Aug 18 2009, 3:16PM
Honesty about the Stimulus
On August 6, Christina Romer, the chairman of the President's Council of Economic Advisers, gave a talk entitled "So, Is It Working? An Assessment of the American Recovery and Reinvestment Act at the Five-Month Mark." The reference of course is to the $787 billion stimulus that Congress, at the urging of the Administration, enacted last February.
Romer answers the question in her title: "Absolutely." And despite the reference to "five months" in the subtitle, her focus is on the second quarter of 2009 (April, May, and June) and her claim is that the stimulus had a dramatic effect on output and employment during that quarter. I do not think her analysis is responsible, and I am concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples. (This is one of the themes of my book Public Intellectuals: A Study of Decline [2001])--and Krugman was one of my examples of the phenomenon.)
Let me make clear at the outset that I support the stimulus, though I wish it had been better designed. I support it for two reasons. The first is that, given the state of panic of the economy last winter, and the limited efficacy of the measures already taken to arrest the economic plunge--the expansion of the money supply and the bailouts of the banks and the two failing automobile manufacturers (Chrysler and GM)--the government had to make a dramatic commitment to try all means of arresting the plunge. It could not just say, "We've tried everything we think might work; it's not working; so we'll just have to tough it out." That would have been destructive of business and consumer confidence, and would have accelerated the downward spiral that many thought could have brought the economy to the depths it reached in the 1930s depression.
Second, there is a pretty good theoretical case, and some empirical backing, for deficit spending on public works as a means of combating a depression. Output (GDP) is the sum of personal consumption expenditures, investment (including savings), and government expenditures. When personal consumption expenditures and investment decline, so that (if government expenditures are constant or falling) total output declines, which in turn results in layoffs, which further reduce income and therefore output, thus triggering a downward spiral, an increase in government expenditures can arrest or at least slow the downward spiral by replacing some of the decline in private consumption and investment.
Of course it's necessary to consider the impact of those increased expenditures, and the debt burden they impose on the government, on private consumption and investment. The impact on consumption is likely to be positive: if government "buys" new highways and thus employment in construction rises, the resulting increase in total wages will translate into an increase in consumption expenditures, though some of the wages will be saved rather than spent. The impact of the public-works program on investment is more complicated. But suppose, plausibly in a serious economic downturn such as the one that we're in at present (and that was even more serious back when the stimulus bill was enacted), that a great deal of investment is in the form of passive savings, such as demand deposits and Treasury securities, because people and companies are anxious about their economic prospects, and they want safe savings, rather than savings that would be at risk because invested in entrepreneurial projects. (In other words, "liquidity preference" has risen.) These passive savings are economically inert--even bank deposits, when banks are reluctant to lend, as they are, and demand for loans is down, as it is, so that, for both reasons, increased deposits do not translate into significantly increased lending to businessmen. By selling Treasury securities to finance a stimulus program, the government transforms inert private savings into expenditures on projects that result in more jobs and so higher incomes and consumption. It can borrow the passive savings of fearful hoarders because there is no risk of the government's defaulting.
Now unfortunately the stimulus was poorly designed and has been (so far as an outside can judge) lazily implemented. Only about a third of the stimulus funds is for public works. Two-thirds are for tax credits and other benefits (including the popular "cash for clunkers" program) and for state governments. The problem with the two-thirds is that there is no guaranty that transfer payments will be put to productive use; they may be saved, directly or indirectly. Suppose a state uses the money for tax relief; then it is in effect putting money in people's pockets, and the recipients may decide to save, rather than spend, the bulk of what they receive. The personal savings rate has been rising, and additional cash received from the stimulus program may go largely to increase personal savings beyond what they would otherwise be. Or, in the case of the "cash for clunkers" program, the major effect may be that people buy cars a little sooner than they otherwise would, in which event auto sales may be depressed a few months from now; or they buy cars in lieu of other products, and the increase in auto sales is offset by a decrease in other sales.
In contrast, when the government pays a road contractor to build or repair a road, we know that the money is going to be spent to hire workers and buy materials, and so employment will rise.
