Late, Er, Morning Thoughts of a Stimulus Skeptic
1. At a smaller scale, isn’t deficit spending with marginal-rate tax cuts (geared toward upper-income brackets) in a loose-money regime what we’ve been doing since the first Bush Administration budget?
2. The counter-arguments are either or both of, a) It wasn’t big enough; b) the composition was wrong.
3. Ripose b seems facially more persuasive than a. Riposte a seems to amount to, "We need a bigger bubble!"
4. As to b, it can be true without the current stimulus being the "right" composition. I tend to think that government money spent on infrastructure (bridge maintenance! SUPERTRAINS!) and health care is more productive of sustained economic health than money spent on JDAM’s and military contractors, and that tax relief for lower brackets may sustain living standards better than tax relief for upper brackets. (Then again, it may just ignite inflation.) But as progressives have complained, there’s only so much infrastructure money in the current stimulus bill. Meanwhile, all the talk is about jump-starting demand still, when the real social need seems to be to recapitalize the middle and working classes. Worrying that people might just save their stimulus money instead of spending it tells me that our rulers either don’t consider recapitalizing the middle class to matter or just have no idea how to do it in a way that keeps the economy going. Hey, I don’t either! But that just fuels my skepticism.
5. I’m still concerned about the question of how much we know about the real economic history of the United States over the last decade or even three. We’ve been through at least two bubbles in short order. One problem progressives have identified is that median wages have not risen with productivity. But how meaningful are out measures of productivity across bubble and non-bubble eras? Note: preceding is a real, not rhetorical question. In the corporate world, one gets hit now and then with accounting adjustments for various charges related to past periods. What one tries to do is produce a normalized income statement exclusive of the adjustments so that management has the best possible view of the run rate of the business. I’m not sure national accounting does such things or even has the tools to do it. Leaving productivity aside, what other supposed facts of the US – and world – economy do we think we knew that we don’t really know. (See Quiggin’s "refuted economic doctrines" series, and some of the challenges from his commenters.)
6. There’s an awful lot of right/conservative/soft-libertarian economics I consider well and truly refuted by events. That said, I haven’t seen progressive thinkers grappling with the global nature of the current downturn, which seems to be falling on the social democracies and neoliberal regimes and post-mercantile states alike. What does it mean that pretty much all national economies are in a tailspin, regardless of model? Are the safety-net features of the social democracies successfully blunting the impact on their citizens? In ways that can be sustained through another year, say, of recession? Is the protectionism of post-mercantile states in East Asia protecting their industries more than the less protectionist regimes of the neoliberal countries? Again: real rather than rhetorical questions.
7. More or less all of the above boils down to, a) Do we have any idea what we’re doing? and b) Are we sure we’re not just blowing a new bubble as fast as we can? Are we sure, in our heart of hearts, that’s not what we want to do?
Comment by SomeCallMeTim —
February 1, 2009 @ 12:48 pm
Riposte a seems to amount to, “We need a bigger bubble!”
Alternatively, “We need a big bubble that we can either grow into or deflate slowly.” That seems to make sense to me. It’s wrong to steal from Peter to pay Paul, but it’s only harmful if you aren’t able to pay Paul back prior to any claim of his. It may, in a global sense, even be beneficial.
Comment by joe from Lowell —
February 1, 2009 @ 1:52 pm
The counter-arguments are either or both of, a) It wasn’t big enough; b) the composition was wrong.
Actually, the counter-argument is that deficit spending has different effects in normal economic times from its effects during a deep recession/depression/deflationary spiral. Pouring debt-financed money into different enterprises during strong economic times will divert productive capacity from other enterprises, while doing so during a steep downturn will, to a much greater degree, activate productive capacity which would otherwise be inactive.
Also, don’t confuse growth as a whole with bubble growth. The stock runup in the 90s and the housing (and mortgage-related paper) runup in the 00s consisted of paper profits.
Comment by Jim Henley —
February 1, 2009 @ 2:03 pm
Hi joe: But were the early-mid Naughties “normal economic times?” We hit the post-tech-bubble recesssion at the beginning of the decade and took a further economic hit from the atrocities of September 2001. While this happened, the Fed opened the money tap (always threatening to close it when wages for regular people showed the slightest upward movement, mind you), and the government, at the behest of the Bush White House: cut taxes substantially; jacked up spending on the military; took hundreds of thousands of people out of the labor pool with National Guard call-ups; passed Medicare Part B and generally gave us higher and higher deficits over the course of several years. In the absence of those moves, when, how and would the US economy have come out of the double-whammy recession of 2001? As it is, recovery was never impressive except for the upper crust – no real increase in employment or median wages.
SCMT: Can I confess to not understanding what you’re trying to say? I can’t agree or disagree because I’m not even sure what “big bubble that we can either grow into or deflate slowly” quite means. Would you be willing to take another stab?
Comment by Jim Henley —
February 1, 2009 @ 2:07 pm
Should add in response to joe: We probably agree that the deadweight loss of military spending and security-panic expense after September 2001 was huge. It may be that factoring deadweight loss into account the aggregate effect of the Bush budgets was depressive rather than stimulating. That would put even more causal weight on Fed policy for inflating the asset bubble(s). Again, I have more questions than answers here.
