Assessing the G-20 Stimulus Plans: A Deeper Look

Assessing the G-20 Stimulus Plans: A Deeper Look. By Eswar Prasad & Isaac Sorkin
Brookings, Mar 05, 2009

Almost all of the G-20 countries have announced some type of fiscal stimulus plan to get their economies back on track but how strong are the plans and what measures are included? Eswar Prasad and Isaac Sorkin analyze the G-20 stimulus plans in detail in new research.

View the article as a PDF » View the interactive map »

The financial crisis turned into a broader macroeconomic crisis in the fall of 2008. The world economy has hit a wall since then, with growth plunging in all the major advanced and emerging economies.

Monetary policy acted as a first line of defense against the crisis but conventional measures appear to have reached their limits in many countries. Policy interest rates in many countries--including the U.S., U.K. and Japan--are now close to the zero nominal interest rate floor. Moreover, the implosion of financial systems in many economies has rendered monetary transmission mechanisms far less effective.

Thus, fiscal policy has become essential to kick-start the global recovery or, at a minimum, to prevent global Gross Domestic Product (GDP) from declining further. At the November 2008 G-20 Summit in Washington, DC, the leaders of the G-20 countries promised to “use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.” How well have countries been doing on this promise?

In this note, we provide a detailed assessment of the stimulus measures in each of the G-20 economies. We first present data on the size of fiscal stimulus packages as announced by the authorities and compiled by the IMF.[1] These data represent estimates of the size of new measures, rather than the announced size of stimulus packages, which typically includes measures already planned before the scope of the crisis became clear. We then supplement these bottom-line numbers with additional information from a variety of sources. This allows us to evaluate the fiscal stimulus packages based on three key criteria:

• Size—the extent of stimulus relative to GDP
• Composition—balance between spending and revenue measures
• Frontloading—the speed with which fiscal measures hit the ground

These criteria enable us to systematically evaluate the potential punch packed by fiscal policy in each country. This analysis also sheds some light on the amount of stimulus on a global scale. In an integrated world economy, the effectiveness of stimulus is contingent on how coordinated it is across countries. If the sizes of the stimulus packages (relative to domestic GDP) are very different across countries or if the effects of some countries’ stimulus packages are backloaded, then there could be “leakage” of stimulus from countries that act early and forcefully.

Thus, lack of coordination could reduce the global bang for the buck of individual countries’ policies. Given the dire situation the world economy is in, large frontloaded stimulus packages that are coordinated internationally could not only be more effective directly but also boost consumer and corporate confidence.

Our analysis is limited to the G-20 countries, mainly because this has de facto become the main global grouping of countries that is driving responses to the crisis. The G-20 countries in this analysis (substituting Spain for the EU) constitute over three-quarters of global GDP (on a market exchange rate basis) and over two-thirds of the world’s population.

We begin with a broad assessment of the contours of stimulus packages announced so far. The interactive country map provides extensive details on individual countries’ packages. It also indicates our assessment of countries that have announced packages that are large and frontloaded (green), modest in size and speed (yellow) and unimpressive in both respects (grey).

Size of Stimulus

Almost all countries in the G-20 have announced fiscal stimulus measures.[2]
The total amount of stimulus in the G-20 amounts to about $692 billion for 2009, which is about 1.4 percent of their combined GDP and a little over 1.1 percent of global GDP. This is a significant amount of stimulus, but appears to fall short of what is needed to tackle a crisis of the proportion we are currently in. The IMF, for instance, has called for stimulus equal to 2 percent of global GDP.[3]

Three countries—the U.S., China and Japan—account for about $424 billion of the overall stimulus in 2009, with their shares in the overall global stimulus amounting to 39 percent (U.S.), 13 percent (China) and 10 percent (Japan). Measures for 2009 in the U.S. stimulus package amount to 1.9 percent of its 2008 GDP and the corresponding numbers for China and Japan are 2.1 percent and 1.4 percent, respectively. For the remaining G-20 economies, the total fiscal stimulus amounts to 1.0 percent of their overall GDP.

In 2010, the U.S. accounts for over 60 percent of planned stimulus. China and Germany are the next largest contributors with China contributing 15 percent of G-20 stimulus and Germany contributing 11 percent. Measures for 2010 in the U.S. stimulus package amount to 2.9 percent of 2008 GDP, China’s 2.3 percent, and Germany’s 2.0 percent.

