Christy Romer: 02-27-09 Fiscal Stimulus: Likely Effects of the ARRA

Christina D. Romer
February 27, 2009

The Case for Fiscal Stimulus: The Likely Effects of the American Recovery and Reinvestment Act

There are many thrills to my new job:

1. Three gates have to open to allow me to park each morning.

2. I get to speak frequently with the leader of the free world.

3. And, as a courtesy I get to see the Federal Reserve?s Greenbook forecast in real time rather than with a five-year delay.

Actually, the biggest thrill of all is that after more than two decades of studying macroeconomic policy, I had the privilege of helping to craft what is without question the boldest countercyclical fiscal action in American history. In the face of a severely escalating recession and an even more severely stressed financial system, the Administration and Congress worked together to pass the American Recovery and Reinvestment Act of 2009. This act provides nearly $800 billion of stimulus over the next few years.

Over the past several months, there has been much discussion about whether the act will do enough to get the country back on track. I am extremely optimistic that it will, and thought it would be useful to spend my time today explaining why. In the process, I will explain why I disagree with some arguments that have been made against the recovery plan. Before I dive in, I want to apologize in advance for occasionally sounding like an Administration cheerleader. Like any normal parent, I am sure I find the baby I helped raise just a tad more perfect than it actually is. But, at the same time, I will strive to do my CEA best to give a balanced, dispassionate assessment.

The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no-stimulus baseline, it isn?t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy.

I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish.

Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.

This discussion of what the bill is intended to do leads naturally to the more important question of whether it will actually accomplish the President?s goal. This involves two issues. One concerns the effects of a typical fiscal change. What will a quintessential increase in government spending or cut in taxes do to output and employment? The other concerns the particular fiscal changes in this bill. Are there aspects of its structure or timing, or of the economic environment in which it is taking place that would lead us to expect the effects to be different from usual?

Let me start with the issue of the effects of fiscal policy in general. If we cut taxes by 1% of GDP or increase spending by a similar amount, what will that typically do to the economy? I will be the first to point out that estimating these multipliers is difficult and that there is surely substantial uncertainty around any estimate. But, I feel quite confident that conventional multipliers are far more likely to be too small than too large.

David Romer and I have argued that omitted variable bias is a rampant problem in estimating the effects of fiscal policy. One good way to illustrate this is to discuss Robert Barro’s approach to estimating multipliers. Barro has argued that a reasonable way to estimate the effects of increases in government spending is to look at the behavior of spending and output in wartime. But, consider one of his key observations ? the Korean War. If he were using just this observation, Barro would basically divide the increase in output relative to normal by the increase in government purchases relative to normal during this episode. When one does this, one gets a number less than one. From this Barro would conclude that the multiplier for government spending is less than one. But, other things were going on at this time that also affected output. Most importantly, taxes were raised dramatically; indeed, the Korean War was largely fought out of current revenues. The fact that output nevertheless rose substantially is in fact evidence that the effects of increases in government spending are very large.

To address the problem of omitted variables, David and I used narrative evidence to isolate tax changes uncorrelated with other factors affecting output. We read Congressional reports, Presidential speeches, the Economic Reports of the President, and other documents to identify relatively exogenous tax changes. We found that the estimated effect of these changes is very large. A tax cut of 1% of GDP raises GDP by between 2 and 3% over the next three years.

Unfortunately, doing the same kind of narrative analysis for government spending would be very difficult: there are vastly more spending changes than tax changes, and the motivations for them are less easily classified. But, the same issue of omitted variables is surely present. As the war example illustrates, spending changes are often taken at the same time as tax changes that push output in the opposite direction. Also, spending increases are often taken in recessions, where other factors are clearly reducing output. As a result, it is likely that conventional estimates of spending multipliers are also biased downward.

