Tag: fiscal stimulus

The Old Infrastructure Excuse for Bigger Deficits

Washington Post columnist/blogger Ezra Klein recently echoed the latest White House rationale for additional “stimulus” spending for 2013-15 and postponing spending restraint (including sequestration) until after the 2014 elections. Klein argues for “a 10- or 12-year deficit reduction plan that includes a substantial infrastructure investment in the next two or three years.” In other words, a “deficit-reduction plan” that increases deficits until the next presidential election year.

Citing Larry Summers (who similarly promoted Obama’s 2009 stimulus plan while head of the National Economic Council) Klein says, “There’s a far better case right now for being an infrastructure hawk than a deficit hawk.”

“Deficit hawks tend to [worry that] … too much government borrowing can, in a healthy economy, begin to “crowd out” private borrowing. That means interest rates rise and the economy slows… That’s not happening right now. In real terms — which means after accounting for inflation — the U.S. government can borrow for five, seven or 10 years at less than nothing… . That’s extraordinary. It means markets are so nervous that they will literally pay us to keep their money safe for them.”

If low yields on Treasury and agency bonds simply reflected investor anxiety (unlike stock prices),  rather than quantitative easing, then why has the Federal Reserve been spending $85 billion a month buying Treasury and agency bonds? Despite those Fed efforts, Treasury bond yields have lately been moving up rather smartly – even on TIPS (inflation-protected securities). The yield on 10-year bonds rose by a half percentage point since early May. It is not credible to assume, as Summers does in a paper with Brad DeLong, that today’s yields would remain as low as they have been even in the face of substantially more federal borrowing for infrastructure. Even the Fed’s appetite for Treasury IOUs has limits. 

A second worry of deficit hawks, according to Klein and Summers, “is a moral concern about forcing our children to pay the bill for the things we bought… .These are real, worthwhile concerns. But in this economy, both make a stronger case for investing in infrastructure than paying down debt.”  Paying down debt?!  Nobody is talking about paying debt. That would require a budget surplus.  The debate is only about borrowing slightly less (sequestration) or substantially more (Obama).

The Summers-Klein argument for larger deficits is that interest rates are very low, so why not borrow billions more for a “substantial investment” in highways, bridges and airports?  Summers says, “just as you burden future generations when you accumulate debt, you also burden future generations when you defer maintenance.”  This might make sense if there was any link between government tangible assets and federal liabilities.  In reality, though, this smells like a red herring. Politicians always say they want to borrow more to build or rebuild highways and bridges.  But this is not how borrowed money is spent, particularly when it’s federal borrowing.

Accumulation of federal debt since 2008 − including the 2009 stimulus plan − had virtually nothing to do with investment. Nearly 90 percent of the  2009 “stimulus” was devoted to consumption – $430.7 billion in transfer payments to individuals, more than $300 billion in refundable tax credits, $18.4 billion in subsidies (e.g., solar and electric car lobbies), more pay and perks for government workers, etc. Stanford’s John Taylor shows that even the capital grants to states − ostensibly intended for infrastructure projects − were used to reduce state borrowing and increase transfer payments such as Medicaid.

In the National Income and Product Accounts (NIPA), the closest thing we have to a measure of “infrastructure” is government investment in structures.  Federal borrowing in the NIPA accounts rose from $493.5 billion in 2008 to $1,177.8  in 2010, yet total federal, state and local investment in structures was unchanged − $310.1 billion in 2008 and $309.3 billion in 2010. Such investment was lower by 2012, but not because federal borrowing was “only” $932.8 billion that year.  

NIPA accounts show only a $12.9 billion federal investment in nondefense structures in 2012 and $8.5 billion for defense structures. By contrast, transfer payments accounted for 61.7 percent of federal spending in 2012, consumption for 28.2 percent, interest 8.5 percent and subsidies 1.6 percent.   Consumption is mostly salaries and benefits. Transfer payments did include more than $607 billion in grants to states and localities in 2011, according to a new CBO study, but 81.7 percent of such grants were for health, income security and education, leaving only 10 percent for transportation. Transportation accounted only 3.2 percent of total federal spending in 2012 and nine percent of “discretionary” spending.

