Let's start with two indisputable facts. First, both the financial system and the economy are in far better shape today than they were in the dark days of January or February 2009. For example, even though unemployment is higher now, it is receding rather than soaring, dropping to 9.7% in May from 9.9% in April. Second, the growth of the U.S. economy over, say, the last 12-18 months beat virtually every forecast made back then. I know, because I stuck my neck out on this page with a forecast viewed as too optimistic in July 2009, and the U.S. economy did better than I predicted.
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Why the bad reputation [for the stimulus package]? The main reason appears to be that the White House's January 2009 forecast was too optimistic -- projecting, for example, an unemployment rate around 8% by the end of 2009 if the stimulus passed. (It was actually 10%.) Notice the reasoning here: Since unemployment turned out worse than expected, the stimulus must have failed. Did someone say non sequitur? Let's see. If the Yankees lose a game 13-11, as they did one day last month, the hitters must have failed. Right?
Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion -- which is roughly correct -- and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that -- or none at all?
Thursday, June 17, 2010
Economic Assessment
Alan Blinder's Op-Ed in the Wall Street Journal yesterday is a fantastic analysis and defense of Obama administration economic policies. Blinder is a professor of economics at Princeton and former vice chairman of the Federal Reserve. He was moved to write by a recent poll demonstrating extraordinarily low marks for the Obama administration's economic policies.
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There are a number of things that jump out at me about Blinder's analysis that are wrong:
For example, even though unemployment is higher now, it is receding rather than soaring, dropping to 9.7% in May from 9.9% in April. Second, the growth of the U.S. economy over, say, the last 12-18 months beat virtually every forecast made back then.
Well, yes, unemployment dipped by 0.2%, which is an impressive decline on a month-by-month basis. However, as well all know, all but about 20,000 of the jobs created were in the public sector, so this is no reason for celebration. Further, unemployment also doesn't reflect those who have given up looking, which is why unemployment can actually rise even when job creation surges and decline when jobs are scant. If we look at long-term unemployment the picture remains grim:
http://www.businessweek.com/news/2010-06-04/duration-of-unemployment-in-u-s-rises-to-record-34-4-weeks.html
As for GDP figures, they suffer from their own problems. Did you know, for example, that GDP is expected to slightly benefit from the BP oil spill, even though this is clearly a case of economic wealth destruction?
http://blogs.wsj.com/economics/2010/06/15/oil-spill-may-end-up-lifting-gdp-slightly/
Some other problems with GDP can be found here:
http://togetrichisglorious.blogspot.com/2009/07/meaning-of-gdp.html
http://togetrichisglorious.blogspot.com/2009/08/meaning-of-gdp-ii.html
Of course, that does not prove that the president's policies caused the unexpected improvement. Maybe our luck just turned, and the economy would have done even better under a laissez-faire approach. (A few diehards still argue that FDR's policies worsened the Great Depression!)
A few diehards? That doesn't square with the facts:
http://www.independent.org/blog/?p=840
In 1995, economic historian Robert Whaples published a survey in the Journal of Economic History asking “Where Is There Consensus Among American Economic Historians?” (Vol. 55, March 1995). Half of the economists and more than a quarter of historians agreed, in whole or in part, that the New Deal prolonged the Great Depression.
Blinder continues:
In fact, most of [TARP] has already been paid back—with interest and capital gains. When TARP's books are eventually closed, the net cost to the taxpayer will probably be under $100 billion—far under if General Motors ever repays.
We shall see. It is no surprise that much of TARP has been paid back, as many of the banks that took the money were forced to and didn't really want or need it in the first place. However, yesterday this story appeared:
http://www.cnbc.com/id/37732312
90 banks have missed TARP payments, and banks still hold $130 billion of taxpayer money.
More Blinder:
The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs.
Except the CBO analysis is not an actual survey of jobs created, but rather simply running a mathematical model.
http://reason.com/blog/2010/03/26/heckuva-job-creation-estimate
But the CBO, to its credit, has been fairly forthcoming about its methods and their limitations. In response to a question at a speech earlier this month, CBO director Doug Elmendorf laid out the CBO's methodology pretty clearly, describing the his office's frequent, legally-required stimulus reports as "repeating the same exercises we [aleady] did rather than an independent check on it." CBO tweaks its models on the input side, he says—adjusting, for example, how much money the government has spent. But the results the CBO reports—like the job creation figures—are simply a function of the inputs it records, not real-world counts.