Conservative economists argue that the effects of the stimulus in increasing output and employment will be undone by the fears of businessmen and consumers concerning the addition to the national debt of $787 billion in deficit spending. Those fears, these economists argue, will cause businessmen and consumers to hoard, knowing that their taxes will have to rise in the future (and their wealth therefore be lower--hence the need for greater savings now, so that they can use their savings to maintain their standard of living when the higher taxes take effect) to pay back the $787 billiion. Most economists, however, believe that it is unrealistic to suppose that people have enough information about the future to adjust their current behavior to expectations of higher taxes, inflation, devaluation, or other possible consequences of an increase in the national debt. There is too much uncertainty.
The point is not that people are irrational, but that they just don't have the information that would enable them to decide what adjustment in savings and consumption they should make today to optimize their economic situation if and when the national debt has to be paid down through higher taxes, inflation, or other measuires.
But Romer actually gives some credence to the unrealistic picture of the far-sighted consumer or businessman by arguing that recipients of tax credits authorized by the stimulus bill will spend rather than save the tax-credit money because they will assume that the credits are permanent. (The significance of this assumption is that people are more likely to spend a tax reduction that they think is permanent than a temporary reduction, because it would be a bother to adjust their spending patterns temporarily only to have to change them back when the surge of money--what economists call "transitory income"--runs out.) They will assume the credits will be permanent, she says, because the Obama Administration is committed to middle-class tax cuts. In fact no one knows whether the tax credits, enacted as part of a temporary measure--the stimulus--will be permanent; and it is extremely doubtful that many people are acting on the expectation that they will be.
Romer argues in her talk that by the end of the second quarter of this year, $100 billion of stimulus money had been spent. That is a suspiciously round number, and it is unclear how it was arrived at; but let us assume it is accurate. She then argues that this small expenditure--about two-thirds of one percent of the Gross Domestic Product--is responsible for the fact that the decline in GDP fell (on an annualized basis) from 6.2 percent in the first quarter of the year to 1 percent in the second quarter (though the latter figure is likely to be readjusted upwards).
This assertion is groundless. No one has the faintest idea what effect the stimulus has had. My guess is that it has had some positive effect, because of its confidence-enhancing character that I mentiioned earlier and because some of the $100 billiion--though no one seems to know how much--has been spent rather than saved. But it is impossible to determine the net impact of the stimulus on GDP or employment because so much else has been happening to stimulate an economic recovery. Some people have had to dissave--turn savings into expenditures--because their income has fallen (maybe because they have become unemployed) below the level necessary to cover their basic expenses. Some people have had to replace durables that wore out. Foreign demand for U.S. products has risen some. (Dissaving, replacing durables, and export growth if the domestic currency loses value are standard nongovernmental spurs to recovery from a depression.) And the government has been doing a lot to stimulate recovery besides the stimulus--has in fact expended or guaranteed trillions of dollars in an effort to increase the amount of lending, which is essential to economic activity.
Disentangling the various factors that are responsible for the reduction in the rate of decline of output in the second quarter is probably impossible, but in any event has not, to my knowledge, been attempted--and certainly not in Romer's talk.
This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards and that what they say in their public-intellectual or governmental careers should not be thought identical to their academic views. As an academic, Christina Romer was a respected student of the business cycle, and actually expressed skepticism, no longer in evidence, about the efficacy of stimulus programs in arresting economic downturns. The statement in her talk that she thinks the allocation of moneys by the stimulus bill is just right is hard to credit as her professional opinion. But as chairman of the Council of Economic Advisers, she is a spokesman for the Administration, and I would guess that her public statements are vetted by the President's political advisers.
(Photos: Flickr Users David Paul Ohmer and borman818)
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Richard A. Posner
The Congressional Budget Office says that the stimulus package will actually shrink the economy "in the long run."
The stimulus package destroyed thousands of jobs in America's export sector by triggering trade wars with Mexico and Canadian municipalities over vague "Buy American" provisions that didn't even do much to provide markets for American products.
The stimulus package did little for public works projects, because only 6 percent of it went to transportation -- plus, it contained costly "prevailing wage" regulations that will increase the cost of state projects by $17 billion, and costly racial set-asides that will harm taxpayers of all races.
