The European Social Welfare State Bill
Let’s start with some basics about the stimulus bill. According to my quick read (so all numbers here are subject to revision) of the Congressional Budget Office (CBO) analysis, the total estimated cost of the proposal is $816 billion over ten years. This is composed of $604 billion of extra spending, plus $212 billion of less money collected in taxes than had been planned. That’s a whole lot of money, even for the U.S. economy.
First, consider when the $604 billion is projected to be spent over the next ten years (all spending timing in Fiscal Years):
Only about 1/7th of the outlays occur in the current fiscal year. Substantially more of the outlays occur in 2012 or later than occur in 2009. How is this stimulus spending?
One argument is that we expect this to be a very long-lasting recession, so we’re going to need this stimulus spending in 2011, 2012, and so on. But, consider that if we’re heading into a Japan 1990s style decade-long slowdown, this kind of spending is exactly what they tried, and it sure didn’t work in that case.
So, if this is a “normal” length recession, the spending bill will have the classic problem that fiscal stimulus does – namely, it comes too late to do much good, but right on time to help stoke inflation and mis-allocation of resources that are suddenly in high demand as the economy enters a recovery. And if this is a very long-lasting recession, more like a U.S. 1930s Depression or Japan 1990s “lost decade”, then the problem is so long-lasting that we’re not really debating a stimulus bill, we’re debating a near-permanent shift of control of resources to the government, which doesn’t exactly have a sterling track record of success. Only if this is a “Goldilocks-length” recession of more than 1 – 2 years, but less than a decade (which is a pretty hard beast to find in modern American history) would this temporal spending pattern turn out to be wise.
Compare this to the projected temporal distribution of proposed tax reductions:
There is a huge debate among economists about the “multiplier” which is basically an estimate of how much economic growth bang we get per buck of deficit spending in a recession, and about the effectiveness of fiscal stimulus generally. Keynesian theory is that the multiplier should be greater for government spending than for tax reductions. The debate about this question among economists has a lot more in common with a debate at a meeting of the Modern Language Association (if you were to just add a bunch of data and subtract the intermittent urbane charm) than it does with a meeting of the American Physical Society; which is to say that it’s long on theory and the use of analysis as rhetoric, but pretty short on empirical demonstrations of causal models that can reliably predict the impact of any of these proposals.
That said, at least the tax reductions occur pretty early, and it’s hard to see a whole of multiplying going on for spending that happens several years from now. Of course, these tax cuts weren’t exactly developed with a copy of Hayek in one hand and a calculator in the other. They are mostly a combination of disguised redistribution, social welfare and environmental spending disguised as tax credits, and the kind of rigged changes to investment expensing that have made the U.S. corporate tax the shining model of effectiveness and fairness that it is today. And for whatever it’s worth, academic economists seem to agree with the everyday observation that the 2008 tax rebates didn’t seem to head off many problems at the pass.
Next, consider how the $604 billion of outlays would be spent.
It’s easy to go through a huge proposal and find what seem like fairly ridiculous line items, so I’ll focus on as comprehensive a view as I can of the spending. The CBO reviews each Title (basically, spending area) of the bill, and calls out major items within each Title. Here are all the items that I saw them identify as individual programs with more than $10 billion of projected outlays, in the order that they call them out:
• $20.0 billion to increase the maximum benefit under the Supplemental Nutrition Assurance Program (i.e., Food Stamps)
• $18.5 billion for energy efficiency and renewable energy programs
• $20.4 billion for programs administered by the Department of health and Human Services
• $20.0 billion to renovate elementary and secondary schools
• $17.6 billion for Pell grants and other student financial assistance at post-secondary institutions
• $29.1 billion for other elementary and secondary educational programs
• $30.0 billion for highway construction
• $13.1 billion for other transportation programs
• $11.2 billion for housing assistance programs administered by HUD
• $19.5 billion (minimum, could be higher, as per Title XIII) for education grants to states
• $27.1 billion for increase unemployment benefits
• $13.3 billion to increase health insurance for unemployed workers
• $11.1 billion for “Other Unemployment Compensation”
• $20.2 billion for Medicaid and Medicare incentive payments to encourage providers to improve healthcare IT
What does this sound like to you? It sounds to me like a wish list for the left wing of the Democratic Party.
