Wonkbook: How much stimulus does the economy need?
By Ezra Klein,
Joe Raedle GETTY IMAGES
I don't mean that as a question of optics, or politics. I mean that as a question of economics. If we're going to pretend that tonight's plan has some chance of passing and affecting the economy, we may as well set some benchmarks for it.
According to a number of economists I consulted, the normal way you would start to think about this question is to take the difference between potential GDP -- what the economy could be producing if we were at a normal rate of unemployment -- and expected GDP. The Congressional Budget Office publishes these numbers: they're in tab 2-1 of the excitingly titled "Data Underlying Selected Economic Figures" (xls file). In 2012, expected GDP is projected to undershoot potential GDP by about $600-$700 billion. (Want to hear something scary? The cumulative output gap, when all of this is said and done, is expected to be in the range of $5 trillion.)
So that's the hole the economy needs to fill in 2012. Then we would ask what the multiplier -- the bang-for-the-buck -- is going to be on our economic support package. A dollar of unemployment insurance, or school construction, can be worth more than a dollar of demand, as that dollar gets spent and then spent again. But a dollar of, say, payroll tax cuts can worth less, as many who receive the tax cut simply save it. An optimistic estimate of the multiplier on a stimulus package would probably be about 1.5, which would imply a stimulus package of a bit more than $400 billion. A pessimistic estimate would say there's no multiplier at all, or it's slightly beneath 1 because of how much will get saved. It's also worth noting that the bigger your stimulus gets, the smaller the multiplier becomes. It's harder to spend a lot of money well then it is to spend a little money well.
Another way to ask the question might be how much we need to do to simply start bringing the unemployment rate down. Without any government support, economic growth is expected to be around two percent next year. That won't do it. Harvard's Jeffrey Liebman has calculated that "we need real GDP to grow at 4.5 percent a year for two years to bring the unemployment rate below 7 percent." If you run the numbers, that suggests about $400 billion in pure stimulus each year, which would be a package as big as the original Recovery Act, and much better targeted (no AMT patch, for instance).
Another option is we could simply try and keep the federal government from making the hole we're in any deeper. If we do nothing, the payroll tax cut and the unemployment insurance expansion will both expire next year, as will a few other programs. Economist Mark Zandi calculates that "federal fiscal drag" -- the demand that would be sucked out of the economy -- at 1.7% of GDP. So simply treading water would require a package well above $200 billion.
It's worth stopping here to note a couple of caveats. Most of the economists I spoke with said that it would be unwise to pass any significant stimulus without offsetting the cost with longer-term deficit reduction. The White House agrees on this point: they are planning to name offsets for their proposals.
It's also worth emphasizing the difference between stimulus that gets spent and stimulus that gets saved. "Remember that the key is spending," says Bruce Bartlett. "If you just gave people $500 billion in rebate checks and they saved all of it then you would get zero extra growth. That means that the additional stimulus must be in the form of government purchases of goods and services or a program that got people and businesses to spend more than they would have otherwise spent. Under current circumstances, a dollar saved is worthless." There is an argument out there that the stimulus that gets saved is speeding with the deleveraging process, and so is actually providing some economic support, but that's a very slow way to help the economy.
The expectation right now is that President Obama will propose a package in excess of $300 billion, putting it slightly above the "treading water" mark but well below what would be needed to fill the gap or bring unemployment down quickly. Much of that package will consist of tax cuts. Beyond that, the expectation is that Republicans in Congress will not pass the president's plan, or at least not much of it, meaning we're likely to have a federal anti-stimulus next year.
Five in the morning
1) Rick Perry and Mitt Romney sparred over their economic records at last night's debate, report Karen Tumulty and Philip Rucker: "Appearing together for the first time on a debate stage, the two leading contenders for the 2012 Republican presidential nomination squared off Wednesday over the question most likely to shape the race: Who is better equipped to restart the country’s economy? Seizing the spotlight in his national debate debut was Texas Gov. Rick Perry, who has vaulted to a lead in the polls over onetime front-runner Mitt Romney since joining the race three weeks ago...'We put the model in place in the state of Texas. When you look at what we have done over the last decade, we created 1 million jobs,' Perry said, contending that Texas has generated more jobs in the past three months than Massachusetts did in the four years it was governed by Romney."
Read what the candidates had to say, issue-by-issue: http://wapo.st/mT16vN
2) Obama's jobs plan will come to around $300 billion, report David Nakamura and Zachary Goldfarb: "President Obama is planning to propose a jobs program on Thursday that could entail at least $300 billion in tax cuts, local government aid, and spending on infrastructure such as roads and schools as he aims to restore public confidence in his ability to boost the economy...The president’s plan, in large part, will call for continuing current measures to stimulate the economy, including a 2 percentage-point payroll-tax cut and extended unemployment benefits, administration officials say. Obama is also likely to call for an additional tax cut for companies that hire workers. Those measures together could cost about $200 billion next year. Obama is planning to propose $100 billion or more in spending on infrastructure, state and local aid, and programs that target people who have been unemployed for more than six months."