In summary, while almost all countries have signed on to the fiscal stimulus program, the size of the stimulus varies substantially across countries, with some of the stimulus packages looking downright meek (e.g., France, which has proposed measures amounting to only 0.7 percent of GDP in 2009).


Composition of Stimulus

There is considerable discussion about the relative effectiveness of tax cuts versus spending in stimulating domestic demand. We do not take a position on this but it is useful nevertheless to examine the choices made by different countries in this dimension. We highlight one regularity in the composition of packages across countries and then indicate one dimension in which the structure of the packages differs markedly across countries.

Most countries that have announced multiple waves of stimulus have increased the share of spending (compared to tax cuts) in the second round, just as the U.S. has done from January 2008 to January 2009. For example, Germany’s stimulus in November 2008 was largely composed of tax cuts. The second stimulus package announced in January 2009 was largely tilted towards spending. Similar features can be found in the stimulus measures announced in Australia in October 2008 and February 2009, and in Spain in March 2008 in November 2008.

There is a great deal of variation across countries in the share of the stimulus that is devoted to tax cuts. In the U.S., this share is about 45 percent. Some countries—including Brazil, Russia and the U.K.—have focused almost entirely on tax cuts. Others—including Argentina, China and India—have mostly proposed spending measures. Among the G-20 countries excluding the U.S., about one-third of the stimulus is accounted for by tax cuts and the remainder by spending measures.


Speed of Stimulus

Countries vary in the degree of frontloading of their stimulus packages—the speed with which the tax and expenditure measures hit the real economy (in terms of money reaching the pockets of firms and households, or government monies being spent on social programs or procurement). This is partially a function of the vagaries of the budget process in each country—countries may not announce stimulus for the future though they intend to enact it as part of their regular budget process.

Of the 19 countries that make up the G-20, only four countries—China, Germany, Saudi Arabia, and the U.S.—plan to spend as much or more on stimulus (as a share of GDP) in 2010 than in 2009. In other words, there is a fair amount of frontloading in the stimulus packages of the G-20 countries, with much of the stimulus taking effect in 2009. Of course, this could reflect different beliefs about the length of the recession. It could also reflect difficulty in ramping up government expenditure quickly, especially on infrastructure and other investment projects.

We should also note that some countries recognized the coming crisis and implemented stimulus plans at some point in 2008. This list includes Australia, China, Japan, Korea, Saudi Arabia, South Africa, Spain, U.K. and the U.S.


Bottom Line

Fiscal stimulus has a crucial role to play in stabilizing the world economy, especially as conventional monetary policy appears to have reached its limit in many countries. By and large, policymakers in G-20 economies have acted on their leaders’ joint announcement in November 2008 to use fiscal stimulus in a concerted and coordinated manner to boost economic activity. Some countries like China and the U.S. have responded forcefully, with impressive packages. But the execution, both in terms of size and speed, leaves much to be desired in some of the G-20 countries.

There are legitimate questions about the effectiveness of fiscal stimulus, especially in economies where the financial system has broken down and where monetary policy can no longer play much of a supporting role. Moreover, excessive government borrowing to finance large budget deficits could itself generate instability and there are serious concerns about medium-term sustainability of fiscal positions in economies that are building up public debt at a rapid pace. Given the dire and fast-deteriorating economic situation and the lack of other tools, however, the world may have little choice but to engage in massive frontloaded fiscal expansion. The consequences of timidity, as history teaches us, could be even worse.

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Study: Job Loss Data under Card Check in Canada

New Study Shows Job Loss Data under Card Check. By Ivan Osorio
Open Market/CEI, Mar 05, 2009

This week, Dr Anne Layne-Farrar, an economist with the Law and Economics Consulting Group, published a new study in which she analyzes the likely economic effects of the so-called Employee Free Choice Act if it were to be enacted, especially on employment. EFCA would replace secret ballots in union organizing elections with a process known as card check, whereby union organizers ask employees to sign union cards out in public, thus exposing workers to high-pressure tactics which secret ballots are designed to avoid. Labor unions see this as a way to revive their declining number. The summary of Layne-Farrar’s findings includes:

