Economics editor of the WSJ, David Wessel, has a fine column today on p.2 talking about why the stimulus has been growing in unpopularity. I raised the policy issue of the stimulus earlier in the summer in a post asking whether we should simply cancel the rest of it – a discussion, it seems, that a lot of folks have also been having, at least informally or in their own heads. The comments to my post were very interesting, which is why I’m revisiting the issue here.
Wessel’s column seems to be partly a reaction to polls published in USA Today and elsewhere apparently showing that most people don’t see the stimulus working and doubt that it is doing anything for them – or that it will. There is also this poll, cited by Wessel:
The fiscal stimulus, however, is increasingly unpopular. When The Wall Street Journal/NBC News poll asked in January if the stimulus was a good idea or not, respondents said yes by 43% to 27%. When the question was asked in July, only 34% said yes and 43% said no.
The point of the column is to say that, perception aside, the stimulus is doing approximately what it was supposed to do:
The case that fiscal stimulus was a mistake altogether is weak. A decade ago, economists counseled that politicians should leave recession-fighting to the Federal Reserve and its interest-rate cuts. With the average length of a post-World War II recession at 10 months, downturns usually ended before Congress acted.
This time was, truly, different. The recession was more than a year old when Mr. Obama took office, the Fed already had cut interest rates to zero and the economy was still in free fall. “If ever there was a case for a fiscal stimulus, this was it,” says Alan Auerbach, a University of California, Berkeley, economist who will kick off an appraisal of the stimulus at this weekend’s Fed retreat at Jackson Hole, Wyo.
The problem, Wessel says, is really marketing – marketing the stimulus to the public – rather than the policy itself:
Marketing, it turns out, matters. Promising that the stimulus would save or create 3.7 million jobs, as the White House did, was bound to backfire, and it has. As Citigroup’s Steven Wieting observed recently, the first installment of the stimulus — about $75 billion in tax cuts and one-time payments for individuals — is widely assumed to have had no effect. But a $1 billion “cash for clunkers” program gets credit for turning around an auto industry that was selling so few cars that an upturn was inevitable at some point. Maybe Mr. Obama should have mailed coupons instead of reducing the tax bite on paychecks.
I think Wessel is obviously right – and that Auerbach is right and that most economists would agree – in saying that there was a strong case for stimulus. January (or, really, earlier) was it. But beyond that, the article is mostly talking about the right way and wrong way politically to market a stimulus, and on that, I don’t think Wessel is quite as persuasive. The reason is that one can describe it as “marketing” and then, as the article does, talk about whether the stimulus was “owned” by Congress or by the President, and all sorts of other public-perception issues. But the fundamental issues were (are) three – tightly interrelated with each other. They run not to marketing, and not to perception, but to underlying policy and purpose.
The first is whether stimulus spending is intended to be genuine demand-side stimulus or, instead, whether it is intended to be some long-term investment in supply, whether in the form of public or private infrastructure that, on this view, boosts productivity down the road. The former is what is meant by stimulus in the textbooks; the latter might be true on some set of arguments, but requires a different rationale.
The second is whether the stimulus spending is intended to be received and spent by private actors or public ones. The most important debate over the nature and design of the stimulus was over whether it should simply put money into private hands, immediately and as cash, or whether it should be spent over a longer period of time by public agencies via Congress (and much of it by the states). The arguments in favor of immediate private spending were that it could happen much more quickly and that if immediate demand was the real purpose, the quickest way to do it was simply stop collecting, for example, social security and other taxes for some period, among other things. No need to send out checks or delay – just stop collecting the taxes and leave that much more money in people’s pockets.
The principled (and perhaps winning, but perhaps not) argument against was that an over-indebted public would use the funds to pay down debt, not to pick up demand. The (unprincipled) political argument was that if the money was simply left in private hands, Congress would not get to say how it was spent, with the many ‘public choice’ issues raised over how Congress and the administration would use the funds to reward favored constituencies. That argument was decisively answered by Congress, unsurprisingly, in favor of public, rather than private spending, and in favor of it, rather than individual consumers, deciding what to spend money on.
