Bryan Caplan  

Too Lazy to Waste? A Death Blow to the Fallacy of the Balanced Budget Multiplier

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Take That, Math Geeks... Unbelievably Good News...
Russ Roberts points out that only a small fraction of the $787B fiscal stimulus has been spent.  I've long scoffed at government inefficiency, but it never occurred to me that a full pork barrel could be so slow to empty.  Apparently my expose on the balanced budget multiplier was truer than I ever imagined back in January:
[T]his argument is sleight of hand.  How so?  It assumes that government agencies automatically spend 100% of any new funds allocated to them.  And strange as it seems, that assumption is often false.  It takes time and effort to figure out how to spend new money, you often need the approval of multiple levels of supervision to get started, etc.  The standard Keynesian analysis essentially compares a conditional effect of government spending to an unconditional effect of tax cuts.  Even within the confines of the textbook Keynesian model, this is a clear case of stacking the deck in favor of spending.
A payroll tax cut seems more of a no-brainer every day.  I hope Alex is right that the prospects for this idea are improving, but I'm not holding my breath.


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COMMENTS (5 to date)
Randy writes:

It occurs to me that a payroll tax cut would be a great idea if it were truly a "cut". Unfortunately, any such program executed in the real political world would almost certainly be just another form of borrowing, as the lost revenue would eventually be recovered. So maybe stay away from pots of money that the politicians consider theirs? Is that possible? But maybe just a plain old tax cut would be best.

MikeDC writes:

I'll second what Randy wrote and raise the issue the usual rational expectations critique that a temporary tax cut is only going to shift some of the unemployment to the future and a permanent tax cut is gonna be unfeasible giving our spending levels.

I suppose I like it better than a massive government spending campaign, but only in the sense that I'd rather be punched in the arm rather than punched in the nuts. I'd rather just not be punched.

Bob Murphy writes:

Bryan, of course we agree on the inefficiencies of government and the superiority of a payroll tax cut to "stimulate" the economy, but I think you are being naive in your assessment of the rapidity of stimulus spending.

I don't think it was ever about boosting aggregate demand. I think they structured it so that a bunch of spending kicks in right before the 2010 elections.

Marty writes:

In the 1980s and 1990s I ran the capital funding dept for a very large public transit system, and our fincancial lifeblood was grants from the Feds, State, and a regional authority. I'm talking several hundred million dollars annually, not a small program. There were often issues of how long it took to actually spend out a grant, with pressures both to show a long time (to schedule bond sales around the cash needs and show that the fiscal impact of debt service wasn't so bad) and a short time (to hype the political attractiveness) as well as a realistic time (internal planning purposes such as staffing and coordinating with other projects). In the end, the general consensus was that about 90% would spend out over 7-9 years, with very little in the first year unless the money was just exercising an option on something already well along, and the big money in years 3-4-5. The last 10% could take a decade or more due to bad bidding requiring rebids, contract retention and litigation. Any project where real estate acquisition was required was dangerous and we tried to not commit to big construction grants until the land was secured. It was the norm for a grant with lots of fixed construction and building rehab to be open for 15 years.

"Shovel ready" was and is a crock. It is irresponsible to finish design work and bidding docs on a project where you don't know how to fund teh construction, because such docs are only good for a year or so and then things change and much of the work has to be re-done. A public agency with a lot of "shovel ready" projects ready for a big unexpected infusion is inherently irresponsible and shouldn't be trusted, anyway.

Miracle Max writes:

There's a lot you don't know.

1. Of the $787 billion, there are big pieces for AMT relief and tax cuts, not tracked by Recovery.gov. Roberts' implied denominator is fallacious.

2. The spending reported on the web site is for reimbursement of spending that has already occurred by the recipient. There is a lag between the two.

3. The aid to state governments is spread over their fiscal year, which usually runs from July to June. In fact there are ways the money could have been spent before receipt, or in some future fiscal year (state govs have foresight and can borrow and lend).

4. Most important, especially to an economist, unless you postulate what a recipient would have done with no recovery act, YOU DON'T KNOW THE IMPACT OF THE ASSISTANCE ON TOTAL NET SPENDING.

There are reasonable critiques of the whole package, from either a left or right standpoint, but the remarks from BC and RR do not include any.

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