"The Stimulus Bill and the Macro Impact"

Menzie Chinn on on the degree to which the stimulus package is temporary, timely and targeted, and how large the stimulus package is relative to the size of the problem we face. The graphs below show the temporary and timely aspects clearly, but as Menzie states, it is "not a perfect bill" and could have been targeted better, and it is "rather modest":

Recap: The Stimulus Bill and the Macro Impact. by Menzie Chinn: CBO has now released an analysis of spend rates of the final stimulus bill ... wherein most of the stimulus takes place in the next 19.5 months.

Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 final version. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009).

Once again, I want to stress the adjectives "massive stimulus" conjoined to the noun "bill" is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.

Figure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.

Finally, the degree of "modesty" is highlighted by the challenges -- in the form of the massive negative and persistent output gap [0] -- we are facing in the absence of countervailing fiscal policy. [table showing estimated macroeconomic impacts]

It's not a perfect bill. I would have preferred more public investment spending, more transfers to the states for fiscal stabilization, and less tax cuts. But it's certainly better than nothing -- or all tax cuts (which is what I gather the opposition wanted). ...

The Real World

I want to stress ... the CBO and all major macro forecasting firms (to my knowledge) are projecting a change relative to baseline due to the stimulus bill. I think those who are asserting zero effect from the stimulus should provide the empirical estimates that buttress their case (this is different from saying the effects would be small -- that is implicit in the range of CBO estimates, and the range of multipliers cited by CBO [2]). ...

The Opponents of Stimulus and the Abdication of Responsibility

By the way, I have been amused at how some policymakers have taken to quoting the "temporary, timely and targeted" criteria attributed to NEC Chair Summers, as if the stimulus does not fit these three criteria.[6] As Figures 1 and 2 demonstrate, the bulk of the stimulus takes place during a period when it would be needed -- namely when the baseline output gap is -7.4 and -6.3 ppts of GDP (Table 1 above). And according to the CBO, the stimulus is temporary (i.e., it "tails off" in the out years). This disjuncture between reality and assertion induces me to restate -- saying something repeatedly without supportive data doesn't make it so. I'd also say that the repeated critique without clear alternative merely highlights the lack of an idea of what would be a better policy. Or as one observer put it:

...congressional Republicans were never really willing to concede the principle that stimulus was needed. Their tax plan was just a rehash of old hash that was never plausibly linked to the particular economic problems we have today. I disagree about the payroll tax for various reasons, but at least it would have been focused on the reality of the situation, rather than just being a pointless political exercise. I believe that reinstitution of the Investment Tax Credit would have been the best Republican alternative. I made the argument here, but got no takers. ...

In the end, Republicans preferred to reject the principle of stimulus, thus taking themselves out of the game. I think that was a mistake, both politically and substantively.

Source: Bruce Bartlett at NRO.