House and Senate Stimulus Bills in Perspective

The Senate has closed debate on its bill. What have “moderates” wrought? Figures 1 and 2 depict the fiscal impulse arising from Senate and House bills, respectively.

senstim1.gif
Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 Senate version. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009). senstim2.gif
Figure 2: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 House version. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009).
The vertical axes in Figures 1 and 2 have been made conformable. What is clear is that in the Senate compromise version, (1) the green portion (tax provisions, approximately) of the bars is bigger, and (2) a larger proportion of spending takes place in the next 20 months. Is that a good thing? In combination, no. What will happen is that there will be more tax cuts that expand the already increasing deficit but will have minimal impact on aggregate demand; and less spending on things that will have a maximal impact on aggregate demand. (By the way, throwing in big tax cuts that have minimal effect on aggregate demand makes it more likely that one gets fiscal policy ineffectiveness, as shown in Case 3 in this post.) Figure 3 shows the relative costs of each bill normalized by GDP.
senstim3.gif
Figure 3: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009), CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009), and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.
I want to point out that I have been consistent in arguing for getting the maximal impact on aggregate demand per dollar stimulus. [1], [2] It is even more important because of the incredible profligacy of the Bush Administration which as I have repeatedly noted constrained our options should times like the ones we are now experience arrive. [3] [4] I would observe that those who argued “no problems” with borrowing driven by massive tax cuts, and borrowing from China, have little credibility. Readers of Econbrowser will know of whom I speak (there’s a pretty big overlap with those who are arguing against this stimulus package).
One observation is that it looks like the stimulus is more concentrated early on. But such an interpretation is misguided. Take a look at the components. The amounts in Div B “direct spending” provisions are very similar in the two bills. (Note: change of scale in axes.)senstim4.gif
Figure 4: Cost of provisions in Division B spending, per fiscal year, embodied in HR 1 and HR 1 Senate version, divided by GDP. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009), CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009), and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.
The big differences come in terms of discretionary spending (Division A) and tax revenue provisions (Division B – revenues).
senstim5.gifFigure 5: Cost of provisions in Division A spending, per fiscal year, embodied in HR 1 and HR 1 Senate version, divided by GDP. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009), CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009), and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009. senstim6.gif

Figure 6: Cost of provisions in Division B revenues, per fiscal year, embodied in HR 1 and HR 1 Senate version, divided by GDP. Shaded areas pertain to spending occurring outside of the 20 month time frame. Source: CBO, Cost Estimate of HR 1 (January 27, 2009), CBO, Cost Estimate of amendments in the nature of a substitute by Senator Reid for Senators Nelson and Collins to HR 1 (February 9, 2009), and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.

Most pernicious in the “compromise” was the stripping out of transfers to the state. For this, there is no reason in terms of stimulating aggregate demand to limit this component. The propensity to spend would have been the highest out of these funds. And the spending would have occured fairly quickly. Indeed, in so many of the cuts to the original Senate bill, the wrong things were cut. And the wrong things were expanded, including most importantly tax provisions. That expansion in tax provisions is seen in Figure 6.

The tragedy is that so many of these tax provisions are clearly going to have little “stimulus” effect (e.g. homebuyer credit [5] [6]). But where is the Republican outrage on this count?

So, summing up, I can’t see a reason to dissent with Krugman’s assessment of what the “moderates” have given us.

The original plan also included badly needed spending on school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut from the plan, with the great bulk of those cuts falling on precisely the measures that would do the most to reduce the depth and pain of this slump.

Just to remind people, here are the ranges of estimates for multipliers for various types of measures, as provided by the nonpartisan Congressional Budget Office.

multipliers.gif

Table 5: from The State of the Economy and Issues in Developing an Effective Policy Response,” testimony of CBO Director Douglas Elmendorf, January 27, 2009.

Just to remind us all of the stakes involved, take a look again at the vertical axis in Figure 3: it’s the ratio to GDP. This “massive” stimulus bill is pretty small relative to GDP. And in the absence of a cost-effective stimulus bill, we are hurtling toward a negative output gap that — in the post-War era — is of unparallelled proportions, in terms of depth and duration. ogap_09.gif

Source: CBO, The Economic Outlook, 7 January 2008.Given what data has come out since January 7, I have no reason to believe the outlook is any better than what is provided in this picture.

While this has been a depressing weekend for those of us who believe that reason can triumph over sheer ignorance, at least it’s provided plenty of examples of bad reasoning to dissect in macro class. (By the way, still looking for a reputable macroeconomist against a stimulus bill [7].)


Originally published at Econbrowser and reproduced here with the author’s permission.