Big Stimulus
Arnold Kling does not like the case for a big fiscal stimulus that Obama is advocating ($750 billion).
1. It is harder to spend larger amounts quickly and cost-effectively.
This strikes me as being true even with small amounts of money and when government is involved. After all, the bridge to nowhere in Alaska wasn’t that much money when you look at it from the perspective of the U.S. economy, the U.S. federal budget, or probably even the Alaskan economy. But as the amount being spent increases I’m sure the amount that is spent on firvolous and wasteful programs increases as well.
2. There is a greater risk that we will run into a “sudden stop,” in which foreign investors are no longer willing to fund our deficits (this is Buiter’s main worry).
In other words, Obama’s plans for spending hundreds of billions more depends on the ability to borrow money from both the U.S. and foreigners. If the latter are unwilling or unable to lend the kind of money Obama is talking about it just isn’t going to happen.
3. There is a risk that the intergenerational transfer imposed by the stimulus (from our children to ourselves) is excessive, particularly in the context of other intergenerational transfers of the same sort.
In other words, our children and their children will be left with the bill for bailing ourselves out of this mess. In effect, we are robbing…errr borrowing from them as well in that that money we borrow will have to be paid back with higher future taxes. But this isn’t the only bill we are saddling these generations with. Medicare’s numbers make the current fiscal stimulus package Obama is talking about look like pennies.
4. There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure.
There are arguments about the effectiveness of fiscal policy to stimulate the economy. If the side that says there is little or no stimulus irrespective of the amount spent, then we are just spinning our wheels and possibly delaying recovery.
5. There is a risk that much of the spending will kick in after a recovery is underway.
Fiscal policy is at best an extremely unwieldy policy tool. And if it does kick in after the recovery is underway it could result in the following:
- The economy grows quite fast.
- Inflation starts to go up.
- The Fed raises interest rates to clamp down on inflation.
- Another recession as the Fed clamps down too much.
Neat, huh?
6. The government’s capacity to deal with an emergency, such as a major natural disaster or a foreign attack, will be limited, because its credit worthiness will be damaged.
This is related to point 2 above. If there is a limit to how much foreigners are willing to lend to the U.S. government and even if we don’t hit that limit, if another emergency comes along we might hit it then.
7. There is a risk that government will absorb a permanently higher share of GDP. Policymakers will be reluctant to cut public spending for fear of causing a downturn. Moreover, it will be difficult politically to cut public sending.
In light of my post here, I’d say the probability of this last one occuring is…mmmm…1.
Kling’s last point paragraph is also good, so I’m going to post it here too,
Overall, on close examination, the case for the large fiscal stimulus, like the case for the Paulson rescue plan, is really quite weak. However, the same elite groupthink that made passage of the Paulson plan inevitable probably also makes the passage of the stimulus package inevitable. Opponents of the stimulus plan will be mocked and vilified in the media, even though they may very well have logic on their side.
I have to agree with this too. People are scared and they want someone to tell them it will be okay. Obama is more than willing to do that…after scaring them that the economy is in grave danger of imploding, exploding, both or something equally as bad.
As I pointed out in my recent post, Obama’s smartest political move is to swing for the fence. I think that the $750 billion is just the tip of the iceberg. Note that he’s already being criticized for timidity from some quarters.
I think the Chinese have reasons to want it both ways. They want secure investments in Treasuries and a strong export economy.
They’ll be upset if the balance is missed, as will we all.
Can someone explain for me in a “Global Economics for Dummies” fashion, if everybody in this “global economy” is in bad shape, and the global GDP is so enormous….how can any one country think that an influx of cash and projects will turn the entire thing around??. When gas prices were $3+/gal and the usual catcalls for dumping the strategic reserves onto the market to alleviate the squeeze at the pump came up I read a few articles saying this is a drop in the bucket and would have little to no effect. If that’s the case, like with the oil market, how is $1T going to do anything??.
That’s a good question markm. I wrote this mornging “That TARP money is unlikely to be inflationary – if it is disappearing faster than it is being applied:”
That was in response to Downgrades Outpacing TARP Funding: Analyst.
C’mon, Verdon. Don’t you realize that the world is about to end, and that this is the predicate FOR THE GOVERNMENT TO DO ANYTHING….ABSOLUTELY ANYTHING?? Especially if you are The One. (snicker)
I have in front of me a document showing the US unemployment rate post war (1948) until today. That’s 60 years of history. Seems a decent sample.
