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February 28, 2011

More Bang, Less Buck than You Thought

By: Aaron Datesman

You may have seen this post from Dean Baker last week, in which he discusses a new analysis of the effectiveness of the 2009 stimulus bill. I clicked over to the study itself and read the abstract, which concludes with this statement:

Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.

Baker explains that a fiscal policy multiplier of 2.0 indicates that $1 billion of stimulus spending grows the economy by $2 billion. It is interesting to note that, at a tax rate of 33%, the cost to the Treasury of that $1 billion fiscal stimulus is only $0.3 billion. Most of the cost is offset by taxes collected on the increased GDP (33% * $2bn = $0.7bn).

A few more pieces of simple math are also highly revealing. The study finds a per-job cost of less than $100,000 – that’s at least 10,000 jobs supported by $1 billion of stimulus. I don’t have access to read the paper, but that calculation seems to refer to the nominal stimulus, not to the actual cost to the Treasury. (I would welcome any effort anyone could make to verify or refute this statement.) The true cost to the taxpayers is $0.3 billion/10,000 jobs = $33,000 per job. This compares to the national median income of approximately $44,000.

Isn’t this the definition of a virtuous circle? I guess the country is talking about reducing government spending because….because….

I got nothing.

I feel that this post also relates to a broader issue – we talk about government “spending” as though the dollars pour out and into a black hole. This is certainly true for a couple of holes in Asia, but in other cases it’s quite mistaken. There are many instances where government outlays may best be understood as investments – and we should talk about them in this way. Later this week, I’ll be writing about one instance where government outlays for research yield $20 in wealth (net present value) for each $1 of outlay. Why would anyone not spend $1 if they immediately got $20 back?

(On a personal note, I am also not dead. But I was resting. More on that soon, too.)

— Aaron Datesman

Posted at February 28, 2011 10:04 PM
. . . we talk about government “spending” as though the dollars pour out and into a black hole.

. . . which is why any liberal worth a damn should never, ever use the term "spending" when using public funds for a public purpose with a high return or that serves the public and breaks even. The proper term is investment. Spending is what those thieving assholes over there do; you invest in the taxpayer.

Posted by: No One of Consequence at February 28, 2011 10:30 PM

2for1 sounds good and lends to the theory that with such low, low, rates for the government to borrow, this IS the wrong time to be stingy. America is RICHER THAN ITS EVER BEEN and richest in the world. Its just its in the hands of 2%-3% of the population with not enough paper on Main Street.

PRINT MORE MONEY, DUMP IT ON MAINSTREET, NOT WALLSTREET, call John Boehner @1-202-225-0600. Stop banker welfare.

Posted by: Mike Meyer at February 28, 2011 10:38 PM

If the effective tax rate is 50% then the federal government can spend as much as it wants without running a deficit. You can get 50% by taxing both people and corporations. The general idea is to spend money on education, infrastructure, R&D and healthcare until unemployment hits 4-5% and inflation is about 3%.

Posted by: peter john at March 1, 2011 01:08 AM

Ah yes, ideology and politics rather than logic are ruling these public discussions, and it's a mistake to think that people are making principled arguments. A virulent strain of libertarianism has combined with some pretty malignant old bigotries to infect the body politic. Those who want to drown the government in a bathtub are willing to drown most of the deadbeat country with it, and lots of sympathizers with that view probably mostly just want to get the damn sponging blacks and latinos. The political alliances with the sharpest blades seem to be forged in hate and tempered by resentment.

Plus, there is a very sizable contingent that wants the government to consist ONLY of the military and to use it ONLY to serve our national interest, which they would and do in candid moments admit consists of keeping the rest of the world subjugated enough to let us live better than everybody else. Shit, we've been doing that since long before George Kennan described it so honestly after WWII. Problem is, economic change has pulled the plug, and the prosperity has drained out the bottom of the tub. It's getting more and more expensive to keep that leaking tub full, and that will just get worse. I think that's Fascism 101.

