Aug 21 2009, 2:05PM
The Impact of the Stimulus and the Issue of Integrity
My two blog entries (August 18 and 19) about Christina Romer's August 6 speech on the stimulus package have drawn an unusual amount of commentary, including criticisms (some by seemingly reputable economists) that are at once obtuse and vitriolic.
Some of the criticisms by economists are downright goofy (I have said before, and will say once again, that business-cycle economics is a very weak field), such as that, in treating output, conventionally enough, as the sum of personal consumption expenditures, investment, and government expenditures, I included "financial assets" in investment.
Output (measured for example by Gross Domestic Product) is a flow concept, not a stock concept. The nation's housing stock, and its other assets, including stocks and bonds, are not part of GDP. What I said, in criticism of economists who deny that a stimulus program can have any beneficial effects, is that while it is true that if a dollar invested by government, say in hiring a road contractor to build a new highway, reduces private investment by a dollar, the government expenditure is unlikely to increase net output, but that I doubted that that would be the effect of the stimulus. If private investment and consumption are down because people and firms are hoarding cash for fear of what the future holds for them, government can in effect put those inert savings to work by deficit spending on public works.
This same economist, Mark Thoma, who like DeLong is notably abusive, resorts to the academic trick of reading a passage literally in order to make the author seem an ignoramus. I had said that one of the events in the second quarter that might have helped reduce the rate of decline in output and employment was increased foreign demand for U.S. goods, relative to the first quarter. Thoma says: "he [Posner] talks about foreign demand for US goods, but doesn't include NX in his definition of output." "NX" means net exports. That is to say that increased foreign demand for U.S. goods is a good thing, since exports increase national income, unless U.S. demand for imported goods grows more. That's true, and if that happened in the second quarter (it didn't) I would not have pointed to the increase in foreign demand as a factor favorable to U.S. output, hence a possible confounding causal factor with the modest stimulus disbursements in the second quarter.
My critics are leftwing economists, and I think they simply can't believe that I really support the stimulus program, that I am a Keynesian, and that I am a critic of conservative macroeonomists and finance theorists, though I do not accuse John Cochrane, a distinguished finance theoriest, as Thomas does, of not knowing freshman economics.
Well, on to substance.
Romer's speech argues that the disbursements of stimulus funds through the end of the second quarter of this year (that is, through June 30) have had a big effect on economic output and employment. I said this was unlikely as a matter of theory, and that she had no persuasive evidence to back up her claim. And I raised the question of the ethical responsibilities of an academic who takes a government job and then makes a speech that although it deals with a subject that she had studied and written about as an academic is not a responsible academic analysis. My concern is enhanced by the statement of one of my critics that the Council of Economic Advisers, of which Romer is the chairman, has a sterling reputation for political neutrality and analytical rigor. Romer's speech does not bode well for the preservation of that reputation. Another critic argues that since it was just a speech, intended therefore to be heard rather than read, Romer should be permitted to have rounded off her numbers, and thus to have rounded off $89 billion (this critic's estimate of how much stimulus money had been disbursed by the end of the second quarter) to "more than $100 billion" (her language). This overlooks the fact that the speech was posted on the CEA's website, and is replete with footnotes, which I doubt she read aloud.
In fact, while I am on the subject of the amount of stimulus money disbursed so far, $89 billion seems too high. The government's official figure is $60 billion, and a recent estimate by msnbc.com is $58 billion. One of my fiercest critics estimates the figure at "about $60 billion," without however remarking the discrepancy between "about 60 billion" and Romer's "more than $100 billion.
Far more important than the amount of money disbursed is the amount spent. The distinction is essential. When an individual or for that matter a state treasurer (for the entire stimulus disbursements through the end of the second quarter consisted of transfer payments) receives a check, he has a choice between saving it or spending it, or doing some of both; and if he decides to save it, he has to decide whether to hold it in cash, deposit it in a bank account or a money-market account, buy stock, etc. The more of it he decides to save in a safe form, the less the stimulus he received will do to stimulate economic activity. Most economists believe that "transitory" (one-shot) income is mostly saved rather than spent; and the belief is confirmed by most studies of the effect of the $150 billion in tax relief implemented in the spring of 2008 to fight the then-nascent recession.
Romer's speech does not indicate what percentage of the "more than $100 billion" (or is it $58 billion?) had actually been spent rather than squirreled away during the second quarter. Moreover, given the inevitable lag between the disbursement and the expenditure of disbursed funds by the recipient of the disbursement, disbursements made toward the end of the second quarter could not have affected output and employment in that quarter.
Romer's failure to address these points would be understandable if she were not an academic student of stimulus programs; but she is.
When I read her speech the first time, I missed this startling statement: "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 savings and pay off debt" (emphasis added). Well, if that's what they're doing, they aren't doing much to stimulate economic activity. I agree with Keynes that consumption is the motor of the economy (one my critics says that "consumption does not produce," which rather misses the point), and that what government needs to do when personal consumption expenditures drop is to increase government consumption--and that means public works, which employ people, and not transfer payments, which may not translate into proportionately increased consumption, or at least not without a lag. Romer says that public works (she calls them "direct investments," but the meaning is the same) "have short-run effects roughly 60 percent larger than tax cuts." She doesn't indicate where she gets the number, but it is further evidence that she believes that transfer payments are not as efficient in stimulating economic activity as public works are.
Critics have been particularly unsparing of my having expressed the so-called $100 billlion in stimulus disbursements as a percentage of annual GDP. I think it's a fair criticism--and so it is amusing to note the identical procedure in the second sentence of Romer's speech, where she states that the $787 billion is "roughly 5 percent of GDP." It is roughly 5 percent of this year's GDP. But it is to be spent over at least two years.
The most serious problem with Romer's speech is evidence. She thinks she has shown that the economy lost 485,000 fewer jobs in the second quarter as a result of the stimulus. There is no evidence for that, because she makes no effort to adjust for other developments in the economy that affected employment, including other parts of the government's recovery program. I don't criticize her or anyone for the absence of evidence concerning the stimulus program's early effects. As I said in my book, when the government attacks a depression with several different programs, it is very difficult and maybe impossible to disentangle the causal efficacy of each one. I also said, and I have repeated this ad nauseam without my critics noticing, that it was right for the government to try a variety of measures for arresting the economic decline, including the stimulus, even though the result would be that the relative effectiveness of the different measures might be impossible to determine.
One of my critics, after calling me "obnoxious," states: "Does no one see how ridiculous Romer is, to be arguing that no one should blame her for missing how bad the economy was going to be, in one paragraph, and then, almost in the next, arguing that she knows precisely what the effect of the stimulus has been, because she knows what the course of the economy would have been, in its absence?"
I mentioned that Romer's academic work had included findings (not mentioned in her speech) that stimulus measures employed against the recessions that the United States has experienced since World War II have not been effective, because by the time the stimulus is implemented the recession is over. My critics point out that because this recession is already longer than any of its predecessors, those academic findings are irrelevant. That would be true if the stimulus program had been enacted in December 2007, when the recession (or, as I prefer to call it, the depression) began. At this writing, it seems that economic growth is about to restart, yet more than $700 billion of the stimulus money remains to be spent. If economic growth turns out to be rapid, the effect of stimulus spending, on top of our huge deficits, may be to create significant inflationary pressures.
