Great Debate – More Stimulus?

The Great Debate© is presented to expand our understanding of various topics of interest.  In this Great Debate, the topic is whether the government should introduce a second stimulus for employment.  In a NYT Op-ed article, Laura Tyson – a member of President Obama’s Economic Recovery Advisory Board – argues infrastructure stimulus is the way to go to create jobs.  Steven Hansen counters.We present Laura Tyson’s opinion in its entirety, then the response of Steven Hansen.

Why We Need a Second Stimulus


Op-Ed Article published in NYT on 28 Aug 2010

Laura Tyson, a professor at the Haas School of Business at the University of California, Berkeley, was chairwoman of the Council of Economic Advisers and the National Economic Council in the Clinton administration. She is a member of President Obama’s Economic Recovery Advisory Board.

OUR national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

Two forms of spending with the biggest and quickest bang for the buck are unemployment benefits and aid to state governments. The federal government should pledge generous financing increases for both programs through 2011.

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

An increase in government investment in roads, airports and other kinds of public infrastructure would be cost-effective, too, as measured by the number of jobs created per dollar of spending. And it would help reduce the road congestion, airport delays and freight bottlenecks that reduce productivity and make the United States a less attractive place to do business. The American Society of Engineers has identified more than $2.2 trillion in public infrastructure needs nationwide, and a 2008 study by the Congressional Budget Office found that, on strict cost-benefit grounds, it would make sense to increase annual spending on transportation projects alone by 74 percent.

Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.

The federal government should also create and capitalize a National Infrastructure Bank that would provide greater certainty about the level of infrastructure financing over several years, select projects based on rigorous cost-benefit analysis, invest in things like interstate high-speed rail that require coordination among states and attract private co-investors in projects like toll roads and airports that generate dedicated future revenue streams.

But can the government afford this additional spending? The answer is yes. Despite the large federal deficit, global savers, including savings-hungry American households, are snapping up United States government securities at very low interest rates. And they will continue to do so as long as there is ample slack in the economy and inflation remains subdued. Over the next few years, there is little risk that federal deficits will crowd out private investment or precipitate a crisis of confidence in the American government, a spike in American interest rates or a sudden drop in the dollar.

On the other hand, as long as private demand remains weak, the risk is uncomfortably high that trying to reduce the deficit — by cutting spending or increasing taxes — will tip the economy back into recession or condemn it to years of faltering growth and debilitating unemployment. In fact, either outcome would depress tax revenue and could mean larger deficits.

Faced with these risks, as long as the economy is operating far below potential, policy makers should do two seemingly contradictory things. First, they should provide additional fiscal support for job creation and growth. And, second, they should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.

By easing capital market concerns about the government’s future borrowing needs, such a plan would permit larger deficits and slower debt reduction while unemployment is still high. The long-run debt problem — the result of imprudent fiscal decisions before the recession, escalating health care costs and an aging population — must be addressed once the economy has recovered. But for now the priorities of fiscal policy should be jobs and investment.

Infrastructure Stimulus Does Not Create Jobs

By Steven Hansen

Steven Hansen has spent 25 years building the world’s largest infrastructure projects including the Alaskan Pipeline, various nuclear and conventional power plants, mines, refineries, offshore platforms, and autobahns.

The first stimulus is almost history. It was sold to America as a job builder – and now is being spun as preventing our terrible jobs losses from being even worse.

No doubt the stimulus, even thought terribly misdirected made our economy better today by borrowing from the future.  My grandchildren are applauding (sarcasm) .  Our sovereign financial system requires we create debt instruments when we overspend – and as we are unable to pay this money back in the short and medium terms – they are stuck with finding a solution to the debt this generation created.

When we stimulate using borrowed money, we have a fiduciary responsibility to the next generation to ensure we are not degrading their future.  So whatever we spend the stimulus on, we must ensure they will benefit.

The first stimulus did not do that.  The only legacy we left the future generations is debt – we made their lives worse to make our lives better today.   The first stimulus did NOT create jobs.   With this track record, can we allow this same group to have a second kick at the cat.

On the surface, this call for a second stimulus through infrastructure improvement does meet my criteria.  We are creating a future debt to provide a better infrastructure which my grandchildren can use.

I have several concerns:

1) Infrastructure does NOT create a lot of jobs – it DOES create GDP.  You can go through billions of concrete works and create few jobs.  Highways create few jobs per $ spent.  The biggest multipliers come from building hospitals and power plants – especially nukes.

2) Well planned infrastructure is a slow money burner.  A nuclear power plant requires a minimum of ten years until operational with the peak of jobs coming in five years.  It will take years until this infrastructure stimulus is seen in the employment numbers.

3) The selection of infrastructure to be built will be politically based.  Enough is enough.

Infrastructure spending, if properly done, may have limited effect on employment during the spending cycle. It does satisfy my requirement of benefit for children and grandchildren in that it does, if done properly, support future growth of economic activity. Thus, critics of infrastructure stimulus may be correct in pointing out that the relatively few jobs created are expensive in the stimulus spending cycle (and I agree with this). However, done right, infrastructure improvement may provide dividends long after the stimulus ends.

The biggest problem with Tyson’s agrument is that it does not address the current employment problem.

Tyson bills this second stimulus for infrastructure as a jobs creator.  I will debate this fallacy with anyone at anytime.  It is a misguided solution from those who only watch money flows.

3 replies on “Great Debate – More Stimulus?”

  1. 1) Let’s start the debate with true causation where Laura Tyson opens about effects of falling demand and being disingenuous by not pointing out the real causation. The causation of the current crisis was debt issuance through a combination of low short-term interest rates managed by the Federal Reserve and government which further deregulated the financial industry in 1999 and promoted unhealthy lending (speculation) and accelerating the formation of the housing bubble by additional regulation such as the Community Reinvestment Act . That is called market manipulation creating market distortion. The effect was malinvestment in business and the household level for over a decade ( bubble & housing bubble, now into the final stage of Treasury bubble). Plunging demand comes from credit restriction and deleveraging for Main Street as the economy reverts to the mean pre-FIRE.
    2) I agree with Laura and Steven’s assessment when it comes to deficit spending to produce an income producing assets in infrastructure but can only support Steven Hansen’s suggestion in energy production (all options including nukes).

    In the short-term, the pain would continue to mount. But medium and long-term, such an endeavor would create skilled jobs that require income. Higher energy supply means lower prices, making domestic manufacturing a lucrative investment now that wages and benefits have shrunk this last decade. Since the United States has no real way out of the liquidity trap and balance sheet recession we are in, Bernanke will continue to devalue the currency using QE. This monetary policy makes sense IF we have manufactured goods to export and energy independence as mentioned is pursued.

  2. Jason – – –

    Good comment. I am working on a study of how interest rate distortions across the yield curve (not just short-term rates directly controlled by the Fed) have had an effect on the financial crisis. I should have an article this week.

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