Material reality--climate change, resource depletion, overpopulation, the forgotten about still declining rate of profit in manufacturing seemingly inherent in capitalism--combine that with the trend toward conentration of capital, especially in energy, communications, and finance, and it's easy to imagine some nasty distopias. Yech.

I don't know about you all, but I haven't prepared my kids well enough to deal with the shit they are going to have to deal with. This is probably gonna get ugly, and we better start to deal with it soon. But alas, we're cowards, which is pretty ridiculous considering that no one is getting out of this world alive anyway.

"Suffer us not to mock ourselves with falsehood."

-T.S. Eliot

Posted by: N E at March 1, 2011 06:27 AM

You make good points and I like Baker, but there is something that bothers me. The stimulus was actually in the trillions of dollars, between 3 and 6, or higher depending on how you count. Some of this has been recouped and more will be, but a minimum of 2 trillion will have been spent by the government and most of it was poured into the black hole of investment banks and their customers. Sure, the spending on jobs has an excellent multiplier and investing in schools and infrastructure will pay off down the road and, if you'll excuse me, blah, blah, blah. The government has taken trillions of dollars from working people and given it to a very few people. This is non-stimulative, regressive and pernicious and it dwarfs whatever was spent on jobs. When you factor the true cost of the stimulus, including the payoff to the financiers needed to get the jobs part passed, the stimulus was wholly ineffective. The reason was not that it was not large enough, or that it wouldn't work, but rather that the political class felt it had to pay off the financial class rather than expose them to public scrutiny.

Posted by: drip at March 1, 2011 07:04 AM

The true cost to the taxpayers is $0.3 billion/10,000 jobs = $33,000 per job. This compares to the national median income of approximately $44,000.

Perhaps I've misunderstood, but since you're already taking into account the tax revenue from the created job, then shouldn't the proper measure of the income created be $44,000 minus the 33% tax rate? If the taxpayers spend $33,000 to create a job, which results in ($44k * .67 = $29k) actually making it into somebody's pocket to spend, then this seems like a very inefficient social welfare system. Why not just boost unemployment benefits by $33,000 for 10,000 people instead? Then they could say home, take care of their kids, etc.

Posted by: Picador at March 1, 2011 10:33 AM

What's with the spammers? Has this happened before?

Picardo: IIRC, it's worse than that. I'm too tired to search this information out, but it would be cheaper and better for the economy to simply house the homeless and hand cash to most people on food stamps. Of course, if you've gone that far you're probably going to stop rent collection in corporations and end revolving-door processes between regulators and businesses -- so it's rather all-or-nothing.

The point of modern politics is not to find right answers, but to bury them.

Posted by: No One of Consequence at March 1, 2011 01:07 PM

What's with the spammers? Has this happened before?

It's Datesman. He brings in the rifraff.

Posted by: Jonathan Schwarz at March 1, 2011 02:55 PM

Mr. Datesman:

There are a few of glaring holes in your analysis.

The nominal rate for the top tax bracket is 33% but from elementary economics class the effective individual income tax rate is somewhere around 16%-19% for almost everybody not in poverty. The government takes in more then individual income taxes but I see no reason to have faith that the government takes in 33% of GDP in revenues.

In fact looking at information provided by the Bureau of Economic Analysis the federal government has taken in between 15% and 21% of the GDP in revenues with a concentration between 16% and 19% between 1951 and 2006. The mean is 17.6%, standard deviation is 1.1%, median is 17.4%, and a least squared affine fit has a slope of +.009%/year suggesting that small scale variations dominate over large scale variations in the 55 years.

Picador points out the problem with double counting the effects of the applied tax rate.

The abstract points out varying multiplier factors from .5 to 2 and there is a difference between short term and long term effects which are not discussed. Your discussion of the stimulus program is limited to only a portion of it and neglects the whole thing. It is valuable to try and measure the impact of the package both as a whole and its individual parts as well as the governments economic policy as a whole to help evaluate future decisions.

