James Pethokoukis

This from the WaPo:

IHS Global Insight, an economic consulting firm, estimates that the stimulus has increased the 2009 gross domestic product by about 1 percent over what it otherwise would have been, with the benefit almost entirely in the second half of the year.

The firm also forecasts that the package will, in total, result in about 2 million more jobs than otherwise would have existed at the end of 2010. Moody’s Economy.com estimates that the initiative will increase employment by 2.5 million jobs. Both estimates are below the 3 million to 3.5 million jobs the Obama administration estimated the package would create or save …

Me: Again, arguing that the economy would have been worse without the stimulus plan is not as helpful as arguing the plan has restored prosperity.

I listened to VP Joe Biden today talking abut the Obama stimulus package, aka, the American Recovery and Reinvestment Act. A few thoughts:

– Biden credited the stimulus plan for preventing the recession from turning into a depression. I would certainly place the $140 billion or so in stimulus spending behind the Fed’s action and the natural rebound in the economy after a period of intense fear and retrenchment.

– Even though “reinvestment” is part of the name of the plan, at least two-thirds of the plan has nothing to do with long-term growth.

– If the economy was much worse than the White House expected, why wasn’t a) the stimulus bigger, and b) more front loaded toward 2009?  That was a huge misjudgment.

– Clearing some fiscal space with entitlement reform would allow the WH the ability to do a second stimulus for infrastructure or reducing taxes on company and capital.

– Perhaps the smartest thing the WH has done so far is resist calls for raising taxes (like from Pelosi) or to focus on near-term deficit reduction. Those are exactly the sorts of policies that helped retard America’s recovery during the Great Depression and Japan’s during the Lose Dedade.

An interesting bit from the WSJ:

Dave Anderson, chief financial officer of Honeywell International Inc., said the stimulus package actually froze business activity at first as firms tried to figure out how they could benefit from the government spending. The $787 billion package “created actually a slowdown in order activity in terms of the flow that we would normally have anticipated,” Mr. Anderson said at a conference sponsored by Morgan Stanley. “We anticipate that that’s going to actually pick up in the second half of the year. I think it’s not unreasonable to see several hundred million dollars of orders.

Me: This sounds similar to what seems to happen when cutting taxes. If the start date is a ways off, economic activity is delayed.

Wells Fargo/Wachovia economist John Siliva makes his case:

1) A second stimulus would add fuel to the already recovering economy and would create the false impression that all is now back to the “happy days” of an overleveraged consumer and strong growth. Therefore, estimates of top-line revenues are likely to overstate the true sustainable future pace of sales in a deleveraged economy.

2) A second stimulus would likely add to inflation/interest rate pressures and, thereby, higher interest rates and the cost of capital down the road.

3) A second stimulus would further raise doubts on the ability of our nation to control future spending/deficits and lead to a depreciation of the currency and possible loss of our near-exclusive role as the world’s reserve currency.

4) A second stimulus would further hide the negative impacts of the numerous micro policy proposals in place and thereby obscure, for a short time, the economic losses from the misallocation of public resources.

David Goldman of the great Inner Workings blog loves the Chimerica concept, a furthering of the economic relationship between China and America. He even thinks it would make a great stimulus and long-term economic recovery program:

We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets. The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. … In effect, the world’s two largest economies would establish a full partnership. … The :trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s.  … If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.

The wonderful Jennifer Rubin of the Contentions blog opines thusly:

By December we will see how attractive a massive energy tax would be. (Talk about a lump of coal in your stocking.) But Boxer is smart to shove this off to the side. Democrats who cast a hard vote in the House and are now being pummeled by conservatives, business and taxpayer groups, and potential opponents (as are the Republican Eight who are in the dog house with the base). Those who supported cap-and-trade despite warnings about job losses and the adverse impact on the already struggling economy (especially in energy-producing states) are finding little support for having placed a pet issue on the liberal wish-list ahead of their constituents’ economic interests. Then the G-8 didn’t help matters either. And really, if the EPA’s own administrator says it will have no effect on climate, what’s the point of the whole exercise?