I hope this is something that Romer is beginning to think about, but I am doubtful, because she remarks at the end of her speech that the President is trying to "rebuild the economy better," for example by "urging health care reform to slow the growth rate of spending, tame the budget deficit, and provide all Americans with the [sic] secure health insurance coverage." The first two objectives are inconsistent with the third. And increasingly it looks as if any ambitious health care program that Congress passes will not be funded, and so will add to the national debt and inflationary pressures.
I would like to leave the last word to Lawrence Indyk. Mr. Indyk is a frequent commenter on my blog. His comments, whether critical or supportive (some are the former, some the latter) are invariably thoughtful and lucid. Here is his comment on my discussion of Romer's speech:
"1. Dr Romer gave a speech on August 6th purporting to assess the success of the stimulus up to that point. The analysis she presented to The Economic Club of Washington was quite different from what she would have said had she remained a private academic and not an agent of the current administration.
"2. This difference is, essentially, one of less rigor and, paradoxically, more certainty, than one would otherwise expect, or would otherwise be considered acceptable by peers in the profession. To put it simply, she expressed an extraordinary amount of confidence in her conclusion that the political plan which had been enacted was having, and would continue to have, very close to an optimal effect on the overall economic situation. In other words--it was a Goldilocks stimulus--just right, and working as planned.
"3. She did all this with the reputation of an accomplished and highly esteemed Economist, and therefore with an understanding that her audience would consider anything she said to reflect only the highest standards of objective accuracy. That is why, after all, she was chosen to make this defense of the stimulus plan. Despite this, the analysis she presented was cursory and her conclusions fairly weak.
"4. Though everybody knows it, she did not disclose ahead of time that she was now acting as a political figure and that the statement she was making was not some sterile and disinterested academic seminar, but specifically designed to have a particular political effect. Such a failure to make such a disclosure brings her professional integrity into question in terms of whether we should believe what she says on the basis of her academic reputation so long as she remains in the employ of the government.
"Well, now that the summary is finished, it all seems like much ado over not much to me. Consider paragraph 4 above. Does anyone actually expect Dr Romer to say otherwise? People have been eating similar political-through-professional content with grains of salt for a long time.
"And as for Professor DeLong's outrage (debates over details aside) is the mild charge being levied here really so unbelievable or abominable? No one has said Dr. Romer is incompetent or a bald-faced liar, merely that she speaks for the President, and it seems (as should be expected by all adults) that, while short of outright dishonestly, she is selectively emphasizing a narrative that is favorable to him."
(Photos: Christina Romer White House Official Portrait and Flickr User Ed Yourdon)
Comments (18)
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Richard A. Posner
"1. Dr Romer gave a speech on August 6th purporting to assess the success of the stimulus up to that point. The analysis she presented to The Economic Club of Washington was quite different from what she would have said had she remained a private academic and not an agent of the current administration."
I don't see how you can know this. But, even if it's true, I don't agree with it. Here's a comment that makes sense to me:
http://macroblog.typepad.com/macroblog/2009/08/how-fast-can-the-economy-grow.html#comments
"I am tempted to invoke the ancient economists' chant, "noh-bah-de-noz," but real-life policymakers don't have that luxury ( NB DON ). So we delve in the details and try to sort out what seems like the best approach."
I can well imagine an Economist, who was know for always saying that we're not sure, going into govt and having to make judgments that he didn't feel that he had to before. He might even turn out to be good at it.
This happens in other fields. In Biblical Hebrew and Koranic Arabic, I was always saying that this passage is too ambiguous and we can't really translate it. But, as my teachers kept telling me, when you do a translation, then you're going to have to choose. The alternative is to leave them untranslated. I actually argued that this should be the case, but no one was having any part of it. They were probably right.
Posner wrote:
"In fact, while I am on the subject of the amount of stimulus money disbursed so far, $89 billion seems too high. The government's official figure is $60 billion, and a recent estimate by msnbc.com is $58 billion. One of my fiercest critics estimates the figure at "about $60 billion," without however remarking the discrepancy between "about 60 billion" and Romer's "more than $100 billion."
And I remind Judge Posner for the *third time* that Romer said:
"These numbers reflect outlays through July 3, 2009 from Recovery.gov website and internal calculations from the Department of Treasury through June 24, 2009."
(That’s for the obvious reason that two dfferent government organizations are keeping track of expenditures and tax cuts.)
Donald Marron, relevant to this fact said the following:
"In her recent speech about the impact of the stimulus effort, Christina Romer, Chair of the President’s Council of Economic Advisers, noted that “as of the end of June, more than $100 billion had been spent.”
If you visit the government web site tracking the stimulus (Recovery.gov), however, it will tell you that the government had paid out only about $60 billion by July 3. (You can find this figure in the chart at the lower right hand corner of the home page.)
Why does Christi report a figure so much larger than the one reported on the official website? Because Recovery.gov isn’t tracking all of the budget effects of the stimulus.
Christi’s figure includes the $60 billion of spending reported on Recovery.gov plus an internal estimate, prepared by Treasury, of the tax reductions resulting from the stimulus effort through June 24. Those tax reductions are obviously a big deal, totaling $40 billion or slightly more through the end of June."
http://dmarron.com/2009/08/14/tracking-the-stimulus/
And Menzie Chinn chimes in this article:
"One of my fiercest critics" apparently is me. Since Mr. Posner clearly did not follow the link provided in my previous post, let me quote from Donald Marron, who was CBO Acting Director, and a member of the CEA under George W. Bush (hence, I suspect, not a "left-wing" economist, as Mr. Posner has characterized me)"
"I used $60 billion, and IMF estimate, in my August 1st post, for want of a better guess. The $89 billion is yet again another estimate, from Mark Zandi (all of which I stated explicitly in my post). But from personal experience, I know two things: (1) the CEA has access to more information than those of us in the public have access to; and (2) the CEA would not publish and allow into a White House document (be it a speech or white paper or ERP) unverifiable numbers.
I think a whole bunch of former CEA economists, who have served in both Republican and Democratic administrations, will back me up on this specific point. Hence, on this issue, Mr. Posner simply does not know what he is talking about; I suggest he talk to somebody who has worked in the CEA.
So, to recap: $60 billion paid out on the spending side. $40 billion in tax rebates. No mystery, if one understands the numbers."
http://www.econbrowser.com/archives/2009/08/richard_posner.html
And I won't bother quoting Paul Krugman, but when he heard about the whole bruhaha (he's been on the road and hence without access to the internets) he just had to chip in:
http://krugman.blogs.nytimes.com/2009/08/21/sour-sixteen/
So at this point economists Krugman, DeLong, Thoma, Chinn, Wolfers (as well as Waldman and Duy to a lesser extent) have all piled on Posner in the negative. In my opinion Posner needs to quite now before he falls even further behind. (Or he could just keep going, and dismiss all of them, as he does anyone who criticizes him, as "left wing" and see how much of the entire public economic intellectual universe takes notice of his magnificent ignorance.)
P.S. The lesson in all of this is the following. If you're a public intellectual who accuses other public intellectuals of ethical lapses you had better make sure you're not living in a giant elaborate hypocritical megalomaniacal glass palace (which is hard to do in Posner's case).
"The lesson in all of this is the following. If you're a public intellectual who accuses other public intellectuals of ethical lapses you had better make sure you're not living in a giant elaborate hypocritical megalomaniacal glass palace (which is hard to do in Posner's case)."
I completely agree, as often is the case, with Mr. Sadowski.
