Where Is The Stimulus Shock And Awe?
During a November 25 press conference, then President-elect Obama promised "a new spirit of ingenuity," declaring that the "old ways of Washington simply can't meet the challenges of today and tomorrow," and that "just because a program, a special interest tax break, or corporate subsidy is hidden in this year's budget does not mean that it will survive the next."
Now, as the centerpiece of the Obama administration's agenda -- the $819 billion American Recovery and Reinvestment Act of 2009 -- is before the Senate, there is a growing chorus of economists, policy specialists, and commentators -- men and women across the ideological spectrum -- who suggest that the legislation falls far short of Obama's own standards, that it is rooted in the past, that it lacks ingenuity, that it is not sufficiently geared toward innovation, that it contains a raft of special interest tax breaks and subsidies, that huge chunks of cash will be funneled through old bureaucratic pipelines, and that the measure will plunge the country deeper into debt with little to show for it.
"I just don't understand," said one key Obama transition aide who worked on the economic program, "how a group of A-level people could produce such a B-minus, C-plus product," referring to top economic advisers Larry Summers, Jason Furman, and Treasury Secretary Tim Geithner.
Joseph Stiglitz, Columbia professor of economics and winner of the 2001 Nobel Prize, is a firm believer in the necessity of a major stimulus package and described to the Huffington Post the measure before Congress as "much better than doing nothing. The alternative is massive job loss. [Even with the new spending in the bill], there will be large job loses, but there will be fewer." Stiglitz has reservations, however: "The criticism I've raised is that it is not optimally designed from an economic point of view. There should be maximum bang for the buck."
Stiglitz, like many others interviewed by the Huffington Post, was sharply critical of some of the business tax breaks which allow corporations to collect rebates on past taxes for current losses. "The business tax cuts should be linked directly to investment, not credits for current losses or past investments," he argued. Other tax breaks that could be both stimulating to the economy and socially beneficial include credits for those buying low-pollution cars and for those who improve the energy efficiency of their homes, Stiglitz said, reinforcing a comment he made earlier to the International Herald Tribune:
"I've been a bit astonished that all the discussion around the private-sector stimulus has centered on infrastructure...Bailouts, too, are aimed at correcting mistakes of the past, so they are backward-looking. We would be much better off spending our money forward-looking. If we spend $700 billion on new technology and innovation, we'd have a stronger, new, real economy. Up to now, the discussion has focused on the sectors that have been mismanaged rather than the sectors that are creating our future."
Stiglitz and fellow Columbia economist Massimo Morelli both would prefer a stimulus package that rewards -- in multiple ways -- innovation and pioneering research. Morelli makes the case that the legislation should encourage a return to smaller, local financial institutions that are more likely than big banks to capitalize innovative entrepreneurs who, in his view, help drive productivity growth and job expansion. Morelli argues that "We have to go back to small local banks that evaluate the quality of small entrepreneurial projects and finance them directly, without reselling claims to those credits. In other words, the federal government should spend on incentivizing small business creation by tax credits on hiring new workers, on new ideas, but give no tax breaks at all to established larger companies of any kind that have to use highly paid managers to run the business. I believe innovation comes from new companies, and very little from established ones where share holders are too far from the management."
Morelli sees the current crisis as having its roots not in a lack of regulatory oversight, but in a "lack of innovation and new productive ideas in which to invest. From 2000 to mid 2008, investors moved money out of productive but mature investments like high-tech industry, and put money mostly into real estate and speculative activities. These things have no spillover on growth at all," Morelli notes. To be effective, in his view, a stimulus bill should foster innovation and productive investment.
Dissenting from mainstream views, Morelli contends that "cutting or even eliminating bonuses for managers can stimulate investment when combined with higher taxes for corporate profits which are not reinvested.... Think about it: suppose you are an entrepreneur who owns his business and is expecting some good profits for the year; then, if you know that cashing your profits will make you incur higher taxes, you prefer to reinvest in new plants or new ways to use your productive capacity."
The fear that the hastily-written legislation could result in a huge expenditure of tax dollars with little to show for it except a bigger deficit has prompted a number of supporters of stimulus to argue that the $819 billion bill should be split into two parts.
Alice Rivlin, who was director of the Office of Management and Budget under President Clinton, told the Senate Budget Committee on January 21 that the money needed for swift, anti-recession relief, should be enacted immediately in legislation separate from the "longer-run investments needed to enhance the future growth and productivity of the economy." Combining short and long-term goals in one program, she said, poses risks: "two kinds of risks in combining the two objectives. One is that money will be wasted because the investment elements were not carefully crafted. The other is that it will be harder to return to fiscal discipline as the economy recovers if the longer-run spending is not offset by reductions or new revenues."
Along parallel lines, Brookings senior fellow in governance studies Pietro Nivola says that "a strong stimulus to the economy is desirable -- and the faster the better." But, he warns "there is little room for error. In the current dangerous situation, shoveling $800 billion at the problem, only to discover that too little of it actually stimulates, could prove to be a cure considerably worse than the disease."
