Ending Stimulus and the Shape of the Recovery
by Tom Bozzo
Brad DeLong observes that the FY2011 budget features “big, very big” tightening on the revenue and spending sides (2.5% of GDP “from 2010 to 2011”) for the prevailing labor market conditions. DeLong wants his “morning in America” (don’t we all?), and is understandably alarmed at the pessimistic forecast of the rate of labor market improvement. Paul Krugman echoes the sentiment on “near-term” fiscal tightening.
As is always the case, the tightening question has to be “relative to what?” [1] Receipts as a fraction of GDP are expected to increase fairly substantially, for example, but that’s largely a consequence of expected economic growth.
Compared to the current-policy baseline, the FY 2011 (10/2010-9/2011) budget increases the FY 2011 deficit by around 0.8 percent of GDP. In FY 2012, the budget would subtract around 0.7 percent of GDP from the current-policy deficit. Krugman is correct to attribute this to the winding-down of ARRA stimulus and of our “overseas contingency operations” better known as the wars in Iraq and Afghanistan. Go see Table S-2 here [PDF]. Additionally, current policy has some stimulus on top of current law. Allowing most of the Bush tax cuts to become permanent reduces FY 2011 receipts by around 0.9 percent of GDP. (See Table 14-2, here.)
As for the timing, the budget assumes (see Table 2-1) that real GDP in quarter 4 of calendar year 2010 will be 3 percent higher year-over-year; in Q4 of 2011 (a/k/a Q1 of FY 2012), real GDP is expected to increase another 4.3 percent. Even with the tightening, Q4 2012 real GDP would increase another 4.3 percent y/y. So the FY 2012 tightening only arrives after two years of modest growth.
If measures labeled as such are actually to be temporary economic stimulus measures, they obviously must end sometime. Ending them after the expansion ends is stupid — the tightening would reinforce the subsequent downturn — so it’s going to take some steam out of the expansion one way or another. The most pressing timing concern would be not to take away the stimulus before it’s clear that the recent GDP growth is sustainable; I’d argue that after two years of growth, should we get there, the case that measured GDP growth is a matter of one-time shots and/or statistical glitches will be fairly weak.
The slow assumed labor market recovery Brad DeLong notes might be seen as a mirror-image of the GDP recovery assumed in the budget baseline:
The budget’s baseline economy (with the triangle marks) isn’t as pessimistic as OMB is willing to imagine in public (and if you’re Ken Houghton, you might see all of these as irrationally exuberant), but the ‘output gap’ opened by the recession is assumed to close very slowly. While higher-frequency data are not equally optimistic, there’s building evidence (so far, outside of employment) for a reasonably strong recovery. And as Maynard explains at Creative Destruction, it’s arguably in the administration’s interest to err on the pessimistic side since people (again, even including some economists) don’t understand counterfactuals and thus tend to inappropriately place blame (or credit) for surprises.
[1] Every economics professor who disparages the “jobs created or saved” concept should be immediately stripped of tenure and exposed to the current labor market for forgetting that all economic analysis is counterfactual.
Tom,
The proposed new Federal budget is $3.8 trillion. This will put it in the 25-26 percent of GDP range. Historically, its been at between 18-19 percent. So the budget is huge anomoly that is cutable and I expect the Republicans to do the right thing and insist in a $800 billion cut to it.
And by the way, I don’t know what DeLong wants but i’m pretty sure Krugman would like to see the budget stay at 25-26 percent of GDP (we’re not his beloved Sweden yet).
Cantab, please explain where that $800 billion will come from. Nondefense discretionary spending is budgeted at $520 billion for FY2011. Republicans are telling the world that Medicare spending is sacred to them. So will it be defense or Social Security, or are you saying that they’re a bunch of liars?
Tom, let me presume to answer for Cantie. 1) Don’t spend the remaining ARRA funds. 2) Xfer the remaining TARP funds to pay debt. 3) cut discretionary spending, including DOD, by 10%, 4) In addition to the 10%, cut Energy, education, Ag, Interior, and DOT by an added 15%.
Then freeze at those levels adding only increases at inflation levels. Then let your assured improved economy and related employment take care of the remaining deficit, and eventuially begin to pay down the debt.