Looking at the government economic policy as a whole, it is suggested to me that the goal is to enhance the wealth of those who have it and not at providing the most goods and services to those in the most need. The information I am aware of is that the stimulus package is designed to assist in that end and is successful at doing so. Sometimes the two goals overlap but it should never be merely assumed that they will.

This goes to why people are upset with government spending. It interferes with the "appropriate" accumulation of wealth. It doesn't matter that those who get on camera won't be receiving the benefits from less government spending. In a society in which Jay Gould can "hire half the working class to kill the other half," those who will benefit can convince people to substitute the well being of the person for that of the beneficiary. The systems for doing this are quite sophisticated.

I think it would be a mistake to label all government spending as investments. When it is an actual investment it should be labeled as such but otherwise it shouldn't be.

I've studied public budgeting in an academic setting to some degree and I can tell you that the Federal budgeting process is abnormal. Part of that is policy but some of the processes run counter to stated policy objectives. Much of the budgeting process seams designed to obfuscate the purpose of the outlays and to inhibit objective auditing and control. Unlike many government budgets (including national budgets) the Federal government does nothing to label spending as investment or operations or any other similar categories.

For decades the assumption was that any government spending has a multiplier effect on the GDP in both the short term and the long term and as long as that multiplier effect is greater then the cost of borrowing, then government should barrow. The policy is more sophisticated than that but that assumption underlies the ineffective nature of the Federal budget. The loudest voices for reform of the budgeting process operate under the equally unfounded assumption that any government spending has a multiplier effect of less then 1.

It is possible to implement rational budgeting process reform and Presidents Nixon, Ford, and Carter attempted to do so. The fact that those efforts have failed, I am told that other nations such as Brazil have been suspenseful in doing so, and that there have been no serious attempts since suggest that there are people with a vested interest in maintaining ignorance of the effect of government spending in detail and are able to act on those interests.

Posted by: Benjamin Arthur Schwab at March 1, 2011 03:14 PM

And then there's the fact that federal government spending is not funded by taxes or borrowing. Boehner and Obama are both lying when they claim the federal government is out of money.

The only constraint on federal government spending is the availability of real resources that are for sale in dollars. Lack of money is never an issue.

Posted by: Jeff65 at March 1, 2011 05:51 PM


this message brought to you by DISCOUNTPAC, a coalition of charmingly demented fixed-income double-coupon enthusiasts.

Posted by: hapa at March 1, 2011 06:19 PM

Hapa wins, I think!

BAS - thank you for the polite and thoughtful comment. Are you sure you are on the right internet?

To address a few of your points,

Of course you are right about the difference between average and marginal tax rates. 20% would have been a more sensible number to use, but more people recognize the marginal rate as the "tax rate". The point of the post still stands. I think it's interesting because it's a precise inversion of the Laffer curve-supply side theory.

I have to think about Picador's double-counting issue. I now have a full copy of the article and will consider that as I read it.

The article abstract and my post are explicit that the most valuable types of spending are support for low income households and infrastructure. The point is that we could have more of these things if we directed policy in that direction - and be richer for it. But many Americans who would be in favor of such choices if they understood that they exist will never hear about them.

The overall composition of the stimulus program is too much to address in 500 words or less.

Regarding NOOC's point that the most effective way to spend stimulus funds would just be to give them out to people directly: I think this is correct, and it's one of the reasons that I support a guaranteed universal minimum income for all adults.

If you would like the full article, I can send you the pdf.

Posted by: Aaron Datesman at March 1, 2011 09:35 PM

Aaron: "I support a guaranteed universal minimum income for all adults."