3) We're close to a double-dip recession, writes David Leonhardt: "Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one. From early 2010 through this spring, by contrast, employment was growing fast enough to make the economy look as if it were in a recovery, albeit a modest one. 'The chances that we are in something that is going to feel like a recession are close to 100 percent,' said Joshua Shapiro of MFR Inc. in New York, who has diagnosed the economy more accurately than many other forecasters lately. 'Whether we reach the technical definition' -- which is determined by a committee of academic economists and based on gross domestic product, employment and other factors -- 'I think is probably close to 50-50.'"
4) Obama's smog regulation move is lamentable, writes Al Gore: "Earlier this year, the EPA’s administrator, Lisa Jackson, wrote that the levels of pollution now permitted -- put in place by the Bush-Cheney administration-- are 'not legally defensible.' Those very same rules have now been embraced by the Obama White House. Instead of relying on science, President Obama appears to have bowed to pressure from polluters who did not want to bear the cost of implementing new restrictions on their harmful pollution--even though economists have shown that the US economy would benefit from the job creating investments associated with implementing the new technology. The result of the White House’s action will be increased medical bills for seniors with lung disease, more children developing asthma, and the continued degradation of our air quality."
5) Fed actions could go beyond lengthening debt maturities, reports Jon Hilsenrath: "One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities...A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank. The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury...A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear. Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates."
Mitt Romney and Newt Gingrich said they would replace Bernanke: http://politi.co/qYeT19
Atmospheric interlude: I Break Horses plays "Winter Beats".
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Still to come: Republicans are turning up the pressure on Obama over trade; doctors' fees are driving up health costs; lobbyists are swarming the supercommittee; Energy Department stimulus money isn't getting spent; and Ben & Jerry's latest themed flavor.
Republicans are amping up the pressure on Obama over trade, reports Tom Barkley: "House Republicans sought Wednesday to kick-start the stalled U.S. trade agenda, winning passage of a tariff bill that could pave the way for eventual approval of free-trade agreements with South Korea, Colombia and Panama. Renewal of the expired Generalized System of Preferences program, which provides duty-free access for more than 100 developing countries, is part of a Republican effort to put pressure on President Barack Obama to submit the three trade pacts. 'We're hopeful it will force some action on the part of not just the president, but the Senate as well,' Sen. Orrin Hatch (R., Utah), ranking member of the Senate Finance Committee, said before the House vote. Mr. Hatch was gathered with other Senate Republicans to call for Mr. Obama to send up the trade pacts."
Tax reform might happen outside the supercommittee, reports Bernie Becker: "Senate Finance Committee Chairman Max Baucus (D-Mont.) has scheduled a series of hearings this month on taxes, sending a reminder that congressional tax-writing committees, and not the new debt supercommittee, could have the final say when it comes to tax reform. Officials from both parties are pushing the 12 lawmakers on the special deficit-reduction panel to take a deep look at the tax code in the coming weeks as they try to find a at least $1.2 trillion in deficit cuts. But Baucus and the other chief tax-writer in Congress, House Ways and Means Committee Chairman Dave Camp (R-Mich.), who are both members of the supercommittee, want tax reform to move through the normal committee process."
European bailouts were vindicated in German court, reports Anthony Faiola: "A highly anticipated ruling by Germany’s Constitutional Court on Wednesday both helped and hurt Chancellor Angela Merkel’s battle to shore up the euro. The powerful panel of judges declared that bailouts to troubled nations were legal but also ordered that future rescues involving Germany must first be approved by a parliamentary panel. Analysts and world markets appeared to breathe an immediate sigh of relief. European markets rebounded after three days of stark losses. The Euro Stoxx 50 closed higher at 3.4 percent, German DAX was up 4 percent; London’s FTSE index rose 3 percent; and France’s CAC advanced 3.6 percent...In the worst-case scenario, the ruling could have upended attempts to stem Europe’s debt crisis through multibillion-dollar bailouts."
Americans still have a long way to go to deleverage, writes David Wessel: "For American households, it is--at best--halftime. Americans are saving more. They're either unable or unwilling to borrow as they pay off (or walk away from) their debts. Measured against after-tax income, household debt began soaring in the late 1990s, peaked in 2009 and has fallen since--but only to 2004 levels. No one knows how much further Americans want to go, but it's likely to take them a long time to get wherever they are going. 'Unlike banks,' says David Scharfstein, a Harvard University economist, 'households can't raise equity capital to pay down debt. So the only way to get deleveraging is house-price appreciation (which hasn't happened), debt writedowns/modifications (some), or foreclosures/short sales (some).' He points to the mortgage-debt burden--and winces."
