By Clive Crook
Published: March 7 2010 19:17
Barack Obama’s administration faces a torrid time between now and November’s mid-term elections. Mr Obama finds himself at a disadvantage, his political capital running low. One reason is the public’s verdict on last year’s fiscal stimulus.
Three-quarters of the electorate thinks the stimulus was mismanaged. The country’s children are being strung with debt, voters reckon, for no good reason. This perception that billions have been wasted makes everything else the Obama administration wants to do – notably, healthcare reform – even harder.
The public is wrong about the stimulus, but the error is understandable. As with healthcare reform, the machinations that produced it were gruesome. As with healthcare reform, the administration had no clear policy of its own, and relied on a dysfunctional Congress that the country does not trust.
Two other factors intervened. First, the downturn was deeper and more tenacious than expected. Second, not so well understood, the stimulus was smaller than it looked.
Most economists agree that the downturn called for a big stimulus, and that it is working. Estimates by the independent Congressional Budget Office reflect this view. The CBO finds that the stimulus boosted output in the fourth quarter of 2009 by between 1.5 per cent and 3.5 per cent, and reduced the unemployment rate by between 0.5 percentage points and 1.1 percentage points – unspectacular gains, given the scale of the commitment, but valuable nonetheless.
Sceptics doubt these numbers. Writing in The Wall Street Journal, Harvard University’s Robert Barro argued that, judged over five years, “the fiscal stimulus package is a way to get an extra $600bn [€440bn, £396bn] of public spending at the cost of $900bn in private expenditure. This is a bad deal.”
Mr Barro’s analysis is questionable. He sees the stimulus as a spending increase that will later be financed with higher taxes. His gloomy result then follows, because he believes the multiplier on tax changes is higher than that on spending changes.
But as Gary Burtless of the Brookings Institution points out, more than half the stimulus took the form of tax cuts – either directly, or by avoiding increases in state taxes that would otherwise have been necessary. As the recession took hold, state governments saw their revenues drop. They face limits on their borrowing. Without federal assistance, they would have had to put their taxes up.
Also, Mr Barro’s multipliers are suspect. His low spending multiplier is derived from detailed wartime data – a period of high employment and very rapid growth, different from current circumstances. Even if Mr Barro represents the stimulus correctly, and is right about the multipliers, there would still be something to be said for shifting activity and employment from a more prosperous future to an unusually depressed present.
Stimulus sceptics are on firmer ground when they ask if concerns about future public debt are weighing on consumers. This is hard to judge, since it depends on shifts in the country’s mood – on animal spirits. But this does not mean the issue can be dismissed. Pessimism about the efficacy of the stimulus, even if founded on faulty reasoning, could be a self-fulfilling prophecy.
What if consumers are forward- looking and base their decisions on accurate forecasts? In this case, according to modern macroeconomic theory, and contrary to Mr Barro’s thinking, fiscal stimulus can indeed have powerfully beneficial effects – especially if monetary policy is constrained, as it is today, by interest rates that have fallen to zero. On the other hand, for maximum effect, it is important in these models that the stimulus is expected to be switched off as soon as the “zero bound” is released.
Michael Woodford of Columbia University concludes a recent paper on the subject from the National Bureau of Economic Research by noting: “Careful signalling about the likely direction of future policy is likely to be as important as current actions.” Few would praise this administration for careful signalling. And the recent budget boosts public spending long after the economy is presumed to have returned to full employment. Common sense and modern macro theory seem to agree that vigorous short-term stimulus makes sense, but only if married to credible fiscal consolidation in the medium term.
Even if the signalling had been better, the effects of the stimulus would still have been reduced by a point that is obvious, yet usually ignored: the fiscal role of the states makes the overall stimulus smaller. Mr Burtless is right that some of the stimulus was spent on avoiding higher state taxes. But you can look at that another way. As much as a third of the stimulus was instantly neutralised by the states’ limits on borrowing – by the need, in other words, to override the states’ automatic destabilisers.
Discussion of the US budget deficit invariably focuses on the federal balance, not the general government balance. Since state expenditures are very large – more than a third of general government spending – this is misleading. A new study by Joshua Aizenman and Gurnain Pasricha, also published by NBER, which looks just at spending, concludes that “the aggregate fiscal expenditure stimulus in the US, properly adjusted for the declining fiscal expenditure of the 50 states, was close to zero in 2009”.
Even on this account, because the stimulus cut taxes as well, it helped. But it would have helped a lot more if it had been bigger; if its designers had commanded public confidence; and if a plan to control medium-term borrowing had been included up front.
Copyright The Financial Times Limited 2010.
0 comments:
Publicar un comentario