In estimating the effects of the recovery package, Jared Bernstein and I used tax and spending multipliers from very conventional macroeconomic models. We used simulations based on the realistic assumption that monetary policy would remain loose, and on the assumption that people would treat the individual tax cut as permanent. This last assumption is justified by the fact that the President ran on a permanent middle class tax cut and just included it in his budget. In these models, a tax cut has a multiplier of roughly 1.0 after about a year and a half, and spending has a multiplier of about 1.6.

As I have suggested, it is very hard to claim that those are excessively large. Indeed, if you want to know why I am more optimistic than some, it is probably because I believe my own research. I think that both the change in taxes and the change in spending may pack more bang than the official Administration estimates assume.

Before leaving multipliers, one issue that has come up is the interaction with the financial crisis. A common argument is that fiscal stimulus will have less effect because financial markets are operating poorly and lending is not flowing. I want to offer a different view. I think it is possible that fiscal policy will have even more oomph in this situation. When households and businesses are liquidity-constrained by reduced lending, any money put in their pockets is more likely to be spent.

More fundamentally, there is strong reason to believe that a recovery in the real economy is salutary to the financial sector. When people are employed and buying things, loan defaults fall and asset prices are likely to rise. Both of these developments would surely be helpful to stressed financial institutions. This is, I believe, a key lesson of the Great Depression. In the Depression, the end of deflation, renewed optimism, and increased employment and output were as crucial to the recovery of the financial system as the more direct actions taken to stabilize banks. Thus, real and financial recovery reinforced each other. So, fiscal policy to raise employment may help to restart lending and in that way generate a more durable recovery.

So much for the generic effects of fiscal policy. What about the particular actions called for in the Recovery Act? In many ways, the stimulus plan looks pretty plain vanilla: it emphasizes traditional aggregate demand stimulus over more sophisticated possibilities, it contains a wide range of specific items rather than just one or two big programs, and it includes some things that to a layman don?t look a lot like stimulus.

Nonetheless, I believe all these aspects of the package are in fact desirable in our current situation. Let me take each of the three points I just mentioned the emphasis on traditional demand stimulus, the broad nature of the package, and the inclusion of some things that, to some, at first glance look questionable in turn.

With regard to the first point, economists tend to think that substitution effects can be powerful, and so there is some sentiment that stimulus should rely on incentives to change the timing of spending rather than on the traditional Keynesian approach of trying to increase overall spending. We seriously considered possibilities that focused on substitution effects. And, we did include some modest efforts along these lines, such as the homebuyer tax credit and the auto sales tax deduction.

But, we concluded that the traditional approach was better, for two reasons. One was practical: putting in place mechanisms that give people incentives to change the timing of their spending is not as easy as it seems. Scaling up the types of changes that we did turned out to be very difficult. The other, deeper reason has to do with the nature of the current downturn. The economy is likely to be operating below its normal capacity for the next several years. In that environment, what we need is to stimulate demand in general, not rearrange the timing of demand.

The second issue is the breadth of the plan. I believe that a broad bill, with tax cuts, increases in transfers to those who need them, assistance to the states, and a wide array of government spending programs, is exactly right. There is both a macroeconomic reason for this and a microeconomic one. The acroeconomic reason is that we do not need stimulus narrowly targeted to a specific time window, specific regions, or specific sectors. Given the breadth, depth, and expected length of the downturn, we need broad stimulus ? some that will come on line quickly and some that will give the economy a boost next year, and stimulus that will affect all sectors and regions. Moreover, many of the stimulus channels run into constraints on the capacity of the government to move money quickly. Smaller increases along multiple channels are more likely to boost aggregate demand in a timely fashion than one big increase.

The microeconomic reason is the simple one of diminishing returns or diminishing marginal utility. While all spending provides stimulus, it is obviously important to devote the spending to valuable activities. The short-run aggregate demand effects of government outlays are generally similar across different activities, but the effects on social welfare or on long-run productivity can be quite different. Moreover, these benefits ? like the macroeconomic benefits tend to decline as the government does more of a particular type of spending.

