Felix Salmon

Why I’m unconvinced by calls for a second stimulus package

By Felix Salmon
July 12, 2009

Brad DeLong has an impassioned plea for further fiscal stimulus under the headline “Fiscal Policy: The Obama Administration Is Not Making Much Sense These Days”. His basic argument is simple: if the $787 billion package was designed using assumptions which turn out to have been overoptimistic, then surely now that unemployment is heading into double digits a second major stimulus is warranted.

But the problem is that spending trillions of dollars is actually extremely difficult, and it’s even harder if you try to front-load it. Government, by its nature, moves slowly, and I get the impression that the “easy” spending — and then some — was all included in the initial stimulus bill. The “shovel-ready projects” have already been funded, and any extra stimulus might well take years to kick in.

In an efficient market, a credible government promise to invest hundreds of billions of dollars in mass transit and nuclear power and smart electrical grids and so on and so forth would have an immediate stimulative effect: people would start spending now, in anticipation of all those government dollars which are going to arrive in a few years’ time. But we’re in a liquidity crunch, and we’re not in an efficient market, and unfortunately government spending only seems to cause any stimulus as and when the checks are written, if then. (Insofar as they go to companies who are running down their inventories, there’s no stimulus at all.)

I don’t think there’s any doubt that there are diminishing marginal returns to fiscal stimulus plans — which brings me to Paul Krugman’s take on the subject, where he asks how an examination of the marginal costs and benefits of deficit spending could possibly come to the conclusion that stimulus of $800 billion was exactly what was needed.

Let me try to hazard an answer to that. Start with the guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of spending too much paled in comparison with the risks of spending too little. And because the effects of government spending on GDP and unemployment are hard to predict with any accuracy, there was a strong case that a monster $800 billion stimulus bill was in many ways the prudent course of action.

Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would. This is a useful datapoint — and one way of looking at it is to conclude that the stimulus was so big that the last few hundred billion dollars have had virtually no positive effect at all. And that any extra stimulus would similarly achieve very little.

If there is to be a second round of stimulus, then, I think it should certainly go to areas largely untouched by the first round. I like arts spending; DeLong wants an “aid-to-states-that-maintain-effort package”. But unless and until we can demonstrate that the marginal benefit of extra stimulus spending hasn’t already diminished to something negligible, it does seem fiscally reckless to throw good money after wasted funds.

Update: Commenters rightly say that there’s a limit to how much can be done with arts subsidies. Again, they’re the kind of thing where a little goes a long way, but a lot doesn’t go a lot further.

And Brad DeLong responds, saying that of the $787 billion earmarked in the stimulus bill, only $14.5 billion has been spent so far, and that total will barely exceed $50 billion by October. Which seems to me a good reason why we don’t need to increase the total — we’re having a hard enough time spending the money we’ve already got.

23 comments so far | RSS Comments RSS

“Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would.”

I do not understand the logic of this step. Could you perhaps explain in further detail?

Posted by Tommy Bennett | Report as abusive

Sitting here in California, it seems to me that direct aid to states could have a very rapid effect just in preventing cuts–layoffs, furloughs, etc within state government. It’s not instantaneous, in the sense that a saved job would take a year to add up to a year of wage stimulus, but that year would start immediately.


Given that only a tiny fraction of stimulus money has already made it out, isn’t it far too early to conclude that the stimulus has not worked as well as it was meant to? That’s a rhetorical question, because it _is_ way too early.

Also, I know you like to plug your arts spending idea. I think it’s a good idea but really, how much stimulus can really be provided in the form of arts spending? It’s hard to put $200 billion of money into arts. Arts spending ought to be a _part_ of any stimulus, but it’s ridiculous to propose a stimulus consisting only of arts money.

Also, we know that state tax increases and budget cuts are contractionary. So aid to states _will_ save jobs and fight the recession. Not conjecturally. Definitely. If states are spending X dollars right now, and then all of a sudden they’re spending (X – Y) dollars, that’s contractionary. Period. So it follows that supporting state budgets is a non-contractionary fiscal policy.

Really surprised to see this kind of thing from you…

Posted by bill | Report as abusive

“Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would.”

