Built on Facts

A contrarian view of the stimulus.

And when he had opened the third seal, I heard the third beast say, Come and see. And I beheld, and lo a black horse; and he that sat on him had a pair of balances in his hand.
- Revelation 6:5

Well if everyone’s going to talk about the financial crisis like it’s the end of the world we might as well be literary about it.

The ScienceBlogs homepage has a somewhat panicky roundup of sciencebloggers who’re looking for free cash concerned about the future of science in America. And all kidding aside, they’ve got a point. So far as I can see, there’s three reasons to include a lot of science funding in the stimulus.

1. Science is a driving engine for economic growth and development, even if not usually in the short term.
2. Compared to the rest of the garbage in the stimulus bill, a couple extra billion is pocket change.
3. It will help keep me employed.

Do those outweigh the negatives? The US was already running a large deficit even before the crisis.* I don’t see it being a good idea to add $800,000,000,000 to the “expenditures” line under those circumstances. And to this we’re soon supposed to add some kind of universal health care and college spending, when the boomers are retiring and Social Security is estimated to be less than a decade away from turning from a net source to a net sink of federal funds? Regardless of whether you’re the most dedicated free-marketer or the most conscientious progressive, the numbers are not promising. There’s always tax hikes, but the US already has one of the most progressive tax codes in the world and is already only about 50% behind France in terms of total government expenditures per GDP. Even leaving potential growth-hindering effects of tax entirely aside, we’re running out of people to tax.

And thus we’ll have to borrow, and eventually people will quit buying US debt as the Treasury looks less and less likely to pay those loans back with currency that’s worth anything. It’s not going to be a gradual thing either – with the dollar as a major reserve currency we could easily see a phase transition in international behavior if a weakening dollar precipitates a mass sell-off. At that point we’ll weather a tremendously ugly recession if we’re lucky, or hyperinflation if we’re not.

So I’m not a fan of the stimulus. Money has to come from somewhere, and we’re running out of somewheres.

But what about the science? If we’re going to have a stimulus, I certainly hope there’s lots of money for science in it. In the final analysis though, it’s not our money. It’s the taxpayers’ money. I hope they through their elected representatives continue to decide that science is worth that penny or so of each federal dollar. But if in lean times they decide it isn’t, it’s their prerogative. We scientists are smart people. We’ll live.

* At this point someone usually suggests the Iraq war or military spending in general as an expensive thing that could be cut. True. Like everything else though, the numbers are important if we’re going to be realistic. If the Iraq war were ended tomorrow (and even with Obama it won’t be totally over for years) it would only save around $150 billion a year. Which is a tremendous amount, but still only around 5% of federal spending and not nearly enough to erase the deficit. Baseline DoD spending is about $515 billion, or a little under 17% of the budget. Peace-loving people sometimes also suggest that this could be cut, but it’s a dangerous world and even magically erasing the entire DoD would only barely end the 2008 deficit (current deficit projections are much higher), and that only temporarily. The federal government spends a lot of money – defense isn’t all that huge of a fraction. Per dollar of GDP, the US’s military budget is fairly sedate anyway – roughly the same as other major powers such as China and Russia. Regardless, the DoD employs three million people; putting some fraction of those people out of work isn’t exactly going to do wonders for unemployment. Many of those people will be scientists; DARPA’s budget is more than half the size of the NSF.

Comments

  1. #1 jrshipley
    February 7, 2009

    First, I think that you need to look at deficits and total national debt as a percentage of GDP and make some longer range comparisons. For example, look at what it was after the depression and WW2. The economy managed to expand rapidly in the post-WW2 era despite being strapped with more debt and higher taxes. Part of the reason is that we made infrastructure and education, through the GI Bill, priorities.

    Which future economy would you think will be more prosperous? (1) An economy in a country with modern infrastructure and more educated and innovative citizens but higher federal debt. (2) An economy with crumbling, 20th century infrastructure and fewer educated innovators.

    Second, as the preceding question suggests, you need to make the crucial distinction between good debt and bad debt. It is the same distinction at the personal as at the federal level. At the personal level bad debt is exemplified by credit card bills run up playing big spender at the club. Good debt is investment in future earnings, like borrowing money to pay for an engineering degree. The borrow-and-waste Republicans have run up huge deficits without investing in the future basis for prosperity. Think of it this way. If you’re settling down and trying to get your life straight you shouldn’t rule out getting more education because you’ve got credit card bills. Getting an education may just be the key to future financial security through better job prospects. To be sure, we need to trim the fat from our federal and state budgets, but it would be hasty and foolish to conclude that the way out of the bad debt incurred by the borrow and waste Republicans is not to incur any good debt.

