Stimulus, Unemployment, and Austerity Roundup

Daniel Hamermesh wants to extend unemployment benefits.

The original, and I believe continuing, purpose of unemployment insurance is to maintain consumption of the unemployed—to prevent hardship.  With 45 percent of the unemployed out of work more than 26 weeks, by far the highest percentage since the 1930s, consumption maintenance seems to argue even more strongly than usual for the wisdom of re-extending benefits.

Daniel Wilson for the Federal Reserve Bank of San Francisco estimates the effect of state allocations from the federal stimulus package.

The estimated jobs multiplier for total nonfarm employment is large and statistically significant for ARRA spending through March 2010, but falls considerably and becomes insignificant in April and May. The implied number of jobs created or saved by the spending is about 2.0 million as of March, but drops to 0.8 million as of May. Across sectors, the estimated impact of ARRA spending on construction employment is especially large, implying a 18.4% increase in employment (as of May 2010) relative to what it would have been without the ARRA. Lastly, I find that spending on infrastructure and other general purposes has a large positive impact, while spending on safety-net programs such as unemployment insurance and Medicaid reduces employment.

 Brad DeLong argues for bigger budget deficits.

The Federal Reserve has pushed interest rates to the floor and wishes it could drive them into the basement—to –5 percent per year or so. Thus the multiplier on the government’s spending is not 0.4 but more like 1.5. We do not get $40 billion of additional production and employment for $100 billion; we get something closer to $150 billion. And there is no crowding out of private investment; on the contrary, there is likely to be crowding in. 


The increased cash flows to businesses boost future private-sector incomes by $1 billion a year. The costs of amortization reduce them by $1.07 billion a year. The net cost? $70 million per year. So to gain $150 billion of increased production and incomes this year we incur a $70 million a year cost going forward. That means that using expansionary fiscal policy to boost output today is an investment worth doing at any interest rate greater than 0.05 percent per year. 

Ezra Klein questions the logic of the austerity crowd.

[E]ven as a matter of simple logic, I really don’t understand the case for why a business would begin spending if the government announces major cuts this year. So the government says, “I’m going to take demand out of the market, end tax cuts that are helping people spend, throw a large number of public employees out of work, and reduce the spending power of the unemployed.” And it’s in that context that, say, a manufacturer of picture frames, or a local coffee chain, decides to hire more people? Where is the promise of further demand? 

Krugman faults the Obama administration for not trying to get a bigger stimulus through the first time.  

So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.”

I don’t know why Summers etc. believed this. Even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One — which, if the aftermath of previous major crises was any guide, would be followed by multiple years of high unemployment.

Clive Crook wonders where Obama’s leadership is to push for more stimulus and long-term budget responsibility.

But where is Barack Obama’s leadership when you need it? The White House is letting Republicans win the argument by refusing to address the long-term issue. The president set up a fiscal commission to make recommendations – a classic stalling device. He and his party, if they believe in anything, believe in bigger government. Yet he has tied his own hands on revenues by promising no tax increases for most Americans. He has pushed through an unpopular healthcare reform that only he and his most besotted allies believe will cut costs.

Is it surprising that the country thinks fiscal policy is out of control, even to the point of looking warily at extended jobless benefits? To get its way on short-term stimulus, the White House needs to talk seriously about long-term budget policy. The silence is deafening.

Matt Miller (via Clive Crook’s blog) wants “Jobs Now, Deficits Soon”.

What would a radically centrist “Jobs Now, Deficits Soon” package look like?

Start with the tax side, where we should accelerate the kind of sensible tax reform that’s overdue. That means cutting payroll and corporate taxes now — and offsetting this with phased-in tax hikes on dirty energy and consumption, to take effect only once jobs and growth are back on track.


Toss in some progressive trims to Social Security and Medicare benefits beginning a few years out. And wrap it all up (as I’ve argued elsewhere) with a new law requiring a supermajority vote in Congress to run deficits higher than 3 percent of GDP whenever unemployment is below 6 percent. Along with the new taxes and entitlement trims, this will convince bond markets we’re serious and underscore that we’re only running outsized deficits to fight today’s output and jobs gaps.

Fareed Zakaria interviews British Chancellor of the Exchequer George Osborne. Osborne recently unveiled a massive austerity budget with large spending cuts and tax increases. 

Greg Mankiw counters Krugman’s claim that stimulus skeptics are logically incoherent.

A coherent objection to this line of argument might be the following: If the government borrowed the money to spend, it would need to eventually pay the money back. That means higher future taxes, on top of the future tax increases that President Obama already will need to impose to finance his spending plans. Higher future taxes reduce demand today for at least a couple reasons. First, there are Ricardian effects to the extent that consumers take future taxes into account when calculating their permanent income. Second, those future taxes are not likely to be lump-sum but will be distortionary; it is plausible that at least some of those future tax distortions may adversely affect the incentive to invest today.

That is, businesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future.  The more the government borrows, the higher taxes will need to go, the more distorted the future economy will be, and the less attractive is investment today.

Brad DeLong retorts @Mankiw.

For these parameter values, a $1 boost to infrastructure spending crowds-out $0.01 of private investment spending and $0.05 of private consumption spending, leaving $0.94 of stimulus.

To claim that the excess burden of taxation is not $0.50 on the dollar but $20 on the dollar, or that a 1% fall in productivity produces not a 1.5% fall but a 30% fall in the desired capital stock can be called many things. 

“Coherent” is not one of them.

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