Judge Posner has been on the war path, attacking Thaler and then Romer. Does this have anything to do with the fact that his Chicago school has been considerably undermined of late? His (bizarre) dressing down of Thaler would suggest so.
Anyway...
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Posner: "When I read her speech the first time, I missed this startling statement: '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 savings and pay off debt' (emphasis added)."
You mean when you read it the first time, after you had written two posts in which it played a starring role.
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Posner: "I mentioned that Romer's academic work had included findings (not mentioned in her speech) that stimulus measures employed against the recessions that the United States has experienced since World War II have not been effective, because by the time the stimulus is implemented the recession is over. My critics point out that because this recession is already longer than any of its predecessors, those academic findings are irrelevant."
Umm no. Well, at least not so far as I can tell. It would be helpful if Posner cited his critics so that one could check Posner's descriptions against the originals. I guess that he is here referring to Brad DeLong.
http://delong.typepad.com/sdj/2009/08/richard-a-posners-ethical-lapses.html
DeLong: [Christina Romer] "strongly expressed a preference for using expansionary monetary rather fiscal policy to arrest economic downturns in normal times when expansionary monetary policy can push short-term interest rates down and so stimulate the economy; these aren't normal times--short term interest rates are now zero and cannot be pushed any lower--and so it is appropriate to resort to tools that in normal times are second and third best."
Brad was not saying that the qualitative difference is that 'this recession is already longer than any of its predecessors.' The difference is that, unlike the recessions to which Romer was referring in her previous academic work, the monetary guns have been depleted. Without a (cogent) plan for implementing negative interest rates, (cogent) fiscal policy is preferable to inaction.
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Posner: "As I said in my book, when the government attacks a depression with several different programs, it is very difficult and maybe impossible to disentangle the causal efficacy of each one."
Ok, he is partially correct with this one. It is indeed difficult to disentangle cause and effect when dealing with an uncontrolled reality. Usually, this difficultly is managed by using conservative methodology (which Romer explicitly does) and conducting comparative analytics (which Romer does, viz. international stimulus packages). At any rate, Judge Posner is not Econometrician Posner, so I don't know why he is even bothering getting into identification issues.
Judge Posner...is...not...an...economist. He did not get a PhD in economics. He did not even get a BA in economics, as far as I know. Granted, you don't have to be an economist to understand and discuss many of its implications for society, as Posner has so successfully done throughout his career. But his wading into an argument requiring technical understanding of macroeconomics and econometrics is just absurd. If Joseph Stiglitz were to write an article in the Atlantic entitled, 'Non-tortious breach of contract: What has Richard Posner been smoking?', people would say, 'Why are you even talking right now, Joseph Stiglitz?'
So, I guess I would just like to ask...
Why are you even talking right now, Judge Posner? Stick to what you do best. The law through the lens of economic theory.
Uh, this is what we used to call a flame war. When we were 14 or so, it was fun to play. But, most of us have grown up and see that we need to exchange objective information when writing on the internet.
Posner, you are a respected thinker and there is little or no use in descending into a erudite flame war.
Never make or respond to personal attacks.
In essence, you observe that a) since the cause of the Great Depression is still being debated, and b) Romer is making claims not consistent with that academic uncertainty, then c) it is likely history will judge the veracity of her remarks differently than her current prestige would warrant.
Probably, and that is what makes governing hard.
This blog post defines the term "Concern Troll"
http://en.wikipedia.org/wiki/Troll_(Internet)#Concern_troll
Krugman, having missed the battle, sums this up well. "Off by a factor of sixteen." http://krugman.blogs.nytimes.com/2009/08/21/sour-sixteen/
Just a thought, maybe the reason economists are being so critical of your claims, is because you currently spend your time claiming they aren't very good at what they do. Many economists have probably suspected that since you don't have any training in this field that you don't have any idea what you are talking about. Thus they couldn't help but pile on when you validate their preconceptions so effectively.
I'm sure you'd be pretty testy if Delong spent his time claiming that you don't know anything about law and supported his claims with legal falsehoods.
Forgive me, but I had a bit more to add.
1. Calling Mark Thoma 'notably abusive' is a joke. You can certainly characterize DeLong of being, at times, abusive. However, you are a world-renowned judge, and as such have certainly encountered greater flak than that which Thoma was hurling at you. Calling him 'notably abusive' smacks of a weak attack on his credibility.
2. "My critics are leftwing economists, and I think they simply can't believe that I really support the stimulus program, that I am a Keynesian, and that I am a critic of conservative macroeonomists and finance theorists, though I do not accuse John Cochrane, a distinguished finance theoriest, as Thomas does, of not knowing freshman economics."
Who is Thomas? Whoever he is, I think his broader point is that finance is not economics, just as legal theory is not economics, despite their considerable overlap. An options theorist, for instance, would have very little to say about macroeconomics, because options theory deals largely (and almost exclusively) with statistical variance in pricing.
3. "If economic growth turns out to be rapid, the effect of stimulus spending, on top of our huge deficits, may be to create significant inflationary pressures."
First, what serious economist is projecting rapid economic growth at this point? I mean, Goldman just upped their estimates to 3 percent, but that is a) hardly rapid enough to create significant economic pressure in the current environment and b) a rather shortish projection outside of whose scope are endemic, systemic structural issues.
Second, I might be missing something, but how would the huge deficits themselves contribute to inflation? Given that you are embroiled in a spat with economists, it would certainly seem worthwhile to be more precise with your language. If you meant government spending, then that would be best to say. Honestly, though, I am not sure that is what you meant.
Posner: "And increasingly it looks as if any ambitious health care program that Congress passes will not be funded, and so will add to the national debt and inflationary pressures."
Are you implying that deficits invariably lead to inflation? Or is it debt that is the mechanism?
But why pick deficit spending, when it is at most a secondary danger, far behind a rapid infusion of (what are now) banking reserves into the economy?
4. Msnbc.com? Really?
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Those are just some thoughts. Forgive me if I was rude.
Cheers,
Kevin
First, what serious economist is projecting rapid economic growth at this point?
It seems not totally beyond the range of possibility. (Remember the fact that most aren't predicting a strong recovery certainly doesn't mean most are right -- these self-same most economists were projecting oil going to $200 a barrel in a year while not realizing they were already in a recession as of six months earlier! Nobody knows the future in this game.)If there is any kind of reasonably strong recovery, the "spending portion" of the stimulus, only a tiny portion of which has been spent yet, will arrive in good part years late.
The argument that "we'll, that won't matter because this recession is so long and unemployment so high" is hardly convincing. One, as Posner noted, the recession started in 2007 and the spending still hasn't even really started yet. Two, saying stimulus funds are "more efficiently" spent by incurring the necessary long wait until spending can take place, because of the higher multiplier then obtained, even if that is after unemployment peaks, is rather like saying it is more efficient to lock the barn door after the farm animals have spread all over the countryside because you can get a better price on a lock then. Unemployment and the destruction of business structures are permanently damaging to the people and businesses involved -- it is much more efficient to prevent that damage than to fix it after the fact. (This is something DeLong was happy to point out during the Bush recession).
