Responding to the Vice President’s op-ed

[stimulus] act was intended to provide steady support for our economy over an extended period … not a jolt that would last only a few months.

That’s an unfortunate word choice. Here is dictionary.com’s definition:

jolt: to jar, shake, or cause or move by or as if by a sudden rough thrust; shake up roughly

And yet heres the President last November 24th:

… we need a big stimulus package that will jolt the economy back into shape …

… we have to make sure that the stimulus is significant enough that it really gives a jolt to the economy …

And so we are going to do what’s required to jolt this — this economy back — back into shape.

And again on February 9th in a press conference:

But at this particular moment, with the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life.

Here’s the Vice President, on March 28th in Chile:

The Recovery Act, as we call it, provides a necessary jolt to our economy to implement what we refer as “shovel-ready” projects …

And again on June 2nd in a stimulus roundtable:

And, of course, we also came forward with what we’re going to talk about today, the American Recovery and Reinvestment Act, an initial big jolt to give the economy a real head start.

(hat tip to Don Stewart)

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My intent is not merely to point out the contradictory language, but to focus attention (again) on the question of stimulus timing. The Vice President sets up some straw man criticisms of the stimulus law that exclude my own:

It is true that the act’s effort to address multiple problems simultaneously makes it an easy target for second-guessing. Critics have argued that the tax cuts are too small (or too large); that too much (or not enough) aid is going to rural areas; that too little (or too much) is being spent on roads. Recently, some have even criticized the act for helping support soup kitchens and food banks.

I have a different critique. I believe the stimulus law will increase GDP. It will just do it later than we need it to.

The Vice President addresses this concern in his op-ed:

The bottom line is that two-thirds of the Recovery Act doesn’t finance “programs,” but goes directly to tax cuts, state governments and families in need, without red tape or delays.

This is a sleight-of-hand to argue that the stimulus funds are being spent quickly. If two-thirds of the funds are being spent without red tape or delays, then there is no problem.

If instead we separate out the aid to state governments, things look quite different.

A quick review of the CBO score of H.R. 1, the stimulus law, shows:

	10-year deficit effect ($B)
“Tax cuts”	215
Unemployment Insurance	39
TANF (welfare) & Child support	18
Food stamps	20
Health insurance subsidies	25
Related tax benefits for individuals	1
Total, “tax cuts” and benefits to individuals	$318 B

I put “tax cuts” in quotes because I think much of this funding is mislabeled. If the government sends you a check and you’re still paying the same amount of taxes, that’s not a tax cut. That’s an entitlement check. That’s a separate question from today’s debate, so I will set it aside.

So $318 B of the total stimulus is in the form of “tax cuts” or payments to individuals. These funds get into people’s hands quickly. If you’re going to do fiscal stimulus, this is how I would prefer you do it, setting aside for the moment distributional questions.

While the net deficit impact of H.R. 1 over ten years is the well-known $787 B figure, the macroeconomic stimulus is actually a little bigger, about $810 B over ten years. That’s because the bill would actually reduce spending in years 7 through 10. So the $787 B is $810 B of deficit-increasing policies, followed by about $23 B of deficit-reducing policies.

$318 B divided by $810 B is about 39 percent.

Now let’s look at aid to states. It’s hard to tease this out precisely from the CBO table, but we can get a ballpark figure:

	10-year deficit effect ($B)
State Fiscal Relief	90
State Fiscal Stabilization Fund	54
Highway Construction	28
Other Transportation	21
Housing	13
Education	25
Law Enforcement Assistance	3
Total, aid to states & locals	234 B

(Budgeteers: I would appreciate corrections to the above table. I’m assuming that IDEA and Special Ed all go to S&L. Is that right?)

So roughly another $234 B comprises transfers from the Federal government to State & Local governments. That’s about 29% of the total $810 B stimulus impact. This is where the Vice President’s “without red tape or delays” argument breaks down, for two reasons.

1. When the Federal government gives a dollar to a State or local government, GDP does not increase. That’s just a transfer from one level of government to another. It’s not increasing the size of the government until the State or local government gives that dollar to someone providing a good or a service – a highway road worker, a teacher, or a citizen receiving a tax cut or an entitlement check. So there is a lag introduced when money passes from the Federal government, through State and local governments, into the economy. I don’t see how the Vice President can say that funds transferred from the Federal government to State and local bureaucracies enter the economy “without red tape or delay.”
2. States don’t take all the funds they receive from the Feds and pump it into the economy.
   Example: State A will face a $2 B budget deficit this year. The Feds pay State A $4 B from the stimulus. State A increases spending from $3 B relative to what they had planned, and they cut their budget deficit in half. From a macroeconomic stimulus perspective, 25% of the Federal government’s stimulus was lost to reduce the State’s budget deficit.

Here then is my summary comparison:

Vice President Biden: The bottom line is that two-thirds of the Recovery Act doesn’t finance “programs,” but goes directly to tax cuts, state governments and families in need, without red tape or delays.

Hennessey: The bottom line is that 39% of the Recovery Act goes to payments to individuals without red tape or delays. About 29% goes to State and local governments, where it faces State and local red tape and delays, and where some of it is siphoned off to reduce State budget deficits rather than provide macroeconomic stimulus. The other roughly 32% flows through slow-spending Federal bureaucracies.

We need the macroeconomic benefits of the stimulus now. The Administration is in a box because they want to argue that the economy has improved because of their policies, and that the stimulus has contributed to that improvement, but they cannot show that enough stimulus money has yet entered the economy to have a measurable effect.