The third issue is how much of the plan is really stimulus. Here, my answer is clear: the vast majority. Spending does not have to be on tangible manufacturing goods or on obvious, visible projects to raise incomes and create jobs. Let me give you three examples. First, relief to the states could look like merely moving money from one level of government to another. And when, a week after the bill is signed, we see my home state of California raising taxes and cutting spending by more than the amount of the relief the package provides, it certainly doesn?t feel like we?ve accomplishing anything.

But we have. States have balanced budget requirements. In the absence of the relief provided in the package, the best case is that their spending cuts and tax increases would be even larger, and the worst case is that they would be unable to pay their bills at all. The fact that states are already changing their budgets, and are factoring in the funds from the package in doing so, is a sign that this portion of the package is timely and effective.

Second, there?s a tendency in some circles to criticize specific spending proposals, like funding for preventative care or Pell Grants for college, that involve spending that looks very different from our traditional view of stimulus projects where brawny men build things out of steel. But, those types of spending provide just as much stimulus as road-building and school-weatherizing. Spending on preventative care leads to the increased employment of nurses and clinic staff. Pell Grants lead to job creation in education, and by relaxing the budget constraint for households, lead to jobs in industries that produce consumer goods

Third, there’s been criticism of the fact that not all of the spending will occur quickly. But again, this is not just OK, but desirable. This is something that just jumps out at you if you try to do forecasts. If you take several hundred billion dollars of stimulus off all at once, the results aren?t pretty. Unless you think the economy would have gone into a rip-roaring boom at the beginning of 2011 in the absence of stimulus, taking stimulus off suddenly causes the recovery to stall. So, it’s a good thing that the stimulus tapers off rather than ends all at once.

So, I think almost everything in the bill is useful stimulus. The AMT patch, while desirable as public policy, is less important for the goal of net new job creation. It clearly prevented a large tax increase from occurring, but it is something that households had most likely been counting on in any event. For this reason, in our own estimates of the jobs effects, we gave it a relatively small multiplier. And there?s a small amount of spending after 2011. CBO estimates that about 4% of the overall package won’t be spent out until 2012, which is probably fine in terms of having stimulus taper off, and another 5% in 2013 and beyond. Although our own estimates are that the tail will be even smaller than this, having some tail is an inevitable consequence of devoting some of the spending to valuable long-term investment projects.

Finally, I?d like to say a bit more about the issue of socially valuable spending that I keep alluding to. I think there’s pretty broad agreement that we have been neglecting public investment in recent decades, to the point where there are important areas where additional investment is very likely to have substantial payoffs. Examples include conventional infrastructure, the portion of the electricity grid that requires public investment, and support for basic research. It is hard to think of a better time to make such investments than when resources are underutilized and borrowing costs are low.

These investments will not only help mitigate the downturn in the short run and help spur recovery in the medium run, but will also make the economy more productive in the long run. The bottom line is that I fully believe the American Recovery and Reinvestment Act will have the effects we said it would. This belief is reflected in the economic assumptions underlying the budget announced yesterday. We are projecting somewhat stronger growth than some private forecasters. In part, this is due to the fact that we did the forecast two months ago, and the economic news since then has not been good. But the more fundamental reason is that we firmly believe the stimulus package, together with financial stabilization and our housing policy, will have a tremendous impact. I understand that actual developments may prove me wrong. But everything I know from history and macroeconomics tells me that the policies we are taking will make a crucial

difference.

Help is On the Way: 02-23-09 It’s a Train with No Brakes

If help is on the way, it is a train with no brakes.

Help is on the way

from White House.gov Blog Feed

$15 billion of funds from the American Recovery and Reinvestment Act will be available in just two days, the President announced this morning, just a week after the act was signed into law.

“By the time most of you get home; money will be waiting to help 20 million vulnerable Americans in your states keep their health care coverage,” he told a gathering of the nation’s governors in the State Dining Room of the White House. “Children with asthma will be able to breathe easier, seniors won’t need to fear losing their doctors, and pregnant women with limited means won’t have to worry about the health of their babies.”