Posner also actually was rather kind to the "spending stimulus" in assuming it actually will be spent on construction and to make purchases. Here in NY we've just had the experience of the government employees' union of the Metropolitan Transit Authority receving an 11% $600 million raise even though the MTA is so broke it received a major taxpayer bailout just a couple months ago. The arbitrators who made the award (one of whom was the head of the union) said the MTA can take $360 million for the wage hike from MTA stimulus construction funds. Money is fungible, right? So this particular stumulus "spending", after arriving so late, will be used purchase nothing except higher above-market wages for the the already employed. The multiplier for that?
For the record, Romer & Co project the $787 billion stimulus will "create or save" 6.8 million work years. The average full-time wage in the US is $42,000 (as per BLS), multiplying that by 6.8 million gives $286 billion. Regarding the efficiency of the stimulus (even if it works as advertised) make of that what you will.
Scott Sumner has fully documented how for the last 30 years all the econ textbooks (even Krugman's) have warned that spending stimulus is inferior to monetary policy (even at the 0% interest rate bound) because spending stimulus always arrives late and politically distorted while running up the national debt to boot -- and he presents a lot of evidence to support the now suddenly "unorthodox" belief that all the textbooks are right, even in our current case. (And he wonders at how little economists really believed of the own writings.)
But in the end I wonder about how much of all this argument about the stimulus is really a front for an emotional response to the "integrity" issue. If Posner had said that academics who go into government "leave behind their academic rigor" instead of "scruples" would all this be going on?
But who can deny that when an academic speaks for an Administration about its policy the academic knows full well he/she is speaking for an Administration and speaks accordingly. Is it imaginable that during a heated political season like this the academic will say anyting that invites criticism down upon the Administration from Fox News -- "We put this stimulus together in a big rush and to satisfy a lot of interests, and in retrospect today there are a lot of things in it that could have been better, such as... " -- just because it would be candid and honest? Hello??
Hey, what happened to Goolsbee when word got out during the primaries that he was privately saying nice things about NAFTA to the Canadians. Things that were true. Exile! For the Duration! You think that he and all the other academics in the govt didn't learn from that? That that's not what happens to academics working for a politician who speak uncomfortable truth?
And that people like Krugman and DeLong should be so shocked shocked by such mild comments about Romer -- my word! What did they say about academics (and everyone else!) in the Republican govt for eight long years?? Shall I present a list of the personal shots taken by Krugman and the rest at the honesty and integrity of Greenspan, Hubbard, and all the rest? Was it days ago that Krugman was denigrating Mankiw's "deliberate obtuseness"? Or a few weeks?
That these guys and their best friends should be the ones protesting their great sensitivty to personal slights ... wow.
Jim Glass,
Perhaps I should have taken my own advice and been more specific with my comments.
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First, however, with regards to the linked article...
I am going to be honest and admit that I have no idea what methodology the ECRI uses to compute the WLI. As best as I can gather, it is a forecasting tool with optimal usefulness of two months out, computed by some weighted index of economic indicators. Without knowing the exact methodology, I won't comment on its accuracy, but to say that the current annualized increase is likely picking up a moderate rebound from absolutely abysmal prior indicators. There is a strong possibility that the rebound will be tempered as producers come to realize that the recovery will be slow and weak. This assertion, of course, needs justifying. As I cannot do better than Michael Pettis, I will simply direct you to a recent post:
http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-1/
http://mpettis.com/2009/08/what-should-have-been-discussed-during-the-sed-meetings-part-2/
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Second, as to the efficiency of the stimulus package, a quick note...
"...saying stimulus funds are "more efficiently" spent by incurring the necessary long wait until spending can take place, because of the higher multiplier then obtained, even if that is after unemployment peaks, is rather like saying it is more efficient to lock the barn door after the farm animals have spread all over the countryside because you can get a better price on a lock then."
Clever, but it ignores the possibility that, while employment growth may cease to be negative, it nevertheless fails to become significantly positive. Remember that, relative to previous recessions, employers have relied on furloughs and reduced wages to a great extent. These will likely be reversed before any outright hiring spree is embarked upon.
Additionally, the fiscal stimulus package in not only aimed at the level of employment, but as meant to serve as a moderating influence during the inevitable correction in our current accounts balance. For substantiation, we have Rob Parteneau of the Levy Institute writing at CR:
"From a US only perspective, ideally all of the increase in the private sector net saving position would come from a reversal of the trade deficit. But in a world where global trade is collapsing, in part because export dependent economies have just had the rug pulled out from underneath them as US consumers (and others) try to save, it is a fantasy to think the adjustment process can be done entirely through trade. The only way to avoid a debt deflation outcome, as long as the private sector is trying to increase its net saving, is through an expanding fiscal deficit. As the government spends more than it earns in tax revenue, private sector incomes are boosted, and the private sector can earn more than it spends. They are two sides of the same coin. In that sense, if you agree private sector deleveraging is necessary part of the adjustment process, or at least important, it comes at the price of public sector releveraging, barring a heroic reversal in the US trade deficit (which would throw our trading partners into an even more severe recession unless they also pursued domestic demand led polices, a la China).
To illustrate this, the current account deficit has already gone from about 6% of GDP to 4% of GDP. Let’s say further consumer and inventory contraction gets us to 2% of GDP by year end. The CBO suggests the federal fiscal deficit will be out to 12% of GDP. That means the private sector can net save 10% of GDP without nominal incomes falling in the economy. At the depths of the 1973-5 recession, private sector net saving hit a post WWII high of nearly 9% of GDP. Maybe it needs to go higher this time because of the larger shock to household balance sheets with home and equity price deflation. But at least we can say the fiscal deficit is now programmed to scale up fast enough to reduce or contain the risks of US income deflation, and hence a runaway debt deflation process."
http://www.creditwritedowns.com/2009/03/what-are-the-consequences-of-the-huge-us-deficit.html
We are basically on track to meet his projections, with the current account deficit now at an annualized 2.8% of GDP.
http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Furthermore, a ratio of $286B:$787B, or $1:$2.75 is not at all obscene. It implies that we are spending 2.75 (plus interest) future dollars (if financed by deficit spending) to obtain 1 current dollar. Simply put, we are transferring wealth from the future to the present. I, for one, am all for a transfer at that rate if it means arresting or ameliorating an awful economic situation projected to last for quite some time. The alternative was rather worse.
Also, your $286 billion figure isn't a net benefit figure, as it only counts retained wages. A further benefit, for instance, is that employers are freed from the economic cost of turnover (severance packages, training/retraining when employment picks back up, etc.).
------------
In the end, I believe that this is a response more to Posner's playacting than it is about Romer. Like zosima said:
"Just a thought, maybe the reason economists are being so critical of your claims, is because you currently spend your time claiming they aren't very good at what they do. Many economists have probably suspected that since you don't have any training in this field that you don't have any idea what you are talking about. Thus they couldn't help but pile on when you validate their preconceptions so effectively."
Having read your posts, as well as Professors DeLong and Chen's, I think in you all have made fair points that needlessly spill into invective, DeLong most egregiously.
In your case, I have read I think every single column Krugman has written for the NY Times and most of them he wrote for slate, I can't recall ever thinking his writing was, as you call it, "irresponsible," or worse so "irresponsible" as to call into question the integrity of his academic work.
Such literary disputes are frankly fun for third parties in small doses, and to expect this to never happen is an unreasonable standard as economists are not disembodied intellects. "Reason is ... the slave of the passions, and can never pretend to any other office than to serve and obey them."
