Woodward and Hall: Options for Stimulating the Economy

Susan Woodward and Bob Hall have expanded their views on the type of stimulus package they believe would be the most effective:

Options for Stimulating the Economy, by Susan Woodward and Robert Hall: In 2009, GDP in the U.S. is expected to be about $900 billion below its normal growth path. The ideal stimulus would have most of its effect in 2009 and would close a reasonable fraction of that gap. We see five general strategies for stimulus:

• Further expansion by the Fed
• Income tax cuts with rebates, as earlier this year
• Tax cuts that reduce the prices of consumer goods temporarily
• Tax cuts that reduce the cost of labor to businesses
• Increase in purchases of goods and services by state and local governments

... Conclusions We foresee a mixture of stimulus policies for the coming year. Monetary policy can only [add] a small further contribution. Income-tax rebates seem to have little support and would probably have relatively small effects within the year, with undesirable continuing effects in later years. We are enthusiastic about removing sales taxes for the year and perhaps somewhat longer, with a phase-out. We are not sure that an employment stimulus from a reduced business payroll tax would raise employment enough to be a contender as a stimulus and to prevent the flowing through of the funds to business owners rather than workers. We believe that some federal subsidies to state and local spending would make sense, but are concerned that too large a program would result in stimulus continuing past the time when it would be needed and that it would create excessive rents for contractors and skilled workers. Thus the sales-tax buyout seems to be the best way to spend the bulk of the stimulus dollars.

In the accompanying argument, they explain their lack of enthusiasm for infrastructure spending:

President-elect Obama supports federal funds for state and local construction projects as an element of a stimulus package. ... Government units have backlogs of projects waiting for funding. The questions are how big are the backlogs, how quickly spending can accelerate, and how beneficial are the projects.

State and local construction spending is currently $300 billion per year. The Obama team is hard at work trying to find out how much of a backlog is “shovel-ready”... We are not aware of any easy source for this information.

Timing may be a problem, as it was in the old days when these kinds of projects were called public works. Complicated projects take time to ramp up... Some interstate repairs can be executed in a year, as was the case in rebuilding the collapsed I-35 bridge in Minneapolis last year and in re-opening earthquake-damaged freeways in Los Angeles in 1994, while it took many years to reopen all the damaged roads in San Francisco after the 1989 earthquake.

The president-elect has also mentioned less conventional spending programs, including broadband facilities and online medical records facilities.

All of these proposals for stimulating state and local spending suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly. The consensus of macroeconomists ... is that a spending stimulus raises total spending by between 1.0 and 1.5 times the amount of the direct increase in spending. The follow-on or multiplier effects are between zero and half the direct increase in spending. Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere. Rebuilding aging interstates and upgrading the energy efficiency of public buildings calls for highly specialized skills. A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work.

It’s hard to imagine that a significant fraction of the large stimulus under consideration for 2009 will take the form of state and local construction and other infrastructure spending. We are hoping that discussion of stimulus will not become sidetracked over this part of the program and neglect the opportunities to stimulate consumer spending broadly without complicated, detailed, and time-consuming decisions.

[Note: Another post looks at Puzzles about interest rates on debt. Also, they now have an rss feed.]

Comments

[LJM]

Aren't repairs needed for New Orleans and the areas hit this year in Texas/western LA shovel ready? My guess is the cities have plenty of projects that are shovel ready. There are no doubt projects that remain unfinished due to lack of funds. It seems like repairing bridges always seem to be ready if someone can come up with the cash.

Wouldn't this also help jumpstart the need for recycling, especially aluminum and other metals? I read that the stuff is piling up and some going into landfills anyhow. Putting people to work doing jobs that recycle would make an excellent use of the taxpayers stimulus money. It shouldn't have to be shipped to China. These materials should be recycled into product here or sent to places that use trash in incinerators to generate electricity.

[ndk]

They're right about infrastructure spending and its beneficiaries in our modern era. Even worse, the categories selected do little to enhance the economy's productivity either, except potentially for digital medical records(which would itself eliminate a lot of grunt jobs). To be fair, forcing productivity upwards through central planning is really hard to do, but that just makes me wonder why we do it at all.

