Regarding the liquidity trap, in theory a zero interest rate policy can be optimal in a Friedman optimal deflation model. Many people seem to equate this with a liquidity trap, though I don’t know that they necessarily need to be. If money is neutral, the zero interest rates is definitely possible with deflation and positive real interest rates. A liquidity trap, which I think is not very well defined, for me is when monetary policy is ineffective, as excess reserves make the money multiplier plummet and blunt the effect of monetary policy.

While that seems to correspond to times when the economy is performing poorly and when interest rates are low, I don’t see how a Zero interest rate and a liquidity trap are equivalent. With no deflation and no interest paid on reserves, there would not necessarily be a liquidity trap with zero interest rates.

Call it my subjective opinion if you must, but the ARRA was neither quick nor was it well-targeted. I base my subjective opinion on the CBO analysis. Further, given most spending is next year or beyond and by my reckoning there’s a slim chance we’ll be in a liquidity trap next year then the ARRA won’t even pay for itself. If the ARRA represents the best fiscal policy our institutions can provide, this suggests our political institutions are incapable of producing optimal policy or policy even close to ideal.

Gabriel, the exogenous shock could be this new knowledge about our current set of institutions. We now know they’re incapable of producing good fiscal policy. We didn’t know that (the macro student in me says, “yes we did!” but keeping my sanity in these debates requires me to ignore my inner macro student). So now we can use this new information to find a new equilibrium.

And the report states:

“However, all states have seen substantial increases in their unemployment rates since the start of the recession, so it’s hard to argue that any state currently is at full employment and does not have idle capacity that can be put to use on major construction projects.”

You don’t have to state what your optimal fiscal stimuls would be, but it’s easy to say that government is highly imperfect. It doesn’t add much to the debate though. Who si going to disagree with you? It’s the blog equivalent of a cheap shot.

But if the alternative is Austrian style inaction and liquidationism, then I’ll take the ARRA any day.

Current constraints are the result of the current political-economic equilibrium. No one can magically “change” them unilaterally since, by the definition of equilibrium, you’d have to be worse off.

Calls about changing institutions, then, are as misguided and futile as calls for better policy in the abstract. [I'm not sure I believe that but I see how that might be true.]

So, what one needs to do is pray [if one is into that] for some *exogenous* change in fundamentals that would translate into a positive change in institutions, which would translate into a positive change in policies and, finally, outcomes.

Thorstein, you can always say “if only we had the right people in office…” Our system puts these people in office and they come up with these sub-optimal policies. And you’re crazy to think those two people were responsible for the shape of ARRA spending. Krugman or Stiglitz’s force of will would have overcome the demands of the pork swilling Congressional committees? Their crusading would produce the necessary political compromise, votes and a President’s signature?

I’m not sure they would have been disabused of these concerns had they been reading this blog…

Had liberals been in charge, California and Pennsylvania would not be paying IOUs right now…

Costs contingent on particular institutional arrangements are not proper social costs. Otherwise, the monopoly unable to perfectly discriminate would be efficient, for example.

Optimal fiscal policy, ignoring implementation constraints like the Congress and timing, would be immediate and targeted at idle resources. Our institutional framework does not produce policy like this… implementation constraints are binding.

Optimal Will Ambrosini transport technology, ignoring implementation constraints like physics, would allow my instantaneous transport to and from any position on the globe. Unfortunately, those constraints bind, too.

“So, while ARRA’s state allocations do not represent the absolute optimal stimulus, they are on the whole well directed. Overall, that means that the economic impact of this support for state governments is more likely to exceed than to fall short of forecasts.”

The question becomes, why did you reach a different conclusion than the SF Fed?

Infrastructure is about $111 billion in the recovery package. You seem to support aid to states in principle, which is 144 billion. Do you support the tax cuts too? Because then you would support over half of the ARRA. My point is that I see a lot of people opposing ARRA because they oppose government spending, when the majority of the package is tax cuts and aid to states, which many people support.

If you don’t mind, what would your optimal ARRA look like (or should we have a fiscal stimulus at all)? For me, a good start would be halving the tax cuts and increasing the aid to states to 500 billion. If more good infrastructure projects are available, those could get more funding too. I would rather they get done in time, but given the terrible shape of American infrastructure, they couldn’t hurt at any time. http://www.infrastructurereportcard.org/

There’s a shallow slope on the line fitted between unemployment rates and funds from ARRA (here’s the SF Fed analysis). The fiscal policy our institutions implement doesn’t do a good job targeting idle resources. It would be better if it did, but it doesn’t.

I hate to be a dick, but those that supported the ARRA are the baptists and the special interests in congress the bootleggers in this process. There should be more dissertations written on political macroeconomics.