The Fed must do more, writes Chicago Fed chair Charles Evans: "I think inflation likely will be below our goal of 2%. And of course, unemployment is much above its natural rate. Thus, at the moment, there is little conflict between our two goals. Both suggest at least some additional monetary policy accommodation would be helpful. However, given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation. Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2%.
But I do not think that a temporary period of inflation above 2% is something to regard with horror. I do not see our 2% goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time."
More stimulus would boost the economy, deficit reduction won't, writes Joseph Stiglitz: "First, we must dispose two myths. One is that reducing the deficit will restore the economy. You don’t create jobs and growth by firing workers and cutting spending. The reason that firms with access to capital are not investing and hiring is that there is insufficient demand for their products. Weakening demand -- what austerity means -- only discourages investment and hiring. As Paul Krugman emphasizes, there is no 'confidence fairy' that magically inspires investors once they see the deficit go down...The second myth is that the stimulus didn’t work. The purported evidence for this belief is simple: Unemployment peaked at 10 percent -- and is still more than 9 percent. (More accurate measures put the number far higher.) The administration had announced, however, that with the stimulus, it would reach only 8 percent."
We need to turn savings into investment, writes Peter Fisher: "We need less spending on those things that merely support consumption and more support for those things that stimulate investment -- now and in the future. This should take the form of more genuine, direct investment in roads, bridges, railways, ports and other lasting infrastructure that will speed our products to global markets. We need more, not less, federal support for research and development. We should eliminate capital gains taxes on long-held assets and allow rapid depreciation for investment in new factories. Even better would be to significantly lower the corporate tax rate and eliminate all corporate tax credits and preferences, which would encourage the relocation from abroad of profitable activities and jobs. Let’s make clear that the best ideas -- in spending and in tax policy -- will be those that stimulate the most investment."
Adorable people of all ages being adorable interlude: A compilation of people from infants to the elderly laughing.
Doctor pay is driving up health costs, reports Robert Pear: "Doctors are paid higher fees in the United States than in several other countries, and this is a major factor in the nation’s higher overall cost of health care, says a new study by two Columbia University professors, one of whom is now a top health official in the Obama administration. 'American primary care and orthopedic physicians are paid more for each service than are their counterparts in Australia, Canada, France, Germany and the United Kingdom,' said the study, by Sherry A. Glied, an assistant secretary of health and human services, and Miriam J. Laugesen, an assistant professor of health policy at Columbia. The study, being published Thursday in the journal Health Affairs, found that the incomes of primary care doctors and orthopedic surgeons were substantially higher in the United States than in other countries. Moreover, it said, the difference results mainly from higher fees."
As GOP presidential contenders endorse state-level health reform, an effort for it in Congress is floundering, reports Matt Dobias: "The Republican presidential candidates have been pushing for a state-based approach to health reform -- but a Senate proposal to allow that to happen through the national health reform law has vanished from the congressional agenda. That’s because the proposal -- a bipartisan bill by Sens. Ron Wyden (D-Ore.) and Scott Brown (R-Mass.) -- didn’t allow the sweeping Medicaid changes Republicans want and didn’t come along at a time when either party wanted to reopen the health care law. Even President Barack Obama’s endorsement wasn’t enough to breathe life into the idea. The bill’s failure means the GOP presidential contenders will be free to campaign on their ideal health reform vision -- which gives governors a wide berth to tailor their own health care systems."
House Democrats are suggesting potential health care savings for the supercommittee to tap into, reports Sam Baker: "Democrats on the House Ways and Means Committee have outlined hundreds of billions of dollars in potential healthcare savings for the deficit-cutting supercommittee to consider. Ways and Means Democrats described two dozen policy changes in a memo prepared ahead of the supercommittee's quest for roughly $1.2 trillion in deficit reduction...Republicans are largely opposed to the other triple-digit option Ways and Means described -- extending rebates for prescription drugs so that they apply to people who receive both Medicare and Medicaid. That policy would save the federal government $120 billion over 10 years, and Ways and Means Democrats said the pharmaceutical industry's objections are mostly baseless."
Supercommittee lobbying is amping up, report Jonathan Allen and Seung Min Kim: "Washington’s influence class lined up against the deficit-reduction supercommittee as the dozen lawmakers charged with cutting as much as $1.5 trillion over a decade scrambled to write ground rules in advance of Thursday’s first public meeting of the panel...The Defense and State departments -- and their allies in Congress and on K Street -- are warning that steep cuts could endanger national security. Powerful players in the health sector are calculating that they face less exposure if the supercommittee fails and automatic cuts to Medicare -- limited to about 2 percent by the new debt-limit law -- are imposed. Even Washington’s cottage industry of 'good government' groups are leaning on lawmakers to conduct the kind of public deliberations that some insiders think would make it impossible for the supercommittee to make a deal."
