So How's That Stimulus Money Working Out?

Over at The American, Mercatus Center scholar and Reason columnist Veronique de Rugy charts stimulus spending and unemployment. The result is as predictable as it is dispiriting:

From de Rugy:

There are few studies on the issue, but two have found that government spending shrinks the private sector, at least a little. Looking at war spending, Harvard University's economist Robert Barro estimates that the multiplier of government spending is 0.8: when the government grows by $1, the private sector shrinks by 20 cents. Also, using a variable that takes into account the fact that military spending is anticipated several quarters before it actually occurs, the University of San Diego's Valerie Ramey has shown how U.S. military spending influences GDP and estimates that the multiplier of government spending is between 0.6 (when World War II data is excluded) and 1 (when it is included). Thus both papers support the "crowding out" hypothesis.

More here.

Comments

[Attorney]

We're spending more because employment keeps going up, Silly!

[Rich]

Here,"... Paul Krugman and Obama's economists) estimate the spending multiplier to be about 1.5".

Anyone know any scientific basis for the 1.5? (If there is, I haven't yet found the right Google incantation.)

[Duncan]

Most serious economists agree that unemployment would be worse without the stimulus. Remember correlation does not equal causation. The crowding out hypothesis works much better when we're somewhere near full employment.

[DADIODADDY]

These would be the same economists who's polices were going to create 4-5 million new green energy jobs? BTW, what's the opposite of a "serious economist"? casual or humorous?

[CaptainSmartass]

Yes, you're right, someone with a Ph.D. in economics, who teaches the subject at prestigious university, isn't a "serious economist".

Idiot.

[DADIODADDY]

Not to touchy are we...I guess the only respsone is the classic question we all ask of economists...if you're so fucking smart about money how come you're not rich?

[P Brooks]

Those stimulus dollars are lying in wait, gathering strength, multiplying, in preparation for the Great Leap Forward.

Soon, all will be well; the government job creation machine is gathering steam.

[CoyoteBlue]

Double down! Double Down!

[Pro Libertate]

Anyone who thinks the so-called stimulus is doing jackshit for the economy should go get stimulated by a cattle prod.

[Duncan]

Pro Libertate
So if a company builds an office building, that creates jobs. If the government builds an office building that creates???

[Kevin]

After the building is built...nothing. Because the government does not produce anything useful, it just moves money around. If Apple has built that building, it could use it to devolop or distribute iPods, which would hopefully make a profit, which would lead to another building, etc. The government would fill the building with government employees who require our tax money for their pay and benefits. Got it now?

[DADIODADDY]

A vacuum that sucks all thought and enterprise into an infernal black hole of depression & doom...aka the DMV

[JW]

A BIG, EMPTY, MONEY LOSING HOLE IN THE GROUND.

[JW]

Damnit! I SF'd the link.

A BIG, EMPTY, MONEY LOSING HOLE IN THE GROUND.

[Mike Laursen]

More wealth for some folks involved with the building project, offset by the wealth taken away from other people. You'd have to analyze each government building on a case-by-case basis to know what effect it had on the economy. All Barro's estimates say is that the money spent on that building and a bunch of other government projects, shrinks our aggregate amount of wealth by 20%.

[roystgnr]

Last week's Obama v. reality comparison was more interesting.

http://reason.com/blog/2009/10.....of-the-day

Obama gave us a full graphed prediction of "with recovery plan" and "without" futures in January. Why plot just one (Q4 2010) number from those predictions and ignore the time dependence?

Ah, but don't forget that Obama agrees with Duncan and "most serious economists". (The ones who disagree must just not be serious enough, like we always said about those weirdo anti-Iraq-war politicians). Their testable predictions might be grossly wrong, mind you, but their predictions of counterfactual untestable hypotheticals are still right on the nose! Hooray!

[R C Dean]

Most serious economists agree that unemployment would be worse without the stimulus.

