CBO: "Stimulus" Package Has Negative Long-Run Payoff
U.S. Unemployment Rate, 1948-2008
Notice A Pattern?
The Congressional Budget Office reports that the enormous debt that would be required to implement either the House or the Senate "stimulus" would slightly reduce economic output in the long run.
CBO acknowledges that "funding for infrastructure spending, education programs, and investment incentives ... might increase economic output in the long run." However, the bulk of the $800+ billion programs do not lie in these "stimulating" activities; CBO estimates only one-dollar-in-four (this is the broccoli we should eat more of) in the Senate package.
What we -- the taxpayers -- want, of course, is to see output increase in the long run, preferably at a pace comparable to the growth in the labor force. That's not what has happened in the past eight years.
In 2001, we had 131,826,000 non-farm jobs, according to the Bureau of Labor Statistics. For 2008, the estimate is 137,248,000. That's a growth of 4.1% over an eight-year period (only 3.7% private nonfarm job growth), and there were fewer jobs in 2004 than in 2001. In comparison, during the eight years of the Clinton Administration, jobs grew at 18.9%; Reagan Administration, 11.8%.
Since 2001, however, jobs have grown more slowly than the number of people looking for jobs, which is why unemployment rose while Bush43 was on watch.
This enormous debt package currently winding its way through Congress -- one of my Forum members called it a "spendulus" -- is projected to decrease GDP by 2019, according to the CBO. The only justification for such a massive borrowing scheme would be to provide a cushion for people who have lost jobs. And yes, companies are shedding jobs and the economy is contracting. But there was a housing rebound (of sorts) in December in hard-hit Arizona. And unemployment levels have not begun to approach those of the 1980s, much less those of the Depression.
But investments in infrastructure that have proven multiplier effects should go forward -- although not at the expense of poor planning. After all, we have $2.2 trillion in infrastructure projects pending. This category includes the $7,500 tax credit, which should be extended to any home buyer to help stabilize the housing market.
And no tax cuts. Period. Any stimulus effect due to money-in-hand would not be felt until sometime in 2010. Maybe.
If Congress then wants to talk about borrowing to help the unemployed -- extending unemployment benefits or job retraining -- or wants to talk about borrowing to help states with federal programs like Medicare, go to it, separately from any stimulus package. Because those are not stimulus acts, no matter how pretty the rhetoric; they're government stimulus bills.
Oh. One more thing. No more massive (600+ page) bills. And Axelrod, remind the President of his pledge to wait five days between Congressional passage and legislative signature, would ya?
See:
:: Support For Stimulus Plan Dropping
:: Deconstructing a Political Poll
:: Economic Stimulus Package Has A Little Something For (Almost) Everyone
:: Ron Paul on the Stimulus Package
Comments
A pointe related to my planning one:
“What government, or what company for that matter, can manage a rapid 70% budget increase without some waste, fraud and abuse?” — Alan Blinder in the WSJ.
Just goes to show you again that History is a very neglected study in this country particularly amongst those who purport to know better. Look at the Chart it shows unemployment spikes in 1949, 1958, 1982, 1993, and 2008. Let us examine the situation happenning at those times. 1949 was four years after WWII ended. The Republican Congress was cutting back spending in every respect, particularly in defense. 1958 after five years of spending cuts by the Eisenhower administration; 1982 after the first year of deregulation by the Reagan administration; 1993 (per the graph the date is 1/1/1993) after four years of deregulation by the Bush Administatration; 2008 after eight years of deregulation by the Bush administatration. I see a pattern alright. How did we end the Great Depression, massive government spending on WWII, not only was this short-term stimulus but the spending in industrys like the chemical industry, the aero industry, the auto industry as well as the investment education from the GI bill resulted not only in the foundation of today’s modern industries but also in the creation of todays middle class. Many of the things we now take for granted like retirement pensions and Medical insurance plans orignated during that time. How di we end the 1958 recession, massive government spending on the aerospace industry along with a big investment in education after the Soviets showed us up with Sputnik. This ended up putting a man on the moon. When this spending stopped you ended up with the 1975 recession. In 1981 Reagan came into office with a promise to cut spending and deregulate industry so that business could trickle down proserity to the working man. Instead you ended up with the highest level of unemployment since the great depression. I suffered through that one and I found that the one reason for the apparent decline in unemployment was the increase in “discouraged workers” (i.e. people who have stopped looking because there were no jobs to be had). Another was the great increase in government spending on defesne to backrupt the Soviets into losing the cold war. The first Bush continued the pace of deregulation, but the spending declined as the regan expenditures had their effect on the Soviets and voila another spike in unemployment. The second Bush’s recession is really the only one that is connected with a massive increase in government spending, possibly because so much is being spent overseas instead of here at home. Presicent Obama wants to create jobs again with another increase in spending with some judcious tax cuts but this time he wants to spend it in areas other than the defense industry. I think that is laudable.
