It’s nice to give the critics their due on this multiplier stuff, but what I take away from criticisms I’ve read is a deep discomfort with politics that promises money in exchange for votes. I suspect the reason Matt offers to send the full checks, despite it being poorly targeted stimulus, will leave critics even more upset. ‘We have to do it because we said we would in order to win two senate races’ is exactly what these critics fear. If we start giving people—especially middle class people—money just because they like it, where will it end? Well I guess you could answer, ‘inflation’ (which brings us back to Matt original post on this) but I think the discomfort extends beyond specifics.
Matt nails it: "After Democrats won the Senate on a promise to give a full $2,000 in direct payments, I think they basically have to deliver."
This point cannot be stated enough. I think this was the most persuasive part of the Democratic messaging in Georgia, and am dismayed they are flakey on it at all. Biden was in no way unclear on this point:
"If you send Jon and the Reverend to Washington, those $2,000 checks will go out the door, restoring hope and decency and honor for so many people who are struggling right now,"
I would be more comfortable with the argument, also made by Paul Krugman, that deficits don’t matter because interest rates are so low *right now*, if most Treasury borrowing were in 10 or 20 year bonds. But last time I checked, most of it is pretty low duration: a few years or less. So if you’re going to wave away debt concerns, you need to be really sure that real interest rates are going to stay low for a long time to come. Which may be true, but you need to be forthright about that assumption.
While it's important to get the details on the rescue package as right as possible, let's not lose sight of what the grander strategy is -- I suspect Biden understands it just fine. The aim is to do something palpable that will help restore trust that the government can actually take effective action to solve crises and to make citizens' lives better. If this package helps create that response, then questions about whether we got the package sized properly will drop by the wayside.
Since at least Vietnam, Americans have had little trust in the US government's ability to do things, and for excellent reason, as we review the parade of horrors over the past five decades. Since the Democrats are the pro-government party, versus the Republicans, we know whom that benefits.
If the Biden effort is successful, the pandemic beaten back, and the economy blossoms in a controllable, sustainable way, then the door opens up for further productive, progressive government afterwards.
I don't think anyone knows what the "right" number is for the rescue package or precisely how to tailor its elements, but I go with FDR here: throw everything (*) at it and hope to reap the benefits if enough of it works. Worked like a charm for him in 1936.
“ Lots of clever ideas about automatic stabilizers have been kicking around for years, and congressional Democrats keep refusing to pick them up for bad reasons.”
Do popular things that make people like you and you'll get more leeway to do other things is trivially true.
Movie stars make their passion projects AFTER they become movie stars by making super popular movies. They don't hold the unmade popular movie hostage, that would be unpopular!
Maybe don't listen to an economist about how to be popular and lean on the knowledge of the national election winner instead.
The issue is not the size of the output gap but whether it is the result of a lack of demand or of restrictions in supply and secondarily if the “demand” gap can be filled in the aggregate by spending “stimulated” by state and federal expenditures that could not be filled by spending “stimulated” by more aggressive monetary policy.
This leads me to take issue with Matt’s exposition of the “Keynesian Multiplier.” The multiplier occurs when the government, or someone using a government transfer payment or tax reduction, purchase something the production of which does not reduce the production of something else. This presupposes that there are unemployed people, machines, real estate and intellectual property that can become employed to respond to this additional demand. It also presupposes that the deficit will be financed by the Fed purchasing the new debt. The cleanest example of this is the laid-off police office re-employed by aid to a local government.
I agree completely with Matt’s analysis of the parts of the relief package that is aimed at the supply side constraints to economic activity – testing, vaccinations and expenditures to make schools safer to open. They should be evaluated as investments; do discounted future benefits exceed current costs, but even here how much those fiscal costs correspond to less production of something else remains relevant.
Now we come to the transfers – unemployment insurance top-up, the checks, child support, SNAP. Rather than think of them as really shot term investments and apply the same logic as to other investments (conceptually one might), I think it makes sense to think of them as just that, transfers to some people from other people who sooner of later will be paying the interest on the debt that finance the transfers. So it makes sense to look at the incomes of the beneficiaries and those who will pay.