And as Christina Hoff Sommers has noted, the package was deliberately designed to focus more on welfare than on infrastructure, lest it end up benefitting mostly unemployed male workers (more than 80 percent of the employees who lost their jobs in the current recession are male, heavily concentrated among blue-collar men in factories, construction, and transportation).
"Now unfortunately the stimulus was poorly designed and has been (so far as an outside can judge) lazily implemented. Only about a third of the stimulus funds is for public works. Two-thirds are for tax credits and other benefits (including the popular "cash for clunkers" program) and for state governments. The problem with the two-thirds is that there is no guaranty that transfer payments will be put to productive use; they may be saved, directly or indirectly."
Unfortunately, the stimulus was poorly designed to appease tax ideologues in congress who are, even as we speak, fabricating "death panels" to defeat (or completely wreck) another necessary bill. It continually astonishes me that even after 8 years of unchallenged rule which drove this country into the ground in nearly every way, Americans are still willing to listen and eat up their lies. Clearly, we needed to elect Palin/McCain to reinforce the message delivered so clearly over the last administration.
Here are a few quotes from Romer:
"The Recovery Act, together with the actions taken by the Treasury and the Federal Reserve to stabilize financial markets and the housing sector, is helping to slow the decline and change the trajectory of the economy."
"Again, the answer is almost surely yes."
"At the same time, the fact that consumption fell slightly in the second quarter after rising slightly in the first quarter could be a sign that households are initially using the tax cut mainly to increase their saving and pay off debt."
"Because the evidence from the path of the economy over time can’t settle the issue of what the effects of the Recovery Act have been, it’s helpful to also look at other types of data."
"Obviously, this is a very preliminary analysis of the data across countries and states, and it does not account for all of the factors that may be at work."
"The bottom line is that we are no doubt in for more turbulent times."
Now, I agree with a lot of your specific points. Nevertheless, I found the talk reasonable and nuanced. Here's your view:
"This assertion is groundless. No one has the faintest idea what effect the stimulus has had. My guess is that it has had some positive effect, because of its confidence-enhancing character that I mentiioned earlier and because some of the $100 billiion--though no one seems to know how much--has been spent rather than saved. But it is impossible to determine the net impact of the stimulus on GDP or employment because so much else has been happening to stimulate an economic recovery."
You go from saying that her points are groundless to they're not proven. I happen to agree with your guess, for example. I don't think that our guess is groundless, although it's not proven. Prof. Romer did indeed give grounds for her conclusions. Obviously, whether one agrees with her or not depends upon your view of her grounds. But to say that you disagree with them, and so they are groundless, is not the same thing as saying that she provided no grounds. One is a disagreement ( which is what I see ), while the other is bad faith ( which you seem to see ).
Of course, I'm a Democrat, so that you can say that I'm partisan. But I agree with most of the points you made about the stimulus. I simply do not see bad faith on Prof. Romer's part. And, as you say, we both guess that the stimulus has been a net positive.
The stimulus failed, even in the short run.
France refused to adopt a massive stimulus package like ours, and its economy is already recovering. (It spent just $31 billion, compared to our $800 billion).
That's true even though its banks were leveraged even worse, and it is even more dependent on the volatile export sector.
As I noted above, the Congressional Budget Office says that the stimulus package will shrink the economy "in the long run."
Unemployment is now much higher than Obama said it would be if the stimulus did not pass.
Moreover, as Mickey Kaus of Slate, and think tanks such as the Heritage Foundation, have noted, the stimulus package largely repealed welfare reform, providing incentives for states to promote welfare dependency, and effectively gutting the 1996 welfare reform law.
That will reduce economic output further in the future.
As I noted above, the stimulus package has also destroyed thousands of jobs in America's export sector.
When I was in the Army (I just recently redeployed from Afghanistan in February, actually) we were encouraged to analyze the likelihood of success of any plan of action when applied to a given problematic situation by assessing its strengths along the lines of the joint doctrine on the nine principles of warfare - which we remembered with the acronym "MOOSEMUSS" - Mass, Objective, Offensive, Security (and reserves), Economy of Force, Maneuver, Unity of Command, Surprise, and Simplicity. Those single words are shorthand for the larger concepts, but still capture the ideas in abbreviated form.