Hi, Edward – thanks for your thoughtful post. FYI, the “return” key works in these text boxes and paragraph spacing makes long comments easier to read.
One comment re your last point:
only 1-in-4 dollars in the Senate bill go to infrastructure. The bulk of the money “spent” would result in a 30% increase in non-defense discretionary spending by the gov’t.
I don’t know of ANY institution — private or public — that can efficiently boost its spending that much. “Easily” — sure, just spend without thought.
Also, the chart illustrates that the economy is CYCLIC. That’s the main message.
WWII is what finally got us out of the Depression, although FDR’s Administration left us with legacy infrastructure.
The urgent need, and main purpose, of the bill is not to lift long-run growth. Rather, it is to mitigate the current recession. The same CBO letter you cite says this bill will save MILLIONS of jobs in the next 3 years and create 100s of billions of dollars of GDP relative to what would take place without it. Why skip over this good news and instead emphasize the effect 10 years out, which the CBO letter says is “slight.” Specifically, the CBO letter says the plan shaves 0.1% to 0.3% off potential GDP ten years from now — that’s 1/1000th to 3/1000th — and would do no harm to employment. In return, we get literally millions of jobs saved or created and hundreds of billions of dollars of increased GDP in the next few years. Huge short-run benefit and miniscule long-run GDP cost. The benefit in 2010 is literally 10 times greater than the predicted detriment in 2019 (1 to 3.6 percent boost to GDP in 2010, vs 0.1% to 0.3% detriment in 2019). And in terms of jobs, 1.3 to 3.9 million more jobs in 2009 and no impact up or down on employment in 2019.
I suggest people read the CBO directly if they want to know what CBO says. You and others are misreporting it:
http://www.cbo.gov/ftpdocs/96xx/doc9619/Gregg.pdf
Hi,Jim — I point to the CBO in the very first paragraph.
The point I am trying to make — and the CBO as well — is the long-term drag on the economy that comes from borrowing from Peter to pay Paul.
Moreover, the economy is CYCLICAL. Recessions Are Normal. Look at the chart!
In January, the CBO said that this recession would last through 2009 with recovery in 2010 … all without this “stimulus” – see the pdf
I am also asking for reality check with language: it is not economic “stimulus” to provide extended unemployment benefits. It may be smart on many levels, but any such discussion should be separate from “stimulus” spending.
And I cannot BELIEVE the Senate with its interest deduction for new car purchases up to $49K.
When the government says “spend” it’s time to close your wallet. More than 50% of Americans are opposed to the Stimulus package for a reason- they have brains that work.
It’s too late to stop it now, however. The only thing left for us (the taxpayer) is to respond accordingly: An all out Boycott. DON’T Buy a new car. Don’T buy a house ( lease to buy instead) Steer clear of all shopping malls and buy at thrift stores like Big Lots, Mardens, and Goodwill. Join a food co-op now since it will be a few months before Farmer markets get going. Learn to cook. Buy food storage supplies. Say bye-bye to all fast-food, and yes,I mean including McDonalds.The ice-storm that hit Kentucky was a blessing in disguise, really: Most of my neighbors discovered the simple joys of reading books, playing board games with their kids and chopping wood for their long neglected woodstoves and fireplaces. If the solar storm of 2012 predictions come true, we’ll be living that way for at least a year, maybe longer!! To sum it all up- we can’t control our out of control government any more than we can control solar flares. The only thing we can do is
withdraw from the stock market, spend frugally and just wait until we can vote these idiots out of a job
It’s the economy… Identifying specific associated politics can divert or obscure that focus.