Would those be the same serious economists who thought our unemployment would be a good two points lower than it is with the stimulus?

Really, I think it depends on your time frame. In the short run, is unemployment lower because the government is hiring people? Maybe, if the hiring is funded by debt. In the long run, though, certainly not, as the debt has to be paid by draining money, and therefor jobs, from the private sector.

So if a company builds an office building, that creates jobs. If the government builds an office building that creates???

A diversion of resources from the private sector, thus, at best, breaking even, and likely costing jobs on net.

[kwais]

"A diversion of resources from the private sector, thus, at best, breaking even, and likely costing jobs on net.

That is the answer!

Thank you RC

[Pro Libertate]

I think some people don't understand how friggin' big our economy is and how little a few billion here and there does. Especially when spent not for market-driven reasons but for political ones.

Why not just pay people to throw money in a giant hole?

[SugarFree]

Paul Krugman and Obama's economists

Redundant.

[Duncan]

roystgnr,
Yes, economics is hard because you can't do experiments with a control group. The system is constantly changing and hard to predict. However, what private investment is being crowded out right now by government spending? I don't see a lot of new home construction, auto sales, etc. Crowding out assumes that the money would be invested somewhere else. Look at excess bank reserves. There's a lot of cash out there that people are just sitting on.

[Duncan]

Throwing money down a hole is one thing. When you look at studies of infrastructure investments, you see huge multipliers. Think how much the Interstate highway system lowered the cost of transportation and improved efficiencies, allowed more trade, and a more efficient allocation of resources. Right now, it's cheap for the government to build schools, roads, etc. because the private sector is in such bad shape that construction contractors are coming in with many bids at cost just to avoid going out of business. This is when the government should buy cheap, and then cut back and pay for it with revenues in the future. Infrastructure expands the productive capacity and efficiency of the economy.

[YoungLiberal]

Bad analogy. The interstate highway system encouraged sprawl, which encouraged climate change, which is shifting tax dollars from needed programs to eco-schemes.

[MikeP]

Most serious economists agree that unemployment would be worse without the stimulus.

Yeah, but since that requires only that the multiplier be greater than 0, that's not saying much.

Whether the stimulus is worth the deficit it is built on and whether the stimulus induces malinvestments that will need to be liquidated later are the operative questions.

[MikeP]

Throwing money down a hole is one thing. When you look at studies of infrastructure investments, you see huge multipliers.

You must have been asleep when Congress passed the stimulus bill being discussion here.

[MikeP]

"...being discussed..." or "...under discussion...": reader's choice!

[Pro Libertate]

Multipliers? You want multipliers? How about instead of a "stimulus" we cut spending and taxation, at least temporarily. Massive stimulation of the economy would result--probably the greatest possible bang for our bucks. But, of course, if we did that, it wouldn't reward favored constituents, and we couldn't control what the money was spent on. Can't have that!

I'm distressed that anyone--even an supporter of the current government--can't see that the "stimulus" was purely a Democratic wishlist and had virtually nothing to do with improving today's economy. The timing of the spending alone proves that.

[Duncan]

MikeP,
Actually, a lot of the money in the stimulus was tax cuts and your payroll/FICA tax went down. Seriously, look it up, $275 Billion in tax cuts. A good bit of the stimulus went to support sate budgets which already being cut a lot. In many states, this allowed them to continue transportation projects that would have been cut because it's easier to cut transportation contracts than schools or prisons. A lot of the transportation money has yet to be spent, in fact, the spend out on that is slower than the tax cuts or the state revenue support. However, the unemployment picture looks no better for next year, so there will be plenty of workers available next year when a lot of the transportation money gets spent. Just because a few anecdotes point out that some of the money is badly spent should not lead one to the conclusion that those anecdotes represent the bulk of the money.