I don't think tax rebates are a great idea either unless they're completely monetized by the Fed, which is itself a troubling proposition given our poor collective balance sheet.

Look back at our earlier $100b rebate in isolation: the USG takes on $100b more debt, generally long-term, and 80% of it is saved, especially used to pay off revolving balances, reducing credit outstanding by $80b. We just significantly worsened the credit crunch. Awesome.

Consumers may be marginally less likely to save a sales tax rebate, but if it's not monetized, the multiplier could very well be sabotaged by the resultant reduction in credit outstanding.

At least there's a hidden upside to Obama's infrastructure plans. We'll finally discover the elusive answer to a question plaguing us for generations: "How many realtors does it take to screw in a light bulb?"

[Demand Side]

These suggestions for the most part are the template of what did not work earlier this year. Naysaying infrastructure spending in these words:

"All of these proposals for stimulating state and local spending suffer from a common problem–they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly."

... is extremely short-sighted. Would that we had put some infrastructure on line in the spring.

The multiplier effect that is necessary will not derive from checks from helicopters, which primarily stimulate saving and consumer discretionaries. This is not the broad or deep demand profile that comes with a job, with its influence on everything from daycare to -- yes -- housing.

There is an enormous amount of spending that can be ramped up quickly. Simple building retrofitting, for example. And states and municipalities can simply refrain from cutting and have a positive effect on the outcome.

Further expansion by the Fed is applying the medicine that has not worked so far. Keynes' wrote that monetary expansion was like buying a bigger belt and expecting to get fat. The consumer is not going to drive this recovery. It has to be the public sector.

[Joe]

Basically we want to spend our way back to prosperity. The problem was too much debt. We need to save and protect our jobs our currency our wealth. We are a great country with great people with all different kinds of back grounds I think we can do better then this. If we keep "stimulating" we are going to hyper-inflate the currency. We do not the money, you expect people to pay for this? How? or even why? Foreigners are going to pull out eventually, when they get smart enough to realize we are dead weight. We need to get back to productivity, sound banking, decent currency, and good social ethics.
The storm is coming and it will knock us down. Its how we get up and move on, and more importantly rebuild.

[Winston]

"All of these proposals for stimulating state and local spending suffer from a common problem – they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly."

My father, a Gambian immigrant who has little formal education, drives a Caterpillar for a nondescript construction company that frequently receives government contracts to repair roads and bridges. He'll be happy to know that he is classified as a "highly specialized" worker in a "highly specialized" business.

[Michael Turner]

Joe, you forgot to add "the Plumber" to your ID. Economics isn't a branch of speechwriting.

Winston's comment was more to the point. "Highly specialized" isn't the same thing as "highly skilled." In some cases, there might be overlap. In many such cases, however, I suspect that you can substitute more people with lower skills. Inefficiently? Sure, compared to the optimum, anyway. But we're trying to optimize for something else here.

The term "shovel-ready" has two words in it, and they are both important.

[Bruce Wilder]

ndk: "the USG takes on $100b more debt, generally long-term, and 80% of it is saved, especially used to pay off revolving balances, reducing credit outstanding by $80b. We just significantly worsened the credit crunch. Awesome."

I think you might not quite grasp the concept of credit crunch.

[Bruce Wilder]

Bridge-building is fairly specialized in some ways, but a lot renovation of public buildings, parks and other facilities is not that different from commercial, or even residential construction, which are sectors shedding a lot of jobs.

And, if Head Start is fully funded for the first time, or police departments and schools can staff up a bit, that's good. The SEC, the FDA, the FTC, the Forest Service and a number of other Federal departments need to increase staffing substantially. Let's initiate that, and, when the time comes, and Federal employment needs to decline, we could think about, oh say, I don't know, . . . stop fighting land wars in Asia.

[mmckinl]

Obama had better start thinking about saving the economy first ...

Stimulus? How about getting banks to lend again. The only way to do this is to nationalize the banks and employ an FDR bank holiday or the Swedish Plan to regain trust in the system by cleaning up bank balance sheets.

I have heard nothing from Obama on this, and while such a measure might well be best kept secret until operational I have heard nothing that makes me think he is headed in this direction. Without such a measure there won't be an economy to stimulate.