Relatedly, I am not sure how familiar Krugman, Chen, and DeLong are with your work. To some extent they might simply identify you with "the Chicago School" and in turn identify this with the type of crude neoclassical analysis than makes faulty assumptions of perfect information, no transaction costs, perfect competition, perfect rationality etc used in defense of bad public policy.
Indeed, this is a fairly good description of the normal mode of analysis of your colleague Richard Epstein, and I think you at times lapse into this when you go afield of your normal areas of expertise, which is somewhat unavoidable if you want to write about many and diverse economic subjects since this sort of extreme neoclassical analysis is the simplest to conduct, write about for a general audience, and model.
In any case, I hope their discourtesy in this instance does not dissuade you from seriously considering their work, including their non-academic work. I really think this may stem from them approaching a single post with some of the excesses of Chicago-affiliated people other than yourself also in their thoughts, together with the defensible but unnecessary comment about Romer's sense of professionalism.
Well, all I care to say at this point is welcome to the Enemies List. Even overwhelming agreement with your detractors and/or the Administration is very much besides the point. You have failed to be perfectly consistent in staying both on message and on side, and for that sin there can be no forgiveness, only excommunication. Perhaps, if you are lucky, a stream of scalding articles criticizing the big banks, health insurance corporations, and GW Bush will win a chance for rehabilitation.
Another day and now Robert Waldmann has officially joined the fray (more on that in a bit).
First a few more comments on the substance of this article:
Posner writes:
"The most serious problem with Romer's speech is evidence. She thinks she has shown that the economy lost 485,000 fewer jobs in the second quarter as a result of the stimulus. There is no evidence for that, because she makes no effort to adjust for other developments in the economy that affected employment, including other parts of the government's recovery program. I don't criticize her or anyone for the absence of evidence concerning the stimulus program's early effects. As I said in my book, when the government attacks a depression with several different programs, it is very difficult and maybe impossible to disentangle the causal efficacy of each one. I also said, and I have repeated this ad nauseam without my critics noticing, that it was right for the government to try a variety of measures for arresting the economic decline, including the stimulus, even though the result would be that the relative effectiveness of the different measures might be impossible to determine."
The relevant Romer passage is the following:
"Of course, identifying the effects of the Recovery Act from the behavior of just a few data points is inherently difficult. We don’t observe what would have happened in the absence of the fiscal stimulus. One way to try to add rigor to the analysis of the behavior of key indicators is to do a more formal econometric forecasting exercise.
There are various ways to do such an exercise, but let me discuss the results of a typical one. We forecast the usual behavior of GDP and employment jointly, using data from 1990 to 2007. We then forecast GDP growth and average job loss in the second quarter of 2009 using actual data up through the first quarter of the year.
The baseline forecast implies further substantial job loss in the second quarter. Indeed, the implied average monthly decline is nearly 600,000 jobs. What you see is that actual job loss (the dark blue bar) came in substantially lower.
These calculations imply that employment is now about 485,000 jobs above what it otherwise would have been during the second quarter of 2009. This number is very similar to Mark Zandi’s estimate that stimulus added roughly half a million jobs over the second quarter, relative to what otherwise would have occurred.
I do, however, want to be very cautious. The approach we used is one of a number of sensible ways of predicting what would have happened in the absence of stimulus. Other methods could lead to somewhat different estimates of the jobs impact of the program in its first full quarter of operation. But the clear implication is, the program is working."
The related footnotes say the following:
"12 These forecasts are based on a vector autoregression using the logarithms of real GDP (in billions of chained 2005 dollars) and employment (in thousands, in the final month of the quarter) estimated over the period 1990:Q1-2007:Q4. There are four lags, and the estimates are used to make projections beginning in 2009:Q2. Changes in the specification, such as using fewer lags and extending the sample through 2009:Q1, generally lead to projections of even slower recoveries of GDP and employment growth.
13 Moody’s Economy.com. Précis: U.S. Macro, July 2009, p. 6."
Posner has a point in that Romer never addressed the other elements in the government's recovery program. But this was not really an oversight for the simple reason that the timing makes them practically irrelevant to the econometric results for the second quarter. What are the other elements of the government's recovery program? There are essentially only two elements: 1)Monetary Policy and 2) TARP.
With respect to monetary policy the Federal Reserve's main policy instrument, the federal funds rate has remained where it has been since December 17 at 0%-0.25%. Any effect that it might be having should already be perceptible in the first quarter employment figures. The Federal Reserve has also engaged in some unconventional policies nearly all of which are reflected in its balance sheet. The Federal Reserve's balance sheet surged by some $1.5 trillion in the last third of 2008, but since then it has contracted by $200 billion.
With respect to TARP by the end of the first quarter some $520 billion had been disbursed. Between then and the end of the second quarter another $100 billion went out but $70 billion was returned. Thus of the net disbursements by the end of the second quarter ($550 billion) approximately 95% had been disbursed by the end of the first quarter.
Romer probably should have brought up these facts formally. But I suspect that her audience was sufficiently well informed to be aware of these facts. Of the governments three largest recovery programs the only one that experienced a major change in terms of implementation was the Recovery Act.
It is also tempting to argue that since only an eighth of the Recovery Act had been spent by then of the second quarter that a similar proportion of its effect should be felt so far. But a discretionary fiscal stimulus is qualitatively different in its expected effects on the economy than TARP or the monetary policy measures taken. That is because its effects are proportionate to its flow rate and not its stock amount. The Recovery Act will be spent at a peak rate of $100 billion through the end of fiscal year 2010. Thus as of the second quarter it was already being spent at that rate. Nevertheless, due primarily to rising multiplier effects and changing composition its effects should continue to increase at least through the end of fiscal year 2010.
Naturally aditional econometric analysis could be done taking into account the governments other recovery programs. But for the reasons i have just stated it is unlikely to show anything substantially different from the analysis that Romer and mark Zandi have performed.
Now on to other points. Posner also writes the following:
"At this writing, it seems that economic growth is about to restart, yet more than $700 billion of the stimulus money remains to be spent. If economic growth turns out to be rapid, the effect of stimulus spending, on top of our huge deficits, may be to create significant inflationary pressures."
The proper context for this worry is monetary policy. The primary concern here is will it be posssible to spend the vast majority of the stimulus before a zero interest rate policy (ZIRP) is no longer desirable. Fortunately this has already been analyzed by several public and private economists. The best analysis on this outlook I've seen was by Glenn Rudebusch of the Federal Reserve Bank of San Francisco. Based on FOMC economic projections made earlier this year (which were excessively optimistic) he noted the following:
"The estimated Taylor rule can also be used in conjunction with economic forecasts to provide a rough benchmark for calibrating the appropriate stance of monetary policy going forward. The dashed lines in Figure 1 show the latest forecasts for unemployment and inflation provided by FOMC participants—the Federal Reserve presidents and governors. (The dashed lines are quarterly linear interpolations of the median forecasts in FOMC, 2009.) Like many private forecasters, FOMC participants foresee persistently high unemployment and low inflation as the most likely outcome over the next few years. The recommended future policy setting of the funds rate based on the estimated historical policy rule and these economic forecasts is given as the dashed line in Figure 2. This dashed line shows that, in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year—well below its lower bound of zero. Alternative specifications of empirical Taylor rules, described in Rudebusch (2006), also generally recommend a negative funds rate.
