What Should We Do About The Stimulus?
I’ve written posts pointing out what I think are problems with the stimulus proposals currently in Congress. It seems to me, though, that any responsible critic must answer the question “If not this, then what?”.
First, some table-setting.
1. Don’t be panicked into passing a law right now. A major focus of analysis of any proposed stimulus is how quickly the money gets spent, measured by quarters and years (basically, FY 09, 1H FY 10, 2H FY 10, after FY 10). This shouldn’t be conflated with a sense of urgency to get a stimulus bill signed into law on February 15 vs. March 15. As I pointed out in a prior post, the rate of increase of the unemployment rate in the current recession is just about the same as it has been in all prior recessions for at least the past 25 years. We have time to carefully consider and negotiate the biggest single spending bill in the 220 year history of the Republic
2. The long-term fiscal position of the U.S. is unsustainable. The U.S. has been executing a stimulus plan by another name for a decade. In addition to Fed interest rate reductions in the middle of this decade, we are running a large budget deficit. We have consistently increased the national debt under Presidents Reagan, Bush 41 and Bush 43 (the national debt was reduced under President Clinton). This increase in the debt under Reagan and Bush 41 was, in my view, justified by the needs of the time, and has increased the living standards net of the debt that we enjoy today versus what would have happened without the Reagan economic program and defense build-up. But it remains the bad part of a trade-off (again, a trade-off that I believe was, on balance, a good one) that we have to deal with now. The increase in the national debt under President Bush 43 is far harder to justify, and seems to me to have been extraordinarily irresponsible. Republicans need to come to terms with this, but ultimately the country has to move on to what to do now.
According to the Congressional Budget Office (CBO), under current tax rates and locked-in spending plans, prior to any stimulus plan, the U.S. will add over $3 trillion to the national debt. Over the course of the next several decades, the national debt would balloon to levels as high as hundreds of percent of GDP. Barring some unexpected and miraculous increase in productivity, this isn’t going to happen. Taxes are going up and/or the economic benefits provided by these programs are going down.
The current stimulus will add at least another trillion dollars to this, and likely much more as it will increase the baseline for future budget negotiations. If you think about it, though, even if we didn’t pass any “stimulus” bill, we still running a big deficit, which is to say, we are already doing stimulus. Our debate is over how much.
3. Nobody can reliably predict the impact of the proposed incremental stimulus plan, but it’s almost impossible to imagine “do nothing” will be a real option. This is somewhat unfair as it elides the “what should be done” argument with the “what will be done” argument, but I think that the practical wisdom embedded in the political process, or what I’ve called the Costanza-Hoover Principle, or what Warren Buffet has called “fighting a fire with all available tools” is sound. Recognition that this is an intuitive leap, rather than a quasi-scientific judgment, however, should rationally lead us to be cautious about risks in this direction.
Given that background, here’s my take at a crude cut at what I think ought to be done.
1. Execute a targeted stimulus program. As per Alice Rivlin, we should separate the long-term “seems like a good idea anyway” legislation from the stimulus spending that can happen quickly, and consider it through the normal appropriations process. Further we should structure the law so that any fiscal commitments beyond FY 09 are only an indicative plan, and must be affirmatively re-authorized by a new vote later this year. Further, we should rely heavily, but not exclusively, on taxes and withholding rebates for this purpose. This is for two practical reasons: (1) it can be done quickly, and will therefore mitigate the timing risk, and (2) it is less likely to become a new baseline for future budgets, and will therefore mitigate the future debt impacts.
2. Make an at least off-setting change in future liabilities under entitlement programs. This would include things like means-testing benefits, increasing the retirement age and making this sustainable by linking it to a longevity measure and so forth.
3. Reduce the military budget by reducing military commitments. The United States is increasingly a nation among nations. This will likely become ever truer as the economic rise of the Asian heartland continues. We need to recognize this, and scale our expenditures accordingly.
