Exactly How Does Stimulus Work?

Separating economics from theatrics.

Three major events piled into view Tuesday: The Senate, under intense fire from the new president, passed a $838.2 billion stimulus bill. Treasury Secretary Tim Geithner unveiled the Obama administration’s solutions to the credit crisis. And the Dow Jones Industrial Average fell 381.99 points, 4.6%.

Speaking of the “tired ideas of the past,” how long does it take for the ideas of the here-and-now to start running on empty?

We ask because public anxiety haunts the Obama plan to revive the economy. A USA Today/Gallup poll found some two-thirds of respondents thought the stimulus would help the economy, at least a bit. But half said it would have no affect on their situation and might even make it worse.

By contrast to this ambivalence, the confidence of the president and his team verges on intellectual arrogance. His political adviser David Axelrod describes Republican resistance to the bill as “machinations” and claims the people are not “sweating this detail or that detail.”

Indeed it might not be worth breaking a sweat if the stimulus bill was going to spend the measly $168 billion that George Bush’s tax rebates threw at the economy last year. Nobody gets upset anymore if Washington wastes a hundred billion dollars. But coming after four months of the TARP’s dizzying billions spent in futility, we get a president proposing to spend nearly $1,000,000,000,000 on what he calls “stimulus.” Even a populace numb to its government’s compulsive spending woke up to that fantastic sum.

After kicking the tires of this bill, which Congress blipped downward yesterday to $789.5 billion, a skeptical voter might reasonably ask: “Just how does an economic stimulus work, Mr. President?” In the White House and in Congress, the “stimulus” has become a magical incantation, requiring no explanation beyond that it is “necessary.”

The theory beneath the $800 billion of spending is called the Keynesian multiplier, first posited around 1931. One suspects not a voter in a million knows how this is supposed to work. Barnstorming in Elkhart, Ind., Tuesday, Mr. Obama took a shot at it, calling the weatherization of homes “an example of where you get a multiplier effect.”

The administration’s primary technical explanation for how spending these hundreds of billions revives an economy is in a paper prepared during the transition by Mr. Obama’s economic advisers Christina Romer and Jared Bernstein. To arrive at the number of new jobs the bill would create, the Romer-Bernstein paper attempted to “simulate the effects of the prototypical (stimulus) package on GDP.” The multiplier, as they explain, is applied to a given amount of federal spending to arrive at the likely effect on GDP. Then using a “rule of thumb” that 1% of GDP equals 1 million jobs, they come up with a total jobs figure of 3,675,000. They said their multipliers “are broadly similar to those implied by the Federal Reserve’s FRB/US model” and leading forecasters.

Card-carrying economists are themselves more modest about stimulus theory than the president. Testifying on the bill to Congress a few weeks ago, CBO director Douglas Elmendorf said, “Designing effective stimulus on the scale that the Congress is considering . . . is difficult.” Mr. Elmendorf also noted that “Even without any stimulus, market forces would eventually bring about a recovery from the recession,” albeit with more unemployment and loss of output.

The Romer-Bernstein study for Mr. Obama itself admits “the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress.” Do Ms. Romer and Mr. Bernstein believe the current bill will produce their January study’s job numbers? Is the bill in Congress now a strong-form stimulus or a weak-form stimulus? If the latter, then it’s a waste of money. Martin Feldstein, an early supporter of stimulus, now says that the bill’s effects are weak and need a redo even if it takes a month or two.

If the Obama team won’t consider this, then why shouldn’t one conclude that their case for stimulus, as Mr. Obama suggested with his famous “stimulus is spending” remark, is indeed the crude cartoon version of Keynes, who suggested digging and refilling holes?