The third is a spin-off from the earlier two. Is stimulus spending intended to be, as it appears, public rather than private, rather more long-term than short-term? (Or perhaps to use the anticipation today of future long-term spending as a substitute for actual spending today? Is that realistic in an environment set by a massive credit crunch?) And is the nature of this long-term public spending to be justified not as (merely) propping up demand, but instead as an “investment” in infrastructure? Not – ‘you guys dig holes, and you other guys fill them up, and here, everyone gets paid, so go spend’ – but instead projects that are justified in part because they are supposed to repair long-neglected public infrastructure and lay the foundation for longer-term productivity growth. The long-term public infrastructure argument can certainly be made, and in my view can have a certain merit, up to a point – the problem is that as a rationale it is radically different from stimulus arguments.
It tends to lead to a worst-of-both-worlds, a sort of bait-and-switch: When I want you to answer my objections that the stimulus needs to happen fast (e.g., don’t collect taxes for a while), you say, well, we need to spend on projects that don’t just spend money, but do so in a way as to give us a long-term productivity return as well. When I wonder whether all this money appropriated by Congress in haste can possibly be well spent to produce those public infrastructure investments that actually enhance productivity down the road, you say, well, this isn’t really about that, it’s about quick spending, don’t ask questions about long term productivity costs and benefits, this is just about spending money to create demand.
I suspect that the public dimly senses this bait-and-switch argument, and that this is part of what drives its skepticism. Public skepticism says, in effect, I don’t really get all these complicated arguments, but I’m suspicious of the sense that, somehow, they always come back to saying, spend whatever and on whatever Congress and the administration say. What they say, though, always turns out to be public and long-term, and if I don’t buy one rationale for it, here’s another, and then back again. An increasing amount of the public seems to be saying, even if we mere civilians don’t understand all this, there’s an alternative answer to what feels too much like a bait-and-switch game, and the alternative answer is to reject both. That is, say on the short-term stimulus rationale – yeah, but it isn’t that, at least not any more. And then say to the long-term public infrastructure rationale – yeah, but that’s not how you allocate money for things if they are really supposed to justify themselves as productivity gainers over the long term, not in an instant debate characterized as a national economic emergency.
I think that’s part of the public’s inchoate concern – it’s certainly mine. If that’s the case, however, the problem is much more than marketing. It is a question of whether the stimulus is actually designed as a stimulus or not, and whether the remaining zillions of spending presumed to happen in the next few years in its name are actually about stimulus at all, propping up the economy or instead (one might at least wonder) propping up Congress. It seems to me that this is the debate that needs to happen concerning the remainder of the stimulus spending, not about whether the administration and Congress have explained themselves well to the public or not. There’s a genuine public debate to be had – but it’s not about perception and marketing, it is genuinely about the nature of the policy, and the nature of the stimulus, now and going forward.
In that context, Wessel’s column frames a different kind of question. He frames the question mostly as a matter of skepticism as to whether there should have been a stimulus at all, which allows for an easy answer, at least according to most economists and one which certainly I share. But that’s a different question from asking whether this “stimulus” is that, currently and over the next few years – and even if the public doesn’t know now to frame that question, it is not answered by saying, of course there had to be a stimulus.
It is quite possible to say, yes, there needed to be a stimulus, but whatever stimulus effect, in a pure demand sense, well, it either happened by now or it didn’t. There is at least room for a genuine question and debate over whether spending all the rest of it has anything to do with stimulus arguments in the classic demand sense – or is instead about either public infrastructure arguments or Congressional public choice or both. You don’t get at that – current – question by framing it as a question as to whether there should have been a stimulus in the first place.
Update: Judge Posner comments over at his Atlantic blog, “Honesty about the stimulus.” (H/t Glenn Reynolds.) The post ranges across many stimulus related issues besides what I quote here, and it is well worth reading the whole thing:
No one has the faintest idea what effect the stimulus has had. My guess is that it has had some positive effect, because of its confidence-enhancing character that I mentiioned earlier and because some of the $100 billiion–though no one seems to know how much–has been spent rather than saved. But it is impossible to determine the net impact of the stimulus on GDP or employment because so much else has been happening to stimulate an economic recovery. Some people have had to dissave–turn savings into expenditures–because their income has fallen (maybe because they have become unemployed) below the level necessary to cover their basic expenses. Some people have had to replace durables that wore out. Foreign demand for U.S. products has risen some. (Dissaving, replacing durables, and export growth if the domestic currency loses value are standard nongovernmental spurs to recovery from a depression.) And the government has been doing a lot to stimulate recovery besides the stimulus–has in fact expended or guaranteed trillions of dollars in an effort to increase the amount of lending, which is essential to economic activity.