Paul Krugman | How late is too late?
One big question in the stimulus discussion is how much we should be worried about lags in implementation. Every economics textbook — mine too! — warns that stimulus based on public spending has a habit of peaking much too late, and therefore ends up being counterproductive. Now that we have a genuine CBO estimate of the timing of the stimulus plan, how worried should we be about the effects coming too late?
To answer this, it's important to think about what the right criterion is.
So what is the right criterion? Actually, I think it's quite straightforward. The reason we're talking about fiscal policy is the fact that monetary policy is up against the zero lower bound. Stimulus will still be valuable as long as we're still up against that bound — which is likely to be the case for a long time.
Again, I think it's helpful to look at the last two recessions, even though we didn't hit the zero bound either time. The 1990-1991 recession officially ended in March 1991; but the Fed kept cutting rates, and it didn't start raising the target rate until Feb. 1992, 2 years and 11 months later. The 2001 recession officially ended in Nov. 2001; but the Fed kept cutting, and didn't start raising rates until June 2004, 2 years and 7 months later. This suggests a long window, even after the recession officially ends, before the zero bound stops binding, and hence before the current strong case for fiscal expansion goes away.
Suppose, for example, that the recession ends this summer (which seems wildly optimistic). If recent experience is any guide, the Fed will still be keeping rates at zero 2 1/2 years later, that is, at the end of 2011.
Which brings me to the CBO report, which presents spending profiles in terms of fiscal years (which begin Oct. 1 of the previous calendar year). Given what I've said, any spending that comes in fiscal 2009, 2010, or 2011 is good, and it's no tragedy if some of the spending trails off into the years following. CBO divides the plan into three parts: Division A, which is more or less stuff like infrastructure spending; Division B spending, which is stuff like increased food stamps;and Division B revenue, which is tax cuts.
By my count, 70 percent of the Division A stuff and 91 percent of the Division B spending comes within the fiscal 2009-2011 window. If you go up to the end of calendar 2011, we're probably up to about 77 and 96 percent. That's not at all bad.
So yes, lags in fiscal policy can be a problem — but they're much less of a problem in the current context than the econ principles books might lead you to think.
Paul- it would be great if you could also comment on the points that John Quiggin has been making for some time: that the gov'ts lower borrow costs suggests that the optimal mix for the mixed economy includes significantly greater public ownership of firms, especially in the financial sector, since such firms would be able to use the lower borrow costs to boost lending, but would be much less inclined to find creative ways to avoid leverage limits (since they only have to cover costs, not generate a positive return to the owners).
What do you think of the Republican threat to hold up the stimulus package unless the Bush tax cuts on high incomes are made permanent? Is the threat real, or just posturing? Should the Democrats accede if a filibuster emerges in the Senate?
I'm trying to think about it from from the standpoint of an employer. If I am contemplating a layoff, I should be taking into consideration how likely it is that my business may improve in the future. If I have an expectation that things will get better soon, I would tend towards retaining my employees, if I think the cost of retention is lower than my cost of rehiring/retraining. So would the typical employer, take into account an expectation of lagged stimulus in his calculus? If so, my estimated retention cost should be proportional to the expected lag.
Dr. Krugman, I respect your views, but must respecfully disagree.
Is it possible that part of the reason Fed rates stay so high for so long is because NBER doesn't announce that the recession is over until many months after the fact? They didn't even declare this downturn a recession until almost a year after it started.
Also if this isn't a case of when too-slow stimulus spending might be "counterproductive" then what is? By your account anything after 2011 is really too late, but that's 4 or more years after the recession started. By then we could already be started on another bust.
I understand you justify the spending based on the near-zero Fed funds rate. However, if we spend big now, when will all the deficits and debt stop. Assuming we did pull out of this recession, due to the stimulus, how much economic growth would we need to pay back all the debt that we have accumulated trying to get out? I don't buy the argument that debt is a good thing, or at best, acceptable. Our economy was booming when we had federal budget surpluses in the late 90s, not because we had debt-financed spending.
I haven't seen anyone mention how much of the stimulus could be spent, tomorrow, rebuilding New Orleans. Talk about a shovel-ready project!
Unfortunately, the ordinary consumer spending that supports most of the economy is in an accelerating downward feedback loop with increasing job losses.
This is why the even quicker effect of people tangibly feeling more money in their pockets in the next couple of months would make a big difference. Because it would help brake the downward momentum in the ordinary economy. Therefore we need not only the new stimulus spending, but also the middle class tax cut, and perhaps another rapid rebate to kick it off, as an emergency measure.
If more consumers could pay down their credit cards enough to feel better about their own finances *sooner*, they could resume more ordinary spending sooner, saving millions of jobs.
I'm a philosopher, not an economist, but this looks like merely eleven months, not 2 years and eleven months.
I think that if we as a society are smart, and you're pretty smart and have the connections to introduce ideas, we will try to do two things simultaneously.
But before that, we need to do one pragmatic thing.