Blinder continues:
Try to imagine any government spending a massive sum like $862 billion without creating or saving millions of jobs. More specifically, suppose peak-year spending from the stimulus bill was about $300 billion—which is roughly correct—and that our hapless government just sprinkled its purchases around at random. On average, each job in our economy accounts for about $100,000 worth of GDP. (We are a highly productive bunch!) So $300 billion worth of additional GDP should be the product of about three million more jobs. Do we really believe the stimulus produced only a small fraction of that—or none at all?
I have no doubt that spending hundreds of billions of dollars created some jobs, but how many were also destroyed? All that money had to come from somewhere before it could be spent. Furthermore, future jobs will be lost as we eventually have to pay the stimulus money back, with money spent on repayment representing money that can't be used elsewhere in the economy.
And sources for my statistics:
http://www.bls.gov/opub/cwc/cm20030124ar03p1.htm
http://bea.gov/national/index.htm#gdp
Colin, you cite that "all but 20,000 of the jobs created were in the public sector," which is true. But if these public sector jobs hadn't been filled unemployment would have not gotten better, it may have even worsened. That means 200,000 people that otherwise would have been collecting on unemployment insurance are now providing a service to the nation and being paid for that service. I would love to see more private sector job creation, but in it's absence, as you note, is it not better for the government to pay for people to work then to simply insure people against poverty?
The oil spill has been an issue for 2 months, not even a full quarter, so perhaps in 4 to 8 more months when multiple quarters of GDP growth or contraction can be assessed that could prove valid. For now, Blinder is right to sight the stimulus as being a contributor to better the forecast GDP growth.
Regarding your comments about economists and The Great Depression, when FDR took office in 1933 unemployment was at about 24%. In 1939, it had dropped to 17%. During that same period, GDP grew on average by 5.9%. Did WWII help end the Great Depression? Absolutely. Did FDR's New Deal "worsen" the Great Depression? No.
Colin, you cite that "all but 20,000 of the jobs created were in the public sector," which is true. But if these public sector jobs hadn't been filled unemployment would have not gotten better, it may have even worsened. That means 200,000 people that otherwise would have been collecting on unemployment insurance are now providing a service to the nation and being paid for that service. I would love to see more private sector job creation, but in it's absence, as you note, is it not better for the government to pay for people to work then to simply insure people against poverty?
Whether those people should have been hired is besides the point. The point is that Blinder claims the stimulus has resulted in an improved employment picture, when the truth is that it has mostly to do with temporary Census hiring unrelated to the stimulus. Those people would have been hired even if the stimulus hadn't been passed.
It is, BTW, remarkable that even though the unemployment situation has deteriorated under Obama's watch from 7.7% to 9.7% currently, that Blinder thinks movement on unemployment is one of the stimulus's strong suits. It makes one wonder what exactly would have had to transpire for Blinder to declare the stimulus a failure. One gets the sense he is employing heads-I-win-tails-you-lose logic in which even when presented with a bad unemployment picture he simply retorts that it otherwise would have been worse.
The oil spill has been an issue for 2 months, not even a full quarter, so perhaps in 4 to 8 more months when multiple quarters of GDP growth or contraction can be assessed that could prove valid. For now, Blinder is right to sight the stimulus as being a contributor to better the forecast GDP growth.
Again, besides the point. The point is that the oil spill contributing to GDP shows the fallacy of over-reliance on GDP stats to gauge the health of the economy.
Indeed, if one looks at how GDP is calculated, government spending is a significant part of the number that is arrived at:
http://en.wikipedia.org/wiki/Gross_domestic_product#Components_of_GDP_by_expenditure
Therefore significant government spending will tend to boost GDP by definition.
Regarding your comments about economists and The Great Depression, when FDR took office in 1933 unemployment was at about 24%. In 1939, it had dropped to 17%. During that same period, GDP grew on average by 5.9%. Did WWII help end the Great Depression? Absolutely. Did FDR's New Deal "worsen" the Great Depression? No.
First off, the point that I was making is that Blinder is completely off base when he says that the notion the New Deal failed is limited to a "few diehards." That's flat-out wrong.
Second, I don't see how the statistics you quote make your point. Unemployment declining by 7 percentage points over a six year period is nothing to brag about, especially when starting from such a high starting point.
A good economist looks not only at what happened, but would have happened had a policy NOT been adopted, in evaluating that policy's efficacy. The notion the New Deal succeeded would be more persuasive if it can be shown that countries who also suffered through the Great Depression and adopted more laissez-faire policies recovered more slowly than those which took a Keynesian/interventionist approach.
