Stimulus Spending will not be immediate

Despite the $845 billion, now closer to $900 billion with the Republican-proposed AMT exemptions, price tag on the stimulus only about $340 billion will be spend in the 2009 fiscal year. The stimulus plan includes two sections.

Division A

Provides for new discretionary spending. This spending is likely to take some time to spend. In it's scoring earlier this week the Congressional Budget Office (CBO) presented estimates of how soon the funds would be spent by category.

Table 1 below provides this information:

The figure shows a long time frame for many of these projects, including estimates for Agriculture and Rural Development, Energy and Water, and Financial Services that extend to 2013. Now some of these projects, like laying broadband wire in rural areas may still have value in 2013 but more as development projects than as stimulus.

Division B:

Includes tax cuts and funding for pre-existing programs like Medicare, Social Security, and food stamps. The difference between the two divisions is the speed they can be delivered.

The figure shows, by Division (sorry labeled section) and total, the percentage of total expected outlays that are spent by the end of each fiscal year. As we can see, CBO expects that 25.9 percent of Division B outlays will be spent in the coming fiscal year whereas only 8.1 percent of Division A in the same time. By the end of 2011, 91.4 percent of Division B will be spent it will take until the end of 2013 for Division A (at 92.7 percent to catch up to that). This makes sense with the "shovel-ready" phrase being thrown about. Tax cuts and money to current programs is faster than money to new programs.

Guest Post at NOSSR

I've got a guest post today at Notes on Social Security Reform (NOSSR).

The post explains how the stimulus bill would impact Social Security.

In brief, the stimulus actually discourages the saving that Social Security is designed to promote. Much of the tax cuts will result in lower payroll taxes. This takes funds that were intended to support Social Security and puts them in peoples hands. In fact, the stimulus has been promoted to make people spend their rebates. The plans shifts funding from the future to today, essentially an increase in benefits today at later generations expense (given that we will so no linked decrease in benefits).

The plan also looks to put more people on SSI, the means-tested program for low-earners with short work histories. By increasing the income cap, the plan actually encourages those at the margin to stop working.

Multiply, but it may not be fruitful

On Sunday's Meet The Press, new National Economic Council (NEC) chairman Larry Summers sparred with David Gregory about the size of the stimulus package.

From the show (emphasis added):

MR. GREGORY: I, I--and I want to go through all that. But I just want to go back to your central point, which is that one of the biggest mistakes you can make is doing too little. Yes, this is the largest stimulus in our history, but the problem, as you said, is something we've never seen in our history. So if you have a hole in the economy that's at least a trillion, maybe 2 trillion, don't you need a stimulus package that fills that hole?

DR. SUMMERS: Well, no, David. We have what economists call the multiplier. A fact--when the government--when the government spends...

MR. GREGORY: Right, which is if you create a job, it creates another job.

DR. SUMMERS: ...when the government spends a dollar creating a job, that person has higher income; because they have higher income, they're able to spend more, that creates other jobs down the road. That's why we surveyed a range of economists. We talk--and this is something the president insists on--to a lot of experts, both Democrat and Republican. And you know, frankly, some of them think the stimulus should be larger, some of them think the stimulus should be, should be smaller. President balanced the different views and I think came to the approach that we've taken, and came to an approach that's balanced in another way. It's balanced between very substantial new investments that are referred to between very important protections to prevent teachers and cops from being laid off, and also--and this is a substantial part of the package--tax cuts, because we recognize that we've got to help households to be able to spend, and businesses.

Summers is correct to point out the money multiplier. It's an important economic fact. It's also a variable that we can measure. And the current measure does not bode greatly for Summers.

The money multiplier is based on how fast money moves through the economy. To multiply, a dollar needs to circulate from the backer to the miller to farmer, etc. Yet if the baker gets a bailout and stops buying, which is the concern around bailed-out banks paying dividends or not lending, then there is no multiplication. This speed is known as the velocity of money.

Below is a table from the St. Louis Federal Reserve Bank's monthly Monetary Trends survey.

The figure provides two values of the velocity of money. Nominal GDP/M2 and Nominal GDP/MZM. The figures vary because they use different measure of the money supply. Both include dollars, checking accounts, and other liquid assets but MZM does not include time deposits like CDs that are not immediately accessible. As we can see removing time deposits has made a big difference in the past year, as the MZM measure has dropped quickly.

A lower velocity will supress the multiplier effect and lower the true benefit of the stimulus closer to its price tag.

Of course stimulus does not exist in a vacuum. It could on its own provide liquidity and boast velocity as people spend their stimulus. It could also just be a blip.

Auto Bailout: Concentrating on Cost Likely the Right Plan

In previous post, I featured a recent Congressional Budget Office (CBO) report that undercut the idea that aid to the auto industry is really a loan. The report, which provided estimated subsidy rates--or expected losses to the government--for pieces of the TARP, gave the financial sector low subsidy rates, ranging from 18 percent subsidy for the Capital Purhcase Program to 53 percent on the AIG injections. Yet GM and its (now holding company) GMAC had subsidy rates of 63 percent.

