Friday, January 30, 2009

Obama's fiscal stimulus

The much awaited Obama fiscal stimulus plan, christened the American Recovery and Reinvestment Act (ARRA) - 2009, amounting to $819 bn, has been finally approved by the US House of Representatives. The plan consists of direct spending by way of cash transfer payments (UI, medicare etc) and government purchases of goods and services, both amounting to $604 bn, and revenues foregone over the next ten years by way of tax cuts, amounting to about $215 bn.



The Obama administration describes the proposal as "the first crucial step in a concerted effort to create and save 3 to 4 million jobs, jumpstart our economy, and begin the process of transforming it for the 21st century with $275 billion in economic recovery tax cuts and $550 billion in thoughtful and carefully targeted priority investments with unprecedented accountability measures built in."

The plan contains targeted efforts in - energy efficiency and renewable energy ($54 bn); R&D in science and technology ($16 bn); modernizing roads, bridges, transit systems, waterways and public buildings ($90 bn); education infrastructure including classrooms, labs, and libraries ($141.6 bn); reducing health care costs ($24.1 bn); helping workers hurt by the economy (UI, food stamps, health care, training etc)($102 bn); aid to states to save public sector jobs and protect vital services ($91 bn); tax cuts to workers and spur investment and jobs. The proposal is to spend $20 bn over 5 years on additional food stamps and $43 billion over two years to extend and increase unemployment benefits (adding as much as 33 weeks of benefits). The signature tax cut proposal seeks to provide a credit of up to $500 for individuals and $1,000 for couples, by reducing the amount of money withheld from paychecks.

Discussions on how fast each item in ARRA will take effect is available here, here, here, and here.

Mostly Economics draws attention to useful links on the ARRA - Obama's own outline of the proposal, Christina Romer and Jared Bernstein's analysis of its job creation impact, CBO's cost estimate (full details here). David Leonhardt and Phineas Baxandall raises well founded concerns about how the stimulus spending in infrastructure, especially transportsation, could end up being frittered away. The CBO Director Douglas Elmendorf's testimony before the Congress on fiscal stimulus is available here, and CBO's forecast of the US Budget and Economic outlook for 2009-19 is available here. NYT has discussion on the stimulus bill by some economists here. Romer and Bernstein's analysis of the impact of the stimulus on employment generation is represented below



A few broad observations
1. The CBO estimates that that about 64% of the money, or $526 billion, would be spent by September 2010, the first 18 months, which is the expected trough of the recession. This leaves us still with 36% which would not be spent in achieving the immediate purpose.
2. For all talk of investments in public transport infastructure, less than 5% of the stimulus goes into roads and bridges.
3. The tax cuts dimension is substantial, and extending to well into the next decade.
4. Health and education get a huge boost, at $127 bn and $150 bn respectively. The allocations for education include new buildings, school renovation, special education, scholarships and grants to needy college students, expansion of the federal student aid programs etc. The health insurance proposal covers all those getting unemployment insurance, irrespective of their incomes (ie, without any means-testing), with Medicaid (which is normally for low-income people, and for decades it has been financed jointly by the federal government and the states, with the federal share averaging 57% of costs). This would be the closest to a universal health insurance program in the US.
5. There is a prominent emphasis on assistance to states and local governments, especially in health (increases federal government share in Medicaid), education (larger share of student loans and construction of school infrastructure), and public transit systems. This assistance are on the presumption that states would find it difficult to sustain their spending on these programs and would thereby leave the most vulnerable and affected to fend for themselves.
6. There is little mention of an fiscal exit strategy. Nor is there any attempt to tie-up the program to some form of cost/expenditure recovery plans, so that atleast a portion of the stimulus spending is directly recovered when the economy returns back to normalcy.

Update 1
Economix has this graphic about how much is proposed to go to each state.

Update 2
Susan Woodward and Robert Hall analyzes the Obama plan here.

Update 3
David Leonhardt tracks the debate about the amount required for an effective fiscal stimulus. There are those like Mark Zandi and Jan Hatzius at the Goldman Sachs who estimate that the recession is likely to idle almost $2 trillion of resources — buildings, equipment and people — this year and next, and argue for atleast $1 trillion.

Meanwhile, people like Martin Feldstein have instead of across-the-board tax cuts, been calling for targeted tax cuts that people will receive only by spending money, on a new house or other items.

Update 4 (9/10/2011)

Arguably the most controversial prediction of the sub-prime crisis is the Romer-Bernstein estimate of US unemployment rate with and without ARRA. Here is how it stacks up against the actual unemployment rate till date.

1 comment:

mberenis said...

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