Some in the tech industry aren't so keen on patent reform, reports Michelle Quinn: "Some tech constituencies in Silicon Valley have a curious reaction to the first patent reform overhaul in 60 years that Congress appears poised to send to the White House: ho-hum. The America Invents Act, which the Senate began considering this week after a cloture vote, will most likely be heralded as historic for updating patent laws and as a boon for innovators and job creators. Yet reaction in the tech industry, which has been the main driver behind patent reform since 2005, is decidedly mixed, with some arguing that the bill will make it harder for small entrepreneurs. Others say that for better or worse, the reforms will encourage people to go to the Patent and Trademark Office sooner with their intellectual property. And most agree the legislation is unlikely to put an end to the patent wars roiling the tech industry."
We need to do a cost-benefit analysis on homeland security spending, write John Mueller and Mark Stewart: "The key fact is this: At present rates (and including 9/11 in the count), the likelihood a resident of the United States will perish at the hands of a terrorist is 1 in 3.5 million per year. And the key question, one almost never broached, is this: How much should we be willing to pay to make that likelihood even lower? We have, in fact, paid--or been willing to pay--a lot...After an exhaustive assessment, the Congressional Research Service concluded at the same time that DHS simply could not answer the 'central question' about the 'rate of return, as defined by quantifiable and empirical risk reductions' on its expenditure. Indeed, at times DHS has ignored specific calls by other government agencies to conduct risk assessments."
Ice cream interlude: Ben & Jerry's introduces its "Schweddy Balls" flavor.
Energy Department stimulus programs are spending money slower than promised, reports Ed O'Keefe: "A major goal of the Obama administration’s economic stimulus program -- to create jobs by funding eco-friendly construction projects -- hasn’t been met and is running up against economic realities and regulatory hurdles, according to a new watchdog report. As of March, states receiving funds from a $2.5 billion Energy Department grant program established as part of the 2009 economic stimulus still had not spent as much as $879 million, or one-third of the money, according to a report released Tuesday by the department’s inspector general. Though Congress gave the Energy Department three years to distribute the block grants, the department vowed to do so within 18 months...The department distributed all of the money within a year and a half, but the...recipients still have not spent it."
Regulators could force large-scale safety reviews of natural gas pipelines, reports Daniel Gilbert: "U.S. pipeline companies are questioning whether it is necessary to conduct a type of safety test on all high-pressure, natural-gas pipelines built before 1970, an exercise that federal investigators say would help prevent deadly explosions. Companies are required by federal law to perform a water-pressure test on all gas-transmission pipelines built after 1970. The proposed change would expand that requirement to the nearly 178,000 miles of large-diameter, high-pressure gas pipelines more than 40 years old, about 60% of the nation's network. It is unclear exactly how many miles would be affected because some states, like California, required pressure tests before 1970, and companies say they have already performed the tests on much of their older pipe installed before then."
The nuclear power backlash is increasing reliance on old plants, reports Rebecca Smith: "Japan's Fukushima Daiichi disaster is having an unanticipated effect: It is forcing the world to become more reliant than ever on aging nuclear plants, and if utilities have their way, those plants will run decades longer than envisioned. A batch of new reactors had been planned for the U.S. and other nations, but the backlash against nuclear power triggered by the disaster has dimmed prospects for a 'nuclear renaissance.' Few nations, however, have expressed any intention of giving up existing plants, often considered essential for meeting power demands. In the U.S., two-thirds of nation's 104 nuclear reactors have had their original 40-year licenses extended by 20 years, including nine extensions granted since the Japan accident. Regulators are conducting research to see if U.S. reactors could be pushed to 80 years."
Individual-level environmentalism isn't good enough, writes Gernot Wagner: "You reduce, reuse and recycle. You turn down plastic and paper. You avoid out-of-season grapes. You do all the right things. Good. Just know that it won’t save the tuna, protect the rain forest or stop global warming. The changes necessary are so large and profound that they are beyond the reach of individual action...It won’t change until a regulatory system compels us to pay our fair share to limit pollution accordingly. Limit, of course, is code for 'cap and trade,' the system that helped phase out lead in gasoline in the 1980s, slashed acid rain pollution in the 1990s and is now bringing entire fisheries back from the brink. 'Cap and trade' for carbon is beginning to decrease carbon pollution in Europe, and similar models are slated to do the same from California to China."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.