Have a problem with that? Explain.
***Historically, its been at between 18-19 percent.*** Cantab
As usual — mindless Bullshit. See http://www.usgovernmentspending.com/us_20th_century_chart.html or http://www.gpoaccess.gov/usbudget/fy05/hist.html Table 1.2. The historical number since 1982 (The first Reagan Budget) based on actual outlays is nearly 21%. To get your number it looks like you basically have to consider only the Bush II bubble shop (Put it on the kid’s tab economics) or go back to the 1940s but start after World War II. The number peaked at 43.6% in 1943-1944 BTW
***and I expect the Republicans to do the right thing and insist in a $800 billion cut to it. ***
Having no common sense whatsoever, and never bothering to do even the most basic fact checking, you probably do expect that. However, the entire non-security related portion of the 2011 Obama discretionary budget is around $500B (They’ve claimed $477B, NPR says 520B).
The Republicans are going to cut ALL the non security discretionary spending and 300B out of the 900B defense budget? When pigs fly. Best guess is that they’ll bluster, lie, blunder, obsfucate and backtrack just like usual and do little or nothing.
BTW, Finding a comprehensible breakdown of the 2011 budget was harder than I expected. http://www.npr.org/templates/story/story.php?storyId=123260736&ft=1&f=1003 is the first one I found that was usable.
The question that Calculated Risk and a few other people keep on asking is where the GDP growth it going to come from. It surely will not be construction or real estate– commercial or residential. There is a glut of developed property and a dearth of qualified buyers and commercial leasors. The number of buyers/leasors may well increase, but how much and how fast?
Autos? The situation has to improve. An improvement to 12+M vehicles a year might be enough to keep the auto makers, suppliers, and many dealers alive. But it’s not the stuff that booms are made of.
Agriculture? Maybe. But agriculture nowadays is energy intensive and energy is likely to be pricier than we are used to. Lots of petroleum demand from developing countries. Suppliers struggling to meet it. 40% of our energy usage is oil and switching to other sources takes years, not weeks.
Manufacturing? We still do manufacturing? It’ll probably improve some. But can it carry the economy? Especially with all those developing countries ready to undercut our pricing FOB Los Angeles-Long Beach.
Retailing? Services? With official unemployment over 10%, U6 way above that? If either worker in a family is unemployed/underemployed, that’s a household that is probably cutting back on purchases of both goods and services, No?
CoRev, you have not solved the problem. Cantab needs to come up with $800 billion *a year* to get expenditures to the range he wants.
While I’ll believe a Republican-led 10 percent across-the-board reduction in the DoD budget when I see it, cutting 10 percent from the national security budget and 25 percent from other domestic discretionary programs gets you an average of $128 billion/year for FY11-FY20. Ditching the balance of ARRA doesn’t even get you one year of the other $672 billion/year you need. The uncommitted TARP funds aren’t sitting in an account somewhere — they’d need to be borrowed and so can’t be tapped to reduce the net debt or deficit.
‘Codger, FYI, the charts in the NPR story are based on Table S-4 in the budget’s Supplemental Tables here (PDF, also linked in the post); the table also has info for FY09-FY20.
VtCodger,
As usual — mindless Bullshit.
If you were not such a hot headed troglodyte troll you would have noticed that I was talking about the Federal budget as a percent of GDP. You made a fool of yourself when you linked to all government spending. Last time I looked there was no such thing as a unified government budget.
Tom,
Cantab, please explain where that $800 billion will come from.
Thanks for the softball. Start by taking the budget for 2008, assume a conservative rate of growth in government spending, and then use this as a baseline.
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what has happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays have only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the budget outlay was 24.7% of GDP and going forward the numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%.
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what has happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays have only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the outlay was 24.7% of GDP and going forward the numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%.
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
OK, so it *is* Social Security and Medicare then (seeing as the budget calls for FY 2013 discretionary spending will be only around $40 billion higher than FY 2008 levels in constant dollars).
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what has happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays have only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the outlay was 24.7% of GDP and going forward the projected budget outlay numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%. That’s an average of 23.857%.
Outlay averages of 19.5% vs. 23.857% represents an average growth of 4.257% of GDP. If you want be more specific and focus on FY2001-2008, the average outlay was 19.6125%. So, the difference would be 4.2445%.