4. Demand accountability from state governments. A significant part of the stimulus package is transfer payments to states that have large deficits and would have to engage in contractionary tax increases or spending cuts without a bailout. Just like banks that have been bailed out are now (and should be) subject to greater control by the government, state governments that come to the citizens of the states that don’t have unsustainable debt need to be held accountable. California, for example, wants a bailout from other states that haven’t spent as much. If this appears to be the in the national interest OK, but it should be provided in the form of a loan with conditions. The U.S. government should have authority to seize sales tax and other tax revenues until the debt is repaid. In order to prevent this from simply becoming a driver of yet more state deficits, the federal government should also have the authority to hire, fire and make all spending cuts that it chooses in California’s budget until the debt is repaid. Ultimately, the debt should have recourse to state assets. You don’t want the taxpayers of the other 49 states to start selling oil drilling rights to the area off your cost, or selling off your state beaches to build condos? – then pay back your debt. If you don’t want these conditions, then don’t come to me with your begging bowl. This would have the effect of mitigating the moral hazard of this part of bailout in a very direct way: by humiliating the governors and legislators of states who have gotten themselves into this position.
5. Deregulate. Ultimately, our ability to support this debt, and increase our standard of living, will be determined by productivity growth. It’s unfashionable to say this, but the market revolution must be defended and extended. Yes, we need regulation, to some extent, of everything. The financial markets, as I’ve gone into previously, need to be regulated better than they have been (which is not to say more heavily, just better). A good example of how the stimulus proposal could be used as a lever for deregulation, however, is schools. Schools funding has been an item that has varied most widely between the various bills, but in any proposal I’ve seen, this one bill would more than double federal spending on schools. Unfortunately, education is a broken sector in our society that responds to more and more spending with no observable increase in results. We should have a vision for education, that goes way beyond choice – which I think is a good idea – to incorporate deregulation of this whole sector.
Of course, none of this (other than the spending) is really going to happen, but it seems to me that conservative and libertarian opponents of the current plan ought to have some positive vision of how to address the current situation. This is a quick sketch of mine. Plus 75 cents, it will get you a copy of the Washington Post.
“ The U.S. has been executing a stimulus plan by another name for a decade.”
Perfect.
— Tony Comstock · Feb 12, 06:07 PM · #
There’s an awful lot to argue with here, but what immediately sticks in my craw is the line “The U.S. has been executing a stimulus plan by another name for a decade.”
From where I sit, the budget deficit of the Bush years was primarily directed towards the highest earners in the form of greatly decreased tax burdens. Certainly they’re the only ones who’ve seen substantial increases real wages over the past decade; the money we’ve been borrowing to fund the deficit hasn’t gone towards public spending projects like infrastructure repair, for the most part.
And, absent a real demand for greater investment (at least, I certainly don’t remember a lack of credit for would-be entrepreneurs being a defining characteristic of the last decade), it’s hard to argue that getting money into the hands of rich people greatly stimulated the economy. In contrast, a lot of the construction, etc. that’s being done with the current stimulus is actually stimulative – a lot of people will have jobs created or saved because of this, and a lot of the infrastructure spending will provide things of genuine, long-term value that’ll continue to boost the economy for decades to come.
Still, I apprecaite Dr. Manzi at least trying to make a principled case for alternatives to the Obama plan, however flawed it may appear to me.
— Chris · Feb 12, 06:49 PM · #
“Unfortunately, education is a broken sector in our society….”
Our school system is not wholly broken. We do a poor job of educating poor kids but that is becasue poor kids bring a lot of outside difficulties to the system, difficulties that are better addressed outside the system. Other than poor kids we educate our children just about as well as anyone else. Our primary and secondary education system could definitely be better, but it can’t fairly be described as broken, and is only described as broken as propaganda to support conservative policy favorites which—in my opinion—are more political weapons designed to take control of schools from state and fed governments and teachers unions than they are programs to improve the education of our children.
— cw · Feb 12, 07:33 PM · #
cw:
Obviously, I didn’t go into this in any detail in this post, but:
We do a poor job of educating poor kids but that is becasue poor kids bring a lot of outside difficulties to the system, difficulties that are better addressed outside the system.
Agree.
Other than poor kids we educate our children just about as well as anyone else.
Every international comparison, segmented in this way, that I’ve ever seen shows that many other places do better at all points on the distribution. Do you have specific evidence of this?
Our primary and secondary education system could definitely be better, but it can’t fairly be described as broken,…
Unless I’m wrong about the results, poor performance in combination with more spending per pupil is what I mean by “broken”.
…and is only described as broken as propaganda to support conservative policy favorites which—in my opinion—are more political weapons designed to take control of schools from state and fed governments and teachers unions than they are programs to improve the education of our children.