Finally, we arrive at the Summers critique. What if there DOES come to pass an arbitrary limit on the deficit (or limits on tax increases to keep the deficit within the arbitrary limit. Then the benefits of those transfers have to be traded off against the benefits of the investment we want to make. This still would not justify cutting SNAP, but it might argue for phasing out the $1400 checks at a lower income level.
"..I hope we are laying the groundwork for an infrastructure plan that’s actually about infrastructure and not about “job creation.” Amen! And actually doing infrastructure that is about infrastructure and not about job creation is, in the long run, the very best way to create real jobs.
"The Summers criticism that makes the most sense economically is that the marginal parts of this plan are just not important enough on the merits to be worth burning down Biden’s political capital."
So Summers best economic criticism is actually a political criticism after all?
And we all know that Summers political instincts are so bad, that if Larry says stop, you should go like hell?
I thought this Krugman babysitting coop was more about monetary policy than fiscal policy? Things started working better once everyone had more coupons. The "government" in his analogy doesn't step in and pay any babysitters directly.
What if the multiplier is actually negative as it has been on some government projects in the past. There's some evidence that the multiplier has been -0.01 on average of late. Increasing spending only makes sense is the IRR is greater than the -1% real you are borrowing at (assuming 10Y TIPS).
Ezra Klein in today's NYT reminded me a bit of the Larry Summers Anderson Bridge piece he did in the Boston Globe years back. It's far from a slam dunk that the return to spending is always positive.
Most of the uses of funds in the Biden plan I doubt will suffer from similar fates given their nature, but I think you actually need to think about whether you are just saddling future generations with even more of a debt burden when you say "so what?" to wasteful spending, even at such low rates.
I would prefer that they trim eligibility for the checks and cut the local aid by $100 million or so in order to make the Child tax credit enhancement last for two years. After doing it for a couple years it will be politically much harder to remove and more likely to become permanent.
I would take Biden's legacy being to cut child poverty in half over some random infrastructure stuff. (Though I do want big increases in solar and wind production along with EV infrastructure, but I suspect Biden can negotiate tax incentives with the Republicans to make most of that happen).
Isn't this what's wrong with populists? That they prioritize popular but ineffective/inefficient policies ahead of investing in the future and making tough choices? I get that progressive wonks are more comfortable wasting money on checks for the upper-middle class than, say, cutting the gas tax or building a wall. However, if we're going to spend 1.9 trillion, shouldn't we try to maximize bang for our buck?
This probably would’ve fit better in the previous piece but isn’t it likely that the reason the 5 year break even is where it is bc the market believes the Fed? Even with AIT the institution has made it pretty clear it won’t tolerate much inflation. But that would mean that the multiplier of all $$ past the point at which the market anticipates the Fed’s reaction is 0, right? And that’s the $$ that should be saved for infrastructure?
Thinking about it this way, is it the case that the Fed is ultimately the limiting constraint on the recovery regardless of stimulus? The idea being that extremely rapid recovery simply requires a lot more inflation than the Fed is willing to deliver to get NGDP back on trend.
I finally read Larry Summers’ opinion piece (instead of just about the piece). His main concern seems to me to be that Biden and the Dems won’t be able to do an infrastructure bill down the road. He thinks this Covid relief bill will expend all of their political capital. He’s a smart guy, but I think that’s wrong for reasons that Matt has written about.
What’s weird, is if that is Summers’ major concern, then he should be talking about how $1.9 trillion is too low. He should be emphasizing the low multiplier rate. He should be calling it “relief” and not “stimulus.” He should make the case for future stimulus and infrastructure spending once the pandemic is under control. I think there’s so much discussion about his op-ed because it’s weirdly opaque.