A report released Friday from the Brookings Institution chides that looking only at the subsidy rate may be too narrow a view. In the report, Measuring the Cost of the TARP, Brookings scholar Douglas J. Elliott indicates that there may be both differential cost and differential benefit.

This matters because some uses of TARP funds are expected to lose much more than others. CBO projects that funds for the automakers and AIG are likely to suffer losses of about 55 cents on the dollar while the main bank rescue package loses only 18 cents, less than one third as much. Perhaps the greater losses are outweighed by larger economic benefits to the nation, but we cannot honestly make that choice without the right cost estimates.

Elliott, whose main point is really about how we should use the subsidy rate to measure TARP cots, makes a good point. If we want to be serious about a cost-benefit analysis, we need to include the benefit as well. This includes taking into account jobs saved, tax revenue generated, etc by continuing to have GM and others make cars.

Sadly for the automakers, the production estimates that they need to use the federal funding effectively are not coming to bear. As Jim Manzi points out at The Atlantic's new business channel, GM is still not selling cars. Actual annualized sales for December estimate 10.3 million units, well below GM's Baseline of 12 million and even below its "downside" situation of 10.5 million. It may be that December was simply a very under performing month. Especially if tax cuts and stimulus checks go though we may see more purchases, but only for a short while.

Again, the auto industy stimulus may have large benefits to the economy but calling them loans is simply not warrented at this time.

The Auto "Loans"

A large part of the argumentation concerning the allocation of TARP funds to the auto industry belied a "we're good for it mentality." The auto industry, the argument went, was going through a rough moment and would recover. When it did it would pay back its loans. This followed the logic of the Chrysler bailout during the Carter administration. Unfortunately, we are not in that situation. Despite talk of loans, the government released information today indicating that the financial sector is more likely to pay back than the auto industry.

The figure below is from the first Congressional Budget Office (CBO) report on the TARP, released this afternoon. Click the image for a larger view.


Sorry its a bit hard to read the figure. The image gives the amount given by type of institution and the expected "Subsidy." This is essentially how much money the government does not expect to get back from this disbursement. The total subsidy rate for all TARP money so far is 18 percent. This means that the government expects to recoup 82 percent of its expenditure.

For the auto "loans" that figure is vastly different. For GMAC which received $4 billion the subsidy is expected to be $3 billion, a subsidy rate of 63 percent. The separate loans to the auto industry are valued in exactly the same 63 percent subsidy rate. So while the total allocation to GMAC and all auto industry was small, only $8 billion in this report (more has been given since). The expected repayment is lower than the massive amounts given to the financial sector.

On a plus for the whole thing, GM released new, "more conservative market volume assumptions" yesterday.

Disagregated Stimulus

The NYT today has a great breakdown of the stimulus plan proposed in the House.

The big take away of course being that at $825 billion this is a huge amount of money.

Now I'll give the Social Security-specific tax. I'll skip the monetarists take because to put it simply that interpretation is "don't do stimulus; it doesn't work. Fed policy will get you out of this." That interpretation of course matters and has strong evidence. Sadly, the Hill is likely to ignore it.

There are several things here that matter for Social Security. The biggest being the $275 billion in tax cuts. The plan gives $500 to individuals and $1000 to couple in reduced payroll withholding. This is essentially Obama's Making Work Pay plan. The difference is that instead of refundable tax credits they are going after payroll. This make little to no accounting difference for Americans who already pay no income taxes (about 45 percent of Americans).

The other provision is a small one to spent $4billion (small in this context) to increase benefits to low-income and disabled retirees. This is essentially just an injection into current programs.

Saving, a little, for the future.

New data from the Bureau of Economic Analysis shows that private savings rates reached levels not since September 2003. The new data, reported for November of last year, shows that personal savings rates hit 2.8 percent. As the following figure shows this rate is by no means large by historical standards.


I'm also not convinced that the increase will have any permanence. Personal savings rates spiked to 4.8 percent in April of 2008, after exactly a year of rates below 1 percent. That spike tracks well with the first fiscal stimulus package more than any change in attitudes about saving. Similarly, the recent data follows on the heels of the stock market collapse with rates declining until August and then beginning to grow again.

The increase in FDIC insurance, now set at $250,000 from $100,000 likely caused some people too swap risky assets into safer savings.

In fact other data from the BEA on total national savings indicates a large spike in the second quarter of 2008 that came down, while still above past levels in the third quarter. The table below shows personal saving rates sine 2007 (yell0w)

Of course all this personal savings is dwarfed by the upshoot in the federal government's dissavings (blue).

We're not Japan but its still expensive

In a speech today before the London School of Economics, Federal Reserve Chairman Ben Bernanke sought to distance the Fed's current course from that of the Bank of Japan in the late part of the 1990's and early 2000's.

