A Flea in the Fur of the Beast

“Death, fire, and burglary make all men equals.” —Dickens

Tag: stimulus

Looking back at the stimulus and economic policy in severe recessions

by pdxblake

Mark Thoma points me to an op-ed by Christina Romer, who was Obama’s head of the the Council of Economic Advisors in the first part of the administration,writing on the economic stimulus.  Her perspective offers a few very insightful counter-arguments for why the stimulus is perceived by many to have ‘failed’.  It also tackles head-on what Henry Blodget calls ‘the chart that will get Obama fired’:

The chart above is from the Council of Economic Advisors’ projections of the job impact of the stimulus compared with their estimates for what would happen in the absence of the stimulus.  If projections were always accurate, this chart would be enough to raise questions about the effectiveness of the stimulus.  But, projections are rarely always perfect descriptions of the future, and Mrs. Romer explains the divergence between reality and the projections:

When we were designing it, most forecasters estimated that the United States would lose around six million jobs… Compared with this baseline, creating three million jobs would have filled roughly half of the employment hole. As it turned out,… the correct no-stimulus baseline was a total employment fall of nearly 12 million. With a loss that big, creating three million jobs was helpful, but not nearly enough.

If you recreated the forecasts with twice the job losses in the ‘no stimulus’ projections, and had the actual recovery bill waiting to be analyzed, you would come to the conclusion “we’re going to need a bigger boat”.  And when the stimulus was proposed, it was scaled back for political reasons.  The Republicans and some Democrats would have balked at a stimulus of the size needed, which would have certainly exceeded $1 trillion and possibly over $1.5 trillion.  Paul Krugman, for instance, criticized the size (and heavy reliance on tax cuts) in the proposed stimulus plan as not big enough before Obama was even inaugurated.

The negative campaign against the stimulus being pushed by conservatives, which not surprisingly is not entirely based on the truth, confirms something that Krugman wrote about today on his blog about whether the fact that economic growth coming out of a financial crisis is typically slower than a ‘garden variety’ recession.  He highlighted the difference between saying there is usually slow growth following a financial crisis and saying that it is necessary to have slow growth after a financial crisis.

There are policies that could be used to effectively fight a recession following a financial crisis, but these policies are not usually followed.  Why?  Krugman explains:

“Historically, however, countries tend not to do these things [effective policies to fight the effects of a financial crisis], or not to do them on a sufficient scale. Why? Politics. Intellectual confusion. Inertia. Misplaced fears.”

The US is an example of exactly this failing, and for multiple reasons.  There was the politics, for sure.  Republicans today have a built in and exaggerated fear of the ‘gummiment’ doing anything (particularly with a Democratic president).  There was intellectual confusion for sure.  Many economist stuck their head in the sand, or were just unaware, of the vast literature and policy prescriptions for dealing with a severe recession following a financial crisis that were learned in the Great Depression.  That was ‘Keynesian’ and in their minds, it had been disproved and replaced by ‘micro-foundations’ and the Real Business Cycle theory (the first is useful in some situations, where macroeconomic theory is rooted in the idea of how individuals respond to different incentives; the second is just a crock of shit).

But even without these other factors, there was a failure in forecasting the depth of the recession (or the acknowledgement that other economists like Paul Krugman might be making a good point when he criticized the stimulus as being too small in January 2009).   That forecasting error made the stimulus look appropriately sized (though some would disagree with this point as well).  The recession turned out to be much more severe than the models forecasted, which should have led policymakers to return to the well for some more stimulus.  But by that time, the Republicans had locked the gates of Congress from doing anything that might help the Democrats in 2010 or Obama in 2012 and they had effectively decided that a worse economy was politically better for them, and screw you if you didn’t like that.

Obama, the job creator

by pdxblake

It is tiring to hear over and over the idea that Obama has no plan to create jobs and he was distracted by the Affordable Care Act from finding ways to increase employment.  The Affordable Care Act has its own benefits, but most are longer-term (through, for example, lower spending on healthcare by Medicare, which will reduce future deficits, something Republicans *ahem* used to (pretend to) care about).  But it should have been supported widely to deal with the now-minor problem of structural problems in the economy that “serious” people care about (fact check: the unemployment problem is cyclical, not structural).

Universal healthcare will make it cheaper for people to get healthcare, and should increase the willingness of people to leave their jobs to venture out and become entrepreneurs (ahem, job creators).  As someone who took this course (and as anyone else that has to go to the individual healthcare market) it reminds one of the blessing of being young and healthy.  People who do not fall into that category will find an even worse situation for healthcare if they leave a job with healthcare to start a new company where they are thrown into the individual health care market.  Fixing that problem (which the Affordable Care Act will do in many ways) will incentivize people to become ‘

Back to the main issue of Obama’s policies on boosting employment in the near-term.  Before I got distracted by the longer-term job creator narrative of the Affordable Care Act, I was going to mention the Obama Stimulus bill (which was too small).  Even though it was insufficient for the problem that faced the country when Obama took the oath of office, it did do good things to create jobs.  There have been many studies to determine the effectiveness (which Ezra Klein helpfully summarized, both the majority which found it created jobs and the minority which found it had little effect compared to the ‘baseline).