It’s nice to give the critics their due on this multiplier stuff, but what I take away from criticisms I’ve read is a deep discomfort with politics that promises money in exchange for votes. I suspect the reason Matt offers to send the full checks, despite it being poorly targeted stimulus, will leave critics even more upset. ‘We have to do it because we said we would in order to win two senate races’ is exactly what these critics fear. If we start giving people—especially middle class people—money just because they like it, where will it end? Well I guess you could answer, ‘inflation’ (which brings us back to Matt original post on this) but I think the discomfort extends beyond specifics.
Matt nails it: "After Democrats won the Senate on a promise to give a full $2,000 in direct payments, I think they basically have to deliver."
This point cannot be stated enough. I think this was the most persuasive part of the Democratic messaging in Georgia, and am dismayed they are flakey on it at all. Biden was in no way unclear on this point:
"If you send Jon and the Reverend to Washington, those $2,000 checks will go out the door, restoring hope and decency and honor for so many people who are struggling right now,"
I would be more comfortable with the argument, also made by Paul Krugman, that deficits don’t matter because interest rates are so low *right now*, if most Treasury borrowing were in 10 or 20 year bonds. But last time I checked, most of it is pretty low duration: a few years or less. So if you’re going to wave away debt concerns, you need to be really sure that real interest rates are going to stay low for a long time to come. Which may be true, but you need to be forthright about that assumption.
While it's important to get the details on the rescue package as right as possible, let's not lose sight of what the grander strategy is -- I suspect Biden understands it just fine. The aim is to do something palpable that will help restore trust that the government can actually take effective action to solve crises and to make citizens' lives better. If this package helps create that response, then questions about whether we got the package sized properly will drop by the wayside.
Since at least Vietnam, Americans have had little trust in the US government's ability to do things, and for excellent reason, as we review the parade of horrors over the past five decades. Since the Democrats are the pro-government party, versus the Republicans, we know whom that benefits.
If the Biden effort is successful, the pandemic beaten back, and the economy blossoms in a controllable, sustainable way, then the door opens up for further productive, progressive government afterwards.
I don't think anyone knows what the "right" number is for the rescue package or precisely how to tailor its elements, but I go with FDR here: throw everything (*) at it and hope to reap the benefits if enough of it works. Worked like a charm for him in 1936.
(*) That Joe Manchin agrees to.
“ Lots of clever ideas about automatic stabilizers have been kicking around for years, and congressional Democrats keep refusing to pick them up for bad reasons.”
Could you expand on those bad reasons?
Do popular things that make people like you and you'll get more leeway to do other things is trivially true.
Movie stars make their passion projects AFTER they become movie stars by making super popular movies. They don't hold the unmade popular movie hostage, that would be unpopular!
Maybe don't listen to an economist about how to be popular and lean on the knowledge of the national election winner instead.
The Capital Hill Baby Sitting Co-op is about coordination failures and liquidity traps -that's not really related to fiscal multipliers.
The issue is not the size of the output gap but whether it is the result of a lack of demand or of restrictions in supply and secondarily if the “demand” gap can be filled in the aggregate by spending “stimulated” by state and federal expenditures that could not be filled by spending “stimulated” by more aggressive monetary policy.
This leads me to take issue with Matt’s exposition of the “Keynesian Multiplier.” The multiplier occurs when the government, or someone using a government transfer payment or tax reduction, purchase something the production of which does not reduce the production of something else. This presupposes that there are unemployed people, machines, real estate and intellectual property that can become employed to respond to this additional demand. It also presupposes that the deficit will be financed by the Fed purchasing the new debt. The cleanest example of this is the laid-off police office re-employed by aid to a local government.
I agree completely with Matt’s analysis of the parts of the relief package that is aimed at the supply side constraints to economic activity – testing, vaccinations and expenditures to make schools safer to open. They should be evaluated as investments; do discounted future benefits exceed current costs, but even here how much those fiscal costs correspond to less production of something else remains relevant.
Now we come to the transfers – unemployment insurance top-up, the checks, child support, SNAP. Rather than think of them as really shot term investments and apply the same logic as to other investments (conceptually one might), I think it makes sense to think of them as just that, transfers to some people from other people who sooner of later will be paying the interest on the debt that finance the transfers. So it makes sense to look at the incomes of the beneficiaries and those who will pay.
