I’ve spent a lot of time thinking and writing about what’s wrong with the stimulus package and it’s really easy to critisize a bill that tries really hard to please everyone. But looking at the stimulus from a different perspective, in 2007, the Federal Government spent $2,730 billion (more was spent in 2008), of which $8.875 billion when to the FTA and was spent on transit. So about 1/3 of one percent of the total budget went to transit. With this stimulus package, $825 billion (or $550 billion if you think tax credits aren’t spending) will be spent in total, and $9 billion will go to transit. That’s nearly 1.1%. So compared to most government spending, this stimulus is very transit heavy. And $2.1 billion for New Starts is about 50% more than a typical year’s worth of spending.
Still, even conservatives agree that tax cuts are crappy stimulus and the stimulus will not keep cities from cutting service or raising fares. Peter DeFazio (D-OR) has authored an amendment to the bill to authorize more funding for transit, so it’s not too late to email your congressional delegation and tell them you want to see more transit in the final draft of the stimulus bill. Especially Patty Murray, who’s in the Senate commitee looking at the bill right now.
A couple of videos below the fold.
Here’s President Obama’s weekly address:
He says:
Finally, we will rebuild and retrofit America to meet the demands of the 21st century. That means repairing and modernizing thousands of miles of America’s roadways and providing new mass transit options for millions of Americans.
I believe this is misleading. The stimulus doesn’t come close to creating millions of new transit riders, especially at a time when service cuts means fewer transit options for tens of millions of Americans. But I guess if you run a bus through a city with a million people, you’ve added an option even if only a few thousand ride it.
Here’s the Rachel Maddow show where Rep Peter DeFazio (D-OR) calls out Larry Summers as the reason for the low level of transit funding.
Tax cuts only happen when nominal spending decreases. Otherwise the tax cut is financed by debt. The debt still has to be paid. So a debt-financed tax cut is a tax shift across the time dimension.
Economists are not in agreement on whether the stimulus is a good idea.
Economists also think it is important to justify the spending.
Becker is a discpline of Friedman, and their theories have been shown to be wrong. That’s how we got into this mess, remember? Barro is a teammate of Becker’s.
Greg Mankiw was chair of Bush’s economic advisory council, and we know how great Mr. Bush’s plans turned out…
I’m not sure this makes logical sense, but if a bunch of Friedmanites, whose theories have been trashed over the last few years, say something is stupid, I’m inclined to think it’s probably a good idea, since what they said was a great idea has nearly destroyed our economy.
As for the last point, of course you pick things that pass cost-benefit. Today the FTA turns down good projects because they can’t afford to pay for much of anything. $1.4 billion a year doesn’t get you a lot of transit.
I don’t think this is a fair thing to say. In a situation we’re in now, the debt that the treasury is purchasing has an incredibly low interest rate. If we take that money, for a low interest rate, we can increase the middle class’ cash flow which ends up supplying more than $1 back to the economy per $1 in tax cuts. Now, infrastructure spending has a better multiplier effect, but tax cuts have their own as well.
Either way, the idea is that taking on debt will get us out of the recession faster and on a stronger footing — meaning that in net the government recovers more revenue than otherwise. The problem is that our baseline deficit was so high and it shouldn’t have been the case — especially since the interest rates at that time were not advantageous.
A large difference between these tax cuts and those of Bush are the focus on middle class workers. In general, the middle class is more likely to spend a dollar of money — often on necessities — than to save it or investing it. Saving and investing obviously contribute to the economy, but much less directly than simply spending the dollar.
The balanced approach of Obama’s plan — to stimulate spending from the government as well as from consumers — does expose the plan to critiques on both sides of the aisle. But I also feel this is pragmatic: we have situations like this, apparently, three times in a century. And after each major resetting recession, schools of economics evolve. In other words, I’d rather have the balanced approach for now than presume I know the solution as a certainty. It would be nice to see the plan be larger, though, since even Larry Summers has said that the biggest concern isn’t spending/doing too much, but too little.