The stimulus probably helped a lot. The problem is that things were much worse to begin with, and still are. And it’s not true that nobody predicted this; indeed, lots of people did — Meredith Whitney comes to mind, along with anyone else who has maintained, correctly, that the banking system is insolvent. And it says a lot about the FED and Bernanke that they have made totally lame excuses for not helping the states, but have had no hesitation exercising their emergency powers to help the client banks and other private entities like GE and GM.

Posted by maynardGkeynes | Report as abusive

Felix, question about arts spending. How much do you realistically think could be directed to arts? Assuming $30k per person (your number) and let’s say $20k extra for equipment/supplies/etc, we could employ 1mm artists for $50bn. How many unemployed artists do we have (serious question, I have no idea)? How much would you spend?

Posted by ab | Report as abusive

We need sustainable economic recovery and long-term growth, not Viagara style heart-pump stimulus that works couple of weeks. I totally second what Jon said “direct funding to states” that know better how to keep jobs and create more. Unemployment stats really terrible.

Posted by Ernie | Report as abusive

[We need sustainable economic recovery and long-term growth, not Viagara style heart-pump stimulus that works couple of weeks. ]

try providing long-term rehabilitation and diet advice to a patient who needs CPR some day …

Posted by dsquared | Report as abusive

I think in fairness to Krugman, his original number for stimulus was 2 trillion, so from his perspective 800 billion is maybe not something we’d expect to get a lot bang out of.

And yet again, the stimulus is only 10% spent, so too early to judge its effectiveness one way or the other.

BUT, given how badly the economy is doing, it is not too early to judge that we probably are going to need more than we’ve spent.

My proposal would be 2nd stimulus in 2 parts – the first bill make money available for any work that could plasibly result in shovel ready projects around the time the first stimulus is starting to spend out.

At that point, we’ll have some sense of it’s effect, some sense of it if was enough, and then, if we want more, we should have accelerated how fast it can happen with the earlier bill.

Posted by Chuck | Report as abusive

I have a very difficult time understanding how so many people who rushed to provide direct aid to banks and other financial institutions have quite suddenly sobered up to chant the gospel of fiscal responsibility. The truth is that this is rank hypocrisy. We provided nearly a trillion dollars directly to institutions that were driven into the turf by nothing more than greed and stupidity.

The greed and stupidity of the vile robber-barons is at the source of our problems today. Republicans and Democrats alike were all too happy to reward them for their greed and stupidity by throwing nearly a trillion dollars at them. Now, however, investments that MIGHT have some hope of creating jobs and creating the kind of infrastructure that will support future economic growth are seen as “wasteful.”

How we have gone this far through the looking glass is absolutely beyond me. I want the trillion dollars we vomited up to the banks back. And furthermore, I want all 535 members of CONgress out on their keisters ASAP. All these people should be tried for fraud and treason, and every bank executive in the nation should be so tried as well. These people are the scum of the scum, and we have handed them every dollar we and our children and our children’s children’s children’s children’s children will ever have.

How DARE we let this continue.

Posted by Jonathan | Report as abusive

“Start with the guiding assumption, as stated by Larry Summers when the stimulus bill was going through Congress, that the risks of spending too much paled in comparison with the risks of spending too little.”

What if this guiding assumption is absolutely wrong? Brad DeLong said the exact opposite months ago. If you spend too much you merely push the economy to full employment and risk setting off inflation. If that happens the Federal Reserve merely needs to raise the federal funds rate to prevent the economy from overheating. As it is there is very little risk of that happening and the federal funds rate will likely be set at zero through most if not all of next year.

The fact is that the current $800 billion stimulus looks incredibly puny alongside an output gap that is beginning to look something like $4 trillion over two years (and more in the years beyond that). DeLong is right about aid to the states. State and local governments are cutting back spending on a massive scale this year that is completely undermining the federal stimulus. State transfers are low lying fruit that could be picked with the maximum economic benefit and the least political consequence and put the money where it is needed most.

Posted by Mark A. Sadowski | Report as abusive

There are and will still be many unfunded projects out there that are “shovel-ready” or virtually “shovel-ready” after the $787 billion is exhausted. Many of the projects that are applying for and getting stimulus funding are not “shovel-ready” anyway in the strict sense that all that needs to be done is call up the Contractor and say “start work tomorrow, we can finally afford to pay you”. You will find few projects like this because when the funds aren’t there, the people you need to do the job aren’t either, regardless of whether you have a contract. The point is to get activity into the economy as quickly as possible.