Today we have breached the 7% mark, and are told that the world as we know it is about to end, (about to end !!) and that any and all government action/taxation/spending/regulation etc etc is warranted. Otherwise, we will all die a slow agonizing death I guess.
Well, according to this document, the unemployment rate has been north of 7% in 13 of the last 60 years, or 22% of the time. This includes the Presidencies of Ford, Carter, Reagan, Bush I, Clinton, and now Bush II. And if 7% is guaranteed agonizing economic death territory, well then, surely 6+ percent is “near agonizing death territory.” So add the administrations of Truman, Eisenhower and Kennedy, and now we are at 20 of 60 years, or 33% of the time. Hell, that’s every President except Nixon and Johnson………and what do you know: EVERYBODY HATES THEM SOB’s !!!!!
Listen people: During the working lives of the vast majority of posters on this site, have any of you been worried about immediate vaporization into the (economic) fires of hell?? And yet, now Obama has carte blanche to do whatever because of a few months of financial stress?????
The World is Ending?????? Under conditions same as 33% of the last 60 years??? Please, get a grip.
On unemployment, leftist apologists like to peddle the notion that the rate is understated today, because “frustrated workers” don’t count anymore… (you see, all “frustrated” workers became “frustrated” on January 20, 2001, when Bush was sworn in [snicker])
But they conveniently forget that the rate tells us only about corporate payrolls…….under-reporting the self employed, a rapidly growing portion of the work force — and a conveniently forgotten stat.
And as I have pointed out, I – your’s truly – DREW, am officially accounted for as unemployed by govt rules. That’s right, an unemployed, desperate soul. Yet I am in fact gainfully employed, and in the upper 1% of taxpayers. Whatup, lefties??? This numbers game is silly.
Obama is playing the classic demagogue’s game: play on the ignorance and fears of Main Stream Americans (and dopey internet site commentators)….with a compliant media riding shotgun. Period. I have a term for these guys, but this site won’t allow it. Think “blatantly dishonest” and rhymes with rock and suckers.
So show me an adversarial voice, (Verdon) and I will show you a Patriot. Show me the supplicants and I will show you the intellectually and morally weak (not to mention the flat damned dishonest) ……and also the policy road to hell.
Please keep up the posting, Verdon.
Drew, Obama is not president (yet) and yet everything you fear in your post has already happened under the Bush administration.
I hope you can step back and see how weirdly partisan that post is. It would be different if Bush were trying plan A, and Obama were about to change courses completely to plan B. He’s not really. This is more continuation.
It would be very different if Bush were trying plan A, and it were working.
Is this stuff really intended to work or to make people feel better? If it is just to make people feel better that is sad. I often wonder if we, as a nation, have become too soft. I read these articles about running out of money to get a tv converter coupon. Do we really need to subsidize tv viewing? Don’t people watch too much tv already? If you can’t afford a tv converter then perhaps that is a good thing – you now have more time to improve yourself. I didn’t have a tv throughout college – perhaps I should have applied for federal assistance.
7% unemployment, historically, is not that bad – my understanding is that we can never get below 5% due to the number of people who can’t work for medical reasons or just plain do not want to – the unemployment rate for most western european countries is double that if not more. I just don’t understand why we constantly turn toward the gov’t for assistance as soon as the going gets tough.
I think you’re undervaluing confidence-building as a factor in the economy. Try as we might human beings will never become rational optimizers and as a consequence approaches that make the assumption that human beings are rational optimizers can only go so far.
The stock market took a downtick when George Bush became president. That wasn’t partisanship nor did it have anything do to with his policies since none of them had been put into effect yet. He was just a poorer cheerleader than Bill Clinton was.
Feel-good measures won’t affect the economy’s fundamentals but they will change how the country looks at those fundamentals.
I think there’s a good argument to be made on a cost-benefit basis about the stimulus proposals being bandied about. I genuinely wonder whether they’ll do more than the passage of time will.
But I think we should recognize that some kind of government action is politically necessary, may even have some psychological benefit, and we should focus our attentions on how to maximimze upside gain and minimize downside risk rather than fighting the idea of government action per se.
Drew,
I would imagine that a large number of those are just as scared of the forecasted doom and gloom as the average American. Economics is not a clear science, you can’t show that one theory is right and another is wrong like you can with the physical sciences. I don’t consider it intellectual weakness to not trust theories about what our economy will or won’t do.
Economics is more like religion, most people will trust the theory that produced the best outcome when followed, disregarding what variables actually contributed to the outcome. It’s like a lucky charm, if you have good luck when you wear it, that means it works, right?