    Finally, I think that your reflections on taxes are from a rather static point of view. Part of the point of the stimulus is for some government spending to fill the gap in consumer spending brought by the financial crisis and collapse of consumer confidence. You need to seriously consider the hypothesis, held by a great number of economists, that without the right stimulus we may be heading into a serious deflationary period. Think of what that will do for tax revenues. Incurring debt now for stimulus spending to prevent a deflationary spiral is the way to avoid incurring debt later in virtue of shrinking tax revenues due to a shrinking economy.

  2. #2 Uncle Al
    February 7, 2009

    http://static.seekingalpha.com/uploads/2009/1/20/saupload_scary_1.jpg
    Federal borrowing through December 2007
    http://static.seekingalpha.com/uploads/2009/1/20/saupload_scary_2.jpg
    Same chart to scale, through December 2008. In February 2009 that proud vertical line will be reduced to a pimple.

    Obama blunts the greatest financial collapse in the history of civilization – caused by hyper-leveraging credit with no capital base (Dutch tulip market; 1929; NINJA mortgages) – by hyper-leveraging Federal credit with no capital base. To boldly go where no survivor has gone before.

    http://www.swpc.noaa.gov/SolarCycle/sunspot.gif
    http://www.spaceweather.com/
    to the left

    Th next collapse is global cooling quashing the Green Revolution with a cold and short 2009 growing season. 10 million dead of starvation? 100 million? Add Alaska’s Mount Redoubt erupting big time and you get a year without a summer. 1 billion dead of starvation? Grow bio-fuel!

  3. #3 Willyb
    February 7, 2009

    We should all be concerned about long-term deficits, since mounting debt robs our progeny of the interest payments on that debt, interest payments that might otherwise be used for necessary spending on infrastructure, defense, science, social welfare, or whatever is pressing at the time.

    Deficits are the difference between expenses and revenues. They can be increased by increasing spending or by decreasing revenues. The current recession – as most recessions – is characterized by low demand for products and services, not by demand going unsatisfied because of a shortage of goods and services. To increase demand we must increase the ability of consumers to buy. If a $40,000 income taxpayer receives a tax reduction – thereby leaving him with more disposable income – he is likely to spend it resulting in an increase in demand for whatever goods or services he needs. If a $150,000 income taxpayer receives a tax reduction, he is more likely to save at least a significant portion of the increased disposable income because he is already meeting his current needs.

    A reduction in the upper income taxpayer’s tax burden is therefore not dollar for dollar as much of a contribution to increased current demand as is the lower income taxpayer’s. The added personal savings of the upper income taxpayer could be used to invest in capital that would be available for meeting expanding future demand, but that is not our immediate need for current demand.

    Providing tax cuts for the upper income taxpayer is not only less efficient in creating increased current demand for the reasons stated, but also adds to the deficit by decreasing revenues to a greater extent than the lower income taxpayer’s tax cut because the upper income taxpayer is providing a larger share of the revenues.

    For these reasons, only tax cuts for lower and middle income taxpayers will be a substantial contributor to increasing demand and speeding our recovery from the current recession.

    A stimulus to short term demand more strongly depends on placing more disposable income in the hands of consumers who are likely to spend it. That means providing jobs for the increasing numbers of unemployed. The way to do that is by increasing government spending on projects that are likely to produce jobs in the short term. While many of the spending measures included in early versions of the stimulus package working its way through Congress may be laudable and worthy of adopting at some point, they are not necessarily efficient in producing jobs in the short term.

    In summary, my opinion re the type of stimulus plan that is currently needed is to spend money on projects most likely to produce jobs in the short term and to provide lower and middle income taxpayers with tax cuts. Worthy long term spending programs and lowering taxes on upper income taxpayers can be debated more fully when we are well on the way out of the current downturn.