We need to separate all our good deeds–condoms for the world's AIDS victims, investments in better teachers, etc, etc, into a separate bill that the Neobstructionists can fight with us about after we have fed and sheltered and initiated jobs for people. We have the votes, for god's sake, and we'll have more after we show the public we are serious about recovery.
If we can't blackmail a couple of Northeast Senators and kidnap Lieberman and give Sanders a nice cup of tea to relax him, then what kind of arm twisters are we?
So after we get a pure bill to restore things, we should put into place a series of programs through the states and municipalities to be ready for massive unemployment. It is here now, waiting. This is a Depression underway and it is time we stopped calling it a recession.
Whether it is blatant work programs with very short life or simple long-term (59 week) unemployment and healthcare (Medicaid) programs, we should get the general welfare underpinned. For purely practical reasons, let alone moral, we cannot have a general disruption in the social system. That is how things come apart so badly that they take many years to recover.
Second part of that first stimulus shoujd be real infrastructure projects, including bringing high-speed internet to rural areas. We should get programs out into the marketplace, at even lower level than state level. Let's get it directly to municipal and county level. My god, if George Bailey could do it, why can't we?
Those programs should be massive, at least as big as already planned, and at least as big as we can administer right away.
After that, we should begin the process of redeveloping our industry by building renewable energy sources, the electric grid, battery technology and all those other technologies that need research and testing and some that need investment to begin inserting prototypical programs into the marketplace.
We need to re-think tariffs and re-think incentives for companies that send jobs overseas. None of these things, in my estimate, are far beyond our current reach. They're not daunting problems, if we treat them with the urgency that they deserve.
I know that this does not address the problem that furrows Tim Geitner's brow (no, not taxes) which is the huge weakness among the participants in the financial community. But we have another big hunk of money in abeyance for that.
And at last we have the team of Summers to Geitner to Bernanke in case we need a big play to get us out of the inning safely. And a Nobel Laureate in the on-deck circle.
Your idea to the set the bar for fiscal policy timing using past monetary policy timing (uncontestable by you know whom) was brilliant!
As a science teacher I once knew said: What's a factor of ten between friends?
Point well taken, thank you. But regardless, isn't it prudent to front-load the stimulus? Seems that even if it's okay if some the spending doesn't hit until 2011, don't we want the biggest chunk to hit prior to that? In theory, it would be okay if $0 were spent prior to 2011, but common sense would tell us the sooner the better, right? Even if we want to let some linger so we don't blow it all at once, wouldn't the lingering amount need to be a small percentage of the overall?
This nation's experience during President Roosevelt's New Deal showed that fiscal stimulus might be needed for a number of years, especially if the initial stimulus in not adequate in size. We paid the price for prematurely cutting government spending during the recession of 1937.
Consumer spending is 70% of demand, yet nothing is being done to stimulate it. The result is predictable: the economy continues in a downward vicious cycle of job losses and reduced consumer spending.
So why is the solution infrastructure spending that peaks years from now?
Yes, we are up against a zero bound.
Maybe some thought should be given to why that tool has been a failure before we leap to the conclusion that the next tool on the bench is surely the right one.
The New Deal actually slowed the recovery of America's Depression and left us with policies and entitlements that cannot be continued.
This problem was not the CITI's fault it was goverments fault for their failed "Community Reinvestment Program" forcing banks to loan money to people who could not afford to pay it back.
Get the goverment out of the private sector and let the chips fall.
The suffereing will be shorter and we may learn from it.
Can you explain to me why the government, which is already half way into most of the banks, can't just create an "exploding stimulus" that gives money directly to the poorest members of our society but requires them to consume it in specific ways within three months? With the technology we have available, it would seem to me that this is possible. For example, Visa check cards, Direct deposit, etc. Just specify the areas where the money must be spent. You give the consumers the products of that money. You give the businesses on which it is spent a boost of consumption. You ensure that government money isn't wasted because it can only be consumed in effective ways and will explode otherwise. Please let me know if I'm missing something.
We should be looking to invest in win-win-win projects. For example, vertical-axis wind turbine factories in many states, which could provide jobs, decrease energy costs, and capture energy dollars which normally go overseas. (Vertical because their are many more appropriate sites for smaller turbines than for the big ridgetop models.) Other ideas for investment–improved mass transit, high-speed rail between major cities, better science education and technical training, etc.
In part the crisis reflects a failure of vision among the bankers and politicians, who accept subsidized oil prices (which do not reflect the associated military costs of securing supplies), widespread corruption of science in favor of corporate profits (e.g aspartame, nuclear power), policies of mass incarceration, etc.
The problem with triangulating within the CW, as Obama does, is that he will be insufficiently radical. Perhaps he does not realize that he is in a political trap, brought in to fail in the attempt to clean up the economic, fiscal, foreign-policy, and other debacles of Cheney/Bush. Kudos to Krugman for consistently pointing out the dangers of timidity. The Republicans are continuing their wrecking-crew policies and the Dems should start campaigning NOW for their further attrition in the 2010.
