Arnold Kling  

Timely? Temporary?

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Douglas Elmendorf, the head of the Congressional Budget Office, writes,

CBO estimates that enacting the bill would increase federal budget deficits by $169 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period.

I assume that this is "static scoring," meaning that it assumes nothing in terms of feedback from the economy to the budget. Fiscal year 2009 ends on September 30,, 2009. Fiscal year 2010 starts on October 1, 2009 and ends on September 30, 2010.

Larry Summers famously argued for a timely, targeted, and temporary stimulus. This looks like something that is not timely, with only about 20 percent of it getting into the system in the next 8 months. It does not seem temporary, given that over one-third of it ($291 billion) will kick in at least 21 months from now.

Back in the 1960's and 1970's, Keynesian economists talked about a temporary investment tax credit as the ideal fiscal stimulus. You tell businesses, "invest this year, and you get a tax credit. Wait until next year, and the tax credit goes away."

An investment tax credit is not the stimulus I'm advocating today. I prefer Bryan Caplan's idea of cutting the employer contribution to payroll taxes.

But an investment tax credit has the virtue of being timely and temporary, and hence it qualifies as a stimulus idea. The bill going through Congress is not. It is a Galbraithian transfer from the private sector the government.

UPDATE: Greg Mankiw gives the year-by-year breakdown.

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COMMENTS (18 to date)

So you're upset that we're going to continue to spend money on positive NPV investments that the private sector will grossly underprovide due to well established in economics market problems?

Are you worried that the country will get too wealthy?

John Thacker writes:

"Richard H. Serlin's" website's "About Me:"

"Richard H. Serlin
I am an adjunct professor for the University of Arizona where I teach one of the largest personal finance courses in the country, with over 500 students per year. I also teach advanced personal finance, corporate finance, and investments. I hold an MBA from the University of Michigan, with honors including Beta Gamma Sigma, an academic scholarship, and a tie for the highest GMAT score in my class. I have completed all coursework and written exams for a Ph.D. in finance from the University of Arizona, and am currently involved in a long term dissertation project involving lifetime investment strategy. I am also president and co-founder of National Personal Finance Education, one of the country's largest online U.S. Trustees approved providers of a personal finance course, designed by myself, which meets the requirement for bankruptcy filers under the BAPCPA law of 2005. "

Wow. That just screams "crank" to me, from the "tie for highest GMAT in my class" to the "designed by myself" to the proud boasting about being an ABD, to the middle initial.


You have a generous definition of crank if define it as tying for the high GMAT score in an MBA program that was recently named the best in the country by the Wall Street Journal, or you think there's something wrong with saying you've completed all coursework for a Ph.D in finance.

tjames writes:

Mr. Serlin:

I think it's right to be at least concerned about many of these so-called "investments". I suspect it is devilishly hard to prove a postive NPV for many of these projects. We are already seeing stories alleging TARP money allocation was/is being distorted by politics, which has nothing to do with searching for the best bang for the buck. Why should I expect different behavior for the stimulus.

Furthermore, the fact that many of these "investments" may carry with them a permanent fixed increased cost of goverment decreases the likelihood they will, in fact, have a positive NPV.

Grant writes:

Richard, the problems I see with your viewpoint are:

1) Due to the lack of market prices, we can't know which government investments generate positive returns unless its very obvious (e.g., corn ethanol doesn't seem to be obvious enough).

2) Assuming government is able to calculate returns with some accuracy, the sheer size of the stimulus means it might exhaust investment opportunities with low opportunity costs.

3) Markets don't provide all desired public goods for good (costly) reasons, namely high transaction costs (Dalhman 1979).

4) Much of the stimulus may not provide public goods. Remember the whole point of a stimulus is to boost private sector output.

5) Public choice (or political reality, if you don't favor public choice economics) may mean the stated goals of the stimulus will have little to do with the actual actions taken.

Yancey Ward writes:

I didn't realize GMAT scores were publicly disclosed. I know SATs and GREs aren't, at least they weren't back in the day I took them.

Cat Smiter writes:

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David writes:


Too wealthy? This country's broke! credit-financed consumption is no whealth.

Haven't you read Bastiat? Every penny the government spends has to be taken somewhere. That somewhere would have contributed the same number of jobs (cause it's the same money!!!), and probably more if you factor in government inneficiencies.