[P]assing EFCA would likely increase the US unemployment rate and decrease US job creation substantially. The precise effect on unemployment will depend on the degree to which EFCA increases union density, but for every 3 percentage points gained in union membership through card checks and mandatory arbitration, the following year’s unemployment rate is predicted to increase by 1 percentage point and job creation is predicted to fall by around 1.5 million jobs. Thus, if EFCA passed today and resulted in an increase in unionization from the current rate of about 12% to 15%, then unionized workers would increase from 15.5 to 19.6 million while unemployment a year from now would rise by 1.5 million, to 10.4 million. If EFCA were to increase the percentage of private sector union membership by between 5 and 10 percentage points, as some have suggested, my analysis indicates that unemployment would increase by 2.3 to 5.4 million in the following year and the unemployment rate would increase by 1.5 to 3.5 percentage points in the following year.

As Layne-Farrar explained in a press conference call today, she analyzed the experience of Canada with both card check and secret ballots. Union organizing in Canada is set at the provincial, rather than federal level, so different provicial policies allow for contrast. As she explained, several provinces have moved from card check to secret ballots, while one went the other way. To control for other factors, she said she did a regression going back 22 years.

Study available for download here.

For more on card ceck, see here.

Something New for Climate Doomsters to Fear: Political Backlash

Something New for Climate Doomsters to Fear: Political Backlash. By Marlo Lewis
Planet Gore/NRO, Thursday, March 05, 2009

Global warming used to be such fun for eco-activists and their political allies when it was a stick they could use to beat George W. Bush. For years, the Left milked global warming as a political-theater platform for partisan attack, direct-mail fundraising, and endless moral posturing. But now that they’re running the show in Washington, D.C., climate doomsters know they’ll be blamed if their policies de-stimulate our ailing economy. On two key battlefronts, these vociferous advocates of urgent action are now proceeding with caution.

Consider the climate-treaty negotiations. The global-warming crowd continually castigated Bush for opposing the Kyoto Protocol. Bush-bashing reached a fever pitch during the December 2007 UN Climate Change Conference in Bali, Indonesia. The main bone of contention there was a European Union (EU) proposal to cut developed country emissions from 25 to 40 percent below 1990 levels by 2020. Senate Environment & Public Works Committee Chairman Barbara Boxer (D., Calif.) and 14 other Senators wrote to Bali delegates crowing about the committee’s approval of the Lieberman-Warner cap-and-trade bill and even “bigger [U.S. policy] changes on the horizon.” The letter was obviously designed to give political aid and comfort to the legions of delegates denouncing Bush for rejecting the EU proposal.

Where do things stand in the Obama era of “change?” Greenwire (March 4, 2009, subscription required) reports that President Obama’s lead climate negotiator, Todd Stern, “yesterday dismissed as ‘unnecessary and unfeasible’ a European proposal to have developed nations curb emissions 25 to 40 percent below 1990 levels in the next decade.” In an obvious reference to Kyoto, Stern explained: “I don’t want to bring home a dead-on-arrival agreement. We tried that. It didn’t do the world a lot of good.” Stern said that for America, the EU proposal is “a prescription not for progress but for stalemate,” noting that the EU target is more aggressive than the Lieberman-Warner cap-and-trade bill, which failed to pass in the Senate in June 2008.

So, are eco-pressure groups crying foul or even expressing regret that America still lags behind Europe in global-warming zealotry? No way. Greenwire summarizes their reactions:

Chris Flavin, president of the Worldwatch Institute think tank, praised Stern's comments.

"It's good that he was frank about some of the difficulties with the Europeans," Flavin said. "It was a warning shot that they better get serious about recognizing that we and the Europeans are not going to get to the same numbers starting from a 1990 baseline."

Elliot Diringer, vice president for international strategies at the Pew Center on Global Climate Change, said Stern was simply "reflecting the political realities here in Washington."

Overall, negotiators and analysts hailed the speech as an unmistakable signal from the Obama administration that the United States is serious about getting a global deal.

"There was an unequivocal statement that we are going to make reductions," said World Resources Institute President Jonathan Lash. "I just haven't even heard a U.S. official be explicit and concrete and clear that way.

"Poland's climate ambassador, Janusz Reiter, called Stern's comments "exactly the mix of idealism and pragmatism that is the right formula for the process."

Newfound caution is also discernible among activists who litigated and won Mass. v. EPA, and who sued EPA again last year to compel the agency to issue an endangerment finding — the prerequisite to regulating greenhouse-gas emissions from new motor vehicles under §202 of the Clean Air Act (CAA).