The shaded area in Figure 2 is the difference between the current zero-constrained level of the funds rate and the level recommended by the policy rule. It represents a monetary policy funds rate shortfall, that is, the desired amount of monetary policy stimulus from a lower funds rate that is unavailable because nominal interest rates can't go below zero. This policy shortfall is sizable. Indeed, the Fed has been able to ease the funds rate only about half as much as the policy rule recommends. It is also persistent. According to the historical policy rule and FOMC economic forecasts, the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years. The policy shortfall persists even though the economy is expected to start to grow later this year. Given the severe depth of the current recession, it will require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive."
http://www.frbsf.org/publications/economics/letter/2009/el2009-17.html
So, in brief, ZIRP will be necessary for several years. It is extremely unlikely that spending the Recovery Act while ZIRP is in effect will be a problem.
Finally, as someone who is very familiar with Dr. Romer's research I absolutely disagree with the following statement by Mr. Indyk:
"The analysis she presented to The Economic Club of Washington was quite different from what she would have said had she remained a private academic and not an agent of the current administration."
There is really no contrast at all between Romer's academic work and her speech. I am not alone in thinking her speech was a continuation of her life's work. Robert Waldmann said this and several other things today:
"Richard Posner
There is no need for another criticism of Richard Posner's criticism of Christine Romer (too put it mildly) but I can't help myself.
The post below is not only pointless, it is long. I will try a brief summary. Posner accused Romer of intellectual dishonestly, because he was sure that a speach she gave on the effect so far of the stimulus was " "responsible academic analysis." He knows that Romer has worked in the field and is a top notch academic economist (Posner has been cited a lot and, perhaps coincidentally, judges intellectuals by their citation count so he must know that Romer has been cited a lot too). I think he has an idea of what top notch academic economists are like based the ones he knows at the economics department and business school of the University of Chicago. There is indeed a huge contrast between *their* academic work and Romer's speach. However, there is no contrast at all between Romer's academic work and her speech. The speech is clearly, among other things, the continuation of a decades long research progect.
I think that Posner can't get his head around the fact that work which is viewed with contempt at the U Chicago economics department is massively cited.
now long boring post.
Professor Judge Posner has made mistakes which should be totally humiliating but is not humbled in the slightest. Most notably he casually compared the annualized growth rate of quarterly GNP to annual GNP effectively making a factor of 16 arithmetic error.
I do think there is something still to be said. Posner is not only persistntly unable to handle the IS-LM model, unfamiliar with national income and products accounts terminology, unfamiliar with federal budgetary terminology and arithmetically challenged (just start here and follow the links).
He is also unfamiliar with the standards of academic research at Berkeley (and Harvard). Discussing Romer's speach on the stimulus, his basic claim is
"Romer's speech argues that the disbursements of stimulus funds through the end of the second quarter of this year (that is, through June 30) have had a big effect on economic output and employment. I said this was unlikely as a matter of theory, and that she had no persuasive evidence to back up her claim. And I raised the question of the ethical responsibilities of an academic who takes a government job and then makes a speech that although it deals with a subject that she had studied and written about as an academic is not a responsible academic analysis."
I have a different impression. My impression of the speech was that I wish I'd written it and submitted it to a journal. I think that it is unreasonable to compare it to a "responsible academic analysis," because academics don't have access to the resources (data and staff) which made it possible. I think it is obvious that the speech could be published in the AER. The editor might demand stylistic modifications, but the analysis is top notch.
More to the point it is exactly the sort of thing that Romer wrote when she was a professor at Berkeley. It is clear to me, and many others, that, when Posner contrasts the speach to Romer's academic work, he displays his total ignorance of her academic work.
I think the problem is partly that the economics profession is divided into schools of thought -- roughly fresh water and salt water -- with profound contempt for each other (although salt water economists such as C. Romer, D. Romer and N.G. Mankiw tend to be polite in public).
I think it very likely that Romer's speech and her academic work is considered to be not* "responsible academic analysis" by top economists working at the economics departments of the Universities of Chicago and Minnesota. My guess (and it is a wild guess) is that they don't consider it to be economics, because it has nothing to do with maximization under constraint. The number one top leader of the school (Prescott) condemns econometrics as such and, in effect, argues that one must assume his theories are true even if they are inconsistent with the data. Even among those who don't regect econometrics as such, there is a profound disagreement about methodology.
At Berkeley, Harvard and MIT simple calculations are demanded.
There is (or was when I was there) pretty much an absolute rule that one must start with summary statistics, then look at correlations and cross tabs or something, then work up to a multiple regression (OLS) then probably do something with instrumental variables with identifying assumptions comprehensible and convincing to the man on the street.
This is pretty much a description of Romer's speach.
The relatively fancy IV part would be the cross state and cross national comparisons which Romer ignored entirely in his critique. Basically his argument was that the speach did not include the sort of analysis required to get a paper published in say the AER if you ignore the sort of analysis required to get a paper published in say the AER which was contained in the speach but ignored completely in his critique of the speach.
Some (Thoma mostly) suggest that Posner is showing contempt for the economics profession assuming a lawyer, law professor, judge and top notch microeconomist can handle macro without brushing up on the terminology. My guess is nearly the opposite. I suspect that he is in contact with macro economists who share his view of Romer's speech and that this made him sure he is on safe ground.
Basically his view is that Romer's speech is not respectable academic economics, because it clearly involves taking the IS-LM model seriously and considering the concept of a multiplier and because the empirical work is a combination of simple reduced form calculations and simple easily comprehensible instrumental variables regressions such that no fancy economic theory or econometric technique is required.
I think Posner genuinely doesn't know that a large fraction of the economics profession agrees with Romer's approach.
The fact is that top fresh water economists think they are the only top notch economists and dismiss salt water economists including the ones with Nobel prizes and stuff."
http://rjwaldmann.blogspot.com/2009/08/richard-posner-there-is-no-need-for.html
On Saturday Robert Waldmann has officially joined the fray (more on that in a bit).
First a few comments on the substance of this article:
Posner writes:
"The most serious problem with Romer's speech is evidence. She thinks she has shown that the economy lost 485,000 fewer jobs in the second quarter as a result of the stimulus. There is no evidence for that, because she makes no effort to adjust for other developments in the economy that affected employment, including other parts of the government's recovery program. I don't criticize her or anyone for the absence of evidence concerning the stimulus program's early effects. As I said in my book, when the government attacks a depression with several different programs, it is very difficult and maybe impossible to disentangle the causal efficacy of each one. I also said, and I have repeated this ad nauseam without my critics noticing, that it was right for the government to try a variety of measures for arresting the economic decline, including the stimulus, even though the result would be that the relative effectiveness of the different measures might be impossible to determine."
The relevant Romer passage is the following:
"Of course, identifying the effects of the Recovery Act from the behavior of just a few data points is inherently difficult. We don�t observe what would have happened in the absence of the fiscal stimulus. One way to try to add rigor to the analysis of the behavior of key indicators is to do a more formal econometric forecasting exercise.
There are various ways to do such an exercise, but let me discuss the results of a typical one. We forecast the usual behavior of GDP and employment jointly, using data from 1990 to 2007. We then forecast GDP growth and average job loss in the second quarter of 2009 using actual data up through the first quarter of the year.
The baseline forecast implies further substantial job loss in the second quarter. Indeed, the implied average monthly decline is nearly 600,000 jobs. What you see is that actual job loss (the dark blue bar) came in substantially lower.
These calculations imply that employment is now about 485,000 jobs above what it otherwise would have been during the second quarter of 2009. This number is very similar to Mark Zandi�s estimate that stimulus added roughly half a million jobs over the second quarter, relative to what otherwise would have occurred.