Someone impressed me by saying that economics was politics, with added mathematics.
That may not be always true but crises like this bring the politics to the fore.
As I’ve said before I think that economics is better understood as a descriptive science like anthropology or political science than as a predictive science like physics.
On the other hand, we have suffered the worst yearly job losses since the end of ww2. Then there is the fact that different economists interpret job data differently:
http://www.guardian.co.uk/business/2009/jan/09/us-unemployment-payrolls
It is a bit like telling someone who’s brakes have failed while driving down a mountain that they should not worry too much because they have not crashed. Yet.
This comment is a bit of a retread, but I think it applies here:
[…] the thing that is probably unfair is that quiet and unassuming economists now experience a ‘backlash’ directed the other extreme, the confident and pontificating.
I’ve amused myself with a little series at my blog, as I saw this forming out there. I first wrote On the Failure of Economics, in which I tried to be positive:
Since then I’ve blogged about a half-dozen ‘backlash’ stories as they caught my eye. This is something happening out there, independent of me.
And it’s something I don’t really understand, or haven’t really settled in my mind. I do value economics, but I also see that economics goes off the rails at some point. I need to think about that, as this plays out, and build an integrated view.
Is it just Taleb and the whole uncertainty school that have the answer? Is economics good when it analyzes a complex world, but bad as soon as it reduces it, simplifies it, models it, and offers us projections based on those simplified models?
Maybe.</p
Pretty simple really. A trillion dollars pumped into a $13 trillion US economy could have a pretty damn big effect for the US, especially factoring a standard multiplier of 1.5. But oil is fungible across the globe. Unloading, say, 350 million barrels, half the strategic petroleum reserve, onto a global market that which consumes that much every 3 days would have hardly any effect at all.
That’s a phony statistic, anjin-san. In 1945 we had roughly 120 million people in the country. Now we have more than 300 million. Additionally, the employment rate is a lot higher than it was then (women in the workforce). They’re counting absolute numbers rather than percentages. It’s alarmist and misleading.
I’m not unsympathetic with those who’ve lost their jobs over the last year—far from it. But I think we should deal with the problems we actually have rather than working ourselves up to a frenzy and taking imprudent actions.
Dave, that almost sounds like you are falling with those above who view the (un)employment stats as static. I think it is the momentum that is worrying people.
Dave,
What would you consider to be a fair statistic, allowing for population growth and changes in the nature of the workforce?
We also have to keep in mind that a growing population demands a greater rate of job creation than was necessary just to stay even 60 years ago.
That’s untrue, anjin-san. Assuming the rate of population increase is the same (it isn’t), it requires the same rate but a greater number.
It would be fair if they were presenting unemployment rate rather than numbers of unemployed. Or unemployed per 100,000.
But being a global economy I would guess that even if the stimulation worked here in the US it would be temporary as global trade would still be down. We may get a positive bump but being the worlds economies are dovetailed as they are I still don’t see how this is the fix.
This becomes a very interesting question. One could also argue that the modern economy requires a two-income household for folks with families, whereas in earlier generations, a working man could generally support his family. Let’s also figure in how the divorce rate has affected the equation. A single mother usually has to work. Divorce was not all that big of an issue in the post-war years.
The core question is how bad is todays unemployment trend when compared to historic levels? And are we prepared to give up economic progress made over decades?
When I started working in the mid 70s in the restaurant business, we had guys with the education and intelligence to be college professors or successful corporate career types making salads because there simply were not enough good jobs to go around. I don’t really want to go back to those days.
odo –
My post was intentionally hyperbolic – as many – to raise attention and debate.
You are incorrect, I am not partisan. In fact, I call out partisans most of the time in my posts.
Here is reality: the economy has performed fabulously for about 25 years – most of my working lifetime – under Reagan, two Bush’s and one Clinton. Why? Low inflation, a relatively low tax environment, and a low trade barrier and entrepreneurial friendly environment. In short: globalism.
Credits? Carter for appointing Volker. Reagan for letting Volker finish the inflation mission, and for avoiding protectionism, forcing corporate America to get competitive. Bush I for maintaining the status quo. Clinton for passing NAFTA and reducing the cap gains tax rate. Bush II for reducing the OI tax rates after the economic shocks.
Now. Does that sound partisan?
Here is my issue. The primary jeopardy to the 25+ years of economic prosperity – GDP growth, equity growth and employment growth – that you and I have experienced in our lifetimes is BS populist crap: kill the rich with taxes, regulate the entrepreneurial economy, replace private market with govt spending.