One of the studies Ezra Klein reviewed was from the non-partisan Congressional Budget Office.  I quote from his description of the study because I tend to trust the CBO because it is less influenced by the politics of the situation than other sources like the Office of Management and Budget, which is part of the White House.  The CBO is usually less inclined to put a partisan swing on the numbers (although in budget analyses is does allow for ‘magic asterisks’).  Two economists from the CBO who reviewed the effect of the stimulus found (from Ezra Klein’s summary):

Through the first quarter of 2011, the stimulus created between 1.6 million and 4.6 million jobs, increased real GDP by between 1.1 and 3.1 percent, and reduced unemployment by between 0.6 and 1.8 percentage points.
That’s something and much bigger than nothing (or even subtracting jobs, which the Republicans have implausibly charged).  The big problem with measurement is that the ‘jobs created’ are measured compared to the baseline (of what would have happened in the absence of the policy).  This problem is more apparent looking into the future (which the Republicans like to try and capitalize by saying that Obama said unemployment would never get above 8.8%).  Analysis of historical data is easier, but still will not ever come to a single point estimate, which is why I explained why I think the CBO is a reasonable source for analysis on this.Obama’s focus on job creation did not end with the Stimulus.  In September 2011, he proposed the American Jobs Act (pdf) using similar language as he has used recently on the campaign trail:

The American people understand that the economic crisis and the deep recession were not created overnight and will not be solved overnight. The economic security of the middle class has been under attack for decades. That is why I believe we need to do more than just recover from this economic crisis — we need to rebuild the economy the American way, based on balance, fairness, and the same set of rules for everyone from Wall Street to Main Street. We can work together to create the jobs of the future by helping small business entrepreneurs, by investing in education, and by making things the world buys.

It was of course dead-on-arrival to the Republican-controlled den of iniquity House.  However, it was estimated by Macroeconomic Advisors to “Raise nonfarm establishment employment by 1.3 million by the end of 2012 and 0.8 million by the end of 2013, relative to the baseline.”  Moody’s Analytics’ Chief Economist Mark Zandi estimated “The plan would add 2 percentage points to GDP growth next year, add 1.9 million jobs, and cut the unemployment rate by a percentage point.”

So, the next time you hear someone say, “Obama hasn’t created any jobs, he only focused on his job-killing socializing of healthcare” you can say, “no, he didn’t” and have some facts to back it up.

Shh, Don’t Admit Government Spending Can Be Stimulative

by pdxblake

Dan Mitchell from the Cato Institute went through the Republican politicians’ statements (so I don’t have to) that lending a sympathetic tone to Keynesianism which its anathema to people like Mitchell.

Anyway, here’s his list of the comments that got him hot and bothered enough to go search for some anti-Keynesian memes to post on his blog:

The problem with what the politicians are saying is not that it’s wrong, it’s that it’s right, but these Republicans are falling into the trap that Paul Krugman describes as making economics a morality play.

What that means in the context of these politicians statements is that they may be right (I have not checked the precise estimates they quote), but it is politically difficult for people like Mitchell to accept these ideas because it suggests that *gasp* government spending might stimulate the economy which leads to all kinds of bad, liberal places.

The bottom line is that these Republicans might like defense spending (especially in their districts) and may hate all other government spending, but they cannot just claim that one is stimulative and the other is not.

At the same time, I can’t claim that a lot of defense is not stimulative just because I don’t prefer the government increasing defense spending more but then claim that stimulus spent on roads and bridges or schools is stimulative.

There may be different degrees to which different types of government spending are stimulative, but I can’t choose and say that only the type of government spending that I like is stimulative and everything else is totally ineffective.

This leads Mitchell to suggest the Republicans change their approach, “I would have no objection to these lawmakers arguing against a sequester if they based their concerns on national security” and he adds a few other explanations that don’t validate government spending doing anything positive for the economy.

And it also shows how much the Cato Institute relies on deception rather than intelligent policy and suggests Republicans make up new excuses for why they oppose the defense cuts in the sequester to avoid recognizing that increasing government spending can be stimulative for the economy.

Hiding in Plain Sight

by evanmcmurry

After Romney spokesman’s Etch-A-Sketch comment, now this, from Greg Sargeant: “Glenn Kessler takes apart Darrell Issa’s claim the other day that the Obama administration deliberately delayed its stimulus spending in order to aid his reelection. Putting aside the absurdity of the charge, isn’t Issa basically conceding he thinks stimulus spending is effective?”

Economics, by Mitt Romney

by evanmcmurry

So we’re clear: bailouts are just fine when initiated by Republican presidents, on days when that President’s brother endorses you. That’s called economics.