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Sunday, January 11, 2009

Christina Romer on YouTube on the Stimulus Plan

Paul Krugman is pushing for more:

More on Romer/Bernstein: Still picking over the Romer/Bernstein official evaluation of the Obama economic plan. Again, kudos to the team for producing such a clear, honest assessment. But the more I look at the report, the more I wonder why anyone in the Obama team thinks the plan is adequate.

Here’s one way to look at it: R/B show the effects of the plan rapidly fading out during 2011. Yet at the end of 2011 the unemployment rate is still 6.3%. Meanwhile, the CBO estimates the natural rate, aka “full employment,” at just 4.8%. Why does the plan go away with the job undone?

Add: By my calculations, the Obama plan is supposed to reduce average unemployment over the next two years from 8.7% to 7.6%; over the next three years, it reduces average unemployment from 8.4% to 7.3%. So it closes around a third of the gap between actual unemployment and the natural rate. Plus, an average rate of unemployment 2.5 percentage points above the natural rate for 3 years, starting with a core inflation rate of 2.5, looks like deflation city to me — and remember, that’s the projection with the Obama plan.

I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level, but that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car -- the possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some. Essentially, I am arguing that there are crucial economic and psychological "tipping points" that must be reached in order for the economic recovery package to be effective (or at least, there's enough of a chance that they exist that they cannot be ignored when formulating robust policy). However, an email suggests looking at another perspective:

Obama's Price is Right Negotiating Strategy?, by Nate Silver: So it turns out that the Senate Democrats are not entirely happy about the Obama administration's proposal to spend "only" $800 billion or so on the economic stimulus package, about $300 billion of which would be devoted to tax cuts. Not just any Senate Democrats are angry, moreover, but a series of VIPs who ... command a great deal of respect on the Hill...

My question is: can Obama really be entirely surprised that this is happening?

Before you answer, consider who we haven't heard very much from the past couple of days. We haven't heard very much from Mitch McConnell. And we haven't heard very much from the Blue Dogs. Nobody seems (publicly) to be taking the position that the $800 billion is too much, at least provided that it comes with $300 billion of tax cuts.

Now consider what Obama told CNBC the other day:

Obama also confirmed that he plans to lay out a roughly $775 billion economic stimulus plan on Thursday but indicated that the amount could grow once it gets taken up by Congress.

"We've seen ranges from $800 (billion) to $1.3 trillion," he said. "And our attitude was that given the legislative process, if we start towards the low end of that, we'll see how it develops."

Obama isn't picking these numbers out on accident. This range -- $800 billion to $1.3 trillion -- is most likely the range of outcomes that his administration considers acceptable. He says that "given the legislative process", he's deliberately chosen a number on the lower end of that range.

What does this mean? It means he wants the Senate Democrats to do his dirty work for him. All of the sudden, the administration, which is about to spend at least $800 billion, gets to play the role of the fiscally prudent tightwads, negotiating against the Senate Democrats. This has at least two benefits. One, it requires less of the administration's political capital to sell the package. And two, it completely co-opts the conservative opposition. ... If you're Mitch McConnell or Mary Landireu or Bob Corker and you see that John Kerry thinks that $800 billion is too little -- well then, 'gal darn it, this Obama fella must be doing something right.

Imagine instead that Obama had started out at $1.3 trillion, assuming that the conservatives in the Senate would negotiate him down. Then we have some big, old-fashioned brouhaha about economic philosophy, with Obama and the Senate Democrats lining up against the Blue Dogs and the Republicans. This strikes me as a considerably more dangerous negotiation... Public sentiment, moreover, which now favors the stimulus, might easily have turned against it...

I call this a Price is Right negotiating strategy. When bidding on an item on The Price is Right, you want to come as close as possible to the item's price without going over. But if you do go over, your bid is invalidated. Thus, it is worse to bid $1 too much than $100 too little. Here, analogously, the risks of overbidding seem to be considerably greater to Obama than the risks of underbidding.

Some of you will object: but why even worry about this whole bipartisan song and dance? Don't Democrats have the votes to shove this thing through?

Actually, that is not completely obvious. The Democrats have plenty enough votes in the House, but in the Senate, they'll need either one or two Republican crossovers to break a filibuster...

The median expectation a week ago seemed to be that we'd wind up with a stimulus of about $800 billion. Now the question seems to be whether we'll end up at $800 billion or somewhat above $800 billion.

That doesn't mean that those of you who think we need more than $800 billion ought to shut up about it (in fact, Obama's whole strategy falls apart if you do). But for the time being, it would seem, that number has nowhere to go but up.

    Posted by on Sunday, January 11, 2009 at 11:25 AM in Economics, Fiscal Policy, Politics | Permalink  TrackBack (0)  Comments (46)


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