Stimulus Counterfactuals   

Stimulus Counterfactuals   

Stimulus Counterfactuals   

Moneybox
A blog about business and economics.
Dec. 21 2011 5:10 PM

Stimulus Counterfactuals   

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City of Las Vegas field electrician John Meier replacing a streetlight with a new LED fixture on August 3, 2011 as part of a Recovery Act program.

Photo by Ethan Miller/Getty Images

Paul Krugman and Ezra Klein are back to debating the hoary counterfactual of whether the Obama administration could have gotten a larger stimulus bill out of Congress had they fully recognized the depth and breadth of the recession they were facing. One thing I want to say about this is always that insider testimonies on this subject provide sort of poor evidence. This is often discussed in terms of arm twisting or political pressure, but administration officials who were there assure me they did everything they could and I more or less believe them. But maybe they could or should have been more genuinely persuasive? Presumably if Ben Nelson sincerely believed that appropriating hundreds of billions of extra dollars in stimulus spending would meaningfully imprve the American economy, then he would have voted for it. Pressure is nice, but on some level there's no substitute for sincere conviction which means there's no substitute for effective persuasion.

That said, I think the interesting counterfactual here isn't if Obama could have persuaded congress to appropriate a bill similar to the American Recovery and Reinvestment Act but with a much larger price tag. The more interesting counterfactual is whether he could have done something completely different like:

— Move a freestanding state government fiscal aid bill, perhaps explicitly structured as a bill to prevent state level tax increases rather than with all the effort at earmarking monies for specific programs.
— Move a modest "stimulus bill" increasing federal spending flows on food stamps, Unemployment Insurance, and other safety net programs.
— Move a payroll tax cut bill, reducing both the employer and employee sides, with the extent and duration of the payroll tax cut explicitly pegged to the unemployment rate. A bill that, in other words, would be really expensive if the recession got really bad but would be pretty cheap if the recession were mild.

I think you can certainly imagine all three of those bills passing, and certainly the first and third. And since the recession was, in fact, extremely severe this would, in fact, have turned out to be a super-gigantic stimulus. But it wouldn't have required persuading anyone to vote for a super-gigantic stimulus, just to vote in favor of the proposition that the worse the recession the bigger the payroll tax cut you need.

Whether I'm right or wrong about that, I think these are the more interesting kind of questions to pursue since we obviously can't go back in time and redo ARRA one way or another. The question is what kind of lessons do we want to take away from ARRA's failures and shortcomings. My big takeaways are that you want more automaticity and more focus on things that are administratively simple like writing checks to governors, increasing benefit formulae for existing programs, and cutting taxes.