I don’t think that means anything. Economists are as political as they are scientists and researchers. I think you fairly say that most economists believe that we need some sort of spending to encourage consumption. Nearly all believe that the banks need to be lending more, but that is outside of the scope of this bill (for now).
I hope everyone feels that way.
“I don’t think this is a fair thing to say”
I think it’s a very fair thing to say. Just because interest rates are low doesn’t make [Erick]’s statement false. In the end we have to pay back this money. I don’t have the feeling this will be easier in the future than it has been in the past. In fact, one thing modern America hasn’t shown it can do is pay down any portion of its debt. I’m sure you’ve seen graphs like this. Those trillions aren’t going away – even with low interest rate.
So we’re in tough times right now. But do you have any faith that after the tough times people will vote to tax themselves to pay down this debt?
That graph looks terrible, and debt is a serious problem, but for it to be really meaningful you’d have to see an inflation adjusted, per capita national debt. If you look at a nominal GDP chart, it looks crazy too.
I’m not saying debt’s not a problem. But why even have this conversation whe we’re talking about 1% of the stimulus.
You want to cut the 1% that’s for transit?
Why not the 33% that’s tax credits?
Why not the 27% that’s for medicare?
Why not the 4% that’s for roads?
Out of that whole thing, why that specific 1%?
Ok, try this one (sorry about the red/blue bit in the graph). It still shows we’ve doubled debt per GDP since the 80’s, and it doesn’t even include recent years (the GDP for first quarter ’09 is predicted to fall by another 5%).
I won’t argue against your points, if I were stimulus king we’d have new electric HSR up and down both coasts and subways in most cities. I do think we’re off topic with this discussion. I just think stimulus for stimulus sake is like encouraging us to consume in the name of the economy and is setting up a dangerous future.
It is good if the conversation shifts to where we need to cut spending. The United States is broke and insolvent. Ignoring this fact only compounds our problems.
I think the most sensible place to cut spending is overseas. We spend hundreds of billions of dollars per year maintaining an overseas empire we do not need.
Why are we in Iraq and Afghanistan? Why are we in GERMANY and JAPAN?? Cut military spending and balance the budget.
That is far more palatable in my mind than defaulting on our medicare obligations.
Erick, I think we can agree on a lot of issues like that. Bush’s tax cuts for the rich are also insolvent and need to go. However, personally, I wouldn’t do anything that would cut a job in the public sector in the next 16 months even if it is on the surface “responsible.” Obviously, you cut enough public sector jobs and it reduces the amount of spending in the private sector as well.
>> Why are we in GERMANY and JAPAN??
If America were to shut down empire tomorrow, we’d see strife and war all across the globe. Imagine how fast Taiwan would be China. Who would protect New Zealand? The Virgin Islands? Don’t say they can protect themselves. Scaling back is going to be a very hard problem, something we should begin doing, but not too quickly.
Remember when the last empires fell to pieces? When the soviets fell apart whe had Yugoslavia genocide. When the French Empire broke up we had genocide in Cambodia, strife in Vietnam and war in West Africa (Ivory Coast is still a war zone). When the brits fell apart we had apartheid in South Africa, the mess in Zimbabwe, War between India and Pakistan, war between the Arabs and Israel, War between Iran and Iraq… Should I go on?
I agree with you for the most part, but we should be rational about it and not rush to isolationism. A big part of our military is about protecting supply chains, often oil, and we should get off that stuff as soon as we can. This stimulus does help that problem, but only a little bit.
If your only goal is employment then I have the perfect solution. Give everyone a number. People with even numbers dig holes. People with odd numbers fill them up. Everyone has a job.
Everyone will starve. The jobs are worthless. No one is baking bread.
Variations of this broken window fallacy are pandemic. Henry Hazlitt explains the flaw in Economics in One Lesson:
We have to consider what we are doing, not just the amount of spending.
Time spent blowing up bridges and hurting people in the Middle East is time we do not spend fixing bridges and providing health care in the United States.
I want to fix bridges, build railroads and provide health care. We have no savings. This will require cuts. Cut military spending.