Does anyone think that $787 billion is going to take care of the capital needs of all of the existing infrastructure in the U.S.? Even the most conservative estimates of the cost are several times this amount.

Posted by may | Report as abusive

Stimulus. What stimulus, are you talking about the theft from the taxpayers, to bail out the richest, greediest, most well connected banksters???
And no-body saw this coming?? plenty did and what’s more, plenty don’t believe the green shots, nonsense currently bandied around.
Things are getting to get worse!

Posted by G.Kaiser | Report as abusive

Instead of patronizing or subsidizing wise world leaders should just give back what people already owned.
Capital Dynamics:

I have been playing with some analytical insights to figure out the underlying functioning of the global financial meltdown as follow:

Lost and Found Conceptions:
Many objects lost can be found so that institutions may have a department to handle lost objects returning them to their owners.

Money can be lost on two ways in the financial market.

1. Lost by transfer.
A person loses his wallet but somebody finding it can spend the money keeping it cycling in the economy.

2. Lost by destruction.
A person loses his wallet in a fire and the money is burned being out of circulation definitively.

Last year only in the US the stock exchange lost by destruction 7 trillion dollars that is considered out of circulation forever. This economic crisis that started in the US and spread globally may have contributed to vanish around 15 trillion dollars worldwide. UN predicted a consequence of 50 million jobs to shed due to this economic downturn.

The approved stimulus package of less than a trillion dollars may provide some sort of relief to a crisis that destroyed about 7 trillions in the US. However the amount destroyed in one year in the stock exchange takes around 5 to 10 years to be created.

Mr. Obama, when a person loses his wallet in a fire it becomes a challenge to claim any loss because there is no way to provide any information about the content lost. The Stock exchange system tracks the stocks allowing losses be reimbursed to owners. It is a good deed retuning money that was meant to pay retirement or college fees, or even charity institutions endowments.

Why to do it?
There are 50 million jobs losses to prevent ensuring a better leadership to the world. A simple smart management in the economic system could avoid such catastrophe.

Transforming stocks to fixed rate investment could give all governments a strong tool to restore destroyed capital back to previous values curbing destructive power from fears. Investors would accept a deal to transform their stock to the purchasing value plus interest rates (2% a year?) with a minimum moratorium (2 year?} for the companies to allow programmed withdrawing.

There is a very fair reasoning since the capital destroyed existed previously originating from many sound sources. Good part of healthy money can be restored to its integrity curbing a worldwide damaging financial crisis worsened by combined effect of fears.

I estimate that there was a general loss around 30% of stocks worldwide; it means that money in such stock applications should be around 50 trillion dollars which allowed about 15 trillions to be destroyed and harm the global economic system.

I believe that 50% to 70% of money lost in the stock can be recovered back as a fixed rate investment meaning 3 to 5 trillion dollars returning to the economy in the US to the purchasing values plus interest rates of the period.

Converting stocks to fixed rate investment can be a permanent tool to prevent future economic collapses and to reduce the size and importance of stock exchange in the economy. Companies would sell stock and ensure that at least fixed rates their stocks should guarantee investors in case of downturns. When a company degrades its performance, its stocks start becoming fix rate investments preventing a further degradation by fears in the free offer-demand rule.

If investors know that their money can be recovered at least at the levels of fixed rate investments, they would not become so eager to retreat from the stock market from falling stocks. In general the stock exchange should compensate at least to the level of fixed rates. This puts a tricky break on falling trends avoiding worsening situations.

What should it be called?
Stock Rescue System:
Governments will make Laws to ensuring that companies selling stocks would offer options to transform stocks to fix rates investments. This amendment would protect against spreading fears and any sort of retreat that spoil parties or overall functioning of the economy. Fixed rates could become a capital investment for withdrawing on investor interest.

There is a strong coherence in nature functioning stating that any single problem can accept or admit many sorts of solutions with variable results. Lost and Found department works pretty well on many places returning lost objects because they were not destroyed and were found. It seems that some money lost in the financial crisis can be tracked back to due owners and returned on a safe fashion to avoid further consequences to the global economy. Also, a permanent Stock Rescue Amendment should provide a way to prevent such situation take place again bringing a more stable economic functioning worldwide.

We are learning that a subtle huge destruction of capital in a short span can be very damaging to the economic system. It is not hard to assume that intelligent humans can organize better their way of handling their common issues.

