is provided in this picture.
While this has been a depressing weekend for those of us who believe that reason can triumph over sheer ignorance, at least it’s provided plenty of examples of bad reasoning to dissect in macro class. (By the way, still looking for a reputable macroeconomist against a stimulus bill .)
Originally published at Econbrowser and reproduced here with the author’s permission.