Federal Reserve Working Paper on the effect of the Stimulus Package: 800,000 jobs saved or created by May 2010, down from approximately 2 million in March 2010.
NPR reporting on a Moody's Analytics study demonstrating the economic impact of unemployment benefits versus tax cuts. Mark Zandi, Chief Analyst for Moody's and a former advisor to Sen. McCain's 2008 campaign, testified similarly before Congress.
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I'll note that one of the conclusions reached by the Fed working paper appears to conflict with the Moody's analysis, as the Fed paper states:
"...spending on safety-net programs such as unemployment insurance and
Medicaid reduces employment."
Mark Zandi, meanwhile, is a longtime stimulus booster and registered Democrat who refuses to say who he voted for in 2008. I don't mean to imply he is a bad economist, but let's not make too much of his role as a McCain adviser.
That doesn't actually conflict with the Moody's analysis. Moody's isn't arguing that unemployment benefits will improve the employment outlook, it's arguing that the net economic benefit--"the bang for the buck"--of unemployment benefits outweighs other action like tax cuts, particularly the Bush tax cuts ($1.61/$1 to $0.32/$1). It's not tremendously surprising; it's rather coldly logical that giving people with no income source a source by which to purchase necessary goods and services will boost the economy--the people receiving those benefits have little choice but to spend them. Whereas tax cuts, particularly tax cuts going to wealthier individuals, are not as likely to be spent immediately.
At any rate, it seems that the $1.61/$1 bang for unemployment benefits is an excellent argument for finally passing the unemployment benefit extension.
That doesn't actually conflict with the Moody's analysis. Moody's isn't arguing that unemployment benefits will improve the employment outlook, it's arguing that the net economic benefit--"the bang for the buck"--of unemployment benefits outweighs other action like tax cuts, particularly the Bush tax cuts ($1.61/$1 to $0.32/$1).
Except, if this really benefits the economy so much, one would expect to see employment improve as a result.
It's not tremendously surprising; it's rather coldly logical that giving people with no income source a source by which to purchase necessary goods and services will boost the economy--the people receiving those benefits have little choice but to spend them. Whereas tax cuts, particularly tax cuts going to wealthier individuals, are not as likely to be spent immediately.
It's hugely surprising, as your analysis seems to imply that economic growth only occurs as a result of increased demand. Money not spent is usually invested. The rich typically don't get rich by hoarding their money in vaults. Rather it goes to investment in new businesses or business expansion -- an expansion of the supply-side.
At any rate, it seems that the $1.61/$1 bang for unemployment benefits is an excellent argument for finally passing the unemployment benefit extension.
Beyond the Fed paper which seems to suggest such a measure would reduce employment, Moody's finding also seems to conflict with the findings of Christina Romer, head of the Obama administration's CEA.
http://www.voxeu.org/index.php?q=node/3962
In a recent paper Christina and David Romer (forthcoming) find a much larger multiplier. According to their estimates, a tax cut equivalent to 1% of US GDP raises output just over 1% within a year, but the magnitude amplifies in the following periods to reach an effect of nearly 3% after three years. The effect is highly statistically significant and stable over time.
This implies a multiplier of 3, a far cry from the 0.32 found by Moody's.
Beyond academic theory, this also strikes me as far more logical and plausible, as the notion that tax cuts generate a lower multiplier than government spending implies politicians can better direct dollars to productive uses than the market economy. In which case the Soviets should have prevailed in the Cold War.
BTW, the more I read this Fed working paper the more bad news I seem to find for stimulus backers. Not only does the paper only show the stimulus creating or saving 800,000 positions -- a far cry from the 3.5 million figure used by the Obama administration in pushing for its approval -- but the spending is quite a bit more too. While the price tag was widely cited as $787 billion, the Fed paper notes more recent CBO estimates which have the price tag at $862 billion. If you divide that number by the 800,000 jobs created or saved, we arrive at the astonishing price tag of $1.077 million per job!
Hell, even if it HAD worked out to 3.5 million jobs saved or created, that still would have come to nearly $250K per position. We could have simply given handed out checks for $200,000 to 3 million people and actualy saved money. That's enough to live on for a few years I would think.
Furthermore, the paper notes that actual infrastructure spending seemed to generate the most bang for the buck. Well, according to this:
http://cafehayek.com/2010/07/shovel-ready-revisited.html
The Department of Transportation -- which one would logically assume takes a lead on such infrastructure projects -- has only spent 5.5% of the stimulus money spent thus far. This would seem to imply that one of the most successful aspects of the stimulus package was also -- hype about infrastructure notwithstanding -- given some of the least funding.
Admittedly these are back of the envelope calculations, and maybe other agencies were doling out infrastructure funds, but I am skeptical.