  4. #4 Anne
    February 7, 2009

    Thanks for posting this viewpoint, Matt Springer. I’ve posted my own opinion in comments on a couple of related blogs today, but (maybe because it’s a sunny Saturday across much of the country) haven’t seen much discussion. I agree what happens with this stimulus bill doesn’t matter much in the long run. But as a person who values science very much, I would love to see scientists rise to the challenge of deciding which kinds of science really matter, and become willing to acknowledge that some kinds of science — science that’s being done right now — is not as vital to the wellbeing of our country or world, especially in a crisis. I’m definitely not willing to call my congressman and demand emergency funding for science until I see a genuine, humble inventory and an establishment of priorities across the disciplines. I don’t know where the fluff is, but I know our science is an outgrowth of a nation that has been supporting a lot of it. Until we find it and trim it, bailing out science is not a shred better than handing bank execs the cash for frivolous luxuries. And if the scientists themselves aren’t willing, then maybe it’s not so bad for the NSF to have limited funds to dole out, as a way to cut back to what really matters. I love science. It’s a fantastic tool for discovery and collective human growth on a variety of levels, and I want to see it thrive. But like a parent who wants to see a child become strong and independent, I’m advocating tough love.

  5. #5 Matt Springer
    February 7, 2009

    That true, Willyb. I’d worry about just focusing on demand though. Rich people may not buy as much per dollar, but they’re also more likely to do things like invest in business and hiring. I’m no economist though, so let’s say you’re right.

    The possible problem there is that there’s not much tax left to cut for lower-income people. I myself am in a low income bracket by virtue of being a grad student. By my preliminary self-accounting, I’ll have paid just over 4% of my income to the feds. While of course I’d be happy to see that fall, I wouldn’t end up with that many more dollars because I’m not sending many of them to Uncle Sam in the first place.

  6. #6 Miko
    February 7, 2009

    But then, the idea that Defense spending should be measured as a percentage of GDP is pretty ridiculous. As our country gets richer, we’re able to spend more money on more things. It doesn’t automatically follow that we’d want to spend more money trying to kill people. Cutting the defense budget by, say, half, would still leave us the strongest military power in the world. The main effect would be to diminish our capacity to launch force against remote parts of the world, which one can only label as “defense” with a twisted definition of the word.

    And the lost DoD jobs argument is just silly: we care about production more than employment; if this weren’t the case we’d just employ half the population to dig holes and the other half to fill them back in. If the DoD employees aren’t giving us a worthwhile benefit in exchange for their salaries, they should be forced to seek new jobs in a more productive sector.

  7. #7 Peter
    February 7, 2009

    This stimulus plan is to create jobs and increase disposable funds which are to be spent to get the economy going again. The problem is too much of what will ultimately be purchased will come from outside the US economy so the whole country ends up POORER the more that is fired at the problem. To maintain the current “Good Life”, money must flow out of the country increasing debt – sooner or later that must stop.

    The real problem is that the world is now global – old barriers of distance, lack of education or training, or lack of equipment, these things no longer exist – somewhere in the world there are people with the equipment, skills, and drive to do anything that can be done in the USA, only due to their lower standard of living, cheaper.

    There is no reason Americans (or any developed nation) should have the exorbitant lifestyle they currently enjoy – they are no longer special and no one (including other Americans) can afford their uncompetitive costs. This cost imbalance will only be fixed when either the rest of the world is brought up to the US standard of living, or the US is brought down to theirs. Either way the cost of production is equalized and wealth will no longer flow net one way as it is today.

    Protectionism and artificial trade restrictions that seem like they might limit this outflow of wealth limit flow both ways – and lead to the economy being isolated for output market (production sales), but still in OPEN competition for necessary inputs (think oil.) If anything protectionism will speed and extend the decline.

    The only way I can see any hope of maintaining the current lifestyle, and indeed have the Earth support EVERYONE at this sort of level is with massive technological innovation and change – in other words SCIENCE. So instead of spending more on imported consumer goods (the endgame of the current “stimulus”) I believe the correct answer is to drive innovation to create, and then widen a US technological advantage towards SUSTAINABILITY so Americans can live a good life, and ultimately so can everybody else, within the constraints of the planet’s renewable resources.

    To this end I believe massive spending on science of all forms, but particularly practical applied technology for sustainablity is the urgent priority!

  8. #8 Carl Brannen
    February 7, 2009

    I don’t think the Democrats really want to get the economy rolling again. Poor people tend to vote Democratic, why should they drive off voters if they can blame the bad economy on Bush? And the greenies believe that strong economies cause destruction of the environment.