[Duncan]

Pro Liberta,
Tax cuts. Yes, there were large tax cuts and the state revenue support reduced that likelyhood of states raising taxes. The collapse in revenues has led many states to increase taxes in a recession which is exactly the wrong thing to do in a recession. So while the Federal Government cut taxes, states and localities were raising them.

[TP]

Was "Stimulus" really meant to "create jobs", or was it all just political payback? Clinton did it in '93, Bush did it in '01, and Obama did it in '09. Call it whatever you want, but we all know what it really was.

As far as government spending, the only reasonable thing, right now, is to extend unemployment benefits, and perhaps low interest loans for small businesses.

The 2002 recovery was based almost entirely on credit. Everybody (banks, businesses and individuals) was/is over-leveraged. Until that is worked out, unemployment will remain high.

[Pro Libertate]

For most taxpayers, federal taxes are their biggest single tax burden, so I'm not sure how much that matters, to the extent that it's true. In Florida, while we have no income tax, the property taxes are still too high, with the government pretending that somehow our homes aren't back to 1998 values.

Don't worry, I condemn the state and local governments, too. Why can't they just revert to, say, 2005 spending levels rather than casting about for creative new ways to steal money from their citizens?

[Duncan]

State and local revenue is collected so many ways that you don't always realize how much your spending on it. In fact, when I looked at the 2007 data, sales tax revenue for state (not local) governments was about equal to state income tax revenue. Then you think about how many different user fees there are for licensing your car, etc. So while everyone notices the federal and state taxes due in April, people tend to ignore the taxes they pay every day to their state and local governments. If you rent, you really don't notice that you're paying property taxes.

[Duncan]

I meant state sales tax revenue was roughly equal to state income tax revenue. My bad.

[DADIODADDY]

and that would be why states with both are forecasting large budget shorfalls?

[P Brooks]

what private investment is being crowded out right now by government spending?

Private investors sat on their hands while the government bailed out banks and car companies, because the government was explicitly working to keep those assets in the least productive hands.

If the government was not propping up GM, they would likely be willing to do contract production for a Penske-owned Saturn. But, since the government has shown they'll prop them up no matter what, they can refuse.

[P Brooks]

"A good bit of the stimulus went to support prop up bloated sate budgets"

And keep those state and local governments from cutting back on union jobs.

[Paul Krugman]

First of all: in the immortal words of John Maynard Keynes, in the long run we are all dead. Beyond that, however: the recession is causing low business investment, which means lower capacity in the future; it's causing young people to postpone or cancel education; it's pushing people out of the work force, eroding their skills; it's raising child poverty, with devastating consequences for personal development. Stimulus, by mitigating the slump, helps limit all these long-term costs.

[Winson Churchill]

"The truth is incontrovertible, malice may attack it, ignorance may deride it, but in the end; there it is."

[Mike Laursen]

But the stimulus money has to come from somewhere. Looks like it is coming from borrowing against either future higher taxes or future inflation, or both. Aren't higher taxes and inflation going to cause low business investment, young people postponing education, pushing of people out of the work force, increased child poverty, etc?

[R C Dean]

However, what private investment is being crowded out right now by government spending? I don't see a lot of new home construction, auto sales, etc. Crowding out assumes that the money would be invested somewhere else. Look at excess bank reserves. There's a lot of cash out there that people are just sitting on.

Perhaps they are sitting on their cash because the business environment has gotten significantly worse, with new taxes and regulation on the horizon, and government intervention in various sectors of the economy, raising risk and uncertainty for any investment.

As a nano-investor, that has been my response. My preference is to be fully invested, and right now I actually am, but more than half of my investments are in gold (and gold mining stock). Most of my straight equity investments are overseas.

The course charted by the US government, largely through its stimulus programs, drives investment out of the US economy.

[Duncan]

So you agree with my point that most people are sitting on cash or investing outside the US? You're sitting on cash (what's gold but just another currency)? I think that the fall of the dollar is being attributed way too much to government policies, and not enough to the lack of attractive investments in the US right now due to a weak economy. Many people may point out the growth in the market. In reality, a lot of those big companies earn a huge percentage of their revenues abroad and with the exchange rate, those earnings in foreign currencies are rising in value.