Whenever wisdom is applied sound results should benefit many from a more coherent outcome


One trillion or two trillion dollars is moot. The government has only been able to spend 20 billion dollars so far. Who would have thought that Congress would find it difficult to spend money. There is a deeper underlying problem here. Where is the money and why can it not be spent?

Posted by Anubis | Report as abusive

Stimulus money has created and saved government jobs. Unfortunately, hundreds of thousands of private sector jobs have been lost, with thousands and thousands more private sector jobs disappearing daily. It takes the private sector jobs to provide the tax dollars to the government to maintain their lofty goals of growing more and more government. This government is using this stimulus to grow itself and feeding off the private sector. As a consequence the private sectors are leaving this country in droves; leaving more and more of the private sector workers in the unemployment line. This is more than a train wreck. This is an orchastrated, organized manipulation of the economics in this country being used to bring this country down and to elevate the political elite to aristocratic status.

Posted by Sandra | Report as abusive

“Since then, however, the economy has done much worse than anybody thought it would. Which is one way of saying that the stimulus has not done as well as people thought it would.”
As noted above, there is no logical causation shown here. “This is a useful datapoint —”
It’s not data, it’s opinion.
” and one way of looking at it is to conclude that the stimulus was so big that the last few hundred billion dollars have had virtually no positive effect at all.”
Again, this is a speculative conclusion with no causation shown.
” And that any extra stimulus would similarly achieve very little.”
This is not backed up by any facts or logical construction.

There is really only one assessment of the stimulus that can be accurately made: it does not appear to be working as much or as quickly as some people expected it to. Many people had their own expectations of what it would achieve and when. Some of those people have not had their expectations met by their perceptions of the effect of the program. That is ALL you can say.

You cannot conclude it didn’t do anything, because 1) you don’t know what would have happened had there been no stimulus and 2) you don’t know it has stopped, or even started, working, because of #1.

If I were to offer my own OPINION (not data, fact, of conclusion) I would say it was poorly constructed. Too much pandering, too many tax cuts, and spread too thin among too many projects. Some of the money was so poorly apportioned it will be nearly all wasted – the $8B High Speed Rail funding is so little money spread across so many pie-in-the sky ideas that, at best, it will employ a couple hundred “consultants” doing studies for a year. It will not put a single shovel in the ground. I’m sure there’s another $100B of stimulus funds spent just as ineffectively. Deduct the $400B in tax cuts (that may not show up in people’s pockets for a year) and you have, at best, $287B of real stimulus spending.
Perhaps you should have said you don’t favor a second stimulus as poorly constructed as this one?

Posted by Rockfish | Report as abusive

First what/where are the alternate plans-discussions-theory etc of “do nothing and no stimulus”? I find NONE posting anything that, couid show us how “do nothing, no funds for anyone” etc, would have worked.
That said, we need to address that the money alone will NOT repair the beaten up and nearly destroyed USA “building real things” manufacturing areas that are the source of the middle class. We are instead stuck with the care and feeding of the old school ties, the NE version of the Good ole boys, AKA the NE Triangle, loosely a line about 60 miles wide from DC-NYC-Boston, where ethics, integrity and money enter, never to be seen again.

Those “others” commoners, not privileged member’s of the Triangle’s education, politics, finance, “contacts in corp jet/limo ride” or government, those pour unwashed masses of commoners, outside of the triangle are relegated to sort of (“other 90%”) roles of Triangle supporting, alien life forms residing in the hinterlands. http://en.wikipedia.org/wiki/Hinterland.

The residents of the Triangle are assured to live in their world of revoking doors and
“Well it was legal (Says my million dollar lawyers-sub/Committee on ethics etc),
I am here to serve (but rarely in uniform in wars),
The people do not understand the complexity of this (AKA USA about 50th in education),
We must pay big bonus to retain the best (AKA as one of them, even if they wreck the systems)
If we tax the wealthy they will not grow the nation (AKA Senate a place of billionaires, Tax code where 14$ MAX tax rate on LLC types (before deductions)
This Bill=etc would destroy the middle class” (BUT??? 90% of REAL worth in USA is owned and controlled by 5% and 3% own-control 70%). Real world of REAL WORTH is there is no middle class left, or at best a small struggling group in the Hinterlands.