That is not my motivation.
— Jim Manzi · Feb 12, 08:08 PM · #
If you look at the housing market, you see that the financial crash was set off by a combination of regulation (denying acquisitions to firms that didn’t promise gigantic loans to politically favored groups, such as Bank of America’s $1.5 trillion pledge to Community Reinvestment Act-preferred borrowers) and deregulation (such as Bush’s 2002-2004 war against downpayments, demonizing prudent lending standards as the chief barrier to closing the homeownership race gap.)
The common denominator is not ideology, but a Who? Whom? outlook.
— Steve Sailer · Feb 12, 09:08 PM · #
Jim:
I’m actually with cw on this one — if you look at the PISA results, you can’t look at the variables I think of as most useful (how many parents in the household?), but you can see the results by race.
Here are the science results, but you see this almost across the board:
http://nces.ed.gov/surveys/pisa/pisa2006highlights.asp
and
Non-Hispanic whites — a pretty diverse population — blow away the average. Speaking crudely, it seems that Finnish schools are good at educating middle-class white kids and American schools are also good at educating middle-class white kids. Unfortunately, we don’t have finer-grained information to see where we’re going wrong, if that’s the right way to think of it, with non-white kids, including Asians, by the way (the lag is smaller, but it’s there).
That said, I agree with you in that we need to do a much better job. The US used to be far ahead in educational attainment. Now, at best, we’re treading water. I’m not one of these competitiveness guys — I think it’s great when other countries do well. But I buy the idea that rising living standards will require upgrading our skills, so I say we experiment, get better at measuring outcomes, etc.
— Reihan · Feb 12, 10:02 PM · #
Similarly, of you look at the NAEP scores by state, you’ll see a striking positive correlation with “closeness to the Canadian border” (as Daniel Patrick Moynihan coyly called it).
On the PISA statistics, Hispanics in the U.S. score higher than their cousins back home in Latin America. I imagine that’s true for African-Americans, too, but the PISA doesn’t bother testing in Africa, so there’s no data on it.
The huge issue in educational outcomes is quality of the students, but we’re not supposed to talk about it, so discussions of educational policy never get anywhere because we are supposed to ignore the elephant in the living room.
— Steve Sailer · Feb 12, 11:51 PM · #
Jim,
I believe you when you say that that is not your motivation. I strongly believe that is the motivation of plenty of other conservatives though. There is a huge chunk of conservatives who couldn’t care less about poor, black and hispanic kids which is evidenced by their voting records, campaign strategies, and the things they say, yet many of these same people calim to also be very interested in the educational outcomes of these same black and hispanic (and it’s poor white rural kids as well, they do no better).
Thank you Reihan for providing those test scores. You also write: “Unfortunately, we don’t have finer-grained information to see where we’re going wrong, if that’s the right way to think of it, with non-white kids, including Asians, by the way (the lag is smaller, but it’s there).”
I think what is going wrong is a huge complex of factors. Here’s an interesting one that just occured to me becasue of things I read when we recently had this new baby. There are studies out there that say breastfeeding for one year raises the baby’s IQ by 4-6 points. That may or may not be correct and there could be different reasons for this other than the obvious, but it is very interesting to also note that poor black mothers breastfeed way less than white middle class mothers. And that is just one factor that could contribute to the achievment gap. There’s lots of other ones: teacher quality, cultural attitudes about education, parenting styles, test taking issues, moving every six months….
I guess my point here (if I really have one) is that we have several large populations of studetns in this country with some very differnt experiences, cultures, and backgrounds. It should not be shocking that they have different levels of success in our schools. It doesn’t mean our schools are broken, it means our schools have just begun to attempt to deal with the differences in the student populations.
And there is only so much schools can do anyway. We ask way too much of them. I think that is the correct way to look at it in the end.
— cw · Feb 13, 02:51 AM · #
But cw, I think Jim would agree with you — the big problem is that we clearly need to do a better job of serving this more heterogeneous population. There aren’t a lot of levers for addressing the other big drivers of poverty — we can try to build a better public health system, but there’s a chicken and egg problem here (there is severe inequality in health outcomes in Britan, where they have the egalitarian NHS; France has the ecole maternelle and they make a difference, but there are cultural barriers to that level of intrusiveness — try it, sure, but improving outcomes in schools is if anything an easier problem to solve); we can increase incomes at the low end through transfers, but there’s a diminishing returns issue here; and we can’t really hector and cajole families into staying together through government fiat, though that’s been tried and I can understand why.