Bring our troops home. Pay them to build our light rail system.
I do not think that the opposite of having troops in 130 countries is isolation. Why do we need troops in Germany to exchange ideas about mass transit, buy their beer, visit their cities and build friendships?
I am all for making a rational plan to draw down troops from Germany and Japan in an orderly fashion. Bush never presented one. Neither did Clinton. I hope Obama does.
I prefer to base our political discussions in reality. We’re simply not going to massively slash military spending in the next year all the while withdrawing from Iraq and Afghanistan. We’re not going to close down bases around the world. It is not politically feasible. It does nothing at all to help with our economic crisis, since it has already been established that borrowing is perfectly rational in a recession. It is simply not relevant to this discussion since a surge of government spending isn’t a cause but a symptom.
I do think that defense spending can be cut responsibly over the next few years, but we’re not going to rush into it.
(Regarding Germany: bases there have proven their utility in both Iraq and Afghanistan.)
What does the graph you linked to mean? Why is the absolute number going up bad? Because “we” have repay it? Why not consider that in 20 or 30 years there will be a bigger “we” to shoulder the burden, with [potentially] a stronger economy?
I think a much more illustrative graphic is this one which takes your graph and also models the the debt as percentage of GDP which is more constructive from an economic point-of-view.
It does not make sense to have deficit spending in economic uptimes when the interest rates — and government revenues — are at their highest. But absolutely, when you have an economic downturn the government should go into debt to replace or stimulate private sector spending. If the government doesn’t, and instead raises taxes and cuts services, you can cause serious harm to the economy.
Yes, from 2003-2008 there wasn’t really an excuse for the amount of public debt taken on, since even without a balanced budget we could have drove the deficit down as a smaller percentage of GDP. A baseline of $500bn in debt spending before it’s really necessary is definitely stupid and bad policy. But times are a lot different now. There is reason to limit the amount of debt that we take on, but also being too conservative about this debt could prolong the economic crisis or let the economy slip into a depression.
Let’s just put it in very dramatic terms: Public debt (at a 2% interest rate) doesn’t really make people homeless, go without health care, or turn to soup kitchens. It’s simply not as big of a deal compared to avoiding a depression. $2bn in debt is a good trade-off for avoiding double-digit unemployment rates.
“Why not consider that in 20 or 30 years there will be a bigger “we” to shoulder the burden, with [potentially] a stronger economy?”
The same case could have been made 10 years ago, and was. The fed cut and cut interest rates, the president cut and cut taxes. 85% of petroleum geologists say we’ll have hit peak oil within your timeline of a better economy.
The sky is not falling. This is a painful bump in the road, but it is minor compared to what may be coming. Boosting up industries based on resource consumption (result of tax cuts) is a terrible idea right now. We may need much more of our debt capacity soon. Just like you shouldn’t max out your credit cards with luxury items right before you find out if you’re still employed.
Bush’s tax cuts were indeed irresponsible and established a baseline deficit that was bad policy. I can’t really analyze the impact of interest rates — some smart people say that it led to a devalued dollar and high gas prices this past summer — but “government economic policy” by almost definition means interest rate fluctuations. Low interest rates mean that the government is saying, “Stop buying secure and safe treasury debt, and go spend your money in the private sector to create jobs!” (Simplified.) Interest rate manipulation has had very little impact on creating private sector spending, which is why a large economic recovery package is even being discussed.
While I can’t say how things will be in 20 years for sure, you make a point to start investing in green tech as soon as possible. Perhaps funded by deficit spending. But certainly, if we recover from this economy, we will have a larger economy to pay off our debts. The risk of two years of recession and dipping into 10% unemployment is just not worth it because peak oil may be worse. Besides, high oil prices this past summer led to inflation — which while rough is not nearly as terrible as deflation. And we’re going to have deflation within the next few months if we haven’t already.
Now, I’m not an expert by any means, so your theories are as valid as mine. But I have been listening to the Planet Money podcast (http://www.npr.org/blogs/money/) and I don’t think anyone is being dramatic or over-the-top when they talk about this economy.