So this may turn out to be the worst of all worlds for the Democratic House leadership and the White House, who forced vulnerable members to walk the plank for nothing. Environmental groups will be furious if large Democratic majorities and a Democratic president can’t deliver. And yet those members who tried to deliver will be tagged by opponents in 2010 as disregarding bread-and-butter concerns during a recession.

My spin: And is it possible that by year end, there will be no passed and signed climate change bill, no healthcare bill (or merely a rump version) and no financial reform bill? And all Obama would have accomplished is an $800 bill stimulus bill that might well be perceived as a failure given double-digit unemployment?

Morgan Stanley economists Richard Berner and David Greenlaw on whether the U.S. stimulus package should have been bigger:

Clients are asking whether the American Recovery and Reinvestment Act of 2009 was too small.  We don’t think size is the issue; rather, the problem is one of timeliness and bang for the buck.  It is heavily back-loaded and full of spending that is unlikely to be stimulative.  Moreover, some of the spending programs will be difficult to unwind, leaving structurally larger deficits and debt.  What happened to ‘timely, targeted and temporary’? The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now.

The  $1 billion federal “Cash for Clunkers” program that will pay consumers up to  $4,500 for trading in aging gas-guzzlers for new, more fuel efficient models could be a big bust. Macroeconomic Advisers just completed a study on the program and found that it will bring forward future sales that would have happened anyway (though that could be good for cash-strapped companies). This is very similar to what economists have found with natalist policies that try to incentivize women to have more kids:

We expect the program to be successful in that all of the roughly $1 billion of incentives will be exhausted in the purchase of some 250 thousand new vehicles.  However, we expect CARS to affect the timing of sales, not total sales.  In particular, we expect that roughly half of the 250 thousand in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway.  Therefore, we do not expect a boost to industry-wide production (or GDP) in response to this program.  It does, however, accelerate the return to more comfortable inventory levels and provides needed near-term cash flow to an industry that is struggling with the current low pace of sales.

Brad DeLong worries that the downturn in bond yields is hinting at an anemic economic recovery.

A recovery in which unemployment is higher two years later than when
the recovery began is not much of a recovery. And I don’t see what is
going to keep the probability of such an eventuality low.

The lower are ten-year Treasury interest rates, the more are people
trading in the bond market willing to bet their money that the future
holds that kind of non-recovery recovery. And so I worry.

Me:  Think a second stimulus would change that trajectory? Remember that the 2001 Bush tax cuts were considered to be almost perfectly timed stimulus.

Some interesting conclusions from a Minneapolis Federal Reserve Bank study of how country’s deal with financial crises. The White House might want to take a peak at the whole thing. Here is a bit of it (bold is mine):

1) Governments are now spending huge sums of public money to bail out financial institutions that had not been previously regulated. … Labor and capital will stay employed in unproductive uses. Incentives for future investment will be distorted by moral hazard problems.  …  Indiscriminate bailouts in the financial sector will reward many of those who made bad decisions and make it even more difficult to assess risks in the future. Understanding the moral hazard problems created by bailouts, many citizens and politicians will call for massive regulation of all financial institutions. Directly and indirectly, massive and indiscriminate bailouts of the financial system will create inefficiency and low productivity.

2) What do we need to do now? The central banks in the countries that are in crisis should lend to banks to maintain liquidity.  … The bailout should not be used to maintain high returns either to the equity holders or to the bond holders in these institutions. Investors who made risky investments should not be rewarded when these investments have  gone bad. Any public spending on investment in infrastructure should be justified on its own merits, especially in terms of its potential for increasing productivity. Otherwise, we should let the market work in letting unproductive firms go bankrupt and reallocating what remains of their resources to more productive firms. Reforming bankruptcy laws in some countries could make this process more efficient.

3) Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression. Those who try to justify the sorts of Keynesian policies implemented by the Mexican government in the 1980s and the Japanese government in the 1990s often quote Keynes’s dictum from A Tract on Monetary Reform: “The long run is a misleading guide to current affairs. In the long run we are all dead.” Studying past great depressions turns this dictum on its head: “If we do not consider the consequences of policy for productivity, in the long run we could all be in a great depression.”