Tuesday, January 15, 2008

Obama vs. Clinton vs. Edwards on Fiscal Stimulus

I'm generally against the use of a temporary fiscal stimulus, for reasons that Brad Delong mentions. Studies of this kind of thing estimate that the "lag" for fiscal policy--meaning the time between when the policy is first considered and when it actually has some effect--can be a year or more. Usually, by the time a fiscal stimulus package is enacted and has had time to take effect, the recession which inspired the initial calls for stimulus is already over.

For this reason, it's a better idea to rely on "automatic stabilizers," policy measures which automatically start pumping more money into the economy when the economy starts to go south. The standard example of this is unemployment compensation; when more people lose their jobs, the government automatically starts spending more on the program. The lag on such automatic stabilizers is short enough that they can have a good chance of serving as as a fiscal pump at the right time.

There are, however, some economists, including Larry Summers, who are arguing for a fiscal stimulus now, and all three major Democratic candidates have introduced stimulus packages. Let's say for the sake of argument that a stimulus package is a good idea and consider what sort of package would be best.

Here's a note from the Center on Budget and Policy Priorities and a recent Brookings primer on fiscal stimulus by Doug Elmendorf and Jason Furman.

Both the note and the primer explain that any fiscal stimulus should be timely, targeted, and temporary. The Brookings paper list the following Good Stimulus Ideas:

  1. Extend unemployment benefits temporarily.
  2. Issue flat, refundable tax credits temporarily.
  3. Increase food stamps temporarily.
CBPP has one more: 4. State fiscal relief.

How about Bad Stimulus Ideas? Under "ineffective or worse" they list infrastructure investment, business tax incentives and reductions, and permanent personal tax reductions.

How do Obama, Clinton, and Edwards's proposals stack up?

All three are proposing (1), extending unemployment benefits, and (4) state fiscal relief (linked to the housing crisis). Only Obama is proposing (2) temporary tax credits, though Clinton suggests they should be enacted if things get worse.

The glaring omission from all three candidates' plans is (3) increasing food stamps temporarily. This option has extremely attractive features: it can be done quickly and easily using existing systems, and it goes to people most likely to be in need, who have a high marginal propensity to consume, i.e. they'd almost all the money right away, which is what you want for a stimulus. I suspect they haven't proposed this because "food stamps" sounds like "welfare" to people, and welfare has been slimed by years of conservative propaganda.

All three propose various legal measures to stop people from being evicted during the housing crisis. There are a few other features to Clinton's and Edwards's proposals, but none of them are likely to have much effect as stimulus.

Clinton proposes a massive increase in spending $25 billion on emergency energy assistance for households facing high heating bills. Obama and Edwards have both supported spending more on this elsewhere. The entire budget of the LIHEAP program has never been much more than $3 billion, so she's proposing a massive expansion, presumably with the intent of making it permanent. This might be a good idea as general policy, but it's not effective stimulus.

Likewise, both Clinton and Edwards are proposing spending more on renewable energy, something that Obama also proposes elsewhere. Again, this may be a good idea, but it's not good as stimulus. It's basically in the category of one of the Bad Stimulus Ideas, "infrastructure investment," which will have too long a lag to prime the economy anytime soon.

The big contrast between the candidates' stimulus proposals are 1) Edwards and Clinton have thrown in some non-stimulating measures, and 2) Obama is proposing a tax rebate as a primary measure, which Clinton leaves as a backup measure, and Edwards doesn't mention at all.

Krugman asserts that Obama's proposal is "less progressive," apparently because it doesn't include renewable energy measures and because the tax rebates are not targeted to only the poor. But as noted, Obama proposes renewable energy measures as part of his long-term policy, where it belongs, rather than as a temporary measure. Although not well-targeted, the tax rebates have the huge advantage of being very easy to enact and distribute quickly as a temporary measure.

All together, I think I'm being objective when I conclude that Obama has the best stimulus program. It looks pretty much like the streamlined program the Brookings and CBPP experts would have written, minus food stamps, and has a halfway decent chance of actually working to its desired effect. I suspect, in fact, that it was written by Obama economic advisor Austan Goolsbee after talking with just those experts.

P.S. I just noticed that Brad Delong beat me to the punch with some similar thoughts.

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