@ D. Sean (#4) – I don't believe that the Fed acts in conjunction with NBER. Therefore, they would be (and in the case of this recession were) acting much faster than the "official" calling of the recession by lowering their rate. However, once their rate gets to 0, what else can they do? Dr. Krugman's point here is that spending needs to take the place of lowering interest rates until the Fed has to raise rates to stave off inflation. Once the Fed starts raising rates, the spending can come back to normal. According to his research, that time frame is looking like sometime in 2011 at best.
@ halbhh (#6) – If you are threatened with losing your job, are you going to spend a tax rebate or save it for when your unemployment runs out? If it was me, I wouldn't be spending it, even to reduce debt unless I could eliminate that debt and use my paycheck to reimburse my savings. In addition to people that you think should be spending the tax cut/rebate, there are still plenty of middle class people not worried about their jobs who will be getting that money. Even if those people go out and start buying stuff, that won't be enough to save the hundreds of thousands of jobs being lost. Please read some of Dr. Krugman's recent posts about multipliers and spending vs. tax cuts. A dollar spent is worth much more than a dollar given back in tax cuts. And it's temporary while tax cuts tend to end up being permanent no matter what the last administration claims will happen in 2011.
It looks like Prof. Krugman's duration was correct and a digit wrong in the year for the early '90s recession.
It seems like regardless of how quickly we should get stimulus spending started, its going to take a long time to gear up the projects outlined in Obama's spending plan. It seems like there should be more instantanous programs that could help curb rising unemployment and the deflationary spiral. One example would be to replicate the state law here in Oregon, where no one can pump their own gas. Our gas prices aren't much higher than other states, yet the law creates thousands of jobs to those that may be struggling or faced with unemployment. It puts some amount of money directly into an economy without requiring huge public works, red tape or tapping directly into the governments wallet.
If I get a tax cut, I will not spend it. If I have a feeling that I will have a job for the next few years, I will spend. Middle class people cannot create the numbers of jobs needed by spending a piddly little tax cut. Wealthy people have proven they will not create jobs (at least in this country) with their tax cuts. Let the government spend to create jobs and forget the tax cuts.
I am also not the economist that a Krugman is. But I'm no dunce either. I like Paul, but he underemphasizes how the government lies about economic downturns- better known by the nonthreattening term recession. Do you really think the Bush administration has been honest about anything. His whole term has been one big recession, interrupted only by Bush's desire to get reelected, and the free credit giveawys helped stimulate the economy for about a year and a half, but when that bubble burst it brought about this current megarecession.
Which brings me to my manin point: What caused the last THREE recessions, caused them to be much more painful than they had to be were the GOP's addiction to huge budget deficets that turn into a mountain of debt. The recession of the late '70's-early 80's got much worse after Reagan's cuts. The early '90's were caused by it and the Bush tax cuts killed the tech bubble entirely. Some cuts for compromise and stimulus, yes, but the Bush cuts have to go and must not be negotiable. We will not get back to true prosperity until tax rates on the upper bracket got back up to '90's levels. Paul should reemphasize that!
One bit of spending that could happen right away and would greatly assist small business would be for the Administration to eliminate user fees the government charges on information. Especially in such departments as Commerce, information which once was free–and therefore readily accessible by individuals and small businesses–has in recent years been "sold" to the public through user fees. The intent was to make some of these government agencies more self-sufficient, but the effect has also been to reduce the flow of information to individuals and small businesses.
Give the departments a big enough budget that the information can be made freely available, then step and watch a creative and more information-empowered American people get back to work!
Any attempt at a quick fix is bound to get it wrong and leave lots of very important things out. What should be done in my opinion is for the government to discontinue all trading in stocks, bonds, etc., all but the most immediate and pressing lending, temporarily fix prices and wages where they are, forget about weekends, holidays, etc., roll up its sleeves and work for at least 3 full months to think through the problem and come up with solutions that make sense for ALL the people of this country (who are, by the way, NOT "consumers," nor "taxpayers," but human beings). Government FOR the people must once again be the priority. And ALL the old models based on past "successes" that were in fact illusions, should be ignored, along with the people who created them.
Why are you the ONLY economist recommending a health care coverage program as stimulus for the economy?
My family would have an immediate $15,000-$25,000 per year increase in spending capacity. We need a new car! We would buy one if 25%+ of our earnings weren't spent on healthcare premiums and deductibles, co pays and pharmaceuticals (so called underinsurance, even though it costs a fortune). Our medical insurance premiums alone surpassed our monthly mortgage payment about 3 years ago and are still climbing. In my circle of friends and colleagues, this is not at all unusual.
Congress seems to view this as in the expense column rather than in the stimulus column. Wouldn't this be an immediate boost to consumer spending – nationwide access to the Senate's group medical plan initally with standard rates for pre-exisitng conditions and reasonable deductibles? Easy to implement and a stop gap measure until a more comphrehensive plan can be formulated.