The BLS data and graphic can be divided into 15 segments for the 15 post-WWII administrations. The distinguishing economic administration differences were policies/ideologies of less-government (taxes, regulations) versus more-government (taxes, regulations). The 6 more-government segments show reduced unemployment. Of the 9 less-government segments, 8 show increased unemployment. This is statistically significant by Fisher’s exact test. Note that the segment where unemployment was prolonged and reached levels not seen since followed the largest tax cut in US history. Moreover the one segment of less-government showing reduction in unemployment resulted from the largest tax increase in US history, an action contrary to the less-government tax relief policies.
In short, tax relief has consistently been followed by job losses. I don’t have completely comparable data for earlier periods, among other things because Inauguration Day date changed. However, unemployment rose from 1929 to 1933 a less-government period while income fell. From 1933 on real income rose. Unemployment stabilized at high (25%) levels. From a purely economic point of view the more-government policies took full force in 1942 putting 25% of the male population on the government payroll and raising taxes on a pay-as-you-go policy. Because less-government believers felt strongly it was better business practice to finance expansion by debt, there was some compromise on taxes.
In an unusual display of unanimity, economists seem agreed infrastructure is the best investment. The objection seems to be that it is too slow to produce short-term results and we need to build confidence now. A dozen years ago one look at the 36 story bamboo scaffolding, cranes everywhere on the horizon, expressways under construction, the Three Gorges Dam project, all assured residents and visitors thye economy was going to boom. I met people living in homes that made FEMA trailers look like luxury who were excited about the future. There were Chinese who had left successful Wall Street jobs who had returned home to live primitively in expectation of a great future. Evident infrastructure activity builds psychological confidence.
Quick results? Thirty years ago four major business consulting firms were built on the premise that the US government was involved in every aspect of life, hence, somewhere in the Federal government there was an expert on every topic. The firms built vast files on such personnel. A baby carriage manufacturer comes to the consulting firm with a production problem (true example). The firm locates and talks to the Federal expert on baby carriages. He is delighted to provide a public service and to have someone value his expertise. The consulting firm submits the solution to the client. Problem solved. Then the idea was advanced that government was the problem, not the source of solutions. Believing it to be true, competence became irrelevant as a requirement for government jobs. For example, the SEC ceased to employ economists.
Forty-five years ago a visiting Federal official explained how shocked he was, when he was appointed, to discover how much faster the Federal government produced results than did the private sector. He explained that projects were authorized by the House and Congressmen demanded results to which they could point in time for the next election.
How fast can we get results. It depends on the will and the people we put in charge. Pearl Harbor was in December 1941. We found we had no intelligence capabilities. The OSS, now CIA, was authorized after Christmas. Wild Bill Donovan was appointed in the first few days of 1942. A selection testing program was created. A training program was created. People were recruited, selected, and trained. We had Resistance agents on the ground in Europe in March. Only with declassification in 2008 did we learn how large an operation it was. At the end of 1942 Congress authorized a national nuclear laboratory. Possible sites were inspected. Oak Ridge was selected. The project was designed. One of the largest construction projects in history was undertaken. A town of 35,000 was created from scratch. We had a functioning reactor within a year.
All of these economic phenomena are predictable from von Neumann and Morgenstern, Theory of Games and Economic Behavior (1944), considered one of the great masterpieces in the history of mathematics. Fifty years later John (”A beautiful Mind”) Nash received the Nobel Prize in Economics for his expansion of the theory. We have a tried and proved predictor. The President was misled or mistaken when he said on January 30 that the American Economy is not a zero-sum game. One of the elegant proofs in the 1944 original was the showing that a very simple mathematical transformation converts any nonzero game to zero-sum.
The well evidenced zero-sum model has predicted and predicts tax reductions lose jobs. The model also predicts maximum jobs return on publicly owned infrastructure construction. It also explains how, while job losses mount, per capita income can rise, as it did in December, despite the added number of zero incomes entering into the per capita calculation.
We can expect tax relief, the largest component of the stimulus package, to increase job loss. We can expect infrastructure construction, the smallest component of the stimulus package to give the most bang-for-buck in adding jobs.