Any way you cut it, we’re talking about 2.5-4% GDP growth in outlays which is quite a hit.
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
VtCodger is referring to Federal spending. For example, the FY 2011 budget calls for spending 25.1 percent of GDP in FY 2011, dropping to 22.8%-22.9% in FY 2013-2015. The comparable average for the Reagan years is 22.4%, and the average for the 20 years up to and including FY 2008 is 20.1 percent.
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what has happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the outlay was 24.7% of GDP and going forward the projected budget outlay numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%. That’s an average of 23.857%.
Outlay averages of 19.5% vs. 23.857% represents an average growth of 4.257% of GDP. If you want be more specific and focus on FY2001-2008, the average outlay was 19.6125%. So, the difference would be 4.2445%.
Any way you cut it, we’re talking about 2.5-4.2% GDP growth in outlays which is quite a hit.
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
Current federal expenditure as a percent of GDP by decade (ie Current Expenditure / GDP)
1930s6.9
1940s
19.2
1950s
16.4
1960s
17.5
1970s
19.9
1980s
22.2
1990s
21.4
2000s
20.0
2009
24.2
President Obama seems to be setting new records in Federal spending both in size and percent of GDP. The only exist strategy that I see is to beat them at the polls.
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what has happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the outlay was 24.7% of GDP and going forward the projected budget outlay numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%. That’s an average of 23.857%.
Outlay averages of 19.5% vs. 23.857% represents an average growth of 4.257% of GDP. If you want be more specific and focus on FY2001-2008, the average outlay was 19.6125%. So, the difference would be 4.244%.
Any way you cut it, we’re talking about 2.5-4.2% GDP growth in outlays which is quite a hit. Where is the revenue growth to cover that level of increase in expenditures?
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
Current federal expenditure as a percent of GDP by decade (ie Current Expenditure / GDP)
1930s 6.9
1940s 19.2
1950s 16.4
1960s 17.5
1970s 19.9
1980s 22.2
1990s 21.4
2000s 20.0
2009 24.2
President Obama seems to be setting new records in Federal spending both in size and percent of GDP.
VtCodger,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what happened during the past 15 years regarding budget outlays.
Since WWII, U.S. Government budget outlays only hit 21% or more of GDP during the period 1975-1994. The average Government outlay from 1995-2008 was 19.5% of GDP.
In FY2009, the outlay was 24.7% of GDP and going forward the projected budget outlay numbers are FY2010 25.4%, FY2011 25.1%, FY2012 23.2%, FY2013 22.8%, FY2014 22.9%, and FY2015 22.9%. That’s an average of 23.857%.
Outlay averages of 19.5% vs. 23.857% represents an average growth of 4.257% of GDP. If you want be more specific and focus on FY2001-2008, the average outlay was 19.6125%. So, the difference would be 4.244%.
Any way you cut it, we’re talking about 2.5-4.2% GDP growth in budget outlays which is quite a hit. Where is the revenue growth to cover that level of increase in expenditures?
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
Tom,
It’s the job of the current administration to bring the federal budget down to match revenues at the 18-19 percent of GDP range to meet their historical average. I would give them some leeway in doing this if I had any faith in what they’re doing and their motivation.
The budget is a moster by historical standards. For the democrats to win on this they have to convince voters to be more European and vote out republicans for filibustering their montrocity. Given the results of recent elections I don’t think this is the trend we’re on.
Tom,
Cantab needs to come up with $800 billion *a year* to get expenditures to the range he wants.
No, I don’t thinks so. If people like me and other people who voted for Scott Brown get our way we will tell the government that this is what your budget constaint is ($3 trillion), now allocate it among competing priorities.
Cantab you have now changed your numbers/average. I appreciate that you do not want to sit still long enough to get whacked but….
need gdp based on productive v. unproductive labor if we want to ‘see’ what portion of stimulus results in growth v. added costs
whole concept of gdp requires re-doing as also notions that all labor is productive or that the relation is fixed and scalable rather than variable /tendency towards greater mass of unproductive and associated mismeasurement.
times series absent all circulation activities for starts or at least all FIRE.
point is: objectively some portion[?] of stimulus can offset other portion[s],
provide technical growth
but real immizeration which standard accounting identities fail to distinquish.
probably not comparable gdp’s since ratio of unproductive to productive labor really took off post-1948.