I do, however, want to be very cautious. The approach we used is one of a number of sensible ways of predicting what would have happened in the absence of stimulus. Other methods could lead to somewhat different estimates of the jobs impact of the program in its first full quarter of operation. But the clear implication is, the program is working."
The related footnotes say the following:
"12 These forecasts are based on a vector autoregression using the logarithms of real GDP (in billions of chained 2005 dollars) and employment (in thousands, in the final month of the quarter) estimated over the period 1990:Q1-2007:Q4. There are four lags, and the estimates are used to make projections beginning in 2009:Q2. Changes in the specification, such as using fewer lags and extending the sample through 2009:Q1, generally lead to projections of even slower recoveries of GDP and employment growth.
13 Moody's Economy.com. Prïcis: U.S. Macro, July 2009, p. 6."
Posner has a point in that Romer never addressed the other elements in the government's recovery program. But this was not really an oversight for the simple reason that the timing makes them practically irrelevant to the econometric results for the second quarter. What are the other elements of the government's recovery program? There are essentially only two elements: 1) Monetary Policy and 2) TARP.
With respect to monetary policy the Federal Reserve's main policy instrument, the federal funds rate has remained where it has been since December 17 at 0%-0.25%. Any effect that it might be having should already be perceptible in the first quarter employment figures. The Federal Reserve has also engaged in some unconventional policies nearly all of which are reflected in its balance sheet. The Federal Reserve's balance sheet surged by some $1.5 trillion in the last third of 2008, but since then it has contracted by $200 billion.
With respect to TARP by the end of the first quarter some $520 billion had been disbursed. Between then and the end of the second quarter another $100 billion went out but $70 billion was returned. Thus of the net disbursements by the end of the second quarter ($550 billion) approximately 95% had been disbursed by the end of the first quarter.
Romer probably should have brought up these facts formally. But I suspect that her audience was sufficiently well informed to be aware of these facts. Of the governments three largest recovery programs the only one that experienced a major change in terms of implementation was the Recovery Act.
It is also tempting to argue that since only an eighth of the Recovery Act had been spent by then of the second quarter that a similar proportion of its effect should be felt so far. But a discretionary fiscal stimulus is qualitatively different in its expected effects on the economy than TARP or the monetary policy measures taken. That is because its effects are proportionate to its flow rate and not its stock amount. The Recovery Act will be spent at a peak rate of about $100 billion a quarter through the end of fiscal year 2010. Thus as of the second quarter it was already being spent at that rate. Nevertheless, due primarily to rising multiplier effects and changing composition its effects should continue to increase at least through the end of fiscal year 2010.
Naturally additional econometric analysis could be done taking into account the governments other recovery programs. But for the reasons i have just stated it is unlikely to show anything substantially different from the analysis that Romer and Mark Zandi have performed.
Now on to other points. Posner also writes the following:
"At this writing, it seems that economic growth is about to restart, yet more than $700 billion of the stimulus money remains to be spent. If economic growth turns out to be rapid, the effect of stimulus spending, on top of our huge deficits, may be to create significant inflationary pressures."
The proper context for this worry is monetary policy. The primary concern here is will it be possible to spend the vast majority of the stimulus before a zero interest rate policy (ZIRP) is no longer desirable. Fortunately this has already been analyzed by several public and private economists. The best analysis on this outlook I've seen was by Glenn Rudebusch of the Federal Reserve Bank of San Francisco (FRBSF). Based on FOMC economic projections made earlier this year (which were excessively optimistic) he noted the following:
"The estimated Taylor rule can also be used in conjunction with economic forecasts to provide a rough benchmark for calibrating the appropriate stance of monetary policy going forward. The dashed lines in Figure 1 show the latest forecasts for unemployment and inflation provided by FOMC participants, the Federal Reserve presidents and governors. (The dashed lines are quarterly linear interpolations of the median forecasts in FOMC, 2009.) Like many private forecasters, FOMC participants foresee persistently high unemployment and low inflation as the most likely outcome over the next few years. The recommended future policy setting of the funds rate based on the estimated historical policy rule and these economic forecasts is given as the dashed line in Figure 2. This dashed line shows that, in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year well below its lower bound of zero. Alternative specifications of empirical Taylor rules, described in Rudebusch (2006), also generally recommend a negative funds rate.
The shaded area in Figure 2 is the difference between the current zero-constrained level of the funds rate and the level recommended by the policy rule. It represents a monetary policy funds rate shortfall, that is, the desired amount of monetary policy stimulus from a lower funds rate that is unavailable because nominal interest rates can't go below zero. This policy shortfall is sizable. Indeed, the Fed has been able to ease the funds rate only about half as much as the policy rule recommends. It is also persistent. According to the historical policy rule and FOMC economic forecasts, the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years. The policy shortfall persists even though the economy is expected to start to grow later this year. Given the severe depth of the current recession, it will require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive."
http://www.frbsf.org/publications/economics/letter/2009/el2009-17.html
So, in brief, ZIRP will be necessary for several years. Thus it is extremely unlikely that spending the Recovery Act while ZIRP is in effect will be at all a problem.
Finally, as someone who is very familiar with Dr. Romer's research I absolutely disagree with the following statement by Mr. Indyk:
"The analysis she presented to The Economic Club of Washington was quite different from what she would have said had she remained a private academic and not an agent of the current administration."
There is really no contrast at all between Romer's academic work and her speech. I am not alone in thinking her speech was a continuation of her life's work. Robert Waldmann said this and several other things today:
http://rjwaldmann.blogspot.com/2009/08/richard-posner-there-is-no-need-for.html
"Richard Posner
There is no need for another criticism of Richard Posner's criticism of Christine Romer (too put it mildly) but I can't help myself.
The post below is not only pointless, it is long. I will try a brief summary. Posner accused Romer of intellectual dishonestly, because he was sure that a speach she gave on the effect so far of the stimulus was " "responsible academic analysis." He knows that Romer has worked in the field and is a top notch academic economist (Posner has been cited a lot and, perhaps coincidentally, judges intellectuals by their citation count so he must know that Romer has been cited a lot too). I think he has an idea of what top notch academic economists are like based the ones he knows at the economics department and business school of the University of Chicago. There is indeed a huge contrast between *their* academic work and Romer's speach. However, there is no contrast at all between Romer's academic work and her speach. The speach is clearly, among other things, the continuation of a decades long research progect.
I think that Posner can't get his head around the fact that work which is viewed with contempt at the U Chicago economics department is massively cited.
now long boring post.
Professor Judge Posner has made mistakes which should be totally humiliating but is not humbled in the slightest. Most notably he casually compared the annualized growth rate of quarterly GNP to annual GNP effectively making a factor of 16 arithmetic error.
I do think there is something still to be said. Posner is not only persistntly unable to handle the IS-LM model, unfamiliar with national income and products accounts terminology, unfamiliar with federal budgetary terminology and arithmetically challenged (just start here and follow the links).
He is also unfamiliar with the standards of academic research at Berkeley (and Harvard). Discussing Romer's speach on the stimulus, his basic claim is
Romer's speech argues that the disbursements of stimulus funds through the end of the second quarter of this year (that is, through June 30) have had a big effect on economic output and employment. I said this was unlikely as a matter of theory, and that she had no persuasive evidence to back up her claim. And I raised the question of the ethical responsibilities of an academic who takes a government job and then makes a speech that although it deals with a subject that she had studied and written about as an academic is not a responsible academic analysis.