Now I hear you say: but «animal spirit» is down, and if we leave people with their money they will save it... Fine! That's exactly what we need to do. People need to clean up their balance sheet to start over this economy on a sound basis. And if people save, they will put their money in banks. This will help these banks recapitalize. Isn't what Paulson and co. are trying to do in the first place?

BTW, this reply is also for Arnold. I'm very disapointed with your inability to see what's unseen.

David writes:

The problem with keynesians is that they think about the recession as if it happened overnight. They never ask: why is animal spirit down? Why aren't people spending? If they'd stop and ponder, they would quickly realize that a gigantic bubble (not simply a deviation from full employment) has popped, and that it is futile and dangerous to try to reinflate it.

It's really, really about time we get some basic, common sense economics around here. If blogs can do it instead of wonkish (and useless) academic journals, so be it.

Maniel writes:

I think that David is right; there's nothing wrong with some hysteria to get things under way, but at this point, a little common sense is in order.

I suggest that a long-term goal - transition out of a government program, Social Security, bankrupt by every definition - be joined to the apparent willingness of just about every decision maker to sacrifice the taxpayer to the gods of the economy. In particular, I believe that we should use the blood (okay, money) from the taxpayers (present and future) about to be offered as "stimulus," to buy out SS "contracts" of all the young (under 40?) and of older volunteers. [more at]

Advantages: return money to working people (stimulus); reduce the hiring burden on employers; and restore economic planning to individuals. Since these are all long-term benefits, this plan will also improve the investment climate.

Disadvantages: aside from the minor inconvenience of debts "from here to eternity" associated with any government stimulus plan, just the usual weeping and wailing about people being too stupid to save and invest for their own retirement.

Dan Weber writes:

I really doubt that all the stimulus, or even a great portion of it, will be spent on things that give positive feedback, as opposed to make-work programs. (We could probably spend a trillion dollars putting geo-exchange in every house in the country, although I don't think that industry could possibly grow fast enough to do that, and once the job is done we'd need to find new jobs for those people.)

But if the purpose is just to spend money, can we get a manned mission to Mars?

And I sincerely hope this doesn't summon the cranks, but if World War II was the stimulus spending that got us out of the Great Depression, does that mean that the Iraq War has been stimulus spending that ameliorated the current recession?

David writes:


A typical keynesian response would be:

Fighting the Irak war has a « multiplier » of 1.0874567655, while building roads has a multiplier of exactly 1.46798788999431.

Stop arguing against stimulus. We have the science on our side.

btw Arnold, is there any link you can provide that would lead to the methodology of this so-called multiplier? I'd love to see how you guys calculate it. Thanks.

The general thrust of many of the comments is that there are some things the government spends money on that are not positive NPV investments. I agree, but the point I'm trying to make is that so much of what government does invest in, or could invest in, is positive NPV (relatively high return), and is grossly underprovided by the pure free market due to well established in economics market problems like externalities, inability to patent, and many more. When this spending comes up it should be supported, not opposed knee jerk, due to simple and false reasoning that all government spending is bad.

This spending, like on alternative energy basic scientific research, scale, support, and infrastructure, should be invested in heavily (to the point of marginal cost = marginal benefit, not, oh, we've already spent 50 billion, when there's hundreds of billions more in positive NPV investments to be had. The foundational rule of finance is you always take any positive NPV investments you can. No matter how many you have taken before, it is still in your best interest to take more of these relatively high return investments if they are available.). It's extremely high return in the energy it creates over the long run, the clean environment it creates, the security against global warming disaster, and the military security it can create by starving terrorists and some of the worst authoritarian regimes in the world of money.

And it's especially positive NPV considering what the money would be used for otherwise. If the government has to raise taxes on the wealthy to pay for these things what are we giving up in return? Yachts? bigger and more mansions? $2,000 or $10,000 suits? Which will create more wealth and advance in science and technology over the long run, these things or investment in alternative energy basic scientific research, scale, support, and infrastructure? Clearly, the latter. And it's not true that the wealthy will work substantially less if you raise their tax rates greatly given how low they are now. This is due to the long established in economics income and substitution effects, and a great deal of empirical evidence.

To learn more on all of this, good starting points are at:

Sorry about not providing hyperlinks, but the spam filter won't let this through with too many links.

David writes:


The problem is: your definition of NPV is highly subjective. You could at least admit it. If these projects are guaranteed to provide a high financial return, I see no reason to treat them as public goods. The private sector will be more than happy to invest. Actually, there are tons of companies working on those projects right now.