Finally, we arrive at the Summers critique. What if there DOES come to pass an arbitrary limit on the deficit (or limits on tax increases to keep the deficit within the arbitrary limit. Then the benefits of those transfers have to be traded off against the benefits of the investment we want to make. This still would not justify cutting SNAP, but it might argue for phasing out the $1400 checks at a lower income level.
"..I hope we are laying the groundwork for an infrastructure plan that’s actually about infrastructure and not about “job creation.” Amen! And actually doing infrastructure that is about infrastructure and not about job creation is, in the long run, the very best way to create real jobs.
"The Summers criticism that makes the most sense economically is that the marginal parts of this plan are just not important enough on the merits to be worth burning down Biden’s political capital."
So Summers best economic criticism is actually a political criticism after all?
And we all know that Summers political instincts are so bad, that if Larry says stop, you should go like hell?
I thought this Krugman babysitting coop was more about monetary policy than fiscal policy? Things started working better once everyone had more coupons. The "government" in his analogy doesn't step in and pay any babysitters directly.
What if the multiplier is actually negative as it has been on some government projects in the past. There's some evidence that the multiplier has been -0.01 on average of late. Increasing spending only makes sense is the IRR is greater than the -1% real you are borrowing at (assuming 10Y TIPS).
Ezra Klein in today's NYT reminded me a bit of the Larry Summers Anderson Bridge piece he did in the Boston Globe years back. It's far from a slam dunk that the return to spending is always positive.
Most of the uses of funds in the Biden plan I doubt will suffer from similar fates given their nature, but I think you actually need to think about whether you are just saddling future generations with even more of a debt burden when you say "so what?" to wasteful spending, even at such low rates.
https://www.nytimes.com/2021/02/11/opinion/california-san-francisco-schools.html
http://larrysummers.com/2016/05/31/a-lesson-on-infrastructure-from-the-anderson-bridge-fiasco/
I would prefer that they trim eligibility for the checks and cut the local aid by $100 million or so in order to make the Child tax credit enhancement last for two years. After doing it for a couple years it will be politically much harder to remove and more likely to become permanent.
I would take Biden's legacy being to cut child poverty in half over some random infrastructure stuff. (Though I do want big increases in solar and wind production along with EV infrastructure, but I suspect Biden can negotiate tax incentives with the Republicans to make most of that happen).
Isn't this what's wrong with populists? That they prioritize popular but ineffective/inefficient policies ahead of investing in the future and making tough choices? I get that progressive wonks are more comfortable wasting money on checks for the upper-middle class than, say, cutting the gas tax or building a wall. However, if we're going to spend 1.9 trillion, shouldn't we try to maximize bang for our buck?
This probably would’ve fit better in the previous piece but isn’t it likely that the reason the 5 year break even is where it is bc the market believes the Fed? Even with AIT the institution has made it pretty clear it won’t tolerate much inflation. But that would mean that the multiplier of all $$ past the point at which the market anticipates the Fed’s reaction is 0, right? And that’s the $$ that should be saved for infrastructure?
Thinking about it this way, is it the case that the Fed is ultimately the limiting constraint on the recovery regardless of stimulus? The idea being that extremely rapid recovery simply requires a lot more inflation than the Fed is willing to deliver to get NGDP back on trend.
I finally read Larry Summers’ opinion piece (instead of just about the piece). His main concern seems to me to be that Biden and the Dems won’t be able to do an infrastructure bill down the road. He thinks this Covid relief bill will expend all of their political capital. He’s a smart guy, but I think that’s wrong for reasons that Matt has written about.
What’s weird, is if that is Summers’ major concern, then he should be talking about how $1.9 trillion is too low. He should be emphasizing the low multiplier rate. He should be calling it “relief” and not “stimulus.” He should make the case for future stimulus and infrastructure spending once the pandemic is under control. I think there’s so much discussion about his op-ed because it’s weirdly opaque.