I have a different impression. My impression of the speach was that I wish I'd written it and submitted it to a journal. I think that it is unreasonable to compare it to a "responsible academic analysis," because academics don't have access to the resources (data and staff) which made it possible. I think it is obvious that the speach could be published in the AER. The editor might demand stylistic modifications, but the analysis is top notch.
More to the point it is exactly the sort of thing that Romer wrote when she was a professor at Berkeley. It is clear to me, and many others, that, when Posner contrasts the speach to Romer's academic work, he displays his total ignorance of her academic work.
I think the problem is partly that the economics profession is divided into schools of thought -- roughly fresh water and salt water -- with profound contempt for each other (although salt water economists such as C. Romer, D. Romer and N.G. Mankiw tend
to be polite in public).
I think it very likely that Romer's speach and her academic work is considered to be not* "responsible academic analysis" by top economists working at the economics departments of the Universities of Chicago and Minnesota. My guess (and it is a wild guess) is that they don't consider it to be economics, because it has nothing to do with maximization under constraint. The number one top leader of the school (Prescott) condemns econometrics as such and, in effect, argues that one must assume his theories are true even if they are inconsistent with the data. Even among those who don't regect econometrics as such, there is a profound disagreement about methodology.
At Berkeley, Harvard and MIT simple calculations are demanded.
There is (or was when I was there) pretty much an absolute rule that one must start with summary statistics, then look at correlations and cross tabs or something, then work up to a multiple regression (OLS) then probably do something with instrumental variables with identifying assumptions comprehensible and convincing to the man on the street.
This is pretty much a description of Romer's speach.
The relatively fancy IV part would be the cross state and cross national comparisons which Romer Posner** ignored entirely in his critique. Basically his argument was that the speach did not include the sort of analysis required to get a paper published in say the AER if you ignore the sort of analysis required to get a paper published in say the AER which was contained in the speach but ignored completely in his critique of the speach.
Some (Thoma mostly) suggest that Posner is showing contempt for the economics profession assuming a lawyer, law professor, judge and top notch microeconomist can handle macro without brushing up on the terminology. My guess is nearly the opposite. I suspect that he is in contact with macro economists who share his view of Romer's speech and that this made him sure he is on safe ground.
Basically his view is that Romer's speech is not respectable academic economics, because it clearly involves taking the IS-LM model seriously and considering the concept of a multiplier and because the empirical work is a combination of simple reduced form calculations and simple easily comprehensible instrumental variables regressions such that no fancy economic theory or econometric technique is required.
I think Posner genuinely doesn't know that a large fraction of the economics profession agrees with Romer's approach.
The fact is that top fresh water economists think they are the only top notch economists and dismiss salt water economists including the ones with Nobel prizes and stuff.
*update: Major oops. I left the not out of my original post. Corrected thanks to a comment.
** update 2: another booboo corrected thanks to comments."
@Jim Glass and K.Arts,
The stimulus cost per job-year calculation needs to consider much more than just wages. Allow me to explain why.
The cost per job-year of the stimulus comes to about $116 thousand.
Now that may sound like a lot until you realize that in the second quarter of this year there were an average of 132.1 million people employed in the US (payroll) and nominal GDP was $14.15 trillion at an annual rate. Thus GDP per job in the second quarter amounted to $107 thousand, or roughly the same amount. That’s because the cost of a job is not just the cost of the wages, but the cost of benefits, and the returns to land and capital as well. So the estimated cost per job-year of the stimulus is not outlandish at all.
It's also worth mentioning that large proportion of these jobs are in health, education and construction. So contrary to what many are saying, these are not simply make-work jobs.
Casey Mulligan has been the worst offender in the cost per job calculation. Unlike Jim Glass who properly refers to job-years, Mulligan doesn't even bother to divide by job-years, instead choosing to divide by 3.7 million, the number of jobs created by the fourth quarter of 2010. He consequently comes up with a ridiculous figure of $215 thousand per job. He surely knows better, and I can only assume he is doing it for intellectually dishonest reasons.
There seems to be a tidal wave of innumeracy at the University of Chicago these days, for whatever reason. It must have something to do with the freshwater.
P.S. I was an undergraduate at Chicago, and in those days it seemed to hold itself to higher standards, but now I am embarrassed to even admit it.
@ Jim Glass
Another good article re: slow growth...
http://www.ft.com/cms/s/0/90227fdc-900d-11de-bc59-00144feabdc0.html?nclick_check=1
@MarkASadowski
Very correct. Also, a simple job years calculation doesn't reflect the changes in potential GDP or labor productivity that job losses can have.
All this debate is amusing and reinforces something Keynes once said about the economics profession:
"...the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher -- in some degree. He must understand symbols and speak in words...No part of man's nature of his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician."
That's as clear an explanation as one is going to get of how difficult the profession is and perhaps answers all those who think that economics is only "properly" interpreted through the narrow lense of a limited professional cohort with its own economic/social interests in mind (not unlike the lawyers these economists associate Judge Posner with).
It is important to remember that Keynes himself was no left-leaning wacko. He was, at heart, a classicist. He largely believed in the general ability of the savings/investment curves to automatically re-adjust. Unknown by many, he was also an advocate of monetary policy as the first line of defense in any concerted public effort to counter-act an economic depression.
But he was flexible enough in this thinking to acknowledge the clear fact that traditional methods could be ineffective, and that while the general classical theories held true in the long run, that of course in the long run "we are all dead." In the interim, something more effective could be done.
And that is his basis for his advocacy of fiscal expansion in the manner that Posner prescribes. For savings and investment is a function of income - and there are times when the national income shrinks so much that savings becomes wiped out while investment, the lifeblood of wealth creation, stalls completely. Any subsequent injection of liquidity (i.e. through monetary policy) may be rendered ineffective as it may only serve to replace depleted savings. In the current environment, liquidity injections have not only replaced depleted savings, but also been hoarded as people anticipate even greater depletion in the national income.
The current cause of the depletion in national income is known by all - excess leverage. When one is leveraged 10:1 and assets (which produce income streams) decrease by 10%, one's equity (savings) has been depleted, causing a chain reaction throughout the business (investment) cycle.
In these instances, it seems that only the substitution of government activity for private demand can stimulate income growth (and the necessary investment cycle which is so crucial to wealth generation). But, as Posner notes, government intervention must effectively substitute for private consumption, which, I agree, has not been very effective as of yet.
In many circles, Keynes has received a bad rap. Perhaps this is because the legacy of his brilliant insights have been tarnished not only by critics, but by his professed "followers" as well - the Krugmans of the world certainly do him no justice. Of course his written words in the form of his General Theory can neither expound nor defend his thoughts. Hence all us non-economists have grown accustomed to relying on his subsequent cohorts. Alas, the teachings of a master should never be judged on the actions of his disciples.
K.Arts,
You wrote:
"Also, a simple job years calculation doesn't reflect the changes in potential GDP or labor productivity that job losses can have."
Absolutely. Based on my simple analysis, it's my observation that the rate of growth in potential GDP is extremely dependent on the output gap. In other words growth in GDP per hour worked (productivity) seems faster when the economy is closer to "full employment." I suspect that the cause of this is, in the case of full employment, the lack of the relative importance of of "hysteresis."