But as with all the money in the ARRA, it’s “not a blank check,” the President said. (Learn more about the grant-making process.) He hammered it home by announcing that he’s tasked Vice President Biden to oversee  the American Recovery and Reinvestment Act, and that he’s named Earl Devaney to keep an eye on every dollar as head of the Recovery Act Transparency and Accountability Board.

A former Secret Service agent, Devaney has worked since 1999 as the Inspector General of the Interior Department, where he exposed the Abramoff scandals and a deep culture of corruption among Bush officials and appointees.

“For nearly a decade as Inspector General at the Interior Department, Earl has doggedly pursued waste, fraud and mismanagement,” the President said, “and Joe and I can’t think of a more tenacious and efficient guardian of the hard-earned tax dollars the American people have entrusted us to wisely invest.

“He looks like an inspector,” he added. “He’s tough.”

The appointment of Devaney follows on a tough memo from OMB director Peter Orszag to the heads of federal departments and agencies, explaining the high standards that are expected of them in reporting use of ARRA funds.

White House photos 2/23/09 by Pete Souza

Cities Compete: 02-22-09 New York Shrinking, Washington DC Growing

Look out, New York. Washington is gaining on you. Full article here.

As the nation’s most populous metro area feels Wall Street’s pain, the fourth-largest—Washington—is barely sensing the recession. In fact, Moody’s Economy.com estimates that metro Washington’s economy will actually grow 2.5% from mid-2008 through mid-2010. New York’s economy is expected to shrink 4.2%.

It wouldn’t be the first time that Washington benefited from a national crisis. Back in 1930 the District of Columbia was a quiet Southern town, scoffed at by New York sophisticates. But as the federal government ramped up to fight first the Great Depression and then World War II, its population grew 65% in two decades, vs. just 14% for New York City.

This time Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.

Stimulus: 02-20-09 Kevin Murphy and Gary Becker Views

Full article can be found here.

The evaluations to date have been incomplete, so we looked at the likely stimulative effect from the spending parts of the House and Senate bills — over $500 billion — and assessed the quantitative effects of four basic factors.

1) How much increase in Gross Domestic Product (GDP) can be expected from the stimulus package?

In a full-employment situation, increased government spending would largely replace private spending, so the net stimulus to GDP would likely be quite small. In the present environment, however, with growing unemployment of both labor and capital, the net stimulus would be larger since the additional government spending would put some unemployed resources to work.

For example, if the government spent money to build new homes with unemployed labor, the stimulus to GDP might be close to, even larger than, the amount spent. However, given the present housing glut, that hardly seems to be a wise policy, although it is a small part of both the House and Senate stimulus packages.

In fact, much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses. This type of spending includes adding broadband to rural areas, spending more on health coverage, encouraging scientific innovations, developing renewable energy, as well as many other things.

As President Barack Obama recently said, “This plan is more than a prescription for short-term spending — it’s a strategy for America’s long-term growth and opportunity in areas such as renewable energy, health care and education.” Such spending may encourage long-term growth, but it will have little short-term effect on GDP.

So our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely.

2) The increased government spending in the stimulus package is supposed to be only temporary, until the economy returns to a full employment level, but probably won’t be.

The evidence of past expansions of government programs is just the opposite. Once created they tend to survive and grow over time, even when the increases initially were said to be temporary. The underlying reason for this is that interest groups develop around new and expanded programs, and they lobby to keep and expand those programs.

This implies that the spending programs in the stimulus package will continue to some extent after the economy has returned to full employment. The multiplier at that time will surely be much closer to zero. Looking several years ahead, then, the average stimulus from the expansion in government spending will be smaller, perhaps much smaller, than the short-term stimulus.

3) The effects on consumers and businesses of the stimulus package depend not only on the stimulus to short-term GDP, but also on how valuable the spending is.

Whatever the merits of other government spending, the spending in this package is likely to have less value. A very large amount of money will be spent quickly over a two-year period: $500 billion amounts to about one-quarter of the total federal government annual spending of $2 trillion. It is extremely difficult for any group, private as well as public, to spend such a large sum wisely in a short period of time.