    Of the various things Obama talked about before the election, i.e. pulling the US out of Iraq, various social welfare stuff, etc., the only thing he seems to be taking any sort of action on is environmental stuff. So I don’t see him as a big supporter of economic growth either.

    As far as restoring the economy, it’s clear to me that we need to reduce debts and the only way we can do this is by reducing the value of the dollar. This sounds horrible, but it’s been done before and it’s not so bad. It will be the inevitable result of huge government budget deficits one way or another.

    To stimulate the economy, giving money to poor people is the best way because they are absolutely guaranteed not to save it.

    The problem we had before the crash was that everybody was doing the same thing, investing in real estate and stocks. The crash occurred when they suddenly realized that the building was on fire and they all rushed for the exits at the same time. The exit meant that they wanted cash instead of stocks and RE.

    So to fix things, we have to shake the cash loose from them. That is, the government must force businesses and rich people to invest their cash. This can be done by tax rebates along the line of “buy xxx now and reap the benefits with a reduction in taxes later”, but it can also be done by “keep hanging onto your cash and our inflation is going to make it worth a lot less, ha ha.” Obama seems to be pursuing the second method. It takes a little longer but it will shake the cash loose eventually.

    Regarding the scientists who were so in love with Obama before the election wondering why it is that they have not been rewarded, this is just another example of the human tendency to believe the BS of their leaders. We are a herd animal and we all do the same thing at the same time.

    It’s not just us that are herd animals, almost all our traditional pets and farm animals are also herd animals. Dogs, pigs, cows, sheep, ducks, chickens, horses, etc. The most common exception is cats. Other non herd animals are rather rare and were traditionally owned only by royalty such as big cats and raptors. The herd mentality is just as strong with scientists as it is with the rest of the herd.

    In fact, to the extent that scientists tend to be highly socialized, they are more docile and herd animal like. See The Unabomber’s Manifesto to see how a being, who is not a member of our herd, sees us.

  9. #9 Andrew Foland
    February 7, 2009

    Roughly speaking, you can spend “debt” on any of five things:

    1. Investment: the creation and employment of productive assets, whose productivity exceeds the opportunity cost of the debt

    2. Amortization: matching cash flows for an asset purchase to the long-term durability of the asset

    3. Malinvestment: an attempt to do #1, but in an “obviously incorrect” way

    4. Speculation: trying to profit by guessing the future direction of asset prices, with the intention of repaying the debt and pocketing the profit

    5. Consumption: using long-term debt to fund short-term assets

    Debt used for #1 is a nearly unqualified good. Debt for #2 is economically more or less neutral; it’s a cash-flow management tool. Insofar as it provides some options, it may have some slight net positive value.

    Debt used for #3 is a losing proposition but generally does not feed back upon itself.

    Debt used for #4 is for the most part economically neutral when the speculation risks are correctly calculated. Since error is inevitable, it is generally economically negative.

    Debt used for #5 is what most people think of when they think of debt as bad. It is bad.

    There is of course a lot of gray area between 1,3, and 4, but not as much as the proponents of 3 and 4 want you to believe. Part of the housing mess was using debt for #3, then pretending it was use #2, when in fact it was use #4.

    So although badly handled debt is bad, it’s not always bad, and sometimes is a positive good.

    Also, a government has a completely different relation to debt than a household. If a household comes up short on a debt payment–that’s it: the end, you’re sunk. If a government comes up short, any government (up to some revolutionary point) has the power to tax wealth and income to make up the difference.

    A few governments–the US foremost among them–have even a yet more powerful weapon in their debt payback arsenal. They are able to issue debt in denominations that they themselves print. (Most governments actually can’t do this.) You can’t do this in a household–at least, not without expecting a visit from the Secret Service. So again, the relationship to debt for a government is very different from a household.

    I don’t want to get into the stimulus details, since I don’t know enough. But a reflexive “debt is bad” position is not likely to lead to the right conclusions.

    By the way–because war is generally not a productive asset, war spending in excess of purely defensive preparations comes in somewhere near #5. Looking at what other powers in the world spend provides a very strong indication that the vast majority of our war spending is in excess of what’s needed for defense.