In a recent paper Christina and David Romer (forthcoming) find a much larger multiplier. According to their estimates, a tax cut equivalent to 1% of US GDP raises output just over 1% within a year, but the magnitude amplifies in the following periods to reach an effect of nearly 3% after three years. The effect is highly statistically significant and stable over time.
This would be convincing if you didn't read the rest of the post you're citing. What makes the Romer and Romer model unique is that it assumes "no other shocks than shifts in taxes are included. Such an approach relies on the assumption that tax shocks are not only orthogonal (statistically independent) to each other, but that they are also orthogonal to any other macro shock – productivity shocks, shifts in government spending, in monetary policy, etc."
This is not an assumption based in reality and would seem to make their conclusions suspect.
From the Fed working paper:
"The implied number of jobs created or saved by the spending is
about 2.0 million as of March, but drops to 0.8 million as of May."
This would match with what many economists have been saying, which that essentially the stimulus stopped being effective this past spring.
What it would also suggest to a Keynesian is perhaps the original stimulus was not large enough to affect the kind of employment change we needed or a second stimulus is needed.
I tend to believe the first stimulus wasn't big enough.
Colin, your per job, back of the envelope calculations are irrelevant. The stimulus was about injecting consumption into a depressed economy. It did that.
Beyond academic theory, this also strikes me as far more logical and plausible, as the notion that tax cuts generate a lower multiplier than government spending implies politicians can better direct dollars to productive uses than the market economy. In which case the Soviets should have prevailed in the Cold War.
That's a ridiculous statement. You're conflating direct government spending--which we'll leave aside at this time, but I'm assured we disagree on its merits--with unemployment benefits. While you're doubtless correct that sometimes the rich get rich by investing their money, they doubtlessly also sometimes get rich by hoarding--particularly in times of economic distress. Unlike the well to do, many of the beneficiaries of unemployment insurance (and other social safety programs) are compelled (by the desire to not starve or be tossed from their homes) to spend the funds they receive immediately, purchasing goods and services which is economic activity.
The well to do, receiving a tax cut, may spend that money, or place it in a savings account, or purchase stock with it. The higher you climb the income earning ladder, the less likely the funds from a tax cut are to drive spending as their marginal utility to the earner is reduced vis-a-vis the marginal utility of a similar percentage of funds to someone lower on the income ladder. The amount of economic activity driven by their investment in the stock market is likely negligible unless they are investing in a primary market. The amount of economic activity driven by their saving money in a bank will depend on whether the bank is willing to lend it (and at what rate). Given the tight credit markets we've seen since the beginning of the great recession, I'd say the value of that economic activity is rather reduced.
This is all to say, again, that it is not surprising that giving money to people who are going to spend it immediately will drive economic activity.
And, I'll note, the $0.32 multiplier effect applies to the Bush Tax Cuts, not tax cuts generally. The Moody's report indicates a multiplier of $1.01 for an across the board tax cut--still substantially less than the $1.61 for unemployment insurance.
I believe the $862 billion includes the slightly less than $300 billion in tax cuts (which for some reason you refuse to acknowledge). Those of course apparently have had no effect. I imagine in the future it will become apparent that the cost of those cuts to federal revenue far exceeds their initial price tag.
This is not an assumption based in reality and would seem to make their conclusions suspect.
It is an assumption that is frequently made, and we even have a name for it -- ceteris paribus. It is also worth noting that the Romers attempted to account for this by limited their study to periods of relative stability, when there were not pronounced swings in other macroeconomic factors.
Colin, your per job, back of the envelope calculations are irrelevant. The stimulus was about injecting consumption into a depressed economy. It did that.
Wait, that's not how I remember it at all. I distinctly recall the Obama administration presenting us with charts showing how the stimulus would keep the unemployment rate down. There was much talk about jobs that would be created or saved. Now the standard is simply stimuluting consumption? Talk about moving goalposts.
I mean, simply increasingly consumption is a low bar to clear.
And now the spending is running out, and the stimulus has shot its bolt. Of course, proponents state this is further evidence that an $800+ billion stimulus was too small. How big should it have been? An even trillion? $2 trillion? And what would have to happen for the stimulus to fail? I mean, if the current situation is what success looks like, yowza...
Ben,
Fair point about unemployment insurance -- it is a wealth transfer rather than straight government expenditure.
But again, your analysis seems premised on the belief that economic growth is simply a product of demand, with no accounting for the supply side. More money left in the hands of entrepreneurs and businessmen is likely to be invested. And this is where real long-term prosperity is derived from, not someone blowing their paycheck.
Colin,
I don't disagree about long-term prosperity. But in the current climate we're looking to foster immediate economic activity that will coax investors back into the market and begin that long-term growth. For that sort of immediate, short-term, dare I say, gratification, I think placing money in the hands of people most likely to spend it is the best move. Particularly in an economy that is so consumer-spending driven--we can, of course, debate the relative merits of a consumer-spending driven economy.
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