If you haven’t read Dylan Matthews’ excellent round-up of stimulus studies, go do that. I’ll wait.
Alright. Those studies are looking at the stimulus we actually had. But in the course of some recent reporting, I’ve heard a lot about the stimuluses -- stimuli? -- we should have had, but didn’t. And I don’t mean the $2+ trillion stimulus we probably needed. Almost everyone agrees that was a nonstarter in Congress. I mean plausible alternative versions of the stimulus we actually had. Here are the four ideas I’ve heard the most about:
The American Recovery Act: Some suggest that the “American Recovery and Reinvestment Act” -- the official name for the stimulus -- should have just been “The American Recovery Act.” That would have meant jettisoning the ambitious projects meant to improve tomorrow’s economy -- high-speed rail, comparative-effectiveness review, updating the energy grid, researching renewables, etc -- and spending that money instead on less-glamorous but quicker-acting policies like tax cuts, state and local aid, and infrastructure maintenance. The upside of this is that the stimulus would have been better targeted to fight unemployment, and fight it fast. The downside is that we would have missed a rare opportunity to make important investments in our future.
The four-part stimulus: Another common complaint is that the stimulus was simply too big and diffuse for Americans to understand, and thus too big and diffuse for Americans to trust. The way to handle that wasn’t necessarily to scale back on its ambitions, but to break it into chunks. One chunk would have been tax cuts, and, with the benefit of hindsight, would have perhaps been a payroll-tax cut, which would have been more visible to ordinary Americans and which had more Republican support. Another chunk would have been state and local aid. Another chunk would have been infrastructure spending. And the final chunk would have been research and education spending. The upside of this is that more people would understand exactly where the stimulus money was going, and the administration would have had more time to craft the research and infrastructure pieces. The downside is that some of the pieces might not have passed.
The automatic stimulus: When the stimulus was being crafted, we didn’t know how bad the recession already was, and most forecasters were overoptimistic about how quickly we would recover. So the idea that we would need more stimulus in years three or four wasn’t given much thought, and insofar as it was discussed in the administration, the prevailing view was that Congress would never let 9 percent unemployment stand and thus would cooperate with efforts to add to the size of the recovery package. Wrong! In retrospect, some say, it would have been wise to fight to tie more of the stimulus -- particularly the unemployment insurance and the Medicaid spending, and perhaps even the tax cuts -- to the unemployment rate, so that the money didn’t stop until the need began to abate. The upside of this is that we would have more stimulus baked into the cake right now. The downside is that it might not have passed.
The deficit-reducing stimulus: The idea behind Keynesian stimulus is that the government balances the budget or runs surpluses in the good times so it has the credibility and fiscal ammunition to borrow and spend during the bad times. The Bush administration governed in mostly good times, but did not balance the budget or run surpluses. So the Obama administration, which entered office facing both deficits and a recession, had less room to maneuver. Some in the administration argued that the stimulus should thus include a significant long-term deficit reduction component. They argued that would help with market confidence, help with public support, and give the administration more space to ask for more if more turned out to be needed. The downside, of course, is that this would have delayed the stimulus and would have layered all the bitter arguments of deficit reduction -- what to cut, how much to tax, etc -- atop the stimulus, which could have collapsed the whole effort.
My own view is that there’s a good argument for all of these alternatives, but the marginal difference they would have made, both in terms of the politics and the economics, is generally overstated.
It would have been interesting to yoke deficit reduction to the original stimulus, but it would have been time-consuming and, when you got into the details, bitterly controversial. It would have been useful to include some automatic stabilizers, but the reality is that most of the policies that would have been rendered automatic got extended anyway, and the payroll tax cut got added on top of them, so it’s difficult to believe the total stimulus would have been dramatically different. It would have been politically preferable to break the bill into different parts, but it’s not clear that it would have mattered much. And as for focusing more on stimulus and less on investment, that’s appealing right now, but whether it would have been a good idea really depends on how the investments pan out in the long-run.
Which isn’t to say the alternatives aren’t superior to the policy we actually got. It’s only to say that, like the actual stimulus, they’re popular and uncomplicated on paper, but would doubtlessly run into their own troubles if anyone attempted to pass and implement them in the real world.