My concern? Obama says: Higher taxes on the productive. Govt is the favored spending entity. Govt regulate more. That worries me.
It is not the subject of this thread. But regulatory failure re: housing and the current crisis is a Democrat policy failure/issue period.. full stop. See Clinton CRA pressures and Glass Steagal/Barney Frank/Chris Dodd regulatory frauds etc…..
I know this is not the way it is portrayed in the press. I know it is not the popular view. But it is true. And if you want to have at it, then let’s go, point by point.
But if you REALLY CARE. If you really care about those who have been hurt. You set aside politics. You deal with reality. These bastards like Barney Frank delivered this economic mess and are taking no responsibility whatsoever. Its just easy to blame Bush because he’s here right now and an unpopular President. But these guys are filthy mother effing bastards. It is the Average Joe who is being hurt by their actions. And that is who I care about. Barney Frank? Chris Dodd? Just assholes……..who don’t give a damn about the Average Joe. Just their political objectives.
That’s reality. Its sad. But that’s reality.
If you want to set me straight………let’s go.
As a follow on –
I agree with odo, it is the (unemployment)momentum that is creating much of the consternation. (I said my post was hyperbolic.)
But take your partisan hats off, people. Do LEADERS talk doom?? What in the world is Obama doing people?
Of course, he is playing politics. If the economy continues down………..its “I told you so, and Bush’s fault, and you should have passed my spending bill.” If it improves….”I’m the savior.” Heads I win, tails you lose. Duh.
The politics is easy to figure out. But I thought he was “a different bread, new politics an such.” Further, by talking down the economy, what does he say to those who lose their jobs as he plays this self serving political game???? (Self serving prick if you ask me.)
I repeat: Are any of you commentators really interested in policy as it affects the Average Joe……….or just in winning political points for your faves?
Obama has shown me no indication that he is anything more than a garden variety political opportunist.
I’m sorry Joe, good luck.
Being an average Joe is the reason I ask the questions I have on the matter.
Hey Drew. Every spleen deserves a venting now and then.
Somber note, from the cautious Tyler Cowen: Eight reasons why we are in a depression
No doubt both parties played their part, but I never seem to hear you calling for Phil Graham or Rick Davis to take responsibility, which does make you sound a bit partisan.
FWIW, I don’t think any politicians deserve the blame (or no more than Americans as a whole). We went debt crazy, in our personal lives, in some of our businesses, and with our government.
To me it is not a coincidence that personal debt, wall street leverage, and national dept all took the same path. Saving became a vice.
odo –
My spleen is now clean…….any advice for my liver??
;->
I found this to be intellectually light: Quick hits –
Eight reasons why we are in a depression
1. We have zombie banks. [What? We have banks with compromised balance sheets…behaving rationally.]
2. There is considerable regulatory uncertainty in banking and finance. [Well, duh, and our confidence in the regulators is……..]
3. There is a negative wealth effect from lower home and asset prices. [The prime problem. I have posted as such many times. And I ask, what in the currently proposed policy mix would alleviate this??]
4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption. [See 3.]
5. Some of the automakers are finally meeting their end, or would meet their end without government aid. [Bullshit.]
6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone. [Bush and Paulson? I must be on Vicadin. Barack “The World is Ending Press Conferences Like a Gattling Gun” Obama is not spooking people??.]
7. International factors are strongly negative. [Indeed.]
8. There is a decline in aggregate demand, resulting from some mix of 1-7. [He must have meant ‘confidence.’ Anyone inspiring confidence?]
Consider my criticism of any Republican re: the mortgage mess to now be official.
That makes one of us intellectually honest. And one of us criticizing about 5% of the problem.
Interesting observations. Back in the the 1950s I wonder how much imputed income a wife/mother contributed to the household? That is she would cook, clean, and act as a baby sitter/day care service. That in and of itself has value although I wonder how much of it is was something women didn’t want to do. In other words, is the two income household of today a result of the push by women to enter the workforce? Once the family gets to enjoy the dual income giving it up is hard thus creating the “necessity”?
Historically it isn’t that bad. It isn’t good, but it isn’t as bad as many politicians and pundits are making it out to be.
We aren’t going to have to give up economic progress just live with reduced growth for a period of time. As Drew has pointed out this is not armaggeddon…I advise you stop reading Krugman.
Ahh, the horrible 1970s. Let me see, average unemployment rate of 6.2% with a max of 9%, a min of 3.2% and and average unemployment rate of 5.4% in the first half of the decade and 7.1% in the latter half.