In short, direct federal infrastructure investment plus grants to states add up to only a little over $80 billion out of a budget that exceeds $3.5 trillion. If federal borrowing had anything to do with $80 billion a year in federal infrastructure spending, then we wouldn’t have been borrowing about a trillion a year for the past four years. 

Klein’s rephrasing of Summers’ rerun of the 2009 “infrastructure” excuse is not a plausible argument for increased federal debt. It is, at best, an argument for ending the chronic misuse of borrowed money to pay for transfer payments and government consumption so that we could prudently reallocate a greater share to transportation infrastructure.  

 

Debt Deal to Slow the Economy?

The Washington Post reports that spending cuts in the budget deal threaten to slow the economy. The article quotes a number of economists who seem to harbor a rather extreme Keynesian bias in their thinking.

The deal would cut discretionary spending by just $21 billion in 2012, or just 0.6 percent of total federal spending that year. And that’s after federal spending has risen 22 percent since 2008 ($2.98 trillion in 2008 to about $3.63 trillion this year). Even if you believe that government spending helps the economy, it seems rather bizarre to claim that a 0.6 percent retrenchment after a 22 percent increase would hurt.

The other thing to note about these spending-cut worries is that, for Keynesians, it is the total amount of deficit spending that is the amount of economic “stimulus.” We’ve had deficit spending of $459 billion in fiscal 2008, $1.4 trillion in fiscal 2009, $1.3 trillion in fiscal 2010, and $1.4 trillion in fiscal 2011. That is a colossal amount of “stimulus.”

In fiscal 2012, we’ve got even more “stimulus” coming, with a projected federal deficit of about $1.1 trillion, per the CBO March baseline. So a spending cut of $21 billion will reduce the giant Keynesian stimulus in 2012 by just 2 percent. And yet the Washington Post says that this will “endanger the anemic economic recovery,” according to “many economists.” 

Those “many economists” who believe in Keynesianism might be more believable if their theories hadn’t so obviously failed in recent years. Despite the enormous deficit-spending “stimulus” of recent years shown in the chart, U.S. unemployment remains stuck at high levels and the recovery is the slowest since World War II by numerous measures. (See cites in my testimony here.)

Biggest stimulus, slowest recovery. Keynesianism isn’t working.

Government Spending Isn’t Working

Over at the Daily Caller, I provide a primer on why government spending doesn’t “stimulate” the economy over the short-run or the long-run.

I look at the huge size of government spending in the United States, and I review the effects of recent stimulus efforts.

Then I describe the government’s “leaky bucket,” which explains why spending harms the economy in the long run, whether or not there are any short-run stimulus effects.

With America heading rapidly toward a spending-fueled debt crisis, these certainly are the times the try men’s souls. Nonetheless, please have a Happy Fourth!

Laura Tyson’s Confused Case for a Second Stimulus

I was a bit critical of Laura Tyson’s New York Times article on “Why We Need a Second Stimulus.” Apparently I wasn’t nearly critical enough.

The Nation and National Public Radio are advising President Obama to “stop listening to infrastructure-phobic advisers like Larry Summers and start taking counsel from Laura Tyson, a member of his Economic Recovery Advisory Board who argues that $1 trillion in infrastructure investment is needed over the next five years.”

At The Atlantic, senior editor (and Boston Globe columnist) Joshua Green thinks Laura Tyson’s article “underscored what a loss it is for the Obama administration that it couldn’t manage to find a place for her on its economic team.” Mr. Green can’t imagine why a Berkeley professor who wants to add an extra trillion to federal spending wouldn’t be the ideal budget director.

