conversableeconomist

Setting up a discussion of the Obama stimulus package

Last week I gave a talk to an alumni group here at Macalester College about budget deficits in the short run and in the long run. For the short-run portion of this talk, I set up my discussion with two figures. I reproduce them here, in part for those who would like to cut-and-paste a copy for their own presentations.

The first figure shows three paths for the unemployment rate. The middle line shows the path for the unemployment rate presented by Christina Romer, head of President Obama\’s Council of Economic Advisers, in January 2009–more specifically, it\’s actual data up though 2008, and then a forecast after that date. The bottom line shows Romer\’s prediction that the unemployment rate would be lower if the \”stimulus package\” legislation — the American Recovery and Reinvestment Act of 2009– was enacted. The top line shows the actual path of the unemployment rate. This version of the figure appears in \”Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act,\” by James Feyrer and Bruce Sacerdote, NBER Working Paper 16759, February 2011.   

Of course, this figure is often used to argue that the stimulus didn\’t work. But of course, it is equally possible that the January 2009 forecast was too optimistic, and that the stimulus made the unemployment rate lower than it would otherwise have been. 
The Congressional Budget Office publishes regular estimates of the effects of the ARRA legislation. The May 2011 report, for example, states that the legislation: 

— Lowered the unemployment rate by between 0.6 percentage points and 1.8 percentage points,
— Increased the number of people employed by between 1.2 million and 3.3 million, and
— Increased the number of full-time-equivalent jobs by 1.6 million to 4.6 million compared with what would have occurred otherwise …

Here\’s a useful CBO figure for illustrating their case that the stimulus improved matters.
With these two figures to set up the discussion, one can then talk about what makes a stimulus package more or less effective in a variety of contexts. Is it timely, temporary and targeted? What about factors like the pre-existing level of debt, the extent to which the economy is open to international trade, the response of monetary authorities, and other factors?

In their NBER paper, Fehrer and Sacerdote summarize some of the conflicting evidence about the effects of the stimulus. Their own findings, as summarized in the abstracts are: \”A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.\”

conversableeconomist

Green Energy is not Growth Energy

Last week Germany announced that it would phase out its nuclear power plants over the next decade or so, and instead substitute green energy sources like wind and solar. I blogged that government support for green energy may be justifiable on environmental grounds, or perhaps on ground of making the a country less dependent on imported energy. However, green energy is likely to cost more as fossil fuel–or at best, cost the same–and that isn\’t going to boost the economy as a whole. Here is some other commentary I\’ve seen in the last week or so related to these issues.

1) At the Technology Review website, Peter Fairley discusses how the policy, if implemented, can lead to higher energy costs and even blackouts in the short term. In the longer term, a Germany that relies less on nuclear power may well end up burning more coal.

2) The Washington Post editorialized on \”Germany\’s nuclear energy blunder,\” pointing out that if implemented, Germany will probably end importing more electricity–much of it produced by burning fossil fuels.

3) Via Clive Crook\’s blog at The Atlantic, I found a couple of sets of quick estimates of how unlikely it is that Germany can find enough wind and solar power to substitute for its electricity generation, and thus how phasing out nuclear energy will lead to higher carbon emissions: one set of number is the Breakthrough Institute, the other from Roger Pielke.

4) Finally, for a misguided argument along the German lines, the June 19 issue New Republic carries a leader called \”Waste of Energy\” (available by subscription only) lamenting that President Obama had deserted the agenda he laid out in February 2009 to wean the U.S. off of fossil fuels. They write: \”From the day he took office, Barack Obama had a unified theory of how the United States could recover and prosper. At the center of his plan–which he voiced in an address to a joint session of Congress in February 2009–was the need to reduce the use of carbon-based fuels …\” The editors at TNR argue that this is a recipe both for environmental gains, which is plausible enough, and also for economic gains, which is not plausible. Indeed,
the TNR editors argue, quite remarkably, that moving away from carbon-based energy is \”the most convincing framework for ensuring America\’s future prosperity.\”