If anything, however, evidence seems to suggest the opposite. Wikipedia notes that Australia did not have an equivalent to the New Deal, and yet unemployment declined from a peak of 28% in 1932 to 11% in 1939:
http://en.wikipedia.org/wiki/Great_Depression_in_Australia#1932-1939:_A_slow_recovery
Oh dear, looking over Blinder's resume I note that he is credited with being the ideological godfather of the cash for clunkers program. While not the most economically destructive program the Obama administration has conjured up given the relatively limited amount of money involved, it surely must count as one of the dumbest public policy initiatives in recent years.
The stimulus was small in the big scheme of things. Too small, in fact. It might have been enough if it were all spending. But the tax cuts portion was useless and just a complete waste of money.
http://economistsview.typepad.com/.a/6a00d83451b33869e20128765e5d28970c-pi
I would recommend this to anyone who is anti-stimulus:
http://www.bankofengland.co.uk/publications/news/2010/045.htm
Our biggest problem is that Obama has completely failed us on financial reform.
http://www.piie.com/realtime/?p=1608
"But the tax cuts portion was useless and just a complete waste of money."
For all of the talk about Obama tax cuts, I still have yet to find one tax rate that has been reduced under his watch.
As for the stimulus being too small -- Paul Krugman's argument -- it's an amazing place we've come to when $750 billion in spending is considered insufficient. But then again, I suppose arguing the stimulus was too small is preferable to conceding the failure of its basic approach.
Why is it amazing to think that $750 billion is too little? I really don't understand why you say that. Yes, it's a large number--but it's not so tremendously large as compared to GDP; in fact it's about 1/2% of GDP. Further, despite your continued protests that the stimulus package did nothing (or, alternatively, was somehow harmful), "many independent economists say the stimulus has helped to revive the economy and prevent even bigger job losses." http://www.npr.org/templates/story/story.php?storyId=127937785. A panelist at the ACS conference noted yesterday that between the United States, China, and Europe, China is having the fastest recovery, the US is next, followed by Europe--notably, China had a much larger stimulus than the United States while Europe had none at all.
The plain and simple truth is that the stimulus package has had an impact and, had it been larger, it would have had a much larger impact perhaps significantly reducing--rather than stemming--the unemployment rate.
Why is it amazing to think that $750 billion is too little? I really don't understand why you say that. Yes, it's a large number--but it's not so tremendously large as compared to GDP; in fact it's about 1/2% of GDP.
Check your math. It's 5% of GDP, not 1/2%. That's a huge number.
Further, despite your continued protests that the stimulus package did nothing (or, alternatively, was somehow harmful), "many independent economists say the stimulus has helped to revive the economy and prevent even bigger job losses." http://www.npr.org/templates/story/story.php?storyId=127937785
You can find economists to support virtually any position out there. In 1991 a number of prominent economists wrote a letter urging that the government of New Zealand not follow through on planned spending cuts, citing its harmful impact on the economy. Actual result? The economy boomed.
http://www.marginalrevolution.com/marginalrevolution/2010/06/ruth-richardson-and-fiscal-austerity.html
In 1981 391 economists warned Thatcher against cutting public sector spending in the UK. Again, the economy ended up improving:
http://www.marginalrevolution.com/marginalrevolution/2010/06/from-the-comments.html
A panelist at the ACS conference noted yesterday that between the United States, China, and Europe, China is having the fastest recovery, the US is next, followed by Europe--notably, China had a much larger stimulus than the United States while Europe had none at all.
I don't see the relevance. China is also a developing market and thus it is much easier to post much higher growth rates. That's an apples to oranges comparison. Furthermore, the Washington Post just the other day had an article noting that there are growing questions over the long-term problems caused by this stimulus spending which is going towards projects likely to end up unused:
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/17/AR2010061705794.html
Further, given the problems with the PIIGS in Europe, their sub-par GDP growth is thoroughly unsurprising. It's also worth noting that Spain has had 3 stimulus packages in the last three years:
http://crisistalk.worldbank.org/2009/03/spains-stimulus.html
Italy passed a sizable stimulus package as well:
http://dalje.com/en-economy/italy-approves-stimulus-plan-analysts-sceptical/208950
Yet both are mired in economic torpor.
The plain and simple truth is that the stimulus package has had an impact and, had it been larger, it would have had a much larger impact perhaps significantly reducing--rather than stemming--the unemployment rate.
How is that the plain and simple truth? What proof can you offer? Right now it seems to me to be nothing more than conjecture. One could call it faith-based economics, as it seems there is no way for such thinking to be disproven. Indeed, despite that fact that the stimulus has not achieved its promised impact on unemployment we still have Blinder and others defending it. One wonders what would have to occur for it to be declared a failure.
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