One discovers pretty quickly that most of the principles are abstract and generally applicable beyond the military context to almost any kind of major organized effort at problem solving. Surprise and Offensive, of course, are limited to competitive scenarios.
In my judgment, the problem with any stimulus plan, no matter how well designed or implemented, is the limited amount of economic freedom of maneuver / reserves to draw upon in most of our fundamental economic indicators.
For example, The Personal Saving as a Percent of Disposable Personal Income rate. After WWII, and for over three decades from 1950 to 1980, and through recessions and expansions alike, the rate stayed within a fairly narrow band with a slowly growing trend that took it from 7% to 11%. The rate quickly dropped back to 7% in the mid-80's, but stabilized and stayed there until 1992. From that point on it, in little more than a decade, declined rapidly to below zero - a figure unseen since the Great Depression - in the Great Leveraging era of the US economy.
Now, if the savings rate in 2006 had been, say, 8%, and it was currently around 15% - one could argue that it had gone "too high" - above historical norms, that there was too much money going into idle deposits, and that the dip in consumption took it below it's normal, prudent, sustainable level. This is the textbook scenario that justifies government interventions, especially ones designed to restore "confidence".
Now, there's no doubt that the savings rate has jumped dramatically with significant effect, but I haven't seen the case that it has jumped "too high". In my view, it probably hasn't even jumped "enough" to return to a sensible and prudent level of wealth accumulation - and unless and until savings continue to rise beyond 10%, it would be unwise to try and again overstimulate consumption beyond it's healthy level.
An important distinction should be drawn between an over-contraction in normal consumption, and a correction to over-consumption. Any stimulus can only delay such a correction, not avoid it. In other words - a low savings rate, derived from too-low interest rates, left us with no room for maneuver, and no reserve of "overreactionary" activity from which to draw upon should a crisis emerge. This is a clear example of the failure of contingency planning and analysis.
I too am concerned with the fact that academics when they become public intellectuals, leave behind their academic scruples. But I think Richard Posner needs to start by looking in the mirror. Nowhere does he admit that he doesn't know what he is talking about because his expertise is in the law, not in macroeconomics. Instead, in his role as a public intellectual, he acts like he is an expert in the field.
In his discussion of macroeconomic policy, he doesn't get the basics right. For example his definition of investment in Y=C+I+G includes savings, something a principles of macroeconomics courses makes clear shouldn't be done. And later he talks about foreign demand for US goods, but didn't earlier include net exports in his original definition of output. But I suspect that this is less due to Posner having forgotten what he learned in principles of macroeconomics than the fact that he probably has never even taken it.
He accuses the stimulus of being poorly designed but fails to remind people that the original design was substantially altered to appease so called centrists in the Senate (Spector, Snowe, Collins and Nelson). Large amounts of highly needed and shovel ready municipal infrastructure spending were removed in order to insert a AMT patch which prior research had demonstrated had little stimulative value. The other tax changes and transfers were in there intentionally from the beginning because although they did not have quite as good a fiscal multiplier as infrastructure, they would at least get spent more quickly, which also was a grave concern at the time (and still is). Anyone who was truly interested in the Recovery Act should have been aware of these details.
The conservative economists he alludes to are by and large libertarians who don't believe in discretionary economic policy (and a majority of which are sceptical of macroeconomics in general). These are the same conservative economists who nearly universally assured the public that a major recession was an impossibility in our day and age, and now we are supposed to believe that they know how to effectively respond to it. Their argument against discretionary fiscal stimulus is largely grounded in the principle of Ricardian Equivalence, which although it is an important assumption of Neo-Classical theoretical macroeconomic models, enjoys little to no support from the vast body of empirical macroeconomic research literature. This however is of little concern to them because they are more interested in finding anecdotal evidence to support their preconceived conclusions than in the pain staking work of forming conclusions based on actual data. But this is the small cadre of economic ideologues that Posner evidently gets many of his economic talking points from.