If this is true, that “this detail or that detail” don’t matter, then a number of conclusions follow:

The whole congressional effort is an irrelevant sideshow; only the final spending number matters. The economics don’t matter, because the real political purpose of the bill is to neutralize this issue until the economy recovers on its own. Much of its spending is a massive cash transfer to the party’s union constituencies; a percentage of that cash will flow back into the 2010 congressional races. The bill in great part is a Trojan horse of Democratic policies not related to anyone’s model of economic stimulus. Finally, if this bill’s details are irrelevant to the presumed multiplier effect of an $800 billion Keynesian stimulus, GOP Sen. Susan Collins’s good-faith participation in it looks rather foolish.

Daniel Henninger, Wall Street Journal

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Full article: http://online.wsj.com/article/SB123440338832275537.html

Deal reached on U.S. stimulus plan

House and Senate members gathered at the U.S. Capitol on Wednesday.

House and Senate negotiators announced Wednesday afternoon that they had reached agreement on a $789 billion economic stimulus bill, clearing the way for final congressional action and President Barack Obama’s signature.

“The differences between the House and Senate versions, we’ve resolved,” Senator Harry Reid of Nevada, the Democratic majority leader, said in a Capitol news conference. The differences were resolved by a lot of intense “give and take,” Reid said, “and if you don’t mind my saying so, that’s an understatement.”

Negotiations had been going on all day, following extensive talks on Tuesday night, to close the gap between the Senate and House versions. In the end, the agreed-upon package will pare back Democrats’ proposed spending on education and health programs in favor of tax cuts that were needed to win Republican votes in the Senate.

Senator Susan Collins of Maine, a centrist Republican whose support was crucial to the outcome, said the final package includes $150 billion in spending on infrastructure, including transportation facilities, and considerable tax relief. Moreover, she said, it includes significant money to aid state governments.

Despite intense lobbying by governors, the final deal slashed $35 billion from a proposed state fiscal stabilization fund, eliminated $16 billion in aid for school construction and sharply curtailed health care subsidies for the unemployed.

In driving down the total cost of the stimulus bill — from $838 billion approved by the Senate and $820 by the House — legislators also sharply reduced proposed tax incentives for buyers of homes and cars that held huge public appeal. Senator Collins said getting the final number to under $800 billion was more than symbolic; it meant “a fiscally responsible number,” she said.

But the final bill retained a $70 billion tax cut that would spare millions of middle-class Americans from paying the alternative minimum tax in 2009, which some Democrats decried as wasting a large chunk of the bill on something that would do little to lift the economy and that Congress would have approved regardless of the recession.

In announcing the agreement, Reid credited the efforts of House Speaker Nancy Pelosi, who he had been indispensable in resolving differences between the two chambers of Congress.

After huddling in the office of Pelosi on Tuesday until nearly midnight, top White House officials and congressional leaders had all but ironed out the differences between the House and Senate versions of the recovery package by noon on Wednesday.

“I think we are way down the road from where we started and I don’t think there is that much more of a distance to travel until we are able to have it put together,” said Senator Ben Nelson, Democrat of Nebraska who is a leader of a bipartisan group of senators whose support is so crucial that they effectively hold veto power over the final legislation.

Even trimmed to $789 billion, the recovery measure will be the most expansive unleashing of the government’s fiscal firepower to fight a recession in modern history. And yet it seemed almost trifling compared with the potential price tag of $2.5 trillion for the rescue plan for the financial system announced on Tuesday by Treasury Secretary Timothy F. Geithner.

Even before the last touches were put to the bill, the emerging deal infuriated some Democrats who said that Obama and congressional leaders had been too quick to give up on Democratic priorities. Some critics also suggested that the final figure was too small to be effective because of the grave condition of the American economy.

“I am not happy with it,” said Senator Tom Harkin, Democrat of Iowa. “You are not looking at a happy camper. I mean, they took a lot of stuff out of education. They took it out of health, school construction and they put it more into tax issues.”

Harkin said he was particularly frustrated by the money being spent on fixing the alternative minimum tax. “It’s about 9 percent of the whole bill,” he said, “which we were going to do later this year in a tax bill. Why is it in there? It has nothing to do with stimulus. It has nothing to do with recovery. This makes no sense whatsoever.”