Most of Obama's plans will take over a year to begin. They will be cost heavy, manpower poor and not reach those that are now being laid off.

What we need now are programs that save jobs. Existing jobs are easier, faster and cheaper to save than creating new jobs. I have proposed Medicare for All. Through this I believe we can save hundreds of thousands if not millions of jobs.

This saves jobs right away, especially in the public sector in states and local governments.

This re-capitalizes business especially manufacturing but also any business currently employing many people.

Strings could be attached such as a no layoff rule whereby companies would run 32 hour workweeks paying for 40 supplemented by the paid health insurance. States would be mandated to take any extra money and use it for unemployment benefits and\ or pension fund replenishment.

Medicare for All would also make our businesses more competitive at home and abroad. All the other G7 nations have government sponsored health insurance giving their businesses a subsidy.

We need an FDR bank holiday and Medicare for All ASAP ...

says...

Well, I dunno. I'm not an American, after all. The best set of suggestions I've read for the US so far is the one on the Economic Policy Institute's (EPI) website, called the Agenda for Shared Prosperity. They've got some ideas about infrastructure (like schools, transport, energy, environment, information technology and so forth) which don't sound so bad.

[BJ Feng]

You can't have it both ways. You can't blame the banks for reckless lending, then criticize them for not lending to those same high risk people now. Banks aren't lending anymore to subprime, alt-A, and suspect companies as you've all demanded.

[bakho]

2000 projects per state would not be a large number given the number of towns and cities and other governing units. In states with 100 counties, that would be 20 projects per county.
Spread over 50 states, a million new small projects could be created. If the projects averaged $100,000, that would be a $100 Billion infrastructure infusion.

[bakho]

Sorry about the pre-coffee decimal place. 2000 projects per state would be 100,000 projecs, not 1 million. However, $100,000 is pretty low ball and would pay about 2 salaries and benefits. It would not be hard to alter the equation to include more projects or fund projects in the range of $100,000 to $10 million. Replacing an old inefficient heating system in a federal building is way more than a $100,000 project.

For example, a recent sewage treatment plant upgrade is just under $10 million. However, one result of the project will be the ability to accept food oil waste which is now hauled long distances for disposal. The project will turn the waste oil into biodiesel that will be used to provide electricity for the plant. The project will decrease dumping fees for local businesses and save the city money.

Not very glamorous, but there are a lot of projects that would be good investments.

[bakho]

Woodward and Hall are proposing to resurrect the failed consumption economy. They leave out the most important part of any stimulus which is targeting. Bush tax cuts (which were always intended as a trickle down giveaway to the wealthy) were poorly structured to provide stimulus.

Since recessions are noted for deflation (especially wage deflation) why not raise the minimum wage as part of the proposed job creation tax credit? Also, raise the EITC. Raise the ratio of grants to loans for college students. Increase the amount of food stamps. Change the food stamp requirements to make more people eligible. (Why are our emergency food pantries being over run with every day demand?)

[ken melvin]

I think Woodward and Hall a bit naive. There were already more than fourteen million Americans workers insufficiently employed. This number will quickly double, so there's going to have to be a way to get these folks to subsistence level and that isn't going be by way of cuts in sales tax.

There were several harbingers. The mutual funds insistence/chainsaw Al saga, the Greenspan couldn't give the damned stuff away era, ... Truth be, the finance crisis is tied to the much bigger problem of lack of investments. Our industrial base consists of: precarious auto, bio-tech, and software. This latest round of investment went to MacMansions and luxury condos, neither of which have been known to produce much of anything. Seems, only a fool would want to invest in American industrial capacity and we are running out of those.

This lack of investment opportunities is tied to off shoring. Heard about the Alaskan salmon that detour to China for fileting? Only a fool - when all one sees about them is closed plants converted to warehouses for imports.

A mo betta criteria: The money has to go to people to give them subsistence and purchasing power. Works projects need to be things that are needed and will be needed for a long time into the future ala the schools, libraries, court houses, ... and other public works of the great one. And, for the stimulus to be effective, the purchases need to be American made, which isn't going to be easy given the offshoring.