In his criticism of Romer's assessment of the Recovery Act he says it is unclear where the $100 billion dollar figure comes from but if one bothers to read the assessment she clearly states it includes some preliminary IRS data. He then proceeds to estimate the relative size of the stimulus in the second quarter without taking into account it was a quarter of a year and not a whole year. Thus he clearly understates its size by a factor of four. Either he has fogotten his basic arithmentic or he simply doesn't care about correctly representing the truth.
He claims that Romer herself claims that all of the change in growth from the first to the second quarter were due to the stimulus. He further compounds his crime by stating that no one has the faintest idea what the effect of the stimulus was on the economy was in the second quarter, nor has anyone even tried calculate it. (He wrote: "Disentangling the various factors that are responsible for the reduction in the rate of decline of output in the second quarter is probably impossible, but in any event has not, to my knowledge, been attempted--and certainly not in Romer's talk".) But in her talk Romer did not claim that all of the change in growth was caused by the stimulus, and in fact Romer listed the work of three private forecasting firms (economy.com, Macroeconomic Advisors and Goldman Sachs) who on average estimated that the stimulus added about 2.5% to GDP growth in the second quarter at an annual rate. So either he has not actually read Romer's talk or he is simply lying.
He suggests that Romer's current position on the stimulus package differs from what is in her academic work. He does not (and cannot) support that claim. However I suspect that the claim is grounded in such gross missinterpretations of her research as done by such other highly ethically challenged public intellectuals as for example Gregory Mankiw. In Mankiw's "Economic View" column of January 11, 2009 he associated Romer with the proposition that the tax multiplier is twice the spending multiplier. Romer, in fact believes in a tax multiplier no larger than the spending multiplier, and she certainly do not believe that a balanced-budget equivalent reduction in taxes and spending provide any Keynesian stimulus at all. Such missconceptions are easily corrected if one only actually reads her research instead of depending on rabid ideologues the likes of Mankiw to missinterpret it for you.
Before Posner starts hurling accusations of intellectual dishonesty and compromised ethics he had better step out of the hypocritical glass house that he has so obliviously constructed around himself. He can start by admitting that his understanding of macroeconomics is limited at best.
Bla Bla Bla. Read an interpreted version of this instead at
http://delong.typepad.com/sdj/2009/08/richard-a-posners-ethical-lapses.html
I don't know who the author is, but he's done a service to future teachers of Macro Economics.
They can set this piece for undergraduates under the title of "List the dumb mistakes"
HF
Judge Posner has been much more tolerant of dissent than the Brad DeLong blog that hyperbolically attacks him.
Judge Posner has duly posted the comments of those who take issue with his post.
But DeLong's blog deleted my comment after I successfully posted it, taking issue with his claim that the stimulus has been a smashing success.
Even the Congressional Budget Office says that the stimulus will shrink the economy "in the long run."
And as I have noted above, it's even worse than that -- the stimulus has been a costly failure even in the short run.
I think your believing what you want to believe Hans. You assert that the CBO said the stimulus will shrink the economy in the long run, the fact that I have not heard that ANYWHERE else makes me think your distorting or making it up. You then move on to vague assertions about trade wars and male female discrimination to conclude the stimulus was a failure. Does not seem very well thought out.
Mr. Posner I think your missing an important fact about the aid to states. Much of the money states received has been used to avoid layoffs leading to more consumer spending and less foreclosures.
20 year old college student
The stimulus is harmful. Both the Washington Times and NPR's blog reported that the Congressional Budget Office predicted that the stimulus would shrink the economy "in the long run."
That's a quote from the CBO's report after the stimulus package was passed by Congress and signed by the President.
That same quote also appeared in the CBO's report before the stimulus package passed Congress.
You can find a link to the Washington Times story and the NPR blog in my posts at the OpenMarket blog and my blog at the Washington Examiner (The "DC SCOTUS Examiner" blog).
I have no idea why so few others in the media, other than NPR and the Washington Times, bothered to report the CBO's finding. That was a serious failing on the part of most of the media.