I tried to go quickly through the spending for all categories and crudely map them to the OECD classification system that allows for the comparison of spending across governments in the developed world. The huge categories of spending under this bill that I could map to categories other than “General Spending” are in Social Protection (about $90 billion), Education (about $90 billion) and Environment (about $55 billion). Interestingly, Defense represents only about 3% of the spending in the bill (as opposed to 12% of U.S. government spending overall, or about 3% of French overall government spending as a point of comparison) and Public Safety represents only about 1% of spending in the bill (as opposed to about 6% of U.S. government spending overall, or about 2% of French government spending overall). In other words, the net effect of this bill is to shift the distribution of U.S. government spending as a whole away from defense and public safety and toward social programs: for good or ill, to make the U.S. into more of a European-style social welfare state. Because the amount of spending is so huge, this will be a material, not notional, shift. Eventually, we will emerge from this recession / depression / whatever it’s going to be. When that happens, is this really the kind of government we’re going to want?
And this change is unlikely to be temporary. Imagine two illustrative scenarios. First, the U.S. goes through a fairly standard recession and emerges by about late 2010 into a recovery. The government, subject to normal grumbling, is mostly given credit for handling things the right way. Obama is reelected in 2012 and Democrats retain control of Congress. Or second, we enter and new Depression, or more likely, a Japan of the 1990s long-term recession. Unemployment is stuck well above 10%. The mood of the country is deeply pessimistic, and government programs are a lifeline for a good chunk of the population. In which of these two scenarios is it realistic to expect that the 2009 increases to food stamps, unemployment compensation, healthcare benefits or HUD housing assistance will really be rolled back in 2012 – 2015? Neither, as far as I can see.
And it is this kind of spending that will happen first, and be so locked in, even if we change course in the next couple of years. It’s hard to spend money on roads and bridges extremely quickly unless you get really reckless and inefficient (and we’ll be seeing a bunch of that, too). After cutting taxes the next-fastest thing to do is cut checks. As an illustration, compare the projected timing of outlays for two categories of proposed spending, each of which is projected to be about $45 billion: (1) “Highway Construction” plus “Other Transportation”, which I’ve labeled as Infrastructure, and (2) “Assistance for Unemployed Workers and Struggling Families”, which I’ve labeled as Unemployment:
Or consider the gigantic – as in close to $100 billion – amount of extra federal money these guys are proposing to spend on education. Study after study has shown that, at a minimum, there is no clearly demonstrable educational benefit from more aggregate spending on schools. Unless you adopt the hard-core Keynesian doctrinaire perspective that it literally doesn’t matter what we spend money on, this will be wasted. We will spend $100 billion on schools and not expect kids to read, write or do math any better. How can this be wise? Do we really want to borrow (because that’s where 100% of this money is going to come from) this much money from our kids for that?
Nobody wants to repeat the mistakes of Herbert Hoover. This is a healthy concern. Hopefully we will be able to restrain ourselves from passing trade restrictions. Trying to balance the budget or restrict the money supply right now is almost certainly a fairly crazy experiment to run. We’re going to be running a big deficit. But this proposal is a disaster.
“What does this sound like to you? It sounds to me like a wish list for the left wing of the Democratic Party.”
Gosh, it’s almost like elections have consequences or something.
“In other words, the net effect of this bill is to shift the distribution of U.S. government spending as a whole away from defense and public safety and toward social programs.”
Yes. And?
We incarcerate a greater percentage of our population than any other country on Earth and we spend more on “defense” than almost the entire rest of the world combined – much of that squandered on useless wars fought under false pretenses so the 101st Fighting Keyboardists could pretend to be heroic and Halliburton could make obscene profits.
I’d say it’s about time we redirected our national spending away from those two areas.
— Travis Mason-Bushman · Jan 27, 08:56 PM · #
I doubt there is much low-hanging military fruit left. Even something like Missile Defense is practically dig-hole-fill-hole level of value added.
As someone in their 20s, I do worry that there is little focus for how my generation is going to inherit the knowledge and human capital stock – as states dry up, flagship Land Grant schools are getting hit hard. Grants and scholarship endowments are DOA. Private student loan markets (which are the worst kind of graft to begin with) are tumbling. People withhold otherwise wise educational investments.
I could care less if people need to eat out less often for 3 years. However my generation being stuck with less qualified engineers and doctors and human capital than normally would have been present is a worrisome thing.
So I’m comfortable with some education waste if it keeps the college market going and public high schools maintaining their current quality. But then again, I’m a product of that kind of wise state investment in public colleges.