  10. #10 Anonymous
    February 10, 2009

    A stimulus, to counter the deflationary pressures that are directing this economy in a direction you definitely don’t want to experience first hand (ask my parents), must put money into circulation. To my mind, that puts paying a salary to persons on the lower end of the income spectrum (such as recently unemployed teachers aides and cops) real high on the list even if some commentators claim that they don’t “work” because the money comes from the government. We’ve already tried giving a few tens of billions in bonuses to wealthy people, but that doesn’t seem to have shown up in Walmart or Target or other areas where the economy is seriously hurting.

    After that comes money for construction that ends up being spend on goods and services, although some projects take a while to get started, tax cuts that show up later on in altered withholding tables or refunds, and long-term investments like federally funded R&D (that also pay out some money in salaries and construction).

    I agree what happens with this stimulus bill doesn’t matter much in the long run.

    It matters a great deal whether it works or not. More than any of us under 60 can possibly imagine. It matters whether the “long run” is 2 to 4 years (major recession to run-of-the-mill depression) or 10 years.

    By my preliminary self-accounting, I’ll have paid just over 4% of my income to the feds.

    That would be true if your income is exempt from FICA and Medicare taxes, as mine was as a grad student, but most low income workers pay an absolute minimum of 15% in taxes (some paid directly by their employer, but paid nonetheless) to the federal government whether you pay income taxes or not.

  11. #11 CCPhysicist
    February 10, 2009

    Oops. That last post was mine.

  12. #12 Jon
    February 18, 2009

    I think you’re missing the point of the Iraq War argument.

    The real point is this: were a more careful and competent executive (of either party) at the helm, the Iraqi excursion would likely not have happened. And that would’ve saved us to the tune of a trillion dollars of federal money, if not more.

    That’s not to mention the state and federal money wasted on bogus homeland security apparatuses–the ones inspired by all that ‘mushroom cloud’ hokum in the run up to the Iraqi war.

    Or the billions wasted on contractors because of redundant tours of duty and inadequate personnel levels.

    Or the millions in aid we send to our faux-allies in Pakistan.

    Et al.

    As for your tax argument–methinks you didn’t read your sources very carefully. Your first link cites a study that looked at household incomes only.

    The relevant quote, with the relevant emphases:

    Of course, these measures do not include the litany of other taxes households pay in each country, such as Value Added Taxes, corporate income taxes and excise taxes, but they do give a good indication that our system places a heavier tax burden on high-income households than other industrialized countries.

    An awful lot of trust is afforded to that kind of conclusion. Especially since adding in corporate income taxes doesn’t significantly increase our overall tax rate compared to, say, most European countries.

    Your second source is a listing based upon dollars spent per $1 of GDP. True, we’re behind France by 50%. Not sure how France is relevant (except in the popular, but irksome, punching-bag sense). A more pressing bit of information might be that we’re 87th out of 183rd on the list, and that France is 25th. Or that France is comparatively closer to the weighted mean they give (0.200) than we are (granted, the sample mean is .169–choose your statistics, I suppose). Without removing any outliers, the standard deviation is .08ish. Removing some of the outliers gives something closer to 0.0500. In any case, a very cogent argument can be made that the U.S. does not spend enough per unit GDP (and that France spends too much–both things can be true at the same time, you know).

    Unless you think that the mean should be significantly lower. In that case, you probably have bigger fish to fry.

    Also interesting is this sentence I found:

    [Data] excludes government military expenditures that are part of government capital formation.

    Not sure what that means. It doesn’t sound good, at any rate, if you’re trying to interpret this data in a very broad way.

    In any case, I say if you’re going to screw taxpayers, screw them into a bunch of science funding. The minuscule amount they gave for science in comparison to other things is embarrassing.

  13. #13 Kaleberg
    March 2, 2009

    1) Money is the ability to command goods and services. As long as there is a larger ability to perform goods and services than there is an ability to pay for goods and services, the government can simply create money to fill in the gap without doing anything nasty to the economy. The government can create money at will, more or less the same way it creates property.

    2) There is no shortage of people to tax. The Bush administration and Congress have already scheduled a tax increase for 2010. Basically it restores the tax rates of the 1990s. It would be nice it also restored the economy of the 1990s as well, but that is why we also need the stimulus bill.

    I think a friend of mine explained it years ago when I was looking for money to fund a project of mine, “There is more money in heaven and earth than is dreamt of in your philosophies.”

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