[R C Dean]

Stimulus, by mitigating the slump, helps limit all these long-term costs.

But the long-term cost of the stimulus exceeds the mitigation of short- and long- term costs that it may achieve, in two ways:

(1) It drives investment capital out of the US.

(2) It all has to be paid for somehow, sometime, by draining resources out of the private/productive economy.

[Paul Krugman]

B-but child poverty! Personal development!

[Pro Libertate]

There's some expectation among the financially wise of a commercial real estate crash on the horizon, driven in part by some bad (i.e., not re-financeable) commercial loans. That's also frozen some movement of cash. Hopefully, if that crash comes, some of the money that's sitting unused will be spent on buying up commercial properties.

[TP]

There aren't that many "bad" commercial loans. Most were traditional financing, but there were a few interest only. Leasing has gone way down. It's much cheaper to lease, now. That may drive down owner revenues to the point of bankruptcy. There's a lot of empty space. However, the lower leasing costs are spurring some new businesses that normally wouldn't be able to afford that lease, or get a better location than they normally would for the same price, thus, increasing their exposure. That's where the government should be focusing their spending, if anything.

[Duncan]

Child poverty actually is a real problem for the economy in the long-run. Imagine if you were building a factory, but constantly used cheap construction and cut corners. In the end you invested a lot of money in an asset that produces very little. In essence, since children are the future workforce, cutting corners is diminishing the future potential of the workforce. I'm not saying that we need to spend more money on childhood education, but I think that we need to reconsider how we're spending the money and focus on alieviating the effects of poverty on children more. We've spent so much on alieviating poverty amongst the elderly who add little in productive capacity to society while we trash the future workforce.

[DADIODADDY]

So poverty is not a spur to self improvement and only government supplied cash will save the children? I suggest we teach more kids trades and send fewer to college to be instructed by "serious" economists.

[P Brooks]

This is when the government should buy cheap, and then cut back and pay for it with revenues in the future.

*outright, prolonged laughter*

[Duncan]

"The frenzy among contractors to pick up work during a tough recession played to the favor of PennDOT, which saw bids come in at 11% below estimates on average. As a result, the state was able to use the unspent funds to add 52 more projects to the program."

source: http://midatlantic.constructio.....efault.asp

[JW]

Lowball estimates with, if history is any guide, little to no bearing on the actual, final cost for what is most likely, pork-ready projects? This money couldn't be better used eslewhere or (gasp) be given back to the public?

Are you *sure* this isn't the "spend it or lose it" mentality that runs rampant through govt.?

[Duncan]

Having driven on the roads in Penn I'd say it was pretty necessary. Lowball bids tend to be more of a problem with things like Defense contracts which are harder to estimate and allow the contractor to bill for overages. Road contracts often force the builder to eat costs (or at least a portion of the costs) when they spend more than their bid. This often means that road contractors somehow, magically means that they come in at cost.

[JW]

So have I; I'm from there. Don't you know the old joke about what the official state sign of Pennsylvania is? "Road construction ahead."

PennDOT is one of the more incompetently run agencies. Their endlessly poor roads are the proof.

Lowball bids exists anywhere there is a govt. contract to be had. Penalties don't scare they aren't applied as often as they are. Don't kid yourself that it's only the nasty defense contractors that do it.

[hurlybuerhle]

*cough cough . . . "Big Dig" . . . *cough cough

[Isaac Bartram]

Actually, no, roadbuilders these days are lowballing bids and hoping to make their profit on claims. Thery're aidded in this by the fact that the Engineer usually leaves a shitload of stuff off the plans.

[JB]

Fuck Obama. The little bitch could have cut all sorts of taxes to spur growth and job creation, but instead he wanted to hand over pork to his cronies.