— rortybomb · Jan 27, 09:53 PM · #
“[The tax cuts] are mostly a combination of disguised redistribution, social welfare and environmental spending disguised as tax credits”
Sorry for second comment – but can you clarify? Isn’t any change in the tax code a redistribution from one group to another?
Also keeping unemployment benefits running is an instantaneous payment to the market – and right now I’m not worried that people who are collecting are sitting on otherwise good job offers from the market. It functions as a de facto tax cut – isn’t it a somewhat good idea?
— rortybomb · Jan 27, 09:59 PM · #
rortybomb:
All tax cuts are redistribution in at least some sense. But some change the relative balance of payments more severely than others. Much like the increased unemployment benefits, the idea of these specific tax cuts is (in theory) to redistribute money from richer people to porrer people because that way more of it will get spent.
The education system in the US has many severe problems. Spenidng $100BB of government money very quickly in comparison to our understanding (as opposed to the requirements of stimulus, by which standard we will spend it very slowly) doesn’t seem to me like a good way to address any of them.
Travis:
Gosh, thanks, that hadn’t occured to me.
— Jim Manzi · Jan 27, 11:08 PM · #
For some reason, this post made me wonder what story Wall-E, the sequel,will tell.
— Julana · Jan 28, 01:22 AM · #
Increasing assistance to unemployed people is ineveitable and necessary: without such measures the pressure to do far, far worse (e.g., protectionism) could become irrestible. A new Smoot-Hawley would cause immense damage to the economy while aid to the unemployed is harmless, even beneficial. As already noted above, the unemployed do tend to spend whatever funds they receive so we do get a full bang for the buck there. And if the GOP is going to start opposing such assistance in favor of a Let Them Eat Cake policy then they really will be repeating the (political) mistakes of the 1930s GOP. The Democrats will dominate the nation for the next 40 years in that case.
— JonF · Jan 28, 02:36 AM · #
“The European Social Welfare State Bill”? Why the sensationalism?
Yes, $604 billion is a lot of money. We should spend it wisely, if we spend it at all (and the political process being what it is, it’s guaranteed that some portion will not be spent wisely).
But, to put it in perspective, we’re talking about $60 billion a year for 10 years. Our GDP is around $14 trillion a year. Our defense budget is over $500 billion per year, not even counting military expenditures outside of the DoD and various supplemental and “emergency” military funding bills. The 2008 Federal budget is $2.9 trillion. These figures could just as easily be used to argue that this stimulus is too small to have its intended effect as to claim that it’s going to move us towards a welfare state to large degree.
As harbringers of the European Welfare State, some of the items in your “wish list for the left wing of the Democratic party” are pretty weak tea. Increased highway construction is not a particularly left-wing wish. A large part of the “health insurance for unemployed workers” money is spent on having the government pay 65% of the COBRA insurance costs for unemployed workers for a year — I have trouble getting worked up about this, especially in light of the health-care proposals that the Obama administration will likely be making in the future. You have a point about the spending on education, but a good portion of the $100 billion of education spending you decry is spent on student loans and money to states that can, in part, be be used for non-educational purposes.
— Ratufa · Jan 28, 04:53 AM · #
JonF:
I take the point, but I think we’re pretty far from “let them eat cake” here. As an example, the actual point of spending of the first ietm I call out is increasing the maximum allowable payout for food stamps, not relaxing eligibility. Given that we are in a deflationary or near-deflationary environment, it’s not clear what the rationale here is beyond strict incremental redistribution in order to stimulate spending.
Rafuta:
I take your point as well, but I think it’s more accurate to describe it as about $500BB of spending over 2.5 years (which is a very different run rate), because as I tried to say in the post, it’s not clear that the spending levels will actually be brought down in 2012. Will Congress really end the extended COBRA coverage if we’re still ina recession a year from now? Will the increased maximum food stamps payout really be rolled back in 2014? In spite of what is said now, I don’t know. I do know that we’re ramping up public spenidng at an incredible rate this year and next.
— Jim Manzi · Jan 28, 01:21 PM · #
Jim,
You point out the extra $100 billion going towards schools. But much of that is merely replacing state money for schools that would have to be cut in order to balance budgets. That includes both the $19.5B in grants and the $20B for school construction, which in at least some states (Illinois, for example) has been underfunded for years.