Which leaves us with KIPP, separating out kids with disciplinary problems to focus the attention of teachers and non-disruptive students, and structural reforms. It ain’t a silver bullet, but it’s something.
Then there’s the bigger question about Baumol’s cost disease: if this is the best we can do — sluggish if any growth in educational productivity — we’re looking at a fairly big political economy problem down the road.
cw, you are a great commenter. I’m glad you read this blog.
— Reihan · Feb 13, 04:21 AM · #
Reihan,
Thanks for the nice comment. And you are right, schools are probably our most effective lever, but to be realistic about how effctive that particular lever actually is…. We need other levers. Maybe you are too pesimistic about mitigating outside the school factors.
The whole issue is really complicated. And I don’t think this country has the political will to make the effort it will take give poor kids a good education (which a lot of poor kids doen’t even realize they want). It would take a lot. It’s not just passing out some vouchers or abolishing teachers unions and summer vacation. It’s not like I’m pessimistic exactly, it’s more like I’m between soloutions. I used to be a big believer in the power of schools. I still am, in theory. A good school is a wonderful thing. But, I have doubts about school’s ability—in this particular country—to reengineer society.
— cw · Feb 13, 05:23 AM · #
re: education as input/output problem
We have two broad categories of issues: (A) the complex algorithm, and (B) the diversity of input material.
One principle of pragmatism: the State may exercise power in A but not B. Ex: KIPP is an A reaction to a B recurring fact.
Side question: is that “just the way it is,” or is there some operation the State may legitimately perform in B? For instance, is there something the State can do about virtue-diversity? If so, is there a best-mode that will travel?
If B is off limits, what is off limits in A? For instance, are we allowed to literalize “in at 5yo, out at 18yo” (Platonic approach), or must we continue our practice of pasting together a thousand “in at 8am, out at 3pm” — a practice which allows the human material to re-randomize its priorities on a daily basis? What can we do to dampen the noise of teaching and administration?
Also: if the State must confine itself to A, is there demand in B for an entrepreneurial approach? — e.g., prenatally squeezing the Bell curve, or a “mold this human clay” outsourcing program for working parents. How close to dystopia are we willing to go? (stupid question).
I think we can all agree that the solution, whatever it is, will be some variation on “reveal B’s high-level patterns and universalities (e.g., emotional scheduling, group performance), complicate and fine-tune A accordingly.”
— JA · Feb 13, 05:38 PM · #
Some very good points here and it’s nice to see some alternative ideas rather than simple criticism of the stimulus bill. I’m not really sure how you go about writing a good stimulus bill within the confines of the existing political system. It is difficult to design legislation with broad overreaching principles and themes when the process requires a piecemeal approach be used to satisfy the (often petty) demands/whims of individual members of Congress.
Simply reducing personal taxes is not an optimal approach because not all of the money will be spent. My family, for example, would not spend more if our taxes were reduced. We would just increase our savings. I felt that congressional Republicans placed far too much emphasis on the tax reduction argument rather than focusing on getting timely, targeted, and efficient stimulus programs put in place.
The Canadian stimulus budget had a couple of things that I really liked – a tax credit for up to $1350 per family for doing up to $10,000 of home renovations in the next twelve months, with minimal restrictions on the eligible renovations. This is, I think, a nicely targeted program which will help retailers and builders while providing homeowners with a long term benefit.
The other program I liked was a secured credit facility to provide financing for auto leasing/purchasing. This will be of great benefit for automakers and dealers who currently are having problems because people cannot secure loans for cars.
It would be nice if the stimulus bill could have been less ideologically driven in the spending programs that were chosen for adoption. Unfortunately, in the current political climate, that wasn’t going to happen.
— ErinSiobhan · Feb 13, 07:16 PM · #
Manzi is semi honest when it comes to laying out the facts. And the fact is the Bush admin and their Republican allies were deficit spending from 2002 onwards. It along with cheap money and a deregulatory philosophy is one of the basic causes of the mess we currently find ourselves in. It’s doubled the national debt for godsake. Taken three years of modest surpluses and turned them into the biggest annual deficits in history. Given the background it’s a mystery why these guys aren’t burying their head in shame. But as the Iraq and Afghanistan fiascoes illustrate when it comes to chutzpah these guys have no equal. They’ve probably brought a 90 years of American economic supremacy to an end.
