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What is going to happen when the federal government has to reduce its deficit to a more normal 2-3% of GDP ?

The stimulus also includes tax cuts and transfer payments. In fact, if my knowledge is correct, the majority of the federal fiscal stimulus was in taxes and transfers rather than government purchases. In principle, the whole thing could have been done with taxes and transfers, and it would still have been considered a stimulus. Whether those sort of stimuli are effective is another question. But there surely was a net stimulus. You make an interesting point, though, that ultimately the net stimulus has been entirely in the form of taxes and transfers, which, after all, may not be very effective.

Significant concern.
The total fiscal stance should include the state position. Given that the state fiscal policy is revenue constrained, the federal fiscal policy should include a strong redistribution capacity to reallocate funds by crediting state accounts.

Norman Leblanc: "What is going to happen when the federal government has to reduce its deficit to a more normal 2-3% of GDP ?"

It will probably do so.

OC, there are so many crazies in Congress now, who knows what will happen?

Exactly who do you think is confused by this point? Certainly not the Obama administration. Obama himself hastened to reassure state governments that the money was coming even before the stimulus package was passed by Congress. And not "saltwater" economists who have always maintained that the most efficient job creation part of the stimulus package was the transfers to state governments which otherwise would have had to layoff massive numbers of teachers and so forth.

And it worked roughly as predicted by both the White House economic team and outside economists: the undersized stimulus package saved a lot of jobs, but not enough to prevent a large increase in unemployment.

The issue has great urgency now, as the conventional wisdom is shifting towards deficit reduction at a time when most of the advanced economies still need more stimulus.

I think I remember Krugman making this similar point a few times in his argument for more stimulus from the federal government because of all the cuts in the state and local government.

"But it's important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to US GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters."

I strongly suspect (but don't have time to prove) that this analysis is deeply flawed.

First, as noted above transfer payments are almost surely not treated as either "government consumption expenditures" or government "gross investment", which are the BEA categories. My suspicion is that things like unemployment insurance won't show up in the Federal, State or Local government expenditure line (line 21); instead they will show up in personal income/consumption. Personal tax cuts will be treated the same way - they will increase personal consumption but be reported as personal consumption or investment (lines 2 and 7) rather than government expenditures (line 21).

Put another way, if the government kept spending constant but cut taxes in half, I think most textbooks would call that a fiscally expansionary policy. Hard to square that with the assertion that the proper measure of stimulation is "spending by all levels of government".

Well - until someone can pin down the BEA accounting and figure out just what is in there measure of government spending, it is hard to draw dramatic conclusions about the net government stimulus.

Having had a chance to look it up...

From recovery.gov we find this description of the Recovery Act:

" The Recovery Act intends to achieve those goals by:

Providing $288 billion in tax cuts and benefits for millions of working families and businesses

Increasing federal funds for education and health care as well as entitlement programs (such as extending unemployment benefits) by $224 billion

Making $275 billion available for federal contracts, grants and loans "

The tax cuts won't be included in the BEA "Government expenditures" line.

Funds for education and health care *will* be included if the government hires teachers and doctors (less likely); it won't be if the government disburses increased scholarship grants and Medicaid money (more likely).

Most of the stimulus won't show up as direct government spending, but I am skeptical of the accuracy of the statement that "total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels."

Why do people always talk about the stimulus in the past tense? This has got to be the best chart outlining stimulus spending out there right now:


Lays it out quite nicely, I think.

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