Of course, things changed when the tax code was simplified, tax rates lowered, we moved away from Keynesian models in terms of the unemployment-inflation trade off, and inflation was brought under control after a sharp severe recession.
But to get out of the mess we are in we need to go back to the 1970’s in terms of policy. Okay.
Drew,
Not only that, but also uncertainty in terms of bailouts. Banks don’t know what to do. Do we act now and make painful decisions, cuts, write downs, or do we wait and see if the government is going to throw more money out there that we can get our hands on and put off the day of reckoning? I’d say this has to be at least a factor in the seizing up of credit markets…yet many of the commenters and writers here have argued precisely the opposite.
If home prices are over-priced or were over priced then we shouldn’t fix this. That was part of the problem, IMO.
Absolutely and why is this? This is exactly what the Higgsian model of government expansion predicts. During a crisis the politicians want to use it to scare everyone into getting more power and a larger government. After the crisis passes the government does not return to its previous size…a ratchet effect.
The “two income trap” is encapsulated thus: With one earner you have the chance of one lay-off and financial crisis. If you have two incomes, while living on one, you halve your risk. On the other hand, if you expand your consumption (base your mortgage payment) to fully use two incomes, you’ve placed yourself at greater risk.
Now if one or the other wage earner loses income, a household may enter crisis.
Steve V –
2. There is considerable regulatory uncertainty in banking and finance. [Well, duh, and our confidence in the regulators is……..]
And further, confidence in the pols to support those regulators?? All anyone has to do is watch those CSPAN tapes of hearings with pol after pol, including my least fave – Barney – just viciously castigating the Fannie regulators while the regulators tried to call BS on what was going on. Barney, Maxine Waters et al basically called the regulators a bunch of racists. This does not build confidence.
“Not only that, but also uncertainty in terms of bailouts. Banks don’t know what to do. Do we act now and make painful decisions, cuts, write downs, or do we wait and see if the government is going to throw more money out there that we can get our hands on and put off the day of reckoning? I’d say this has to be at least a factor in the seizing up of credit markets…yet many of the commenters and writers here have argued precisely the opposite.”
Ah yes. When you have been a fiduciary, investing in, owning, sitting on company Boards – and after you have had a lawyer or two wave the fiduciary responsibility card in your face a few times, when you have been sued by corporate ambulance chasers – you get sober really quickly as to the tough, iffey area business decisions, and potential for legal second guessers to feast on all decisions you make. It has, as they say, “a dampening effect.”
3. There is a negative wealth effect from lower home and asset prices. [The prime problem. I have posted as such many times. And I ask, what in the currently proposed policy mix would alleviate this??]
“If home prices are over-priced or were over priced then we shouldn’t fix this. That was part of the problem, IMO.”
Oh, I agree. It just means that the recovery will be of the traditional kind: a long, hard grind of investment, risk taking, increasing productivity, increasing wealth etc, etc. No quick fix based upon an asset bubble to lean on. Obama is not giving me vibes he understands what this really takes. Politically easier and expedient to just promise handouts of free stuff, tax the rich etc. But now, perhaps more than ever in the last 25 years, we need to encourage entrepreneurial behavior. “Spread the wealth” is a populist, class warfare concept, not an entrepreneurial one. And it is not productive.
6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone. [Bush and Paulson? I must be on Vicadin. Barack “The World is Ending Press Conferences Like a Gatling Gun” Obama is not spooking people??.]
“Absolutely………..”
I guess this is where we hug each other. But I have serious concerns that this crass political approach Obama is taking will result in a significant “ratchet up” of govt control. As always, the regulators will be no match for the smart private enterprise guys, who will figure it all out and prosper no matter what. Same as it ever was. But the Little Guy? Good F’g Luck. (Further, I have been critical of voters who supported Obama who don’t have a clue what he would really do once in office; they have no track record to rely upon, or real campaign testing. Obama got a campaign pass. And these voters just guessed. Initial signs are not good. Some appointments good. Some not so much. But this fear mongering is just ludicrous, and absent of an ounce of leadership. I hope I am flat damned wrong. And if so, I’ll gladly take the arrows from commentators on the board…………….but I’m not too worried right now.)
“The “two income trap” is encapsulated thus:”
A fair enough economic statement, I think. But watch your back, odo, all those women Gloria liberated from the servitude of under-maximized lives as simpleton household managers apparently didn’t think to read the memo on not over-extending themselves.
They might not be happy, and they might believe in the Second Amendment.
Just looking out for your health.