The economic blogosphere seems to be centering around a read of the second stimulus package – the series of tax cuts, tax credits and unemployment insurance extensions bundled with the high-end tax cuts for households making more than $250,000 – as being a good deal for the economy. See Greg Ip’s analysis, Did Barack Obama lose a political battle but win a war? (“The number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive”).
The distributional parts of the total compromise are a form of social robbery: “at least a quarter of the tax savings will go to the wealthiest 1 percent of the population.” But for this post I want to talk about that second stimulus bundled in with the bribe to the top 1%, as I think there are some real problems that need to be addressed in the discussion before this gets oversold.
Saving The Old Stimulus, Maintaining Current Employment Level. We are not creating new stimulus with much of these extensions to tax and unemployment benefits as much as we are merely keeping the old stimulus in place. As such, job creation from the new tax extensions will function more like saving jobs and maintaining the old employment level rather than creating new jobs.
A simple graph will explain. White House Officials are explaining how extending unemployment benefits will create or save around 590,000 jobs. They are basing this off a CEA report, The Economic Impact of Recent Temporary Unemployment Insurance Extensions, which estimates these jobs as follows:
We discuss that report and those numbers here, along with other numbers about unemployment. As a result of the original unemployment insurance extension, the level of employment is almost 800,000 people higher than it would have been otherwise. I’m a huge fan of extending unemployment insurance, but I don’t think we should oversell the stimulus portion of this. I imagine it is the same for the other tax credit extensions.
Remember this compromise doesn’t extend unemployment insurance beyond where it currently is now. Unemployment insurance was extended to 99 weeks and that was set to expire. Unemployment insurance will continue to be extended to 99 weeks for an additional 13 months. This is being worded in a way that is surprising many smart people when they finally piece together that unemployment benefits do not run to 99 weeks + 13 months (Kid Dynamite, CR), so it is important to reiterate: people who have exhausted the extended 99 weeks of unemployment benefits do not get an extension.
The Republicans have us fighting and paying large political and economic costs to keep parts of the ARRA going. This is different from getting a full second stimulus.
Tax Cuts As Stimulus Is Now The Liberal Idea. There is a new set of stimulus measures in the form of the Social Security payroll tax cut. Now, it’s a common argument that the original stimulus should have had less tax cuts and more investment spending. The tax cuts were put in to try and appease Republicans. There’s some debate on whether or not a second stimulus should have included tax cuts (See Mark Thoma here), but now using tax cuts as the only stimulus vehicle is the liberal Democrat model.
I’d prefer to see the Social Security payroll tax cut split in half with a $60bn infrastructure bank going into place, or something more along those lines. (I’m on the fence about the employee/employer target.) This is being debated, and I wouldn’t trust arguments based around survey data too much, but there’s evidence that the tax cuts are largely going to pay down debt. That’s great for helping Citigroup earn their way out of their zombiehood by getting as much for worthless second lien debt, but it does nothing for building and investing in the 21st century American economy.
So in one move Republicans will be tossing the ownership of the weakest form of stimulus spending into Democrats’ hands. When I comment in 2011 that the original stimulus effort needed more infrastructure spending and less tax cuts, critics may point out “if you think tax cuts are so weak why did your team support them as the sole basis of the second stimulus?” I’m not sure what I’ll say. It’ll probably be sanctimonious, whatever it is.
Stimulus As a Whole Will Be Vulnerable Throughout 2010, Debt Ceiling Still Up For Grabs. I notice that nobody is including the anti-stimulus of the federal pay freeze of $5 billion dollars over two years in their estimates. If you put four of those little symbolic moves together you may be cutting the refundable low-income credit stimulus of $38 billion in half.
I worry that there are going to be a lot of these little anti-stimulus spending freeze style measures in 2011, particularly at the state level. Since the multipler is going to be weak on tax-cut driven stimulus spending, it’s even more important that they are guarded. And from the opponents’ point-of-view, the debate around raising the debt-ceiling is the likely focal point.
Obama doesn’t seem promising here:
Obama said he takes House Speaker-designate John Boehner (R-Ohio) “at his word” that Republicans, like Democrats, are not “willing to see the full faith and credit of the United States government collapse.”
“And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as Speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower,” Obama said.
Seriously?!? With statements like that, and my concerns that a debt-ceiling panic is the perfect time to push for slashing social security and other things New Dems would love to do while blaming Republicans, tying the governments hands on this topic is a prerequisite for this stimulus measure actually working. Contra Bill Scher, I don’t think this is signaling that deficit hysteria is out; it never goes out of fashion when it comes to slashing the welfare state, it only takes a break for cutting taxes for the wealthy.
The Democrats really need to get the debt ceiling taken care of in this deal, or there’s an obvious bloodbath on the horizon, a debate I don’t trust their competence to win.