In addition, although politics play an important part in determining all government spending, political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they’ve long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test.

4) There are no free lunches in spending, public or private.

The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

We believe that it is incumbent on both supporters and opponents of the bill to thoughtfully evaluate each of these four factors. We recognize that how individuals will come out in their own evaluation of these factors will determine their attitude toward the stimulus package, and that there is considerable ground for reasonable differences of opinion.

Our own view is that the short-term stimulus from the legislation before Congress will be smaller per dollar spent than is expected by many others because the package tries to combine short-term stimulus with long-term benefits to the economy. Unfortunately, short-term and long-term gains are in considerable conflict with each other. Moreover, it is very hard to spend wisely large sums in short periods of time. Nor can one ever forget that spending is not free, and ultimately it has to be financed by higher taxes.

Anjan Thakor: 02-17-09 Government Bailouts and the Stimulus Package – Causes and Cures

From Discovery@Olin…Article by Anjan Thakor. Anjan is the Senior Associate Dean and John E. Simon Professor of Finance and will soon be profiled as an Economist of the Day.

Anjan Thakor

News of economic doom and gloom keeps piling up almost daily. The news outlets provide round-the-clock reports of additional government bailouts of companies. The bailout of the financial sector and the auto companies represents an outlay unlike any we have witnessed in the past for such a purpose. The economic stimulus package, just passed, represents the largest government expenditure in history.

Is all this going to help rescue the economy and end the recession?

To address this question, we first need to understand how we got here. In my opinion, there were three main reasons for the current economic crisis.

First, there was plentiful liquidity after the economy came out of the shallow recession induced by the tech bubble in 2001. During that time, the Federal Reserve Board kept interest rates low and the economy awash in liquidity. Moreover, wealth in emerging markets such as China coupled with high personal savings rates due to the absence of extensive Western-style social safety nets, meant that there was a lot of liquidity available in those markets as well. Much of that liquidity found its way into the U.S. through the purchases of Treasury bills and bonds as well as corporate debt and equity securities and mortgage-backed securities by foreign investors. So there was a lot of money chasing assets that originated in the U.S.

Second, the idea that the American dream of owning a house should be within the reach of every person in the U.S. was pursued to what many economists now believe was an economically unwise extreme. This political obsession led to housing subsidies that substantially increased incentives to be highly leveraged, at both the individual and bank levels. High leverage always leads to high financial fragility. Moreover, there was political intervention to spur homeownership, even at the expense of prudent risk management by leaders. There was political pressure on Fannie Mae and Freddie Mac to make affordable housing more accessible via initiatives in mortgage securitization, as well as pressure on banks to be more aggressive in low-income loan origination and less aggressive in foreclosures after delinquency in repayments. For example, in 1996 the probability of foreclosure on a home conditional on 90-day delinquency was about 70 percent. By 2003, this had fallen to 25 percent. Why? Because mortgage lenders were now operating in an environment of lax credit, with pressure to ease up on foreclosures. To add to this, Congress passed legislation in 2006 to induce Moody’s and Standard & Poor’s to accept Fitch’s more lenient ratings of mortgages that went into collateralized debt obligations. As an overall consequence of these and related developments, risk management became substantially weaker in the whole financial system as the subprime mortgage market exploded. This led to a surge in the demand for liquidity to finance these assets. Given the fact that the supply of liquidity was high because of U.S. monetary policy and the actions of foreign investors, a perfect storm of high-demand-meets-high-supply began to brew!

Third, one cannot overlook the role of hubris. Part of the reason why investors found it attractive to buy securitized claims against pools of subprime mortgages is that they were earning high returns, and many investors believed the risk was not commensurately high because the mortgage pool against which the securitized claims had been issued was diversified. So if house prices fell in one area – say, California – the losses would be offset by an increase in house prices in another area – say, New York. As long as house prices did not decline nationally, investors would be fine. Similarly, lenders made mortgage loans under the assumption that house prices would always keep going up. And since we had not had a national housing price decline since the 1930s, it seemed like a safe bet that we were not going to see a national housing price decline anytime soon. Subsequent events have exposed the obvious fallacy in this reasoning – house prices nationally have declined about 6 percent in the past 1 1/2 to two years. Thus, many securitized assets had risks that were improperly managed by many financial institutions.

