Virtually everyone agreed that something needed to be done: Unemployment was skyrocketing, banks were failing and consumer spending was crashing. After much hue and cry, President Obama’s signature piece of legislation, the economic stimulus package, has finally cleared the first hurdle to implementation. After two or so weeks of wrangling back-and-forth and attempts at compromise, the $819 billion bill passed the House, 244-188, with 11 Democrats and 177 Republicans voting against it.
Conservatives and libertarians wanted a bill that included minimal new government spending and a whole lot of tax cuts. Liberals and progressives, on the other hand, wanted to ramp up government spending, but not just to stimulate consumer spending and encourage employment in the short term; they wanted to make long-term investments in infrastructure and alternative energy. These investments would not only provide jobs for the growing ranks of the unemployed, but they’re also necessary. Considering that labor, materials and shipping costs are at record lows, it would make sense to make these investments now.
The bill that passed the House was a blend of both conservative and liberal proposals. Bowing to Republican pressure, House Democrats inserted some $275 billion worth of tax cuts, including Obama’s own proposal for a tax credit to those making less than $150,000 a year and Republican proposals to cut taxes on businesses that are hiring workers. The other two-thirds of the plan consists mainly of spending.
A huge chunk of the plan is direct aid to states so that they don’t have to slash their social spending when it’s most needed. Despite any other criticisms of the plan as a whole, this part is uncontroversial. Since states aren’t allowed to run budget deficits, they have to contract their spending when recessions cause tax receipts to decrease due to diminished income.
The sad irony is that when incomes go down and unemployment goes up, the demand for social services goes up. If a state is running a deficit, it’s likely to cut back on key services like unemployment benefits and health care — just when people need it most. Ramping up food stamps, unemployment checks and federal payouts to Medicaid do more than just fill a state budgetary hole: They are also some of the best ways to stimulate the economy.
According to Mark Zandi’s testimony to Congress, food stamp increases have a 1.73 “multiplier effect,” meaning that for every extra dollar spent on food stamps, GDP goes up $1.73. Extended unemployment benefits have a multiplier effect of 1.64 and “general aid to state budgets” has a multiplier of 1.36. So, the fact that Obama devoted a large part of the stimulus package to measures that are likely to, you know, actually increase GDP is a pretty good thing.
But just going after GDP increases can be illusory. The government can always ramp up expenditures, buy a bunch of stuff and increase stated GDP without actually improving anyone’s well-being. In a recession however, there is a fear of a deflationary spiral, where consumers have an expectation that prices will continue to drop, and so they cut back on consumption and save money. The problem is that if everyone is expecting prices to drop continually, no one every spends and spending and prices chase each other down until the economy comes to a standstill. So, simply having the government take up the slack by spending lots of money through capital purchases to build infrastructure or by employing people actually makes sense in a depressed economy. But in the long term, a stimulus plan has to maintain consumer spending at a high enough level so that employers start hiring again, so people can spend money they earn and keep the economy afloat.
The way to bridge the gap between simply increasing GDP and actually improving the economic health of the country is through investment. The case for increased government investment in, say, infrastructure is a complex one. On one hand, infrastructure investment is one of the best types of spending to stimulate the economy. Not only does it have a GDP multiplier of 1.59, but infrastructure spending is a good way to decrease unemployment, especially when there has been such a big collapse in construction projects due to the housing gulch. But infrastructure spending is better than just a GDP multiplier or a stopgap for unemployment, it’s also an investment.
When something like one-fourth of our bridges are in horrible condition (no need to tell Minnesotans), that can have a real drag on economic growth. And since the private sector doesn’t have the resources or desire to make long term plans to build bridges, highways, railways and so forth, it’s the perfect thing for the government to do. And it’s an even more perfect thing to do when the economy is crashing. That’s because the yields on government bonds, which we sell to finance our debt, are at near-historical lows, which makes government spending cheaper. Also, commodity prices are crashing (oil, cement) and due to unemployment, labor is cheap too. So, if you think infrastructure spending is a good idea, now is the time to do it.
The big problem with infrastructure spending is that it’s slow. Ideally, stimulus spending should be near-instantaneous, which is what makes certain tax cuts, food stamps and extended unemployment appealing. Infrastructure projects, on the other hand, take months, if not years to actually get started. The fear is that the government ramps up spending just as the economy is recovering, meaning that output which could be directed more profitably towards the private sector ends up being spent less effectively while still costing the taxpayer. However, this recession is projected to last until, according to the Congressional Budget Office, at least 2011, and even then there is the prospect of a “jobless recovery” which means that stimulus spending which comes on line in 2011 will still have a salutary effect on employment.
So, will this hastily-assembled, imperfect, pork-filled product of compromise actually do anything? The answers is… probably yes.
The Congressional Budget Office estimates that this bill, even with the business tax cuts that will do little to stimulate the economy (they have a C.B.O. estimated multiplier of .4) and with little infrastructure spending will increase Gross Domestic Product for the years 2009, 2010 and 2011 from its project baseline by up to three points.
Unemployment will go down by as many as two points and employment will increase up to three million jobs. So, to put it in terms you understand, seniors, juniors and sophomores would have faced a horrendous job market with 9, 8.7, and 7.5 percent unemployment, respectively. With the stimulus package, that horrendous picture turns into only a very scary one, with projected 7.9, 6.8 and 6.4 percent unemployment (and these are all the high estimates). Freshmen, and next year’s crop of early admits will probably have it okay, regardless of whether or not the stimulus passes.
Of course, fiscal stimulus isn’t all there is to economic recovery. We still have an ailing financial system that is driving the crisis, and the stimulus does nothing to address it. But even so, those projected gains in GDP and decreases in unemployment are nothing to ignore. Sure, the package could have been bigger and better designed, but we don’t live in a perfect world. Bottom line: unemployment will go down, GDP will go up and we’ll all just muddle through this together.