Back in September 2008, David Bookbinder, chief climate council for the Sierra Club, derided as “bugaboos,” a “red herring,” and a “pure scare tactic” (see segments 1:47:10-1:48:22 and 2:03:83-2:05:20 of the Webcast Archive of this hearing) industry and free-market group warnings (see here, here, and here) that regulating carbon dioxide (CO2) under almost any CAA provision would expose tens of thousands of previously unregulated buildings and facilities to new controls, paperwork, and penalties under the Act’s Prevention of Significant Deterioration (PSD) pre-construction permitting program.

Yet last month, the Sierra Club, the Natural Resources Defense Council, and the Environmental Defense Fund declined to file a motion to “stay” former EPA Administrator Johnson’s memorandum clarifying that CO2 is not currently subject to PSD regulation.

Why? According to Greenwire, “If the agency were to stay the memo immediately, Bookbinder said, it could trigger an obligation under the Clean Air Act for broad-ranging regulations targeting even very small sources of carbon emissions.” In Bookbinder’s words: “The Clean Air Act has language in there that is kind of all or nothing if CO2 gets regulated, and it could be unbelievably complicated and administratively nightmarish for both EPA and the states if they were to yank the Johnson memo and not have something in place that makes it clear that we’re going after only the very large sources.”

On Capitol Hill, the same political caution seems to be replacing political theater. In 2008, Rep. Ed Markey (D., Mass.), Rep. Henry Waxman (D., Calif.), and Sen. Boxer each demanded that EPA release the endangerment analysis and draft regulations that the Agency had developed in response to Mass v. EPA. Bush officials put those documents under wraps once they understood how easily CAA regulation of CO2 could spiral out of the agency’s control. Like her Bush-administration predecessor, Obama EPA administrator Lisa Jackson has decided against releasing the documents, announcing that EPA in due course would publish a new endangerment analysis and solicit public comment. None of the usual suspects in Congress is complaining or threatening subpoenas.

What does it all mean? Unfortunately, these rhetorical and tactical adjustments do not mean the Obama Administration won’t advocate cap-and-trade legislation, won’t agree to Kyoto II at the Copenhagen climate conference, or won’t regulate CO2 under the CAA.

However, their more cautious approach — which includes Obama’s proposal for a weaker emissions-reduction target (basically 1990 levels by 2020) than the U.S. Kyoto target (7 percent below 1990 levels during 2008-2012) — suggests that the global-warming crowd are worried as never before about the political backlash the economic fallout from their agenda could provoke. Our task is obvious: keep the spotlight on the threats their policies pose to our foundering economy.

Opposite Views on Climate Feedbacks (and perhaps the answer lies in the middle)

Opposite Views on Climate Feedbacks (and perhaps the answer lies in the middle). By Chip Knappenberger
Master Resource, March 5, 2009

Just how much warming should we expect from rising levels of atmospheric greenhouse gases (GHGs)? The answer largely hinges on how much extra warming might be generated by the initial warming—that is, how strong (and in what direction) are the feedbacks from water vapor and clouds.

By most estimates (including climate model outcomes), these feedbacks are positive and result in about a doubling of the warming that would result from greenhouse gas increases alone. By others, however, the total feedbacks are negative, and imply that the total warming will be less than the warming from greenhouse gas increases alone, and only a fraction of that which is commonly expected.

The ultimate warming experienced across the 21st century will depend on the combination of greenhouse gas emissions and how the climate responds to them. The feedback issue is an essential part of the latter, for it spells the difference between a high climate sensitivity to greenhouse gas doubling (say 3-4ºC) and a much lower one (1-2ºC).

As to where the answer lies, the devil is in the details, and in this instance he is hard at work, as the processes involved are exceedingly complex—difficult to not only to fully understand, but even to adequately measure.

In a “Perspectives” piece in a recent issue of Science magazine, Andrew Dessler and Steven Sherwood attempt to put to rest any notion that the feedbacks on global temperatures are anything but positive and significant. Dessler and Sherwood point out that the role of water vapor plays the largest role in the feedback process—higher temperature (from greenhouse gases) lead to more water vapor in the atmosphere which leads to even higher temperatures still (as water vapor, itself, is a strong greenhouse gas).