In the article that so impressed Mr. Green, Tyson wrote, “The primary cause of the [current] labor market crisis is a collapse in private demand… By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent.”

Combining “fiscal and monetary stimulus” in a single phrase is a clumsy way to conceal the irrelevance of   “fiscal stimulus” (debt-financed federal spending) to GDP growth in 2009. Fiscal stimulus means the Treasury sells more bonds. Monetary stimulus means the Fed buys more bonds. To discuss those transactions as if they had the same effect is just another mysterious Keynesian incantation.  

Tyson claims there is “too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth.” She wants much more spending on unemployment benefits (a paradoxical definition of a jobs program) and on aid to state and local governments (where unemployment rates are relatively low). 

To argue for more borrowing and spending, however, Tyson cannot credit monetary policy for helping the recovery. Because she explicitly advocates much more spending on “unemployment benefits and aid to state governments” (not just “infrastructure”), Tyson has to demonstrate that changes in federal spending (not Fed policy) explain why the economy appeared to be recovering in late 2009 but faltering by the second quarter of 2010. It is not enough to allude to simulations from Mark Zandi’s famously incorrect forecasting model, as the CEA and CBO have done. Tyson needs to show us a fact or two. She didn’t even try. She even got the size of Obama’s stimulus bill wrong, citing last year’s antiquated $787 billion figure that the Congressional Budget Office (CBO) has revised twice since January.

In reality, the 2009 stimulus bill was mostly about extending unemployment benefits, expanding Medicaid, dispensing small checks (refundable tax credits) and other schemes to rob Peter and pay Paul. Such transfer payments add nothing to GDP; they just discourage work. The increase in federal nondefense purchases (such as ”shovel-ready” projects) contributed only two-tenths of one percent (0.2) to the change in GDP in 2009. That was no larger than in 2008 when the Recovery Act did not exist. And even that trivial sum is merely an accounting gain rather than a net economic gain, because federal borrowing is no free lunch. The reason Keynesian accounting is no substitute for economics is that governments can only spend what Danny DeVito called “OPM” (other peoples’ money). To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.

The timing of Obama’s so-called stimulus spending has been totally inconsistent with Tyson’s description of how the economy supposedly responded in the past and present, and why she expects growth to slow by a percentage point or two next year unless the feds spend more on multi-year jobless benefits and deficit-sharing with the states. In its latest whitewash, the CBO “now estimates that the total impact over the 2009–2019 period will amount to $814 billion. Close to half of that impact is estimated to occur in fiscal year 2010, and about 70 percent of ARRA’s budgetary impact will have been realized by the close of that fiscal year.” With half of the spending in fiscal 2010 and 30 percent in 2011 and beyond, that means just 20 percent of the $814 billion ($163 billion) had been spent by the end of October 2009. Yet it was in late 2009 when Tyson claims the stimulus had the most impact. 

Tyson worries that “by next year, the [fiscal] stimulus will end.”  That’s wrong too. The CBO estimates that 30 percent of the spending ($244 billion) will occur in fiscal 2011 (January to October) and beyond to 2019.

Unfortunately, Ms. Tyson’s reference to the second quarter’s GDP is entirely unrelated to her diagnosis of the problem as being “a collapse in private demand.” GDP does not measure private demand because it subtracts imports. Yet spending on imports is just as much a part of “demand” as is spending on domestic goods and services. Real gross domestic purchases increased at a 4.9 percent annual rate in the second quarter, up from 3.9 percent in the first. Neither figure suggests any paucity of private spending.

The second quarter surge in imports (which largely accounts for the wide gap between domestic purchases and GDP) looks like a statistical fluke. “Real” imports appeared to rise so much mainly because import prices supposedly fell at a 9.5 percent annual rate (which means a 2.38 percent rise in the quarter, multiplied by four to get the annual rate). By contrast, import prices rose at a 14.6 percent annual rate in the first quarter and at a 24.8 percent rate in the fourth quarter of 2009. Those figures say more about the folly of converting smallish price changes into annual rates than they do about the real economy. Besides, imports fell 2.1 percent in July and exports rose 1.8%, so the questionable second quarter trade figures did not indicate a lasting trend.

