What Does Stimulus Do?

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The other night a conservative friend asked me what I think about stimulus projects, now that we've had three years of experimentation.


Well, almost three years back, I explored two possible ways that stimulus could work:

There are two ways of looking at fiscal stimulus. One is to assume that the government is simply closing the output gap between what we could produce at full employment, and what we happen to be producing right now. The second is to assume that we are in a liquidity trap, and that we need a whacking great positive shock to jolt us out of a permanently lowered output level. You might think of the former sort of stimulus as a pacemaker, and the second sort as the ER docs grabbing the crash cart and shouting "Clear!".

The evidence for the former sort of stimulus is decently strong, though it's costly. The evidence that the latter sort of stimulus can actually produce a permanently higher level of output--what we need to believe if we are to accept the need for a huge spending package, and the possibility that our spending will create permanent jobs--is, as I wrote in the linked piece, practically nonexistant.

After the biggest stimulus in American history, this is still about what I think.  A bigger stimulus would have given us a bigger temporary boost to consumption, and it might have prevented some human capital depreciation, which is important.  But I do not think that making it 30% bigger, as Paul Krugman seems to be insisting that we should have, would have somehow transformed it from a pacemaker to a defibrillator.  We would still be now about where we are: growth stagnant, unemployment around 9%.  We'd just be in more debt.


I'm not denigrating those who support stimulus: there can be good arguments for income smoothing.  People who are unemployed for a long time undergo an enormous amount of suffering; it may well make sense to move some of our future consumption forward, in order to keep them from hitting rock bottom.

But I think it matters how you frame stimulus.  A lot of its proponents seem to be talking about it as a way to fix the economy; I think of it as a way to palliate the suffering associated with economic downturns--consumption smoothing, not consumption boosting.  That affects how much stimulus you decide to do--if it's not raising your future income, you have to be careful when you think about the costs.  

It also may affect what kind of stimulus you decide to do.  I think it should be targeted towards the long term unemployed, which is why I tentatively favored the administration's plan to reduce payroll taxes on new hires.  Even though I'm aware that this may well simply end up subsidizing hires that would have happened anyway, I think we have to try.

But why can't we get a two-fer?  Why not do stimulus that boosts long-term productivity while also employing people?  Well, I said why in my last post: "This project should not have been wrapped up into ARRA because ARRA's top priority was moving money as quickly as possible--and the loan guarantee program's priority should have been to move money as carefully as possible."  You don't get a second shot to put a bridge in the right place.  

I think the administration has done a better job the second time around with the Jobs Act.  But a correspondent who has experiencing working on federal contracting projects is still skeptical (rest below the fold)
The schools refurbishing program that the President has proposed will be attractive to many, but it really isn't going to create many jobs before the election, unless all they try to do is painting and spackling and floor refinishing. Those jobs are all labor intensive,but they are also specialized skills that not every unemployed blue collar worker possesses. . . . 

So I figure as follows:  for the contractor to be ready next July 1 to get as much as possible done during July and August, the contractor really has to be selected no later than May 1 for simple jobs, so the contractor will have 2 months to actually measure the site, order that which needs to be installed ,have it fabricated, and then delivered to the site. That is the bare minimum time. For anything that has a fabrication lead time or requires new electrical or plumbing or hvac lines, the time point at which the contractor has to be awarded the contract has to be pushed back.

 For the contractor to be given the ' notice to proceed' on May 1, so that ordering can begin, the low bidder has to be chosen on April 1, so all the background checks and paperwork can be done before the actual award of the contract and the notice to proceed is issued. 

To select the low bidder on April 1, the bid packages have to be in final approval by March 1 at the latest,so that there can be site visits and prebid meetings and the like. In particular, all the asbestos and PCB inspections will have to be completed and any remediations programmed at that point.

 The design professional preparing the bid package will have to be doing final design by January 15th, to assure that the bid packages are complete and all necessary reviews by the school board are done before the bidding period starts. More time will be needed if there are to be any public meetings on what is in the final design. Any hazardous material inspections will have to have commenced by this point.

To start final design, the design professional will have to have had the time to survey the school, measure the site and propose solutions to the problems encountered. So the design professional will have to be on board no later than December 1 to gain access to the school buildings during the holidays to do measurements and assess existing site  conditions.

 To start those things on December 1, the design professional will have to be selected in November by whomever wants to review that selection and approve it. So the start of the selection of the design professional will have to start in October or late September, since design professionals do not bid for their work, but propose.

 But to select the design professionals, they have to make proposals on a scope of work. Developing that scope of work must start a month before the design professionals are asked to propose,and that scope may itself need to be reviewed by the school board and put into their priority list. So the scoping and priority setting process will have to start on September 1,2011 to assure that it gets done and through the school board process by  the end of September.

The sum and substance is that the program for school renovations really should have started already. Since there is little chance that the President will have a real bill before the Congress until next week or later, and there is little chance that the Congress will act before the end of September, it is almost impossible to get anything done in the schools that is more than painting and floor refinishing next summer. And even that will conditioned on the hazardous materials inspections and abatements being successfully completed by the time that the contractors are bidding on the work. And just painting and floor refinishing, without replacing roofs and fixing leaks and improving the lighting, will just be like ' putting lipstick on a pig',as the saying goes.

The school infrastructure work schedule is very compressed. But highway and bridge infrastructure work is not much less sensitive to very tight time schedules. Any delay in getting the bill passed is going to make it harder to do any real work next summer. Most of the low-design work, like resurfacing, was already done as part of the ARRA program. There are not a lot of designs hanging around on shelves and the feds have yet to figure out how to do low-design ,high manpower projects under the current eligibility criteria.

I am assuming that there will be waivers of all the usual federal procurement processes to put this money to work. That is a huge assumption. I cannot imagine that there will be any waivers of the environmental hazard remediation inspections or the minority hiring or disadvantaged business subcontracting requirement. Maxine Waters will scream if no one else.If you add all the federal procedural processes for design professional selection and contractor selection and federal agency review and approval, very little can happen next summer.

Nor do I think you can you keep a big bank of projects around, waiting to be done whenever there's a recession, as some people have suggested.  Prices, materials, wages, built environments and regulations change.  Jobs basically have to be bid when they're ready to be done, and that's just not a fast process.  You can get some of the public review out of the way, but that won't help if new EPA regulations--or a new species--pops up in the interim.

Now, in the case of this particular recession, that would have been okay, because it turns out it's dragging on forever.  But it's hard to know that in advance--or to design economic policies around events that seem to happen about once every eighty years.

In general, stimulus is not a bad thing--but I think it's a limited thing.  It's an aspirin tablet, not a cure for cancer.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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