Friday, January 30, 2009

More Details And Analysis On The Stimulus Bill

It passed in the House of Representatives yesterday. It is 647 pages long. This New York Times article, Components of Stimulus Vary in Speed and Efficiency, has what seems like a good over view in terms of facts and analysis. But when the whole thing is 647 pages, who knows.

But the same concerns apply that I mentioned last week. Getting the policies to work at the right time due to policy lags. There is also the issue of who will fill the jobs that the government creates, people currently unemployed or those currently unemployed. The economist Gary Becker has pointed out

"Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching."

As some of my students know, different resources are better suited to different productive activities (which explains why the law of increasing opportunity cost is true). Alot of the workers who have lost their jobs are construction workers and only some of the stimulus can use their skills.


Anonymous said...

Becker has a point, but if the stimulus is to hit the construction and health care sectors, it may work. It isn't that unemployed workers will retrain to a more secure field (healthcare), the people will simply spend more money. With more money in circulation, there is a possibility that investment will rise. Ceteris Paribus, Financials could go back to their normal jobs due to aggregate demand, inasmuch they were laid off and not fired.

Cyril Morong said...

Thanks for dropping by.

Some are saying that it will take time for the contstruction spending (see some earlier posts).

If we just want people to spend more money, I think we should raise unemployment benefits. The way the bill is written by be too round about or indirect. That puts money in circulation, but it might be a little slow. If the bill were targeted in such a way to create more jobs that it seems (given Becker's point), then money would get in faster.

Patrick said...

Obama's stimulus plan is being compared to "The New Deal" and the GOP supporters are calling for the rebirth of Reaganomics. Didn't lower taxes do well to stimulate the economy then? I am not quite as familiar with the results of FDR's New Deal, but I have heard that the results make a case against using a similar approach. Any thoughts?

Cyril Morong said...


Thanks for dropping by and commenting.

How well the New Deal worked and how well Reaganomics (sometimes called "supply side" economics) worked are still hotly debated. I can't give any simple answer. But here goes.

The New Deal was the federal government's policy response to the Great Depression. Unemployment hit 25% in 1933 and the real GDP had fallen nearly 30% in 4 years. Without getting into the causes too much, the main problem was there was not enough aggregate demand. The New Deal did increase AD through government programs but there were also tax increases that offset the spending a bit. Many programs were in conflict. Unemployment did come down (to 14.3% in 1937) but then went up again to 19% in 1938. Government spending went up even more in the late 1930s and by 1941 unemployment was back down to 9.9% (which is still high).

Reagan did cut taxes but there was also an increase in military spending. I don't think there is any consensus among economists that the income tax cuts were the sole reason for the economy improving after 1983. Unemployment was over 9% in both 1982 and 1983. Some argue that lower income tax rates spur investment and production since you get to keep more of your profits. By 1989, unemployment was back down to 5.3%. So something worked, but again, there is no clear consensus on what it was.

Padmanaban said...

Job trend has changed nowadays as most of them are looking for high paying jobs. There are lots of job openings since many companies are in need of smart employers with adequate knowledge