As for much of the rest of the spending, as JonF notes, it goes to help those most hurt in the recession. You point out increasing the maximum spent for food stamps. Earlier this decade, food stamps accounted for 55% of food spending by households with children receiving them and 30% of food spending by households without children receiving them(http://www.bls.gov/opub/ils/pdf/opbils39.pdf). But as the recession grows stronger, food money competes more with other costs, so the percentage of food spending that needs to come from food stamps increases. It does seem like it would be prudent to require that welfare increases like these and unemployment benefits require renewal after 2-3 years, at the very least, but it seems like they do transfer money to those most in need of it.
— Zak · Jan 28, 02:41 PM · #
Zak:
On education: One way or the other, this is still an increase in taxes (though in this case we’re taxing future US taxpayers, whether in the form of higher tax rates or inflation or loss in income due to living in a country that defaults on its debt) in order to spend more money on schools than would otherwise be spent inaggregate across all levels of government in the absence of this bill.
On food stamps: Except that the food stamps program automatically enrolls anyone who qualifies and the size of the benefit automatically grows with inflation. On top of that several motnhs ago congress appropriated an addtional $10BB on top of that, bring baseline sending to $53BB.
At some point, once you move past subsistence, there is no objective way to say how much public money recipeints of any program “need” or “deserve”. It’s certainly true that most food stamps recipients have worse material lives than the average taxpayer who supports them, but unless you want to equalize incomes, you have to reach a stopping point.
— Jim Manzi · Jan 28, 04:00 PM · #
A lot of posts here that essentially say, “On the contrary, point X of the economic stimulus can be construed to help immediate economic recovery.” Jim is doing a better job than I could addressing the specific points, but I think a broader political issue is being missed.
Of course, as Travis points out, the Democrats won, and we should expect a left-wing spending agenda. Normally we would also expect the Republican minority to oppose. With the crisis, however, the Democratic leadership must realize how politically hazardous passing such an agenda without bipartisan support could be. Suppose a conventional left-wing agenda passes with mere partisan support, and then the recession continues for, say, another five years. Voters might then wonder why the majority leadership in Congress ran deficits to fund massive health-care and green-tech initiatives, especially if they are perceived to be boondoggles. The minority opposition will then seem wise and prescient.
But if that conventional left-wing agenda is wrapped into an emergency stimulus package, perhaps the minority could be pressured to vote in favor, lest they seem petty and squeamish in the face of a crisis. Then, if support for that agenda goes south as the recession continues, Democrats can claim bipartisan support as insurance. Thanks to the language of crisis and emergency, a typically partisan spending bill is owned not by the Democrats but by Congress as a whole.
When Jim says that the major points of the economic stimulus are really “a wish list for the left wing of the Democratic Party” in disguise, I take it that he is warning fiscal conservatives in Congress and at large not to be fooled.
— Blar · Jan 28, 08:01 PM · #
Blar:
Where were you when I was writing that post? Exactly.
— Jim Manzi · Jan 28, 08:32 PM · #
It passed the house with no republican votes. This is clearly a political manuever. They are betting that the economy will still be trending downward in two years, ot that if it is on the upswing, no one will remember this vote.
I actually think Obama set them up, either intentionally or it just worked out that way. There was lots in the news about how Obama was reaching across the aisle. Now the story is how the Republicans refused his offered hand. Doesn’t look good in a time of crisis.
The Republicans really really better hope that their economic advisors right.
— cw · Jan 29, 04:50 AM · #
On another note, I think the whole stimulus thing is kind of a holding action or even a pychological gesture. It seems to me that the real nexus of this crisis is the banks. If I understand it correctly, some very big institutions are right on the edge of disintegrating. If that happens, who knows how bad things get. I can envision some kind of chain reaction, panics, full blown depression. So I hope the effectivness of the stimulus package is all we have to worry about.
— cw · Jan 29, 04:57 AM · #
cw: While heartened that the Republicans didn’t take the bait, I agree that politics were at play. If this bill were proposed before the election, I imagine there would have been more bipartisan gamesmanship. Now that they are unequivocally out of power, however, the Republicans have nothing to lose. If the stimulus package works, it’s not as though they were going to get any credit for it. And if it doesn’t, they are sages to the Democrats’ geese. I think Republicans have good reason to believe that the stimulus won’t work, so it isn’t merely a non-ideological game of chicken, but politics are certainly at play in these kinds of decisions.