Investment in any sort of existing capacity will not lead the way out. The government could help develop new industries (investment opportunities). The demand thing is so skewed by offshoring that it will hard to make it function. But, that's the reason we're in this mess.

[Organic George]

Bankrupt ideas from people who ideas bankrupted this country.

Their proposal is about salvaging their reputations not solving the problems of the middle and working class in the US.

They should be ashamed of themselves, but then they have no shame, only egos

[hari]

The commentary...reflects more than ever the nature of text book learning. Devoid of real world political economy....

May be US economic/financial education system (now) needs a bailout...too!

[ndk]

I think you might not quite grasp the concept of credit crunch.

Let me make the process explicit in a simplified situation so you can point out where you believe I'm wrong.

1. Treasury issues $100b of checks to consumers, showing a new $100b shortfall on its books.
2. Consumer receives check and uses, let's say, $40b of it to pay off outstanding revolving debts and $40b to deposit.
3. Bank assets drop by $40b times some multiplier of interest they expected to get back as the debt is repaid, and liabilities(new deposit) and assets both grow by $40b.
4. Treasury issues $100b in bonds in order to fund its shortfall.
5. Customers of the bank, or the bank itself, purchases these bonds. Either the consumer's account at the bank or the bank itself has $100b less current money, and a new bond.

How is this not contractionary on net for the money supply?

[anne]

"How is this not contractionary on net for the money supply?"

Let me count the ways or, better, let me not bother with such nonsense. Check me, and watch me being contractionary.

[anne]

"At least there's a hidden upside to Obama's infrastructure plans. We'll finally discover the elusive answer to a question plaguing us for generations: 'How many realtors does it take to screw in a light bulb?' "

Understand the philosophy we're dealing with here, and the nastiness?

says...

"... and neglect the opportunities to stimulate consumer spending broadly without complicated, detailed, and time-consuming decisions"

Amen brothers and sisters. Even better, eliminate the "consumer" from the equation altogether. Who needs the consumer? The federal government is the lender of last resort, why not also the consumer of last resort, buying consumer goods and services then distributing them to the citizenry at large, or just the unemployed.

[SOL]

"Income tax cuts with rebates, as earlier this year
Tax cuts that reduce the prices of consumer goods..."

Yes, give the average Joe and Jane some help already. Increase the standard of living of the median person. Stop reducing the standard of living of the median person so a few can live high.

[kthomas]

"You can't blame the banks for reckless lending, then criticize them for not lending to those same high risk people now." BJ, you never cease to shock.

"May be US economic/financial education system (now) needs a bailout...too!" Hari...I'll bet you never played football, even the "real world" kind. Take your snivelry elsewhere, lest you get clobbered.

As for Woodward and Hall, nice try, kids. Now get back to your whiteboard.

says...

BJ Feng says...