But even as congressional leaders and top White House officials went through the package with a carving knife, it was clear that the three Republicans who agreed to support the bill in the Senate wielded extraordinary power, and along with conservative Democrats in their coalition, had put a firm stamp on the stimulus package.

For instance, even as negotiators accepted many of the Senate’s reduced spending provisions, they were careful to maintain an additional $6.5 billion for medical research that was inserted at the insistence of Senator Arlen Specter, Republican of Pennsylvania, who is a cancer survivor.

Republican opponents of the stimulus measure continued to criticize it on Wednesday as a bloated and ill-designed spending bonanza by Democrats that would not help lift the economy out of recession but would plunge future generations of Americans deeper into debt.

“Yesterday the Senate cast one of the most expensive votes in history,” the Republican leader, Senator Mitch McConnell of Kentucky, said. “Americans are wondering how we’re going to pay for all this. Judging by the market reaction to Secretary Geithner’s announcement Tuesday and the newspaper editorials this morning, it’s clear that everyone is looking for a little more detail.”

In hammering out a final agreement, the negotiators not only had to settle on overall dollar amounts for the various provisions but in some cases had to resolve bitter disagreements over the formulas that would be used to divide some of the largest categories of money to be directed to state and local governments.

The stimulus plan includes $87 billion in federal aid to states for rising Medicaid costs, and powerful blocs of lawmakers, largely divided between urban and rural states, had been fighting over whether to divvy up the funds according to the traditional Medicaid reimbursement formulas or to give extra help to states with high unemployment.

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Full article and photo: http://www.iht.com/articles/2009/02/11/america/12stimulus.php

Senators Reach Accord on Stimulus Plan as Jobs Vanish

President Obama introduced Paul A. Volcker as leader of a recovery advisory board on Friday.

Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses.

The deal, announced on the Senate floor, was a result of two days of tense negotiations and political theater. Mr. Obama dispatched his chief of staff to Capitol Hill to help conclude the talks and reassure senators in his own party, and he called three key Republicans to applaud them for their patriotism.

Earlier, when it looked as if a vote might take place Friday night, officials said, a government plane was dispatched to Florida to bring back Senator Edward M. Kennedy, a Massachusetts Democrat who has brain cancer.

The fine print was not immediately available, and the numbers were shifting. But in essence, the Democratic leadership and two centrist Republicans announced they had struck a deal on about $110 billion in cuts to the roughly $900 billion legislation — a deal expected to provide at least the 60 votes needed to send the bill out of the Senate and into negotiations with the House, which has passed its own version.

The pact, which is expected to be approved in the next few days, was concluded just hours after the Labor Department announced that 598,000 jobs were lost in January. The contraction in jobs is already steeper than in any other recession since at least the early 1980s. And economists warn that several more shoes are about to drop, a message that added urgency to the Senate deliberations.

As the negotiations were under way, lawmakers said it was time to stop quibbling about the exact parameters of the legislation — which mixes safety-net spending, tax cuts and a huge infusion of dollars into federal programs — and to begin work toward a final agreement that could be sent to Mr. Obama next week.

“Our country can’t wait another day for another approach,” said Senator Ben Nelson, a Nebraska Democrat who is a leader of the bipartisan coalition that worked out the agreement.

The details were negotiated at an afternoon meeting in the office of the Senate majority leader, Harry Reid of Nevada, involving Mr. Reid, other top Democrats and two Republicans, Susan Collins of Maine and Arlen Specter of Pennsylvania. After they came to terms, the senators brought in the White House chief of staff, Rahm Emanuel, for assurance that the deal was acceptable to the administration. Mr. Emanuel signaled it was.

“With today’s unemployment numbers reaching more than 3.6 million workers,” Mr. Emanuel said after the session, “delay and failure were not an option.”

Mr. Obama called Ms. Collins and Mr. Specter, as well as Senator Olympia J. Snowe of Maine, another Republican expected to support the deal, to acknowledge they were acting against pressure from their party and, one official said, to thank them for their patriotism in helping advance the bill at a critical time.