Hans,
There are two reasons why nobody talks about it.
1) The CBO's estimated midpoint reduction (due to "crowding out") in GDP from the discretionary fiscal stimulus was 0.1% in 2019. On the other hand the CBO calculated that the estimated midpoint addition to GDP from the fiscal stimulus compared to baseline will be 2.6% by the fourth quarter of this year. Now I ask you, given that GDP per capita will be about $45,000 in the fourth quarter and that it will be about $52,000 in 2019, would you be willing to accept $1200 more this year for $50 less ten years from now?
2)The CBO also said the following:
"The crowding-out effect will be offset somewhat by other factors. Some of the legislation’s provisions, such as funding for improvements to roads and highways, might add to the economy’s potential output in much the same way that private capital investment does. Other provisions, such as funding for grants to increase access to college education, could raise long-term productivity by enhancing people’s skills. And some provisions will create incentives for increased private investment. According to CBO’s estimates, provisions that could add to long-term output account for between one-quarter and one-third of the legislation’s budgetary cost."
http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-Macro_Effects_of_ARRA.pdf
In other words if more had been spent on education, infrastructure and R&D not only would the stimulus not have lowered long term GDP growth, it could have increased it.(Guess who used their political muscle to make sure less of this was in fact spent?)
@Hans,
Do you happen to remember how much lower GDP was (in percentage terms) by in 2019 because of the stimulus? Do you also happen to remember how this specifically could have been different by changing the proportions of how the stimulus budget was allocated according to the letter from Elmendorf to Grassley? I do.
Hans:
I was unable to post a comment today on Brad DeLong's weblog after two earlier postings. Eventually, my wife posted it for me from her work computer. I suspect (though I have no proof) that there is a problem with the website, rather than that you were censored.
This article is intellectually dishonest.
Just another example of that bad planning you describe: Our local water district is trying to borrow $2M for one of those shovel ready jobs. It seems that matching funding is required for their category of stimulus money grants. It's bad enough to borrow it the first time, but to double the pain is ridiculous.
According to the NYTimes' economist,Paul Krugman, this article is completely uncredible. From Krugman:
"But it turns out that Posner made a couple of mistakes:
(1) He compared quarterly stimulus spending with annual GDP, causing him to understate by a factor of four the size of the stimulus as a share of GDP;
(2) He stated Romer’s claims about one-quarter growth at an annual rate, overstating what she was claiming by another factor of four.
Overall, then, he was off by a factor of sixteen. As Menzie Chinn has shown, Romer’s claims for the stimulus were actually quite modest.
I suspect that Posner’s factor-of-sixteen error sets some kind of record."
Does this publication not employ editors or fact checkers?
Posner: Only about a third of the stimulus funds is for public works. Two-thirds are for tax credits and other benefits (including the popular "cash for clunkers" program) and for state governments. The problem with the two-thirds is that there is no guaranty that transfer payments will be put to productive use; they may be saved, directly or indirectly.
This is not a conservative's case against the "stimulus".
Posner says that too much of the stimulus is tax credits, for goodness sakes! (On that point, he needs to learn more about the legislation).
And he repeats the tired saw that tax cutting would merely spur "indirect" "savings" (i.e., paying down debt) that would fail to stimulate the economy. At a time that banks are failing due to rising delinquencies and insolvencies, it's a bad idea to help people keep more of what they earn so they can pay down debt? Keeping credit ratings and other structures of people's personal financial records intact was far more important that one year of contributions to the social security fund; a payroll tax would have done wonders for this economy.
The Obama "stimulus" was a political grab, in one fell swoop, attempting to undo the budget cuts of the Reagan and two Bush Administrations, restoring failed Democratic programs and transferring wealth to their respective interest groups. The timing of disbursements was never the concern, the payoff was. Although there was a case for some dramatic Fed intervention with the banks (good grief not the auto companies!), it could have put far more of the burden on the equity owners of financial institutions.
Meanwhile, Obama's economists believed the economy would right itself, stimulus or not, treated the "crisis" as "too good to go to waste", and shifted their priorities to political cover for the manufacture of hard lard.