You can't have it both ways. You can't blame the banks for reckless lending, then criticize them for not lending to those same high risk people now.

~~~~

Whose talking about RE. I, personally was talking about AR, Payroll and Revolvong credit for corporations, corporations, the vast majoirity of which would be perfectly viable except that they can't get loans.

[Jeff Eklund]

Best plan for helping the banks and wall street:

Use the bailout plan money to issue tax rebate checks to Americans that can only be used for debt repayment (mortgages, credit cards, etc.). Then we are helping people in an equal way while having capital enter the banking system from the bottom up rather than the top down.

[Lafayette]

Article: All of these proposals for stimulating state and local spending suffer from a common problem – they will end up generating employment for highly specialized businesses and workers, rather than stimulating economic activity more broadly.

Whilst one might agree about yet-another-bunch of tax breaks, any expenditure on Infrastructure, whether Public Works or the more sophisticated Variety of Public Efficiency (electronic medical files), is bound to enhance economic momentum. Which means stop the spiral downward that simply feeds on itself.

Economic momentum is the ability of an economy to either gain or lose speed. When it loses speed, a jolt is necessary, since such an impetus puts people back to work. When it gains inordinate speed, inflation is the result, and money rents are raised in reaction.

Jolting an economy losing momentum by means of Federal expenditure has two consequential results. First, it slows the acceleration of unemployment figures, which gives hope that the slowdown is recovering. Secondly, it enhances consumption such that businesses sense that order books have stopped unwinding. When inventories diminish to "normal", companies will hire to enhance production.

If stocks do not decrease, they signal that they are sufficient to meet demand. Companies will then have no incentive to invest on either enhanced production (since current production capacity satisfies demand). Neither do companies embark on stimulating merchandising for as long as unemployment shows no diminishing. Such is considered wasted money with little hope of return.

It's simple: The key to business sentiment lies in its order-book and inventory levels.

Any spending, whether on relatively unskilled public works or highly skilled programmers has an inevitable knock-on effect to consumption. The point of a Keynesian Expansion is to prime the economic pump. Once it starts working, it continues on its own.

[Lafayette]

BJF: Banks aren't lending anymore to subprime, alt-A, and suspect companies as you've all demanded.

Then why bail them out? Let them fail.

There will be little consequence, since they are not lending, which is their primary function in the economy.

It will present the banking sector an excellent opportunity to shed deadwood and reconsolidate on firmer ground.

[Richard H. Serlin]

Woodward and Hall are looking pretty economically libertarian/Republican, and thus very willing to sacrifice a huge amount of national growth and utility to achieve a little less of the government restricting economic freedom. They write:

Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere. Rebuilding aging interstates and upgrading the energy efficiency of public buildings calls for highly specialized skills. A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work.

It’s hard to imagine that a significant fraction of the large stimulus under consideration for 2009 will take the form of state and local construction and other infrastructure spending. We are hoping that discussion of stimulus will not become sidetracked over this part of the program and neglect the opportunities to stimulate consumer spending broadly without complicated, detailed, and time-consuming decisions.

First, the only important goal is not to just return to full employment leaving horrible inefficiencies intact like gross societal overspending on consumption and underspending on investment -- and yes these are inefficiencies, and enormous ones, due to well established in economics market problems like externalities, especially the pink elephant of economics, positional/context/prestige externalities.

Even if it did take a little longer to return to full employment by increasing investment spending, and fundamentally shifting the national spending mix in that direction (and it wouldn't, you could compensate in other areas), it would be extremely well worth it, especially if in the meantime we tided over the unemployed with generous benefits including universal healthcare and very generous aid to return to school or vocational programs.

[paine]

the spirit of this repells me

but the letter doesn't

a sales tax holiday funded out of uncles
for some of us all from others of us credit line ???

why not fast and easy does it

payment to states on what basis
estimated sales tax yields
for same period

any old per capita state kitty reimbursement
---local cpi weighted ??_--
so long as it exceeds fore-gone state sales tax yields

but of course the pay roll cut option is bogeyed from the starting gun here

you rebate employee side only stupid
not employer side only

rebate payroll taxes even if it does
not get spent
it drives home point one of a new jobbler majority based party

"here take this you earned it yoy spend it "

very diff party that pushes regular folks tax home
instead of the usual liberal constuency grabs