Fuck anyone who voted for the piece of shit.

[P Brooks]

Some prices are undoubtedly falling; contractors who were fully booked a couple of years ago are now willing to deal. However, if you look at the historical record (California, I'm looking at you) governments do not cut back when the economy, and their revenues, recover.

Instead, they spend that much, and more.

[R C Dean]

So you agree with my point that most people are sitting on cash or investing outside the US?

Sure, but a large part of the reason they are doing this is because policies like the stimulus are wrecking the business/investment climate in the US.

[Duncan]

But in a lot of emerging markets, the governments impose higher taxes, are more corrupt, and impose more costs on companies. Talk to anybody trying to do business in India. I think investors look at economic fundamentals in emerging markets and see potentially massive growth. I think that we're suffering now for a lot of the costs imposed by terrible decisions made by the private sector and the public sector a few years ago.

[@]

Meanwhile, at this very moment, the House is voting on a resolution that Recognizes the Contributions of Country Music. Everyone seems to be in favor of it.

[@]

421 to 0. Thank goodness. We can't allow the travesty of Country Music going all unrecognized and stuff. But what about Western? Who will speak for this neglected genre?

[Billy Bob's Roadhouse]

We play both kinds of music, Country AND Western!

[P Brooks]

Meanwhile, at this very moment, the House is voting on a resolution that Recognizes the Contributions of Country Music.

*removes John Deere hat, holds it over heart*

[Bingo]

Well if it isn't working then we need more stimulation!

I wonder what Freud would say about all of this.

[OO==============D]

I know! I know!

[DADIODADDY]

"Sometimes a cigar is just a cigar"

[Tulpa]

Epic fail on that graph.

It's always questionable to have a vertical scale that doesn't start at zero, but this graph is utter bullshit for other reasons:

1. You're plotting an instantaneous variable (unemployment at a given time) and a cumulative variable (stimulus spent) on the same graph. Stimulus spent is ALWAYS going to increase, unless the government starts taking money away from stimulus recipients.

2. The scale for unemployment starts at 7%, while the scale for stimulus spent starts at 0. This causes the unemployment increase to look much steeper in comparison to the spending increase than it would on an honest graph.

[Tulpa]

So basically, to make this plot meaningful, you need to plot unemployment on a scale starting at 0 and plot stimulus spent during the given month.

[Tulpa]

Of course if you did that both plots would be flat, and not useful for propaganda purposes.

[Lud the Impalo]

Of course if you did that both plots would be flat, and not useful for propaganda purposes.

Yet, somehow, if unemployment were to have fallen back to seven percent or lower in that time span, the stimulus would have received voluminous credit in academia and the MSM, whereas, the opposite has proven to be true, unemployment rate exceeding the non stimulus expectations, and you have not heard a correlating peep, propaganda or no propaganda.

By the way, you make a fundamental error in the statistical point of your analysis, You're plotting an instantaneous variable (unemployment at a given time) and a cumulative variable (stimulus spent) on the same graph. Stimulus spent is ALWAYS going to increase, unless the government starts taking money away from stimulus recipients. Can you spot it? Surprised someone as conversant as you hasn't developed a Pavlovian response to not make it through multiple ruler smacks on the hand in your undergrad years, but, sigh, it is there.

[John]

The concept that government spending does not create jobs or help the economy is flat out wrong. Much of the film industry has moved production overseas largely because many other nations give subsidies and tax breaks to shoot films in those countries. A $10,000,000 tax break by the state of California could bring a 100 million dollar production back to California, creating 100's, perhaps thousands of high paying jobs, allowing people to stay in their homes, increases property values along with tax revenues. Film and aeorospace where, at one time, the cornerstone of California's economy. The failure of California is largely because of the loss of those industries, not because of illegal aliens. Also, if we look at the Depression, it is quite clear that government deficit spending lowered unemplyoment by a massive amount; the numbers only went up in '37 when FDR cut back on spending.