Jim: Thanks! Your approval fills me with a warm fuzzy pride, as if some Olympian just patted me on the head, or if Sonny Rollins told me “Nice solo!”
— Blar · Jan 29, 04:05 PM · #
I see it as just more alpha chimping from the republicans. It says to me that they—as always—are not interested in governing. Instead it’s permanent war on the democrats, the purpose of which is to gather all the food and females unto themselves. It’s a lesson not learned form the past 8 years, tactically and morally a mistake. Tactically, becasue they got booted out of power due to their incompetence in governing. Morally, because they are paid to work for the benefit of the american people, not the republican party.
They could have said, there’s a lot we don’t like in this bill, but these are difficult times and in the interest of establishing a working relationship with the president—which we believe would benefit the american people since we have a lot of good ideas to offer—we are going to let the pres do it his way.
They get good press, they get suction with Obama, and they might actually be benefiting the american people. I think think the citizenry might actually benefit if the parties spent a little less energy on politcal manuevering and more on doing the peoples business. Calling a truce in the permanent war might might free up some energy for actual governing on both sides.
— cw · Jan 29, 06:13 PM · #
cw:
I’m not sure about all that.
On the merits, consider a decision tree: (1) Yes/No, I think stimulus (i.e., a larger deficit) is a good idea, and (2) if Yes, I believe that (i) tax reduction will be more effective because of timing or (ii) spending programs will be more effective because of marginal propensity to consume. I think reasonable people can disagree about the answers to each of these questions.
If you answer No to the first, you should vote against the bill, and against a tax-based stimulus. If you answer Yes, then i, you should vote against the bill, but for a tax-based stimulus. If you answer Yes, then ii (and assuming you don’t see other major problems with the bill), you should vote for it.
It seems to me that the Republicans voted unanimously against the bill, and then mostly voted for a tax-based stimulus bill acted in a way entirely consistent with prinicple. (Of course, many almost certainly did it for exactly the political logic that Blar points out.)
Considered from a negotiating perspective, it’s also smart, as it will give the Republicans in the Senate (which is where the real action is anyway) more leverage, and the House members will have another chance to vote for the actual bill that emerges from conference if they decide to do that, which is likely all anyone is going to remember or care about.
I think Obama has played this smart, as have the House Republicans. I thinik that the guys most exposed politically by this are the House Democrats. (I mean this incrementally, of course, they remain in a much, much stronger position that the Republicans).
— Jim Manzi · Jan 29, 09:24 PM · #
“In other words, the net effect of this bill is to shift the distribution of U.S. government spending as a whole away from defense and public safety and toward social programs.”
‘Defense’? How much of the DoD is actually defense, and how much is power projection capacity?
— Barry · Jan 29, 09:29 PM · #
Jim,
Yeah. I failed to include the senate and then the reconciliation stuff into my assesment. Whoops. So this bill is still in the fetal stage. Obama has said as much, and it seems like he is going to work for some changes. So that makes the GOP house vote more reasonable, if…. this is a negotiating tactic aimed at securing a better deal for the public and not just politcal gesturing aimed at strinking some heroic pose for the base. I have certainly read a bunch of things today that reacted to this move as if it were pure (and stupid) politics. I think that is the conventional wisdom so far. And so I think they still made a mistake as far as public relations go, but maybe not as a tactic to get more imput into the bill (But then, do the house and senate republicans work together? If the Senate republicans negotiate and vote with Obama then do the house republicans have any leverage in reconcilliation?)
But I hope that republicans in general are not going to push for a bunch of Bush-like tax cuts: capitol gains, death tax, the traditional corporate give aways…. As I understand it there are a lot better ways to stimulate the economy and it would also be politicaly stupid. The bush tax cuts were one of the reasons that the GOP lost in 08. It would also be a reminder of how intellectually bankrupt republican seem to be. They got 2 perscriptions in their medicin chest: tax cuts and invasion. I know this is hyperbole (to some degree), but I’m talking about the public’s perception. I read somewhere senate republicans were going to push for more infrastructure spending, which would be a lot better.
In conclusions, you make some good points, but they are based on the assumptions that the house republicans are 1. smart and 2. operating in good faith as public servants. One or both maybe possible, but as my dad, the Honolulu Courts and Corrections psychologist used to say: the best predictor of future behavior is past behavior.
— cw · Jan 30, 06:11 AM · #