Counting the Stimuli

Mon, 30 Aug 2010 14:52:15 +0000

The main point of Laura Tyson's op-ed in Saturday's New York Times is correct: we should be using the occasion of very low interest rates on government debt to add to our productive infrastructure. 

But she makes a simple arithmetic error in the title, "Why We Need a Second Stimulus."  In fact, what she's arguing for is not the second but the third stimulus.  As is common with the current administration and its supporters, she forgets that the $150 billion infusion in early 2008 was a bipartisan attempt to prevent economic growth from stalling.  The Obama administration is now populated by those who, in late 2007 and early 2008, were calling for a "timely, targeted, and temporary" bout of deficit spending to prop up the economy.  They shouldn't be running away from it now.

Why does it matter what number stimulus this is?  <!--break-->Because the larger the number, the more it becomes clear that this is not the right way to implement a counter-cyclical fiscal policy.  Good counter-cyclical fiscal policy is established well in advance of the downturn, so that it addresses well established federal government responsibilities and is not held up based on the partisan issues of the moment, like the upcoming midterm elections. 

I have made this point several times since the recession began, starting here.  In her op-ed, Tyson makes the case that educational expenditures could be considered in the same way (emphasis added):

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

Tyson should be more clear about her argument.  The usual Democratic talking point about the need to provide financial assistance to states because they fund education is based on the states' role in primary and secondary education (and, not surprisingly, the teachers' unions' role in electing Democratic candidates).  The case she is making in the op-ed is also about the need for more education beyond the primary and secondary levels.  It would lead to policies like an increase in grants for college-going during weak economic periods.