Summers believed that it was only possible to come up with $225 billion in direct spending that had a high stimulus value. Further money could be targeted at tax cuts and aid to states, but it had a lower stimulus value. So there was a sense of diminishing returns here.
Now, that might have been wrong, but it's a fairly defensible position.
Read it at Mother Jones
The Real Reason Larry Summers Didn't Advocate a $1 Trillion Stimulusby Kevin Drum
Prima facie there is nothing in there to suggest Summers's staunch belief in bond vigilantes. Prima facie it seems to be a mistake of underestimating the size of the crisis AND bringing a politically feasible plan to the table.
ReplyDeleteHowever, perhaps given the absence of an effort to close the whole output gap and Romer's having to convince Summers, he was at one point hesitant.
Cool to see Galbraith in there. Note, Goldman was amongst the most pro stimulus advisers (I'm annualizing the recommendations).
I didn't see a payroll tax cut in their, but I did see an employer side FICA cut. Why?? Seems like a big strategy they missed.
For some reason, seems the mainstreamers see tax cuts as less effective, particularly FICA.
The solution was obvious, payroll tax holiday. Even Lord Keynes called this one.
ReplyDeletehttp://gregmankiw.blogspot.com/2009/02/mature-keynesian-perspective-ii.html
What I don't understand this business of counting the stimulus package over 2 years. Budgets and GDP figures are issued on an annual basis, so in terms of fiscal impact $225 billion should be cut in half.
I doubt many Americans realized that the $800 billion stimulus package was more like two consecutive $400 billion a year programs.
Beo- am I wrong? Was a payroll tax cut holiday not in the memo as an augmentative option??? Grrrrr
ReplyDeleteBTW beowulf, how do you always have a powerful, yet not well known quote/link handy?
ReplyDeletewh10,
ReplyDeleteIf this were The Price is Right, I think Galbraith's $900B a year would have won him the new washer and dryer (or whatever the prizes are these days). Summers himself wrote that a $850B (over 2 yrs) stimulus package would fill just under half the output gap. And that was his high end option! The actual bill came in lower.
Why on earth didn't he set the goal as filling the output gap? That memo was the most half-assed thing I've ever read. Imagine if Kennedy's advisers had edited the moonshot speech by deleting, "and returning him safely to the Earth" (after all, sending a man to the moon is a lot more affordable than bringing him back).
wh10,
ReplyDeleteI have discovered a machine that pulls links from the aether (OK, not really).
To answer your question, Summers only mentioned an employer-side payroll tax holiday. If I had to guess, he was mentally counting the Making Work Pay tax credit as already providing an employee-side tax holiday.
Looks very much like Summers was making a common mistake, namely to attach importance to “bang per buck”, i.e number of jobs created per dollar of deficit. The latter point is important POLITICALLY – i.e. you have to pay attention to the point when dealing with economically illiterate politicians.
ReplyDeleteBut as far as ECONOMICS goes, the only important consideration is creating as many productive jobs as possible. The number of dollars you need to print to do this is irrelevant because the REAL COST of printing dollars is zero.
Ralph,
ReplyDeleteI can't say anything about the economic literacy of politicians, but I think your point is wrong.
Economists are primarily concerned with opportunity cost, not some kind of physical/material cost of production. The physical cost of production only enters the picture because we often care about the other possible uses (the foresaken opportunities) of that physical stuff.
When we talk about stimulus, we must consider the possibility that by starting project A, you're inhibiting project B (which needed some of the resources you grabbed for A). That may be the kind of thing that Sumner was worried about.
Not saying that Sumner was right or wrong. Just saying that evaluating whether he was right or wrong requires some model of idle resources, resource contention, and, when contention arises, a normative/ranking system to decide whether A should be chosen over B.
When we talk about stimulus, we must consider the possibility that by starting project A, you're inhibiting project B (which needed some of the resources you grabbed for A).
ReplyDeleteIf there aren't idle resources then why would we even be talking about stimulus?
Marris,
ReplyDeleteI looks to me as if Summers was concerned with the number of jobs created per $million of deficit. See the part of the article where he mentions “diminishing returns.”
My point is that jobs per $million is irrelevant. The only important consideration is which projects are the most productive. E.g. if some project involves employing people with a high propensity to save, that project will require more dollars per job created. But that doesn’t matter because creating those dollars costs nothing. Or as Milton Friedman put it “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.”