Earlier in the day, Mr. Obama urged Congress to act expeditiously. “It is inexcusable and irresponsible for any of us to get bogged down in distraction, delay or politics as usual while millions of Americans are being put out of work,” said Mr. Obama, who has recently shown less patience for Republican resistance to the bill.

Most Senate Republicans remained opposed to the measure, criticizing it as a case study in excessive spending that would do little to lift the economy. Some conservatives indicated Friday night that they would push for time to study the new legislation before any final vote.

“We want to stimulate the economy, not mortgage the future of our children and grandchildren by the kind of fiscally profligate spending embodied in this legislation,” said Senator John McCain of Arizona, the defeated Republican presidential nominee, who has emerged as a chief opponent of the proposal.

Republicans were clearly irritated at the outcome and faulted those involved in working out the bargain. “When you say this was the best we could do, I disagree with you,” Senator Lindsey Graham of South Carolina said on the floor. “This not remotely close to what we could have done if we had sat down in a true bipartisan fashion and found a better way.”

The Senate’s proposed cuts took aim at an array of popular spending programs that critics said should not be part of a fiscal recovery bill, even if they represent laudable policy goals, because they would not deliver a quick enough jolt to the economy.

Even Mr. Obama’s signature tax cut for middle-class Americans was scaled back as part of the deal. Under the new plan, tax credits of up to $500 for individuals and $1,000 for couples would begin to phase out at lower income levels than first proposed, saving the government $2 billion.

The biggest cut, roughly $40 billion in aid to states, was likely to spur a fierce fight in negotiations with the House over the final bill. Many states, hit hard by the recession, face wrenching cuts in services and layoffs of public employees as they struggle to comply with laws requiring them to balance their budgets.

When debate began this week, the price tag on the Senate version of the stimulus bill was roughly $884 billion, but it grew to more than $900 billion as senators added provisions including tax breaks totaling $30 billion for purchases of homes and cars.

Lawmakers said that by poring over the 736-page bill they had excised about $110 billion, bringing the total cost to about $780 billion — $40 billion less than the stimulus bill approved by the House last week. Because of consumer tax breaks and spending for health research that had been added in the Senate, the new total for the measure could be about $820 billion. But even the senators behind the compromise were uncertain of the number.

In addition to the large cut in state aid, the Senate agreement would cut nearly $20 billion proposed for school construction; $8 billion to refurbish federal buildings and make them more energy efficient; $1 billion for the early childhood program Head Start; and $2 billion from a plan to expand broadband data networks in rural and underserved areas.

The administration had initially hoped that it could win the support of as many as 80 senators, but that goal disappeared after House Republicans voted unanimously against the measure. As questions were raised about the total spending, getting even three or four Republican senators to sign on became difficult.

Ms. Collins said she believed the changes had significantly improved the measure. Mr. Specter said that while he still had reservations, he had come to accept Mr. Obama’s push to enact the economic plan by mid-February. “I believe we do have to act,” Mr. Specter said, “and under the circumstances this is the best we can do.”

But several other Republicans who had taken part in the talks said they could not support the compromise.

“Unfortunately, there was too much in the Democratic counterproposal that was not stimulative,” said Senator George V. Voinovich of Ohio, “and that did not provide the jump-start our economy so desperately needs.”

The Senate Republican leader, Mitch McConnell of Kentucky, said most Republicans remained unconvinced that the package would reinvigorate the economy.

“You have to balance the likelihood of success versus the crushing debt that we’re levying on the backs of our children, our grandchildren and, yes, their children,” Mr. McConnell said.

Mr. Reid urged Republicans to get behind the plan. “This is a critical day for this new Congress and our country,” he said. “Faced with this grave and growing economic crisis, Republicans must decide today whether they will join the president and Congressional Democrats on that road to recovery.”

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Full article and photo: http://www.nytimes.com/2009/02/07/us/politics/07stimulus.html