Friday, January 25, 2008

I needed stimulus yesterday 

Some curious bug has been running around the office, and yesterday was my day for it. Utterly miserable. I managed to get up for 30 minutes on Mid Stream Radio (I will have to listen to hear if I made any sense at all) and then went back to bed, and slept through to 7pm. Ish.

Meanwhile, the powers that be have gone ahead and announced that the economy will receive stimulus, much like the shock paddles you see in a TV drama with the guy about to die on the ground and the hero or heroine shouting "Clear!" from his or her knees hovering overhead. (Particularly bad when the guy seems to only have the flu.) I have been providing for the most part the standard analysis -- that the research says something like 2/3 doesn't get spent, and that somehow giving money away to consumers is wasted. And I agree in large part with John Palmer both that the Ricardian story is oversold and that the timing of stimulus is likely to be bunged up.

Let's suppose the recession began in December. Since WW2, the average length of a contraction or recession is 10 months. Now let's suppose this morning's report in the Wall Street Journal is correct that this bill gets through to the President's desk and that the IRS moves with uncharacteristic speed and gets rebate checks out to individuals in May or June. How long does it take for it to show up in spending? Those who are credit-constrained might spend that money in Q3, but the rest if at all not until Q4, when the recession would be predicted to end anyway.* (John points to Bruce Bartlett making the same point, and Ironman has it with full detail.) And this is the most optimistic scenario we can come up with. CBO Director Peter Orszag says it succinctly,
Stimulus delayed is stimulus denied, and could even prove unnecessary and potentially counterproductive if delayed so long that it takes effect after the period of economic weakness has passed.
So watch the timing on this thing.

Greg Mankiw is suggesting still that we have slowdown but not recession and so the stimulus is not needed yet, and that the monetary policy moves should be the tonic. Paul Krugman disagrees, but dislikes the stimulus package anyway. I argue that the ability to target the stimulus towards the poor via unemployment benefits is unlikely to work, and that temporary food stamps don't really give you much help in non-food areas.

As everyone now knows, I'm not persuaded to the recession-in-December story yet, though I'm waiting for the jobs re-benchmarking in March and some income data before I am fully convinced either way. I will say though that those who say this is "a big waste of funds" are somehow saying money given back to consumers by the government is a bad thing. Regardless of how you use it, it's better for you to decide what to do with your money.

*UPDATE: Found this noted by Mankiw that the checks would take a couple of months to process, so some would not arrive until August.