Math is Math: There Was No "Second Stimulus"
One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)
Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5
David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).
That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B
The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:
FedMultiplier * FedStim = CA-ILEconomyCost
FedMultiplier * $60B = $68.1B
FedMultiplier = 1.135
That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.
Only 47 states to go.
The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.
The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*
1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.
And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.
Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.
*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.
*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.
I don’t understand why anyone would say “there wasn’t a second stimulus.”
The state budget cuts would have occured regardless of the tax deal. Why treat them as a packaged deal?
Isn’t it more accurate to say that the the state budget cuts will offset the impacts of the second stimulus?
Never appologize to Tyler Cowan for anything.
Perhaps we can look to the previous depression for some guidance.
We find two things:
1) Private investment increased as Government spending increased.
2) Private investment decreased when Government spending decreased (’37-38.)
New Deal programs put money in people’s pockets, and that led to demand.
Not exactly rocket science, but math is awfully awfully hard.
DrToast hits it right on the head!!!
This post is rather evasive, I feel.
Gosh, this is fascinating.
So, OK, there’s been no second stimulus. But the economy continues to improve, growth is happening again and so on.
Therefore a second stimulus was never needed, was it?
“Stimulus” seems to be the wrong word for a while now. My impression continues to be that Obama and Congress have been treading water for the past two years–each “stimulus” being just enough to stop us from sinking further.The second “stimulus” mostly prevents scheduled negative-stimuli, such as reduced spending on unemployment benefits and the end of tax cuts. Negating, preventing, and offsetting negative-stimuli is hardly a stimulus. It’s something else.
Meanwhile, my impression–right or wrong?–of our economic growth is that much of it is profits boosted by lower real wage costs and other efficiencies, and less of it reflects business expansion. That profitability is, of course, made possible by federal borrowing and spending to stop the downward slide in demand (you’re welcome). Most of the profits appear to be saved. I take seriously the notion that the profits eventually will go to–often job-killing–acquisitions and mergers unless demand actually grows somewhere somehow. If that happens, maybe we’ll need to borrow and spend to pay for those acquisitions and mergers.
Depends on what you thing the goal of the stimulus was. If it is to prevent a contraction in output, then on currently available evidence, no, we didn’t need another stimulus. If the goal was to reduce unemployment, close the output gap and improve economic welfare, then yeah, we needed another stimulus.
I believe a good number of supporters of a second stimulus, and critics of the first stimulus as too small, take the view that policy ought to have higher goals that just putting an end to economic constraction.
The tricky part is the shift from math to language. There is no equation I know of the solution to which is “stimulus”. Stimulus is not all that clearly defined, but often seems to mean “intervention aimed at causing some economic variable to be higher than it would be in a baseline state.” That leaves open debates over which economic variable (output or jobs or stock prices) and which baseline (without the intervention or relative to some other prior intervention or relative to some dogma about what works and what doesn’t). Which means we can debate whether to call this latest thing a stimulus till the cows come home and shed little light on anything.
That was probably because the private sector investors were waiting for customers, that is people with jobs and money to spend. Private sector investors who don’t wait for customers don’t stay private sector investors for long.
Tax cuts don’t stimulate the economy; they cause autism. Facts are facts.