like borrowing funds for lower higher education
and public works

the fault lies not just in edifice complexity
or even speed and efficiency of impact

this slump ain't going away that fast

obama needs to build a political base first

like roosevelt did
today that means increase
job households non borrowed inflows

if they get it the deficit effect is meaningless to them
they aren't ricardians

if obama builds a solid majority base
he can shift back the tax burden
on the wealth holding class
and sarting from the top down

trickle down taxation literally

[paine]

ndk

based on your swiss cheese "euclidian demonstration
of "contraction by expansion"
don't start designing bridges
at least
not ones that might get build
over a river
anne or i need to cross

[paine]

"Consumers may be marginally less likely to save a sales tax rebate"

i think its a tax free purchase idea not a rebate idea

the states would go to uncle for reimbursement
nkd this ia a warning from a friend

many more knot hole comments
and you'll become
ninja kd

[paine]

"If we keep "stimulating" we are going to hyper-inflate the currency"

joe i don't know shit about car motors
so when i see a ford on the side of the road
with the hood up
i might ask if they need a cell phone
but i don't stop to give advice

see any parallel here

between you and me
on the one side
and
the credit system and that ford by the side
of the road
on the other ???

[paine]

"1. Treasury issues $100b of checks to consumers, showing a new $100b shortfall on its books."

the t then sells bonds

"2. Consumer receives check and uses, let's say, $40b of it to pay off outstanding revolving debts and $40b to deposit."

so consumers spend 20 billion
on a air conditioners and the like
that creates thrust not previously there
how much ????
check your best guess multipliers

meanwhile
40 billion in debt has been transfered to uncles account from household accounts
given relative ability to pay

household -> job market

treasury -> limitless dollar mine

personal logue entry :

'can't wait to pursue the flight of the other 40 billions
can u ???'

at any rate

"3. Bank assets drop by $40b times some multiplier of interest they expected to get back as the debt is repaid, and liabilities(new deposit) and assets both grow by $40b."

a certain gibbering factor enters
the tale right about here

"some multiplier" ???
you got me skipper

then again this we can figure
the credit system now has 40 billion less in risky consumer paper
and once it buys the t bonds 40 billion more of safe
highly liquid gub paper

the consumer has 40 billion less in obligations
it mostly wqould have paid maybe
wealth effect on future spending ??

hard to figure but small

now for my favorite part
the deposit 40 billion
will it go into free reserves fill a hole in reserves fractional get loaned out to some entity other then uncle ???
the credit system has to find a worthy and willing borrower
hmmmmm

"4. Treasury issues $100b in bonds in order to fund its shortfall."
nice reminder but noted up at notes to point one
and of course the credit system buys this all up right ???

to the extent the fed doesn't monetize it eh ??
voila...
"5. Customers of the bank, or the bank itself, purchases these bonds. Either the consumer's account at the bank or the bank itself has $100b less current money, and a new bond"

current money ???
i like that notion

but notice the leaks
household
direct spending
eventual wealth effect

credit system
improved asset quality
added liquidity
possible loanable funds increase

fed monetization leading to money base expansion

this is a silly enterprise

but you wanted some one to do it
and bruce wilder has better uses
of his value added
not to mention
inspecter anne of harvard yard
cranial capital

[OhNoNotAgain]

"Even better, eliminate the "consumer" from the equation altogether. Who needs the consumer?"

Sorry, our corporations have already tried that by off-shoring a large portion of the living-wage jobs, and it's not working out so well.

[paine]

if your point is just this'
they won't loan it to us

fine but that in itself does not sum to systemic contraction
not even in your severe scenario

[don]

demand side: "And states and municipalities can simply refrain from cutting and have a positive effect on the outcome."

and paine: "why not fast and easy does it

payment to states on what basis
estimated sales tax yields
for same period"
W&H offer a very shallow analysis. DS and P have a better point. States can't print money and many can't borrow. And their spending tends to have a higher labor content per dollar than ordinary consumer spending (being service intensive, a sector not helped much with sales tax holidays). So, for a first cut, let the states use the money from 'uncle' to maintain services and stop or reduce layoffs.

[Farrar]

Woodward and Hall's objectives seem too narrow, which is the main reason their recommendations don't suit me or the commenters commenting before me.

They are working on recommendations to get the depression/recession cured as fast as possible. Perhaps their ideas are not that bad for meeting that sole objective

Most of the rest of us have other objectives which we consider equally or even more important -
-cutting our addictions to frivolous consumption
-moving toward a more just society, especially lower cost medical care, education, progressive taxation, etc
-improving the nations infrastructure
-rationalizing energy production and usage

Some of this involves a lot of spending on public capital which is slow to get underway.