— John · Feb 13, 10:03 PM · #
It would be great to separate out the data for poor kids of all races vs middle class kids of all races. I also recommend Heckman’s work in this general area. I think that by the time these kids get into school it may be too late.
Steve
— steve · Feb 13, 10:14 PM · #
As far as education spending is concerned, the problem to me seems less how much and more how it is applied. Since computer technology has found its way into the school system, it has somehow become a necessity. The assumption has become that more computers and smarter technology lead directly to more productive schools. In truth, schools were doing just fine before the burden of computers and could do well without them. All of the funding that goes into installing and updating computers would go much farther if used to hire more teachers and increase the pay of those teachers who are great at their job.
— Jared · Feb 13, 11:25 PM · #
Using computers is something we all have to learn now. Schools are a really good place becasue of all the academic uses a computer and the internet can be put to and because not every kid has a computer at home.
— cw · Feb 14, 04:04 AM · #
- “The whole issue is really complicated. And I don’t think this country has the political will to make the effort it will take give poor kids a good education (which a lot of poor kids doen’t even realize they want). It would take a lot. It’s not just passing out some vouchers or abolishing teachers unions and summer vacation. It’s not like I’m pessimistic exactly, it’s more like I’m between soloutions. I used to be a big believer in the power of schools. I still am, in theory. A good school is a wonderful thing. But, I have doubts about school’s ability—in this particular country—to reengineer society.” –
To Reihan’s point earlier: it seems as though the US and the Finnish schools do a reasonably (and similarly) decent job at educating middle-class white kids. Isn’t the common demoninator the “who” in this equation rather than the “what” of “good schools?” If it follows that certain classes of people have different academic and intellectual capabilities, how do you adjust for this in a system? You can’t.
The reason vouchers are a practical solution – in part – to this problem is that vouchers may at least de-centralize underperformance. What we have is not a problem of underperformance by poor students, but a high concentration of this underperformance in certain schools because of the effects of population density. You have to assume the simplest answer first: that people come in all different shapes, sizes, and abilities. If you have an area heavily concentrated with one type of shape-size-ability profile, the school will reflect this demographic, and it’s not the school’s fault. A voucher system, theoretically, will at least allow the negative pressure of concentrated underperformance to be lessened at a particular school.
We have to start out by assuming that poor students, on average, will underperform versus middle-income students no matter what school they go to. Vouchers, of course, will not solve this. Pooring money into school systems where poor students are highly concentrated also will not solve this, nor will year-long schooling or destroying the teachers’ unions (however nefarious they are). How then do we progress to improve the socioeconomic outlook for poor students, at the margin, through each iteration? By focusing on socioeconomic conditions first, and traditional educational ability second.
We need to revolutionize the concept of “education” to mean “specialization.” Post-elementary schooling, especially for poor students, has to begin focusing on integrating these students into the workforce – not preparing them for college. By marginally increasing the potential earning power of each iteration of poor students, it follows that eventually they may not be poor. One of the primary factors for educational underperformance decreases in prevalence.
Here’s where the unions come into play: they will never reqlinquish power – or the dream that every child can go to college. Moving to post-elementary schooling systems with a proliferation of vocational and technological training means more workers training workers and less teachers attempting to educate. Until this happens, the cycle of poor, underforming students breeding (literally) more poor, underforming students will continue no matter what policy is enacted or how much money the government throws at the system.
— mattc · Feb 15, 02:29 PM · #
Dr Manzi, could you clarify what you see as the difference between “heavier” and “better” regulation of the financial markets? How would the difference play out in practice? What specific measures would you propose? Is the modern GOP capable of recognizing the need for effective regulation?
— nickzi · Feb 16, 03:37 PM · #
mickzi:
I did an NR article on this question called “walls, not brakes”: http://www.thefreelibrary.com/Walls,+brakes,+and+risk:+we+can+learn+from+the+market+turmoil,+or+we…-a0187563387
— Jim Manzi · Feb 17, 04:51 AM · #