These factors led to the current crisis, which began when defaults began to pile up and banks subsequently began to get into trouble. In ordinary times, the government would have allowed banks such as Bear Stearns (which had no insured deposits) to fail. But with the increasing intertwining of banks and markets (see my forthcoming essay with Arnoud Boot, “The Accelerating Integration of Banks and Markets and Its Implications for Regulation,” in the Oxford Handbook of Banking*), Bear Stearns was considered too interconnected to fail in the sense that, because its failure could cause others to fail as well, the government would not allow it to fail. In any case, the interconnectedness of various players in the financial market caused the crisis to spread quickly like a virus through the whole system. As the surviving institutions witnessed this, they recognized that their own continued survival depended on “hunkering down” and preserving liquidity. Consequently, the interbank liquidity market dried up and credit extension came virtually to a grinding halt. The crisis was in full swing.

Now, let us examine the proposed cures to get us out of this crisis.

First, the government initially thought that since liquidity had dried up, the solution would lie in lowering interest rates and flooding the economy with money. Unfortunately, this is one of the reasons why we are in this mess. This initiative didn’t work, and it’s easy to see why.

Next, Treasury Secretary Henry Paulson and the Bush administration said that the government would buy all the toxic assets that were dragging down banks’ balance sheets. This would leave them with healthier balance sheets, and they could go about their business of borrowing and lending again. The problem with this was fundamental – how does one value these toxic assets, especially when there is virtually no trading going on? And even if one could value them correctly, they were likely to be worth so little that banks would be left with highly depleted equity positions when the asset sales were recorded on their balance sheets.

The third initiative involved the government addressing the “equity hole” problem on banks’ balance sheets directly by injecting equity via purchases of preferred stock in these institutions. Surprisingly, two simple rules for taking equity positions were not followed by the government: (1) If you buy preferred stock, you have to put restrictions on the ability of banks to pay common stock dividends. (2) In exchange for providing capital, you have to have corporate governance representation via government representatives on the boards of directors of these banks. So what happened? As the government injected billions of dollars into these banks, the banks took the money and paid dividends to their common stockholders, paid out handsome executive bonuses, and purchased other banks. The crisis did not abate.

What does the government need to do now?

The first step should be the establishment of something akin to the Resolution Trust Corp., which was created during the Savings & Loan crisis. Such an organization can attend to the orderly acquisition and disposal of troubled assets from banks, in contrast to the spasmodic reactions that we have witnessed.

Second, we could establish bridge banks. These are created when the government acquires troubled institutions for a short time, say, 18 months to two years. During this time the government has the right to change management, the time to examine the banks’ books carefully, and determine appropriate asset values. Also, with government ownership, the incentives of managers in the bank are realigned with the social optimum, troubled assets are segregated (perhaps into a separate organization called “the bad bank”) and the bank is slowly brought back to health. Eventually, the bank is sold off through a re-privatization program that enables taxpayers to gain from the upside associated with selling the bank in a healthier market.

Let me close by remarking briefly on the stimulus package of over $800 billion. While some components of this package have merit, it rests on two troubling premises: (1) that government spending is the solution to the problem and (2) that without this stimulus, the crisis will prolong. I am not entirely convinced about either premise. In particular, providing incentives to individuals to borrow more to buy more stuff – such as tax breaks for buying new cars – only adds to the factors that contribute to greater personal leverage and financial fragility, which is not what we need right now. And while there are elements in the stimulus package that can help revitalize the economy, there is far too great an allocation of resources to items that will do little to stimulate the economy.