So “stimulus is not working” is simply not true.. The Triangles banks/finance/Government world is doing quite well. Suddenly “profts” are back, and enough to repay Gov money, and not to arrogantly,as from the Triangle, NOT the great unwashed of the Hinterlands, “Banks now pay back money so free to give bonus’s” and all there flap their ole school ties in ole school ritual secret manner that means, “we put it to the Hinterlands again”.

So it seems the commoners, those aliens of the Hinterlands are once again getting “their just rewards”. They sent their trusts, their money, their taxes, their retirements, their cash, their sons/daughter for the wars, and sadly their votes, to assure the residents of the NE Triangle live well and will continue to do so. Their reward is “that of being a citizen struggling, the backbone of this great nation which is reward in itself as that is the great American way!”
Unless of course you are resident of the Triangle, where Boards-Gov agencies amply rewarded each other, be it fees, tax cuts, bonus-yearly Congress=staff pay raises, higher salaries, or other outrageous benefits the commoners do not deserve, but the Triangle finds crucial.

This is not intended to knock the privilaged of the Triangle, nor to suggest most of the “Stimulus funding and related Financial Welfare actions pouring out is concentrated in the Triangle or will eventually dock there via “fees, investments, campaign contributions or such. .That was already established when banks refused to disclose what they did with money, and AIG, Sachs, et al, issued bonus billions and most kept, now getting further “bonus to retain top people”. Sorry Hinter Land’rs, , but “Stimulus is working as planned”, you just do not understand the “Plan”.. or perhaps you do?

The next target of a one and half million per day in lobby money is “government run health care” being beat down, as it applies to the many aliens, and could result in cash flowing OUT of the Triangle to the commoners. This is of course now labeled socialistic and will lead to communism etc”. This “commie influence” is apparent as shown by the total social and financial collapse of our Canadian friends to North. You will note they have “RED” color in their flag as do many of the other major industrial nations that engage in such practices. So stay tuned for the attacks on this that will rate right up their with the attacks on “tax the well off to pay for ///// (you fill in). I only ask the purponents on BOTH sides supply me with the following.
WHAT is their/family health care plan cost who?
WHO pays for it?
If a “I pay for it” does it somehow get into a “business tax deduction” as incorporated self, AKA “single payer plan as tax payers paying for it if you deduct it?
WHAT is your retirement health care program as to above?
WHY are not you covered like those of the Hinterlands?
WHAT are the details of your plan and what have you used so far and what has ALL health related cost you?

So my friends, we great unwashed commoners, we aliens of the Hinterlands.. The “programs/health care, etc are working”, and if you look real closely at the ties, and closely listen to the words, you will see all is fine in the NE Triangle.. all is well, you just reside in the wrong place.

Posted by Charles | Report as abusive

What do you mean, hard to spend? Remember the Bush stimulus, which included the Democratic-sponsored $600 rebate checks? Just send us all money now!


Felix needs to read “Psychology of the Call” blog. Sorry, but I feel his analysis borders on the seventh grade level.

Posted by avi | Report as abusive

According to the College Art Association figures ” In 1999 the number of degrees had increased to 2,097, showing that the M.F.A. graduation
rate is increasing at a steady rate of about seventy diplomas per year.”
The MFA is the terminal Fine Arts professional degree, given that not all Artists have taken the academic route there can hardly be more than 100, 000 who have demonstrated professional credentials over the past 40 years. During the WPA only 3700 Artists were employed nationwide. Less than 2 years MFA grads.

Posted by Jim VanKirk | Report as abusive

I don’t follow your logic. We know what situation the stimulus package was meant to address and we know things have already exceeded that target. As you point out, a lot of the money has not been spent yet, but that just proves that if we wait and see and things are much worse then it will already be too late. And as others have pointed out, state aid would have a huge impact right now in saving jobs. It’s like being on the Titanic and waiting to see if that iceberg it just hit is going to sink the ship.

Posted by Argel | Report as abusive

At the presentation of a play my daughter did at an arts camp recently (a fantabulous performance of “The Nightingale”), the program director made a little plea about how hard it is for “the arts” to get funded during Hard Times. Fact is, when “the arts” are starved, Art benefits. The constraint of funding to the arts should give rise to dynamic and cleansing forms, like punk and its progeny hard core, which will wash away the overproduced excesses of the era of Koons, Barney, and Hirst.


Really amazing how many people think the stimulus is the bailout…

Posted by bill | Report as abusive

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