Also, will the economy be stronger in 10-20 years? I mean, it’d be pretty bad luck if not given that right now banks aren’t lending, unemployment is rising fast, and nearly every state is facing massive budget cuts… But “stronger” is kind of an in-flux term. Really, I mean “larger” economy such that the pace of debt and GDP growth roughly matches, when smoothed out for the infrequent economy crisis (now).
I think “peak oil” is a giant, giant, giant red herring. If “fossil fuel” meant “oil” than I would say peak the oil story is a compelling one. But “fossil fuels” mean “oil, gas, and coal” and coal will be in substantial quantity for centuries to come. We could burn coal until it literally kills us.
I don’t think anyone could say “peak oil means that we cannot continue a fossil fuel based economy into the foreseeable future” and “oil is going to doom us due to global warming” they are at odds with eachother.
Sadly, peak oil doesn’t matter that much, but fossil fuels do. And oil is just coal’s easier to use and less plentiful sibling.
Peak oil is debatable, but global warming isn’t. To address global warming without major disaster, we’ll have to act as if peak oil is real. That is, even if potential production could still rise, our planet can only take it if our consumption peaks as soon as possible.
This relates directly to transit because electric cars only get you so far. Part of the solution has to be more people using public transit. To do that, we need a massive investment.
Honestly, $100 billion/year for ten years running wouldn’t be too much given the problems before us. That first $70 billion or so is ready-to-go projects, yet we’re stuck at roughly $10 billion in the proposal as it now stands. At the very least, this package should be $60 larger, and we should be preparing to roll-out a long-term plan that turns large-scale transit projects into actual construction as soon as possible for as long as possible until we’ve got the national transit system we need.
A few things I’d like to point out about indexing debt to GDP:
1. It’s dangerous in terms of this discussion. It assumes a constantly increasing GDP. If/when something like peak oil does hit we may end up with a 1950’s GDP with a 2020 debt. That’s like trying to pay off your mansion after being laid off from Microsoft and finding a job with a paper hat.
2. Using your GDP scaled debt chart, our debt/GDP is double what it was in the ’80’s. Ignore the predicted numbers on the right, our debt has climbed higher and faster and our GDP has far from kept up.
“The risk of two years of recession and dipping into 10% unemployment is just not worth it because peak oil may be worse.” I respectfully disagree.
(oh, and I too am a frequent listener to Planet Money. they do a great job)
I agree that Global warming is a problem, I just think peak oil confuses the entire thing. The problem is carbon, not oil.
[Andrew] What [Cascadian] said. Except I’d add that in some ways peak oil is a very serious economic issue in the short term even if we decide we don’t care about global warming. Electric cars get you only so far with current technology. Long-haul trucking will need to almost completely go away. Sure coal-to-fuel may keep them going if the bugs are worked out (god I hope not), but the cost will always be high compared to diesel. There will be far fewer airplanes in the sky.
This Mitsubishi is well within the range of the vast majority of commuters, and reaches speeds fast enough for any freeway:
http://www.msnbc.msn.com/id/7816102
Matt-
“It assumes a constantly increasing GDP.”
Yeah, but historically the GDP grows.
“If/when something like peak oil does hit we may end up with a 1950’s GDP with a 2020 debt.”
So… We should go into a depression now? How does that address peak oil? I’m not trying to argue with a strawman so forgive me if that’s not your point. But how does 10%, 11%, or 12% unemployment help at all with peak oil? How do falling government revenue and cut government services? Or tax increases?
Isn’t it smart to link our current problem with solving the energy problem, in effect avoiding the doomsday scenario where our GDP falls 75% (to 1950’s levels)? Doesn’t a stimulus plan that starts the ball rolling on a new electric grid as well as begins stronger investments in green energy both help alleviate our current economic problems while laying the framework for moving away from fossil fuels?
I do have to agree with Andrew regarding peak oil. And if the choice is between using coal or having our GDP shrink 75% and having millions literally starve, then I’m pretty sure the market will move to coal. I hope we’ve already made a greener country by then that depends less on the personal vehicle and more on dense urban areas.