When you include costs related to global warming or else, that's where it becomes subjective. I, for one, don't believe human action can do anything remotely sufficient to cause or prevent global warming or global cooling. I believe there are goods/projects that have much more value right now (not only tv or cars, but why not use the money to fight Malaria, for example).

Now if you want to force me to pay for projects that YOU believe are worth, then you will need to use the State to physically coerce me to join in.

Then it should be obvious that your case is not convincing enough.

And let me repeat my main point: you don't take costs into account. Why would I let my daughter inherit a bankrupt country just to please your alternative energy obsession?

(BTW you should add a disclaimer in your comments saying if you own or not companies in that sector.)


The private sector won't invest in many of these projects even though they materially create much more wealth than they cost due to the pure free market problems I mentioned. Take externalities for example: The benefits of great investments in solar, wind, nuclear, etc. include that this would plummet the price of oil, which would plummet the money and abilities of terrorists and the states that sponsor them.

This would save us, and other countries, trillions over the long run in military and other security costs, not to mention peace of mind, but no private company will be able to charge for and profit from these benefits, so many projects which are profitable when including them, but aren't profitable when not including them, won't be taken by a private company.

And, greatly decreasing the momentous potential costs of global warming is an expected benefit in the many many trillions. You may not think so, but I put more weight on the opinion of virtually all of the best climate scientists in the world than on yours.

And there are many more very serious pure free market problems in addition to extrenalities.

By the way, I own no single stocks, only funds. The least diffuse is Warren Buffet's Berkshire Hathaway (officially a stock, but structured like a fund).

Jay writes:

"Back in the 1960's and 1970's, Keynesian economists talked about a temporary investment tax credit as the ideal fiscal stimulus."

Come on. We have centuries of evidence as to how politicians behave and I guarantee you there will be nothing temporary about the Obama spending spree. We still have most of the Great Depression stimulus running through our economy(like the antiquated Farm Subsidy Boondogle).

Ian writes:

Richard H. Serlin:

"The foundational rule of finance is you always take any positive NPV investments you can"

True, but only assuming unlimited resources. If you have limited resources you should only invest in the highest NPV combination. Every dollar the government spends it must tax from somewhere and someone who would otherwise invest in their own best positive NPV project.

"what are we giving up in return? Yachts? bigger and more mansions? $2,000 or $10,000 suits? Which will create more wealth and advance in science and technology over the long run, these things or investment in alternative energy basic scientific research, scale, support, and infrastructure? Clearly, the latter."

Yachts, mansions, and suits may not seem like NPV positive projects to you, but they are for the companies that make them. These companies also provide employment for designers, scientists, and engineers among others, and they seek to research and improve their products.

For me it's not "clearly the latter". How successful was Reagan's "Star Wars" program? Did it achieve its goal to "give us the means of rendering these nuclear weapons impotent and obsolete"?

Of course, some of the spin-off inventions and discoveries from government and military spending are useful, but it is usually only private companies that bring benefits to the masses e.g. you won't be buying a military-manufactured GPS for that "wasteful" yacht or car.

Furthermore we should be clear that the $816 billion sums being talked about total more than a few suits each for the handful of super-rich people. So what else would you tax?

I agree with you that spending should not be "opposed knee jerk, due to simple and false reasoning that all government spending is bad", but the government has some very high hurdles to jump to justify itself.

Firstly, and you say it, "there are some things the government spends money on that are not positive NPV investments". So how do we tell the difference? Who chooses? And how does the government make sure they are only investing in positive NPV projects given the uncertainties of the timing and nature of any benefits?

Secondly, to make the comparison, how do we calculate the alternative NPV to private individuals and companies that would be taxed to pay for the spending?

Finally, government projects have their own unintended costs such as corruption and "pork barrels", and consequences e.g. encouraging biofuels with subsidies: replacing food crops, leading to the price of food going up (affecting everyone but the poorest more than the more wealthy).

So government spending shouldn't be supported based only on a positive NPV from wild estimates of the externalities saved v.s. the private sector investment opportunities, and even with accurate costing there could still be unintended consequences.

John writes:

I am no where near as educated as those who have commented here. I am experienced enough in life to understand that going greater in debt is not how you help yourself get out of the trouble you got yourself in. We might want to first look at where the money we have is going then find ouy why we don't have more. (earned US funds being shipped out of country)I know this is too simple and common sense like for our Gov't but it is Basic P&L 101.

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