From August 1999 to July 2000, Japan kept it's benchmark interest rate at zero. This zero-bound prevented the short-term rate from being used as a method to inject liquidity. Instead the Bank of Japan (BoJ) engaged in quantitative easing--the practice of holding more reserves than needed to maintain the overnight rate. The process caused the Bank of Japan's real assets as a share of GDP to peak at just over 30 percent in late 2005.

The US now looks to be on the same path. In December, the Fed abandoned its single figure Federal Funds rate target and instead took up a range of 0-.25%, closing in on the Bank of Japan. As the figure below shows, the BoJ used to be an outlier in global policy rates but all rates have moved down quickly this year. (UK--yellow, US-dark Blue, BoJ-bottom, European Central Bank--Purple, Australia--thin blue)

Yet, says Bernanke the US is "credit easing" not quantitative easing. Says Bernanke:

Our approach--which could be described as "credit easing"--resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.

He's right. The Fed has taken on a lot of assets, from bank equity to less savory commercial paper and GSE debt that it's never held before. He's also aware of why he's doing it and that just monetary policy may not be enough.
In a 2002 speech about Japan, Bernanke noted that:

As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy.

So there we are. Monetary policy seems to be on the right track, being even more aggressive than the BoJ. Structural reform, at places like the SEC, may be much harder.

Social Security and the end of white america

In this month's Atlantic, Vassar College professor Hua Hsu explains that America's majority white racial category is disappearing. To demographers this factoid is not all the surprising. Although Hsu's piece "The End of White America?" does get credit for teasing out the cultural implications of the shift in the total melanin in the US population.

While demographers have long been aware of the rise of majority-minority cities and the fact that the US will soon have no majority racial demographic, I was struck by one fact in Hsu's article. He writes:

According to an August 2008 report by the U.S. Census Bureau, those groups currently categorized as racial minorities—blacks and Hispanics, East Asians and South Asians—will account for a majority of the U.S. population by the year 2042.

Usually, I wouldn't worry too much about a random, even year somewhere in the future of my lifetime. The reason I do worry is that the Social Security Actuaries most recent report expects the Social Security Trust Fund to drop to zero. The fund will continue to take in revenue but have no accrued savings.

When it comes to demography and Social Security immigration is the most noted impact. Since immigrants tend to be younger and have more children they add to the working age population. Do not look behind the curtain and remind that those people will age eventually.

Yet few have talked about the impact of changing racial demographics on family structure and its perception of Social Security. A 2001 Census report on the living-situation of children breaks down how many live in extended family homes. The percentage of children living in extended family homes, most often created by the precense of an older relative is below.

Race Extended home
White 7.4
Non-Hispanic 5.6
Black 13.2
American Indian 16.9
Asian/Pacific Islander 20.6
Hispanic 17.5

As we can see non-Hispanic whites are least likely to live in extended family homes. If changing demographics shift this balance toward more such homes, cutting Social Security benefits may become more politically palatable as they will be seen as a support to workers to care for elders rather than a pure tax to retirees.

Obviousl this speculative but may be worth researching.

An Economist's Style Resolution

The following is a new year's resolution that takes some really basic ideas about two-good economies and applies them to getting in shape. Since most of the economic incentive to keep up with the project is social pressure, I"m publishing it to increase that pressure.

The Double-bound Capital Acquisition Project (D-CAP)

In the hopes that good money should not go after bad , I hereby set out to begin a fund of $90 per month (~X% [sorry I don't intend to broadcast my net earnings, and not because they're very high] of net earnings). The double bound capital fund, hereby known as the l fund, will be held via accounting in my personal Finances spreadsheet and counted against spending at the start of each month. The fund will serve to 1) ensure that a fixed amount of income is directed toward capital, 2) incentive good health, and 3) demand a more precise accounting of monthly expenditure.

The fund (F) must be expended each month in full (efficiency). The fund may be expended either upon Investment or capital.

Investment (I) includes: Debt service, a set-aside fund for investment in mutual funds.

Capital (K) shall include: clothing, athletic wear, timepieces, or any other persistent good designed for personal use. K is to exclude objects purchased as gifts.

Without constraints, these assumptions demand that

F=I+K where F=F-bar=90

A second condition is imposed upon the amount of the fund directed toward capital using a function of workout performance. The purpose of these kink points is to encourage training for the 10-mile run on Sun, April 5, 2009. These formulas produce kinks in the consumption possibilities of the fund



Activity (ai)
Return (ri)

Run <3mi
3

Run >3mi
5

bike <20 min
3

bike >20 min
5

rowing >10 min
4


Kmax=Min [80, ri*ai]

Preferences are assumed to be strictly concave. Therefore F=I+ Min [80, ri*ai]


This project shall last for a term of no less than three months.



12/18/08