Tyson did not bother to figure out how large the first stimulus bill was, or when the borrowed loot was spent. She did not bother to look up the negligible contribution of federal spending to recent changes in GDP, and she confused GDP with domestic demand. 

The press kept telling us that Tyson was almost certain to replace Peter Orszag as OMB director, and then to replace Christina Romer as head of the Council of Economic Advisers. Yet such plums keep slipping from her fingers, to the dismay of her fans at The Nation, NPR and The Atlantic. This is rare evidence of good judgment from the Obama White House.

Paul Krugman and Regime Uncertainty

Paul Krugman dismisses concerns that the Obama administration’s fiscal and regulatory policies are fostering uncertainty in the business community, and thus inhibiting job growth and an economic recovery.

My Cato colleagues and I have been citing this “regime uncertainty” for a while now, and it is gaining mainstream acceptance as evidenced by a recent Washington Post editorial.

I have pointed to surveys of small businesses conducted by the National Federation of Independent Business. The businesses surveyed continually cite the combination of government taxes and regulations as their “single most important problem.”

However, Krugman looks at the NFIB’s most recent survey and comes away with a different conclusion:

Or read through the latest survey of small business trends by the National Federation for Independent Business, an advocacy group. The commentary at the front of the report is largely a diatribe against government — “Washington is applying leeches and performing blood-letting as a cure” — and you might naïvely imagine that this diatribe reflects what the surveyed businesses said. But while a few businesses declared that the political climate was deterring expansion, they were vastly outnumbered by those citing a poor economy.

This is the chart from the survey that Krugman is referencing:

Considering the depth and length of the recession, the fact that “economic condition” is the runaway leader isn’t surprising. But I wonder how many of the businesses citing “economic conditions” are happy with the “political climate.” I doubt very many. Notice that zero respondents said that the political climate was a “good time” to expand. Couple that with the plurality who said this isn’t a good time to expand due to economic conditions and you get an indictment of the administration’s interventionist policies that Krugman has supported.

Krugman continues:

The charts at the back of the report, showing trends in business perceptions of their “most important problem,” are even more revealing. It turns out that business is less concerned about taxes and regulation than during the 1990s, an era of booming investment. Concerns about poor sales, on the other hand, have surged. The weak economy, not fear about government actions, is what’s holding investment down.

Interestingly, Krugman ignores the chart that immediately precedes the trends in business perceptions: the “single most important problem” respondents currently face. It is definitely more revealing:

Thirty percent of respondents said their single most important problem is “Poor Sales.” “Taxes” and “Government Regulations and Red Tape” come in second and third place at 22 percent and 13 percent respectively. Combining the two, the biggest problem facing small businesses according to respondents is government.

Krugman waves the government problem away by pointing out that taxes and regulations ranked higher in the 1990s when the economy was strong. However, he ignores the trend. Concern about taxes and regulations trended lower as the 1990s moved into the 2000s, but have been trending higher in the last couple of years.

Take a look at the trend chart that includes taxes:

The tax outlook improved as the Clinton and Bush administrations cut taxes and the federal budget was brought under control. Rising tax concerns could be explained by future expectations of higher taxes to pay for Bush and Obama’s profligacy. Additionally, states have been raising taxes during the recession to make up for budget shortfalls. Future expectations of higher taxes to pay for the unfunded liabilities of state and local employee benefits could also be a consideration.

Also note how much higher taxes rank than financing. Yet, it seems that most media outlets believe credit unavailability is the chief problem facing businesses. Indeed, the president has been pushing a $30 billion package to increase lending to small businesses. But businesses don’t need more subsidized credit backed by taxpayers — they need relief from the president’s agenda.