Stimulus – Page 2 – Donald Marron

Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

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Counting Stimulus Efforts

Today, the Washington Post has a letter to the editor about counting stimulus efforts. I think the letter is pithy and on-point, but that might be because I wrote it. Anyway, my conclusion is:

[T]here have already been two rounds of stimulus since the recession started in December 2007. The first, enacted in February 2008 (when I served at the President’s Council of Economic Advisers), provided $168 billion in tax cuts for families and businesses. The second, enacted in February of this year, provided $787 billion in various spending programs and tax cuts. The question we face today is whether to enact a third stimulus, not a second one.

The letter was a response to an editorial the Post ran last Friday.

Stimulus aficionados will recognize that, in the interest of brevity, I used dollar amounts that aren’t completely apples-to-oranges. As noted in my previous post on this topic, the $168 billion amount for the first stimulus reflects the gross amount of stimulus in the first couple of years; the long-run, net cost budget cost of the bill is lower. The $787 billion amount for the second stimulus is the ten-year net cost; the initial stimulus is a bit larger. I think the gross impact is a better way to characterize the stimulus effort, but I didn’t want to confuse anyone by referring to an $800+ billion stimulus, when everyone knows it as $787 billion.

We Already Did a Second Stimulus

Much ink, both physical and electronic, has recently been spilled on the question of whether the United States should undertake a second stimulus.

To which there is only one possible answer: we already did a second stimulus.

The first stimulus — the Economic Stimulus Act of 2008 — was signed by President Bush in February 2008. That Act gave families $115 billion in tax rebates and allowed companies to depreciate business investment more rapidly. Overall, the Act reduced taxes and increased spending by $168 billion in 2008 and 2009 (the long-term budget hit from the Act is smaller — about $124 billion over ten years — because the corporate tax reductions deferred tax payments rather than eliminating them.)

Those were the days before the collapse of Lehman (heck, it was even before the collapse of Bear Stearns) when policymakers were rightly worried about a weak economy, but $168 billion seemed like a lot of money.

The second stimulus — the American Recovery and Reinvestment Act of 2009 –was signed by President Obama in February 2009. That Act increases spending on a host of programs, including infrastructure, state assistance, and extended unemployment insurance. It also created the Making Work Pay tax credit, among other tax reductions. The Act is usually described as a $787 billion stimulus, with ten-year spending increases of $575 billion and tax reductions of $212 billion. The reality is a bit more complex, however. On the one hand, the Act provides somewhat more stimulus than the headline figure; for example, there are about $810 billion in spending increases and tax reductions during the first seven years. On the other hand, the stimulus takes time to phase in; during fiscal 2009, for example, the estimated stimulus is about $185 billion.

The question we face today is whether to enact a third stimulus, not a second one. I will have more to say on this in the future. For now, I think the Obama administration has it exactly right, indicating that it’s premature to enact a third stimulus, but their economic team is closely monitoring the situation.