But actual hard evidence that water vapor is increasing in the atmosphere has been hard to come by. Dessler and Sherwood review the recent literature on the topic, including an important contribution from Dessler et al. published last year, and conclude that there now exists sufficient evidence to conclude that atmospheric water vapor is increasing very much in line with climate model expectations and that this increase produces roughly twice the global temperature rise than does anthropogenic greenhouse gas enhancement alone. Meaning, of course, that all is generally right in model world, or as they put it: “There remain uncertainties in our simulations of the climate, but evidence for the water vapor feedback—and the large future warming it implies—is now strong.”

But apparently Dessler and Sherwood didn’t convince everyone that this is the case. One notable person who was less than impressed that this was the whole story was Roy Spencer, who has himself been working on the feedbacks issue. Spencer points out that water is actually involved in two feedback processes—the first, through water vapor as described by Dessler and Sherwood, and the second, through water droplets, or, more commonly, clouds. Changes in the patterns (horizontal, vertical, and temporal) and characteristics (droplet size, brightness, etc.) of cloud cover play an important role not only in the earth’s climate, but in how the climate responds to changes in the greenhouse effect. And, as you may have guessed from their ephemeral nature, the behavior or clouds is not particularly well-understood, and even less well modeled.

Spencer has been looking into the cloud part of the feedback processes. Over the past several years, during the period when Dessler et al. (2008) finds a positive feedback from increases in water vapor, Spencer, in his investigations, finds that cloud cover changes produce a feedback in the opposite direction. And when he adds these two effects together, he finds that the total feedback from warming-induced changes in water in the atmosphere to be negative (that is, the cloud effect dominates the vapor effect). Granted, Spencer’s investigations are far from complete and even farther from being generally accepted, but they do raise important concerns as to the ability of examinations of short-term behavior to diagnose long-term response (a situation relied on by both Spencer, and Dessler and Sherwood). Spencer concludes that “unless you know both [vapor] and [cloud] feedbacks, you don’t know the sensitivity of the climate system, and so you don’t know how much global warming there will be in the future.” Virtually the opposite sense of things than that put forth by Dessler and Sherwood.

Obviously, the final arbiter will be the earth’s climate itself, as it is the true integrator of all forces imparted upon it. But, still today, we struggle to even accurately observe the finer details of how it is responding to the changes to which it is being continually subjected. And we are further still from understanding the processes involved sufficiently to produce unassailable models of the climate’s behavior, much less future projections of its response response (as evidenced by the recent slowdown in the rate of global temperature increase despite ever-growing greenhouse gas emissions). And so the process of science continues…

[Breaking news: A new peer-reviewed paper has just been published in the journal Theoretical and Applied Climatology, by researchers Garth Paltridge and colleagues which finds that the increase in atmospheric water vapor that, according to Dessler and Sherwood most definitely accompanies the increase in temperature, is absent in one of the primary databases used to study climate behavior—the so-called NCEP reanalysis data. The authors admit that perhaps there are errors contained in this dataset which may explain their results, but as it stands now (and unless some errors are identified) the reanalysis data supports a negative water vapor feedback. Paltridge et al. conclude:

Negative trends in [water vapor] as found in the NCEP data would imply that long-term water vapor feedback is negative—that it would reduce rather than amplify the response of the climate system to external forcing such as that from increasing atmospheric CO2. In this context, it is important to establish what (if any) aspects of the observed trends survive detailed examination of the impact of past changes of radiosonde instrumentation and protocol within the various international networks.

Lead author Garth Paltridge describes the trials and tribulations of trying to get this result (which runs contrary to climate model expectations) published in an enlightening article over at ClimateAudit, including how at least one of the Dessler and Sherwood authors knew of Paltridge’s soon-to-be-published results and yet made no mention of it in their Science piece. Hmmm, so much for an open discussion of the science on this issue.]

References:

Dessler, A.E., and S. C. Sherwood, 2009. A matter of humidity. Science, 323, 1020-1021.

Dessler, A.E., et al., 2008. Water-vapor climate feedback inferred from climate fluctuations, 2003-2008. Geophysical Research Letters, 35, L20704.

Spencer, R., and W.D. Braswell. 2008. Potential biases in feedback diagnosis from observations data: a simple model demonstration. Journal of Climate, 21, 5624-5628.