The 2009 “Stimulus”: How much does it continue to help?
The Congressional Budget Office has a new report out entitled “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2010 through June 2010” (August 2010) (pdf file). (To give credit where due: Benjamin Page was the author of the report.) It concludes that the stimulus package passed in February 2009 (ARRA) continues to have a mildly beneficial impact. Specifically it finds that ARRA increased GDP by between 1.7% and 4.5% last quarter and that the law lowered the unemployment rate by 0.7%-1.8%. This mean an increase in number of people employed (as a result of ARRA) by between 1.4 million and 3.3 million, and an increase in the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have occurred otherwise. (Full-time-equivalent jobs include “shifts from part-time to full-time work or overtime” and are therefore usually larger than increases in the number of employed workers.) The report also concludes that the Act’s benefits outweighs its cost in terms of the budget deficit.
You can look at the numbers yourself (as well as the explanation why the benefits cited are probably understated, see p4), but what I find interesting is the report’s discussion of “multipliers.” In assessing direct and indirect effect on the economy the report makes estimates of multipliers for several categoires of spending and tax relief from models and “historical relationships.” It says (p4) that each multiplier “represents the estimated direct and indirect effects onthe nation’s output of a dollar’s worth of a given policy.”
“Direct effects consist of immediate (or first-round) effects on economic activity. Government purchases of goods and services directly elicit economic activity that would not occur otherwise and thereby have a direct dollar-for-dollar impact on output. For reductions in taxes, increases in transfer payments, and increases in aid to state and local governments, the size of the direct effect depends on the policy’s impact on the behavior of recipients. If someone receives a dollar in transfer payments and spends 80 cents (saving the other 20 cents), production increases over time to meet the additional demand generated by that spending, and the direct impact on output is 80 cents. Similarly, if a dollar in aid to a state government leads that government to spend 50 cents more on employees’ salaries (but causes no other changes in state spending or revenues, with the other 50 cents used to reduce borrowing or build up rainy-day funds), the direct impact on output is 50 cents.”
So in terms of “stimulus” to the economy, those spending or tax reduction portions of the bill with higher multipliers effect the purpose of the bill better than those will lower multipliers. Here’s the list (from Table 2, p6):
- Purchases of goods and services by the federal government: Multiplier of 1.0 to 2.5. (This portion of ARRA relates to Energy Efficiency and Renewable Energy; Innovative Technology Loan Guarantee Program; Other Energy Programs; Federal Buildings Fund; National Institutes of Health; Other Department of Health and Human Services)
- Transfer payments to state and local government for infrastructure: 1.0 to 2.5
- Transfer payments to state and local government for other purposes: 0.7 to 1.8 (This relates to Education for the Disadvantaged; Special Education; State Fiscal Stabilization Fund; State Fiscal Relief Fund)
- Transfer payments to individuals: 0.8 to 2.1 (for supplemental nutritional assistance, student financial aid; unemployment compensation and health insurance assistance)
- One time payment to retirees: 0.3 to1.0.
- Two year tax cuts for lower and middle income people: 0.6 to 1.5.
- One-year tax cut for higer-income people: 0.2 to 0.6
- Extension of first-time homebuyer credit: 0.3 to 0.8.
You can see that the Republican tax cut (#7) had essentially no “multiplier.” In fact it was simply a transfer from the general population to the wealthy. The cost of the cut was greater than its direct and indirect benefit to the economy even under the high estimate. This of course comes as no surprise to anyone who takes the smallest interest in tax policy. It is consistent with the analysis contained in the recent Moody’s Analytics report, one of whose author’s was an economic adviser to John McCain. The fact is that there is no real authority for the supposed general welfare advantages from the GOP’s continual campaign for regressive tax relief. And they make the merest attempts at a fig leaf for their naked wealth transfer to the wealthy.
When George W. Bush was running, he promised his backers (the wealthy) tax relief. The supposed rationale was that the budget surplus that the Clinton years produced might be a drag on the economy and that “fairness” required that those who “paid” for the surplus get a rebate. After he entered office the economy began a downturn. When the time came to follow through on his “rebate,” the rationale changed. It was now a Keynesian “stimulus” to prop up an ailing economy. But the tax cut remained the exact same proposal. One would think that different purposes required tailor-made proposals. But not to the GOP. Their policy goal always remains the same. Only the rationale changes. In the Reagan era it was called “trickle down.” That soon proved to be a poor public relations choice of terms. So now different explanations are given. But it all remains the same: regressive tax relief is their goal. It is the one principle they stand for. More than abortion. More than their fool-hearty neo-conservative foreign policy. More than their love of military spending. And we will soon hear the rationale they give in the upcoming debates to extend the Bush tax cuts.
We will also hear the GOP cite the “non-partisan” CBO for deficit numbers. But we will never hear them cite the evidence of the CBO’s models about how bad a public policy choice their regressive tax relief is. We don’t hear it from the Democrats either. They after all permitted the tax cuts that the GOP wanted in ARRA. We can only guess that they are making a run at the same source of funds that the GOP tapped into — the wealthy single-issue voter. We will soon see if the Democrats have any integrity left, when the vote to extend the Bush tax cuts takes place.