Ultimately, we will get out of the crisis because we will get the banking system to start lending again and because of two traditional strengths of the U.S. economy – private entrepreneurship (including risk taking) and innovation. Encouraging these should be the focus of government intervention. A simple way to do this is by to provide tax breaks and other subsidies for these activities. In this regard, providing additional resources to the National Institute of Health was a good idea, but reducing money initially allocated in the stimulus package to the National Science Foundation was not a great idea. A more ambitious way is to invest more in the infrastructures related to these activities. Places such as Silicon Valley, companies such as Google and Microsoft, and our fine research universities are the envy of the rest of the world. Let us invest in strengthening those institutions rather than simply assuming that throwing enough money at a problem is bound to produce some good results.

Murkowski: 02-13-09 Criticizes Wasteful Spending in Stimulus Bill

WASHINGTON, D.C. – U.S. Senator Lisa Murkowski, R-Alaska, today made the following remarks on the Senate floor regarding her objections to the $790 billion stimulus bill:

Mr. President, today we vote on the conference report for the American Recovery and Reinvestment Act. I was one of 37 Senators to vote against the bill earlier this week, and have come to the floor to discuss some of the reasons why I was unable and unwilling to support it.

My principal concern was the scope of new spending – none of which was paid for through initiatives to raise revenues or reduce spending,

As the media has reported, the cost of the bill is $790 billion, however, when you account for interest, the cost increases to more than $1 trillion. Even if it actually creates the 4 million jobs that the White House once promised, those jobs will come at a cost of roughly $300,000 apiece. However, even the most optimistic economists now estimate that it would create or save less than 2.5 million jobs.

Others have talked about the need to fix housing first, and I strongly agree with that approach. But as ranking member of the Committee on Energy and Natural Resources, I would like to spend some time on another aspect of this bill – an area where millions of new jobs have been promised – and that’s energy.

There’s no question that we must facilitate the development of renewable resources, increase energy efficiency, and pursue innovative solutions to the many challenges we face. But I was not satisfied that the energy provisions in the bill are “timely,” “targeted,” or “temporary.” By adopting this conference report, we will miss significant opportunities that would revive our economy and improve our energy security at little or no cost to taxpayers.

My first criticism is not of the items that were included in the stimulus, but the items that were left out. Simply put, this package made no effort to increase domestic production of traditional resources such as oil and natural gas.

By focusing only on new technologies, and to the total exclusion of those tried and true, this bill creates a false dilemma. Clean energy is viewed as the only viable option for energy development and job creation, when in fact it may not even be our most effective option.

Consider the benefits that could be brought about by greater production of oil and gas here in America. According to one recent study, the full development of domestic oil and gas resources could generate up to $1.7 trillion in revenues for the federal government and create as many as 161,000 new jobs by 2030.

The revenues from production could be used to provide a tremendous down payment on the long-term strength and security of our nation. Instead, as a result of this bill, American taxpayers will ultimately pay more than $1 trillion because of decisions those of us in the Senate chose not make.

Setting aside my concerns about the priorities of this bill, it is also highly uncertain that the funds provided by it can be spent in a rational, cost-effective manner.

Perhaps the best example is the Department of Energy, which is set to receive roughly $45 billion. DOE’s total budget for fiscal year 2008 was $24 billion. Assuming the department receives similar funding through fiscal year 2009 appropriations – which we will debate after the recess break – DOE will have received almost triple its historical level of funding in less than a month.

For the most part, the amounts allocated to programs specified in the bill are completely unprecedented. The Congressional Budget Office reached the same conclusion when it determined that DOE would only be able to spend 24 percent of its funding before the two-year deadline. The Energy Department simply does not have time to gear up and properly spend so much money over so short a period.

So, will this level of funding become a new baseline for the department? If it does, we will have significantly expanded federal spending at a time of unprecedented federal deficits. If it does not become part of the baseline, that crashing sound you will hear will be the gears grinding back down as funding returns to normal. Such wild swings in funding are disruptive and one of the most ineffective ways to spend taxpayer dollars.