I say "so what!". Even if it kicks in a little late, most of it won't be wasted. and as Lafayette points out, it provides momentum and a sense of purpose.

Meanwhile extend unemployment insurance, food stamps,and send as many as possible back to school.

And forget about bailing the financial sector. Just let Sheila Bair nationalize as many as possible.

[Richard H. Serlin]

Second, "a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels" is still raising employment levels. And the extra income they make will be at least partially spent, raising employment elsewhere. There's still a very substantial short-run stimulus here, as well as a fantastic long run return -- increase in national productivity and wealth -- on these investments.

"A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work." Yeah, and likewise, the extra income they make will be at least partially spent, raising employment elsewhere. There's still a very substantial short-run stimulus here, as well as a fantastic long run return -- increase in national productivity and wealth -- on these investments.

And third, the recession is considered to have a good possibility of lasting 2 or more years, so not all stimulous has to come online in a matter of months.

[paine]

"for a first cut, let the states use the money from 'uncle' to maintain services and stop or reduce layoffs"

total agreement

my mockery misfired some
basically i'll take any uncle action
so long as its large fast and
doesn't preclude more more more

bold spending in all directions
and done with a wild eyed confidence

what was bad on wall street the last 6 years
is great right now
coming down off capitol hill

just what the doctor ordered in fact

[Aaron from NJ]

The issue at the heart I think is corporate earnings, which are falling and with demand falling we are in a thrift paradox on the corporate, consumer & public side.
As corporate earnings keep falling, corporate investment falls, employment falls, demand falls etc..
I think we could shock the economy with a 10% of GDP tax cut for 2009.
This will shock corporate earnings side if we had a 2009 only massive tax cut.
Corporate rates taken down to 0 for 09 (corp taxes are only going be $300-400b) in 09 anyways.

R&D tax credit that is huge $400b at $100b a quarter available only for R&D/CapX,/Plant Equip etc..
Cap gains to 0% for 09 only
Payroll tax cut to 0% for all of 09
All of these will stimulate corporate earnings in 09 by 10-30% Equity prices will raise 20-50%, debt prices will come down from 8-18% to 5-10% and drive demand in CapX which will have solid multiplier effects. With large value to the balance sheet.

On the individual side
a 2009 payroll tax cut to 0%, a 2009 indiv. tax cut of 20%
both of these will drive large savings, debt payments, bank deposits & better credit ratios, asset prices will rise 401k's, home buying will begin and the consumer balance sheet will be cleaned up

[Larry]

Two points:
I prefer activity that offers some promise of eventual recompense. I.e., "investment", rather than "spending". We're digging a huge fiscal hole for ourselves with the numbers we're talking about. If possible, we should build a ramp that we can use to get out of the hole down the road.
I get the point that even "spending", because it increases activity, offers dividends in the form of increased tax payments. In that spirit, I see three kinds of pure spending that make relative sense.
- Payments to state and local government that make up for shortfalls in tax revenues. These payments - on the order of /$100B - should be used to protect existing programs, projects, and the jobs that go with them. Those employees will continue to spend normally.
- Sales tax holiday. That $440B annually is a big number and even though some of it will be diverted to savings/deleveraging, it is broad based and will both encourage people to spend money and increase the impact of that spending on existing employers.
- Palliative spending, such as food stamps and unemployment benefits. This money is highly impactful because it will immediately get spent and it is also compassionate. I don't support paying for health insurance, mostly because health care employment continues to increase even now.
That leaves infrastructure. While I'm sure that there are some shovel-ready projects, most will fail the critical timeliness or usefulness tests. Funding those that pass is fine, but given the corruption in our system, will such tests even be considered? Note also that the construction industry is highly capital intensive (fewer jobs/$) and that many of its employees have lately been illegal aliens. In fact, one of the reasons that unemployment isn't worse than it is is because many of those hardhat illegals have left.
@LJM - "Wouldn't this also help jumpstart the need for recycling, especially aluminum and other metals? I read that the stuff is piling up and some going into landfills anyhow. Putting people to work doing jobs that recycle would make an excellent use of the taxpayers stimulus money."
We need jobs that consume recycled material, not jobs that produce more of it.
@ndk - "Look back at our earlier $100b rebate in isolation: the USG takes on $100b more debt, generally long-term, and 80% of it is saved, especially used to pay off revolving balances, reducing credit outstanding by $80b. We just significantly worsened the credit crunch. Awesome."
Strictly, paying down debt doesn't worsen the credit crunch, which is a phenomenon of supply rather than demand. But you're right that people are clearly working to deleverage themselves. I like to note that those 3% mortgages people got left them with the same 33:1 leverage ratios that brought down the investment banks. See above for comments about the sales tax rebate.