Travis,
Cantab you have now changed your numbers/average.
The numbers are the average of the ratios over the decade. This does not distort the result in any way. The high spending during the 1980s is there for all to see.
Movie Guy,
I expect that Cantab was thinking of revenues. Your point, though, overshadows what happened during the past 15 years regarding budget outlays.
I was thinking about expenditures but my notion on size was based on revenues, so it was good to go back and look at the numbers again. Using expenditure Obama’s spending is still way too high and higher than any of his post war peers, but less than the 7-8 points higher if you used a balanced budget that matched historical revenue as a baseline.
Historically countries do not smoothly move towards convergence with potential GDP. That’s not how it happens. The usual scenario is to oscillate around potential GDP. So if we do actually follow the stylized path in the budget forecast, then it’s going to take many years and many election cycles before the economy gets back to its normal growth rate.
Let’s not forget that the 2011 budget is less than 8 months away, so the idea that somehow we should be concerned about too much fiscal stimulus strikes me as out-to-lunch. If you want to argue that we should start planning on a contractionary 2012 budget, then maybe we can talk.
And as it happens, this week this is yet another new paper on government multipliers in a liquidity trap. http://www.nber.org/papers/w15714 It’s a short paper and comes to the same conclusion as several other papers written over the last few months. Basically govt spending can be strongly stimulative as long as the Fed doesn’t sterilize with positive interest rates.
Cantab,
If you account for the GDP gap, then the Obama budget is right in line with St. Ronnie’s budgets as a percent of GDP.
CoRev,
1) Don’t spend the remaining ARRA funds. 2) Xfer the remaining TARP funds to pay debt. 3) cut discretionary spending, including DOD, by 10%, 4) In addition to the 10%, cut Energy, education, Ag, Interior, and DOT by an added 15%.
You really shouldn’t be allowed to vote until you take that macro 101 course. In the same way that an increase in govt spending helps soak up excess savings and stimulate aggregate demand, so too does a cut in govt spending add to excess savings and further depress aggregate demand.
Then let your assured improved economy and related employment take care of the remaining deficit,
Inserting the word “assured” doesn’t change the fact that this is crackpot economics. Just how does cutting govt spending increase aggregate demand???
CoRev,
1) Don’t spend the remaining ARRA funds. 2) Xfer the remaining TARP funds to pay debt. 3) cut discretionary spending, including DOD, by 10%, 4) In addition to the 10%, cut Energy, education, Ag, Interior, and DOT by an added 15%.
You really shouldn’t be allowed to vote until you take that macro 101 course. In the same way that an increase in govt spending helps soak up excess savings and stimulate aggregate demand, so too does a cut in govt spending add to excess savings and further depress aggregate demand.
Then let your assured improved economy and related employment take care of the remaining deficit,
Inserting the word “assured” doesn’t change the fact that this is crackpot economics. Just how does cutting govt spending increase aggregate demand???
***You made a fool of yourself when you linked to all government spending. Last time I looked there was no such thing as a unified government budget. ***
Cantab
Cantab. You are an obnoxious, ill informed, worthless, adolescent twit. But I am glad to see that you have gone out and looked up more realistic numbers. If there is anything else I can do to increase your rather limited contact area with reality, please fell free to ask.
BTW, your new numbers look fairly OK except for the 1940s which I have at 24% rather than 19%. Not sure why the discrepancy. In any case, the 1940s include four years of huge deficits during World War II and reflect an era when the relatively new Social Security program was a much smaller component of the budget than it is today. Whether 19% or 24% or something else is the right number for the 1940s it probably isn’t meaingfully comperable to 2010s.
***whole concept of gdp requires re-doing*** juan
I doubt you will find a single economist or interested observer on the right, left, or in the center who actually likes the way GDP is calculated. The problem is that it is not clear how to do it better. And there is a reasonable fear that all tinkering with the calculation would do is prevent comparing next year with this year and this year with last year.
There’s a pretty readable paper on GDP and the problems associated with it at http://www.westga.edu/~bquest/1996/csgdp.html