The stimulus, by giving government agencies completely unprecedented amounts of money for non-existent programs, also sets forth near-perfect conditions for waste, fraud and abuse.

Consider the $3.2 billion provided for block grant programs for energy efficiency. The conference report provides $400 million for a competitive grant system that does not currently exist, and for which there is no administrative process. Making matters worse, it provides an additional $3.1 billion to state-run energy programs, but imposes conditions to receive funding that are currently met by only a handful of states.

Perhaps the most unprecedented amount is the $4.95 billion allocated to the Weatherization Assistance Program, which represents a nearly twentyfold increase from the past fiscal year. This is a good program, but the state government entities that administer it will face the same allocation problems. How do you ramp up to spend almost twenty times more money over the course of two years, only to have the money slow down to a trickle thereafter?

The bill also allocated $4.5 billion for the smart grid program. Smart grid was authorized at $100 million in the 2007 energy bill, and has received zero funding to date. But the government has still not promulgated standards to establish an interoperability framework. Is it possible to expect that this program can spend $4.5 billion in two years in a rational way?

One last example is the brand new $6 billion loan guarantee program available only for “commercial renewables and transmission.” We already have a loan guarantee program that we authorized in 2005 that is available for all clean-energy technologies, but has yet to issue a single loan guarantee despite billions in pending applications. We should have focused on making the existing program work rather than allocating billions more to a start-from-scratch initiative.

The energy provisions within this bill crystallize the reasons why I opposed the passage of this package. Rather than work to reform the systems first, we are spending money – lots of money -in the hopes that it works. I don’t think the public objects to their tax dollars being spent, but they want accountability. They want to know it will work. They want to know we have done our homework first.

Nearly every senator in this body supports the development of renewable resources and the more efficient use of energy. Likewise, almost all members realize that at this juncture the government must take action to stimulate demand and our staggered economy.

The divide we saw on this bill was not a disagreement over the goals for our country. By and large, those goals are the same across party lines. Instead, it was a disagreement over how we can accomplish those goals as soon as possible, as safely as possible and at as little cost as possible.

The stimulus bill simply did not chart the right course. At a time when every dollar counts, we went overboard – and by limiting our options throughout the process, we came away with a product that I simply can not vote for.

Stimulus Cost: 02-13-09 Teach your Children Well

From the Cato Institute…here.

The bill costs the average U.S. family about $3,300, and it raises the national debt by about $7,700 per family.

Let’s go through that.

The bill spends about $5,500 per family, or $1,750 per person.
It reduces taxes by about $2,200 per family, or $700 per person.
Total cost (using our methodology): $3,300 per family, or $1,050 per person.
Added to national debt: $7,700 per family, or $2,450 per person.

Arnold Kling: 02-13-09 Why The Stimulus Won’t Work

Economist Arnold Kling speaks at The Heritage Foundation & Club For Growth Conference on Why the Stimulus Won’t Work. He has a great blog which can be found here.

Stimulus: 02-10-09 Hundreds of Economists Sign on to Cato Institute Ad

There is plenty of disagreement on whether a big-government stimulus project is the best way to bring the United States out of recession. The Cato Institute purchased a full-page ad in major newspapers across the country listing the names of several hundred economists who object to massive deficit spending as an economic stimulus. Cato scholars and ad signatories have made their case on television since the spending program was proposed. I have the the petition in my blog here.

Stimulus: 02-09-09 Gomer Pyle, Mistake! Mistake! Mistake!

WASHINGTON (CNN) — The Obama administration’s $827 billion economic stimulus plan moved toward passage in the Senate on Monday as a compromise version of the bill cleared a key procedural hurdle.

Monday’s 61-36 vote ended the prospect of a Republican filibuster that could have killed the measure, which President Barack Obama and Democratic congressional leaders say is necessary to pull the country out of an economic nosedive and create new jobs. Three Republicans — Arlen Specter, of Pennsylvania, and Susan Collins and Olympia Snowe of Maine — joined Democrats in voting to cut off debate on the measure. Sixty votes were needed.

Full article here.