Posted by: Jeff65 at March 1, 2011 09:48 PM

Mr. Datesman:

I try my best. I agree that a full analysis of even your limited scope would take more then 500 words. I don't praise the stimulus package as a whole even if there are elements that are quite valuable. One of my main points is that the goal of the stimulus package and of the economic policy of this nation is not wealth creation but instead an "appropriate" wealth distribution.

The usual Laffer curve has no place in rational thought. At 100% taxation there would still be revenues because people would still work and they would be paid by the government which would then tax them. Even assuming that the correct Laffer curve is continuous and ignoring the absurdity of money in a 100% taxation economy, the revenue at the end points are not both zero. There is also insufficient justification that the second derivative is negative over the entire domain. It is on this last issue that you are pointing that evidence contradicts the hypothesis usually given in order to construct the curve. Any rational economist should posit that over a non-zero area of the domain, the Laffur curve has a positive second derivative.

Empirical evidence shows that (at-least when wealth inequality reaches a certain amount) affirmative steps to redistribute wealth more equitably increases the overall wealth in society. If the goal of an economy is to deliver the most goods and services to people then it always makes sense to have a minimum livable income in a society but such would have effects on the distribution of income that some find undesirable.

Investment in infrastructure makes sense if it needs it, if it does not then the investment does not make sense. The best aspects of the stimulus package are the sparse investments in infrastructure as they have the greatest positive long term impacts on wealth creation as well as equatable income distribution. Direct aid to the indigent has the greatest short term impact but its long term impact is tempered by the opportunities the indigent have in using this assistance to maintain their needs. If the aid is sufficient for he indigent to meet all of their needs then the indigent can and will use the aid in constructive fashion but if the aid is insufficient the indigent will use whatever opportunities are available regardless of whether they are destructive or constructive.

The questions of what generates the greatest wealth and of what provides the most positive opportunities for people in an economy are important to discuss but so is the realization the those setting national economic policy don't care about either question other then perhaps in an academic sense. The question that is instead being addressed is how to we maintain a wealth distribution that relative to others in the same society maintains the right people with the right material advantage. In a capitalist economy it is about keeping up with the Joneses and not about keeping up with oneself after all.

Posted by: Benjamin Arthur Schwab at March 1, 2011 10:55 PM

hmmm, mister schwab, i don't think most people would work at 100% marginal taxation rates, and I think a guaranteed minimum income isn't going to work eitherr, because lots of people would rather get money for nothing than for working. Not everyone, but lots of people, especially if the work alternatives suck and they have kids they maybe shouldn't have had. Then again, giving money to people to take care of kids is better than giving money to banks.

Posted by: N E at March 2, 2011 07:14 AM

What's with the spammers? Has this happened before?

It's Datesman. He brings in the rifraff.

Oh, superb. First ATR comment in ages to make me LOL.

Jon, can you somehow blackmail Aaron to post something sciencey every Monday or something? It adds such a nice dimension to the site.

Posted by: Mike of Angle at March 2, 2011 01:10 PM

N. E.:

I never claimed that most people would work in a society that taxes 100% of all income only that the employment rate would be positive (that is to say, more then zero). The more important fallacy in the way that Laffer curve is usually constructed in the assumption of a negative second derivative over the entire domain. Mr. Datesman has provided evidence to contradict this assumption.

One of the common ways in modern American society to motivate work is to use materiel needs to compel people to work. This is hardly the only reason why people work. Even if material needs were completely satisfied people would still work to advance material wellbeing beyond substance levels and to satisfy higher needs in the Hierarchy of needs: . I am open to a discussion of how this would effect productivity, wealth, holistic wellbeing, and other aspects of society.

The set of societies with a 100% taxation rate is equivalent to a subset of societies in which there is no medium of exchange. The historical examples of such societies reveal that most people do, in fact, work.

Posted by: Benjamin Arthur Schwab at March 2, 2011 02:19 PM

Mike, the fact that you like it is all the bribe I need.....

Posted by: Aaron Datesman at March 2, 2011 06:42 PM