@Demand Side - "Would that we had put some infrastructure on line in the spring."
We do about $100B in infrastructure spending every year.
@Michael Turner - "The term "shovel-ready" has two words in it, and they are both important."
We may hope that Obama was talking about the shovel on the front of a Cat rather than the one with a wooden handle. Roads and bridges use fewer of the latter and more of the former these days.
@Bruce Wilder - "And, if Head Start is fully funded for the first time, or police departments and schools can staff up a bit, that's good. The SEC, the FDA, the FTC, the Forest Service and a number of other Federal departments need to increase staffing substantially."
Spending in the spirit of doing things we should already have been doing is fine, but isn't really in the spirit of "stimulus". It's about saying "we need bigger government, and this is a chance to get it, even though we couldn't get it without this unrelated crisis". Can't blame you for trying.
@mmckinl - "How about getting banks to lend again. The only way to do this is to nationalize the banks and employ an FDR bank holiday or the Swedish Plan to regain trust in the system by cleaning up bank balance sheets."
Why is this the only way? Interest rates are coming back down and lending is starting to increase.
"Most of Obama's plans will take over a year to begin. They will be cost heavy, manpower poor and not reach those that are now being laid off."
Agree.
"I have proposed Medicare for All. Through this I believe we can save hundreds of thousands if not millions of jobs."
Huh? We're not seeing mass layoffs in health care. How about Cars For All? Hedge Funds For All? Chemicals For All (Dow)? That's where the layoffs are.
"We need an FDR bank holiday ..."
What's the point? There are no bank runs for a holiday to stanch.
@bakho - "2000 projects per state":
At least do it by population rather than state. Also, this kind of mindless "equality" would absolutely guarantee that most of the money would be urinal bound...
"They leave out the most important part of any stimulus which is targeting."
You're implying that politicians, mostly Congress, can allocate spending better than the market. Can you support that?
@ken melvin - "There were already more than fourteen million Americans workers insufficiently employed. This number will quickly double, so there's going to have to be a way to get these folks to subsistence level and that isn't going be by way of cuts in sales tax."
That's what unemployment benefits and food stamps are for, no?
"Truth be, the finance crisis is tied to the much bigger problem of lack of investments."
Our investment levels have not declined (until this fall.) They went up as we absorbed $6-800B per year in foreign capital. That's what paid for the housing bubble. Again, until the fall, US manufacturing output was at a record high. And wouldn't you rather our base be in winner industries like software and bio instead of textiles and commodity electronics?
"The money has to go to people to give them subsistence and purchasing power."
That's what the sales tax holiday would do. It increases everybody's purchasing power.
@Jeff Eklund - "Use the bailout plan money to issue tax rebate checks to Americans that can only be used for debt repayment (mortgages, credit cards, etc.). Then we are helping people in an equal way while having capital enter the banking system from the bottom up rather than the top down."
If anything, we're deleveraging too quickly now. Until the ice thaws, we need people to spend, not reduce their debts. The paradox of thrift is hitting us where we live.
@Lafayette - "any expenditure on Infrastructure, whether Public Works or the more sophisticated Variety of Public Efficiency (electronic medical files), is bound to enhance economic momentum."
Not if we pour it down the drain. See Dig, The Big. Our ability to waste money is essentially infinite. And most of that money wasn't even "use it or lose it".
@Richard H. Serlin - "First, the only important goal is not to just return to full employment leaving horrible inefficiencies intact like gross societal overspending on consumption and underspending on investment -- and yes these are inefficiencies, and enormous ones, due to well established in economics market problems like externalities, especially the pink elephant of economics, positional/context/prestige externalities."
If we are underspending on investment, we need to make investment more attractive. If you're talking about public investment only, that requires a fundamental shift in our politics, from short-term to long-term. That would be a neat trick, indeed.
@Farrar - "Most of the rest of us have other objectives which we consider equally or even more important -
-cutting our addictions to frivolous consumption
-moving toward a more just society, especially lower cost medical care, education, progressive taxation, etc
-improving the nations infrastructure
-rationalizing energy production and usage:"
Without arguing the specifics of your goals, they seem rather like worrying about termites (normally a perfectly valid concern) when the house is on fire.
@Richard H. Serlin - ""a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels" is still raising employment levels."
Yes, but why pick those workers to be the winners? See capital intensity and illegal alien points above. Lots of other groups are feeling the pain, too.