“Using your GDP scaled debt chart, our debt/GDP is double what it was in the ’80’s. Ignore the predicted numbers on the right, our debt has climbed higher and faster and our GDP has far from kept up.”
You’re absolutely right. Bush’s tax cuts and his party’s inability to act as fiscal conservatives (borrow and spend rather than tax and spend) were bad politics. Another look at the graph can be helpful though. You’ll not that the share did decrease under the latter half of Clinton’s term, while we only saw one balanced budget. So I posit that the challenge of reducing debt as a percentage of GDP is actually an easier problem than reaching for a balanced budget.
GDP grows because of two things: we constantly produce more, and because our planet constantly consumes more. At some point this increase in consumption must stop, and eventually reverse – our world is just not sustainable in its current form. Now, I don’t believe world consumption will flatten out for quite a while. But peak oil will certainly slow down the rate of growth in consumption, and may even drop it for a few years.
Ok, 1950’s level was probably a terribly pessimistic scenario. So let’s say 80’s level – or even 90’s. Debt has climbed so fast that our ability to keep up with even the interest would fall short at that point.
Getting back to policy discussion, no I don’t think it’s a great idea to go into a depression. But I strongly disagree that a tax cut solves this effectively. If we’re going to spend money, the prudent choice would be to spend money preparing for the next disaster – one that we know will come soon.
Matt,
You’re completely ignoring services, which make up the majority of the output of most advanced economies and allow much more output for any given material and energy inputs.
Which is to say nothing of our ability to adapt to using whatever resources are available.
So no, the world GDP is not strictly bound by the amount of oil, or aluminum, or whatever in the ground.
Does a song off iTunes burn petroleum? What watching a rock-and-roll show?
How about an eBook? It doesn’t even have to be services to be environmentally friendly consumption.
Martin’s right – I am ignoring a very large part of our economy. And although I see the service side of our economy as more fixed and the consumption side variable, perhaps I’m wrong. Maybe the future will be filled with more rock stars and authors. I’d be happy with that. But it still seems like paying triple the price for a loaf of bread because it’s either six times as expensive to produce and transport or has to be grown on expensive nearby land would have a strong effect on our economy. Expand that to bacon and milk and aluminum foil and shoes and paper… and I just don’t buy that our current problem is all that bad.
I think all of us were excited about the economy recovery package perhaps ushering in a very strong investment in our infrastructure and in particular — for us — transit. However, the most I think about it, the more I believe that this just isn’t the bill to do that. The upcoming transportation funding re-authorization bill is what we can use to truly start to guide our country toward transit. And the infrastructure investment bank floated by Dodd and supported by the president is another strong component. (“The president”! Yippie!)
But economic stimulus in the next two or three years? I’m not sure we’d ever see what we want — some massive capital investment in major projects like NYC’s 2nd ave subway or, locally, East Link. I think all we’d get is renovations, and bypasses, and other absolutely necessary things but nothing that is entirely sexy or forward progress over maintenance. I don’t think that there are many major transit capital projects that have EIS completed and submitted without having funding secured or forthcoming. Though, of course, having the feds handle maintenance and injecting some early capital does clear up future monies for more forward-thinking investments.
Now, even if the projects aren’t sexy it does make sense for this stimulus package to handle them if they are shovel-ready within 90 days, or whatever. So I absolutely support more transit funding getting it. I do think it is an uphill battle, though, and I’d be prepared to be disappointed at the outcome. I do ask though, do we really win if the feds pick up some operating costs? In one way, absolutely. Bus drivers keep their jobs, and riders keep their service as well as avoid fare hikes. In another way, it’s the continual lack of capital infrastructure investment that has made America so weak regarding transit in the first place.
But this crisis *still* gives us opportunities. All funding this year will go through the lens of job creation and investment in our economy. The transportation reauthorization is no exception. In addition, a real investment in HSR in CA or the mid-west, or NYC DC, would of course be look at as a jobs program, with green benefits, and cost savings vs. flying. We have many chances come up.