Instead, Nivola suggested that Congress "proceed in two tranches. The first would pump money directly into the hands of consumers and businesses through a combination of judicious tax relief and quick-hitting expenditures (including, as one example, ramping up military equipment procurement and recruitment of personnel). Subsequent legislation could take up the long-term infrastructure spending and more exotic projects (such as various green energy programs)."
Columbia economist Brendan O'Flaherty argues that passage of legislation quickly is important, and indicates that he is resigned to accepting some "looser" provisions: "the House bill is not perfect, but good enough. I like a lot of things like the unemployment insurance, food stamps, medical insurance expansion. The tax provisions aren't too bad. Most of the infrastructure stuff will probably be a bust, but you can't have everything the way you want it in a package other people put together. I'm sure there are a bunch of other losers in it too. There is no excuse for the losers, but that's life."
Also critical of the current bill, Douglas A. Hibbs, Jr., Professor of Economics at Göteborg University in Sweden, argues that "We are sliding from recession into quasi depression and academic economics has little useful to say about how to turn the situation around. Economics suffers its long-standing divisions about the efficacy of monetary and fiscal expansions -- or for that matter of any government action at all in reviving macroeconomic activity -- divisions that are strongly correlated with the broader political orientations of the profession's various factions. At bottom, the problem is one of street level social psychology, not contentious technicalities of optimal policy. A reversal of Keynes' animal spirits, now dominated by fear and uncertainty yielding paralysis, should be the main object of attention. To this end the particulars of the fiscal stimulus bill are less important than its capacity to shock and awe, to restore confidence by convincing the citizenry that its government will do anything and everything to boost economic activity, thereby inducing solvent individuals and institutions to ramp up spending, lending and investing. The magnitude of the fiscal thrust now on the table falls short -- it ought to be scaled up by a factor of 2 or more in order to set tongues wagging, arms waving and conservative hands wringing."
Along somewhat compatible lines, Gerald Roland, a Berkeley economist and political scientist, is looking for a "very large fiscal stimulus plan....The only way to prevent a new Great Depression is massive expenditures by government." Roland believes that "tax cuts are not a good idea in the stimulus package. They might have been designed to win the support of some Republican representatives. Their effect is very limited, especially for businesses, but also for households because they will be used to cut down people's debt without having a strong effect in terms of stimulating demand. Support for tax cuts instead of spending is based on ideology and not economic analysis."
More in favor of tax cuts as a way to stimulate the economy, but also in favor of a more thoroughly considered bill, is famed Harvard economist Robert Barro, also a Nobel Laureate. Barro told The Huffington Post: "It's more important to work things out correctly than to do them quickly (with 'shovel-ready projects'). The problems involve mainly the financial sector and housing markets, and the solutions should mostly emphasize those two areas," Barro said. He suggests that "cuts in marginal tax rates might be helpful. These actually worked to help the economy in the past: Kennedy-Johnson in 1963-64, Reagan in 1981-83 and 1986, Bush in 2003. Throwing money at people is not a meaningful 'tax cut,' because it does not have the incentive effects from reduced rates."
While the stimulus bill is encountering growing skepticism, it retains numerous supporters. University of Texas economist James K. Galbraith told the Huffington Post: "The great virtue of HR 1 is that it funds programs that have already been authorized or are otherwise well understood and widely-supported, at least within the Democratic caucus. This means it can be enacted and implemented quickly." After passage, he warns, "there should be no expectation of a 'return to normal' in the near term," calling for "a comprehensive housing program, expanded social security benefits, a reduced age of eligibility for Medicare, and consideration of expanded payroll tax relief."
At a more practical, bread and butter level, Laurie Gould, a Harvard MBA and expert on housing, community development, and nonprofit organizational planning, argues for a massive boost in money transferred directly to state governments. "The House bill provides a total of $79 billion for the State Fiscal Stabilization Fund, in two $39.5 million hits. This sum falls far short of the actual budget shortfalls faced by the states....My argument is that greater federal aid to compensate for these state budget deficits would be a particularly efficient way to preserve jobs. 36 states have already eliminated jobs from the state payrolls, or are considering doing so. Further, to address budget deficits, states are eliminating social service programs, cutting aid to local school districts, and reducing government services."
Interestingly, some of the criticisms of the stimulus voiced by liberal economists are shared by Harvard's Martin Feldstein, a guiding light of the GOP and Reagan's Chairman of the Council of Economic Advisors. The business tax cuts are "likely to do little to increase business investment and employment. The extended loss 'carrybacks' are primarily lump-sum payments to selected companies. The bonus depreciation plan would do little to raise capital spending in the current environment of weak demand because the tax benefits in the early years would be recaptured later," Feldstein wrote on January 29 in the Washington Post. "Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment."
Some of the criticisms of the stimulus bill that Feldstein aired in his Post op-ed are clearly far to the right of the consensus among liberal Democrats: "The largest proposed outlays amount to just writing unrestricted checks to state governments... Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues? The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse."
Although Feldstein supports stimulus legislation, he too thinks the legislative process has to be slowed way down. "We cannot afford an $800 billion mistake."
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First Posted: 02- 3-09 08:55 AM | Updated: 03- 6-09 05:12 AM