Recap: The Stimulus Bill and the Macro Impact

CBO has now released an analysis of spend rates of the final stimulus bill to be signed by the President on Tuesday. While the proportions of expenditures and tax cuts are changed, the time profile is little changed from the original House bill — wherein most of the stimulus takes place in the next 19.5 months.

Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 final version. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009).Once again, I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.
stim2.gifFigure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.Finally, the degree of “modesty” is highlighted by the challenges — in the form of the massive negative and persistent output gap [0] — we are facing in the absence of countervailing fiscal policy.

cbo_hr1final.bmpTable 1: from CBO, Estimated Macroeconomic Impacts of H.R. 1 as Passed by the House and by the Senate, February 11, 2009.It’s not a perfect bill. I would have preferred more public investment spending, more transfers to the states for fiscal stabilization, and less tax cuts. But it’s certainly better than nothing — or all tax cuts (which is what I gather the opposition wanted). Here is a description of the components that have an impact on state finances.[1]

The Real World

I want to stress two facts. First, the CBO and all major macro forecasting firms (to my knowledge) are projecting a change relative to baseline due to the stimulus bill. I think those who are asserting zero effect from the stimulus should provide the empirical estimates that buttress their case (this is different from saying the effects would be small — that is implicit in the range of CBO estimates, and the range of multipliers cited by CBO [2]).

The Rest of the World

Second, with rest-of-world output declining [3], and fiscal policies moving toward a more expansionary stance, the fear that additional budget deficits in the US will manifest in a higher risk premium associated with Treasury debt is mitigated. In other words portfolio balance effects [4] are of less concern since all other governments are issuing debt. (Of course, I — unlike some others — do believe that deficits matter [5]; holding all else constant, deficits should raise interest rates. Of course, with credit demand collapsing around the world, not all else is held constant.)

The Opponents of Stimulus and the Abdication of Responsibility

By the way, I have been amused at how some policymakers have taken to quoting the “temporary, timely and targetted” criteria attributed to NEC Chair Summers, as if the stimulus does not fit these three criteria.[6] As Figures 1 and 2 demonstrate, the bulk of the stimulus takes place during a period when it would be needed — namely when the baseline output gap is -7.4 and -6.3 ppts of GDP (Table 1 above). And according to the CBO, the stimulus is temporary (i.e., it “tails off” in the out years). This disjuncture between reality and assertion induces me to restate — saying something repeatedly without supportive data doesn’t make it so. I’d also say that the repeated critique without clear alternative merely highlights the lack of an idea of what would be a better policy. Or as one observer put it:

…congressional Republicans were never really willing to concede the principle that stimulus was needed. Their tax plan was just a rehash of old hash that was never plausibly linked to the particular economic problems we have today. I disagree about the payroll tax for various reasons, but at least it would have been focused on the reality of the situation, rather than just being a pointless political exercise. I believe that reinstitution of the Investment Tax Credit would have been the best Republican alternative. I made the argument here, but got no takers.

In the end, Republicans preferred to reject the principle of stimulus, thus taking themselves out of the game. I think that was a mistake, both politically and substantively.

Source: Bruce Bartlett at NRO. (h/t Brad Delong)

Originally published at Econbrowser and reproduced here with the author’s permission.