Comment by albatross —
February 1, 2009 @ 2:18 pm
Yes, but since we were already running huge deficits, if the above theory is true, we’ve already gotten many of the advantages of this kind of deficit-financed stimulus, right?
Constraints on growth from non-financial resources (machines, labor, land, technical expertise) have gone down, as parts of the private economy have shut down–meaning that the government’s use of those resources is less of a constraint on remaining private industry now. The large number of deficit-financed engineers or clerks hired by government, and the large number of cars and trucks and such bought by government, is no longer raising the prices/constraining the availability of those resources for private industry to the same degree.
Financial stuff is different, I think, because the economic meltdown is centered around finance.
Comment by sglover —
February 1, 2009 @ 2:41 pm
About those social democracies: It sure comes as a surprise that a New Deal-ish institution like state-guaranteed bank deposit insurance has only very recently been introduced into many (most?) European countries.
Comment by Thoreau —
February 1, 2009 @ 3:08 pm
My thoughts exactly.
It may be that a stimulus will jump start us back into greater economic activity so we can get going on fixing things and avoid a worse situation. If so, great. But in the long term, we need an economy built on working and saving rather than borrowing and spending. This isn’t the libertarian in me talking, this is just old school common sense from my grandparents (who are in no way, shape, or form libertarians). So when I hear that the solution is even more borrowing for even more spending, well, maybe as a short-term kick, but there are some fundamental things that need to change in the long term. And when saving starts to replace spending, there will be pain during that transition.
So I’m not opposed to stimulus per se, but like Jim I am a skeptic.
Comment by joe from Lowell —
February 1, 2009 @ 5:12 pm
Jim,
Did you mean “were the early-mid 00s ordinary times,” or did you mean to ask me about the 90s?
We had recessions at the beginning of both decades, and a good case could be made that deficit spending was a good idea during both of them, at least to maintain service levels and to cushion the fallout. A good case could also be made that they were not deep enough to produce deflationary spirals, so there was no real need to prime the pump in order for a recovery to happen. Either way, we’re not talking about the need for the public sector to stimulate demand in order to keep the economy from shutting down.
As it is, recovery was never impressive except for the upper crust – no real increase in employment or median wages. I think that this is more a consequence of the way our economy works, in both good times and bad, than of the fact that the economy didn’t experience robust growth.
I tend to put more weight on the Fed’s cheap money policy for the bubble than the deficit, which wasn’t actually that large in %GDP terms anyway. (The reason I was unhappy with the big deficits during relatively good times was because they left us with less debt capacity on the off chance that the economy falls off a cliff. Keeping the national debt low, a la Al Gore’s lockbox, is the federal version of a rainy day fund).
Comment by joe from Lowell —
February 1, 2009 @ 5:15 pm
I can never remember if it’s “here here,” or “hear hear,” but HERE effing HEAR!
We’re going to have an awful lot of debt to pay down in the 2010s. Here’s hoping that the anti-stimulus people fretting about the size of the national debt remember what they’ve been saying, and don’t revert back to “let’s cut everyone’s taxes because Reagan proved that deficits don’t matter” the next time we run a surplus.
Comment by Thoreau —
February 1, 2009 @ 5:43 pm
It’s not just about the federal budget, though, joe. It’s about individuals too. Th next time things are good, maybe it would be better if people save a lot of what they’re getting. Hell, maybe it would be good if people start saving right now. The way things are generally discussed, advising people to save rather than spend is regarded as a recipe for economic downturn. Well, it’s also an insurance policy against bubbles and nasty shocks.
Comment by SomeCallMeTim —
February 1, 2009 @ 7:18 pm
I can’t agree or disagree because I’m not even sure what “big bubble that we can either grow into or deflate slowly†quite means. Would you be willing to take another stab?
I meant only that some large part of the problem appears to be that we deal badly with large disruptions in expectations. Someone who is overpaid by $20/hr at $100/hr might be worth $100/hr (or $95/hr) in a year. So for a year we provide price support for a year, and someone who would have been fired before keeps his job and produces $80 of value per hour rather than nothing. We’ve inflated the cost of his labor beyond what the standard metrics would suggest is appropriate because (perhaps) we think that the standard metrics will pop back in line with $100/hr (or $95 or $90) in a year or two. And (perhaps) we think the $20 hr for a year is less expensive than the total cost of letting him be unemployed.
Comment by Joe Strummer —
February 1, 2009 @ 8:02 pm
A bubble deflating will hurt somebody. There is nothing that can be done about it. I would say soft-libertarianism has been shown to be pretty nonsensical. I would say that hard-libertarianism is right, but it doesn’t matter that it’s right.
The real question going forward is not how can we grow faster etc. But how can we screw the people who deserve screwing.
Comment by Thoreau —
February 1, 2009 @ 9:44 pm
Could we get definitions on hard and soft libertarianism? Given the clout of pro-business voices in libertarianism, detractors from that approach (those who might also have concerns about workers and consumers and *gasp* poor people, not just employers and sellers) have sometimes seemed to be the “softer” ones.
OTOH, since the business uber alles approach is more concerned with one set of players in the marketplace, while their detractors are concerned with all players in the market, one could argue that those taking a wider view of the market are the ones taking a “harder” (more complete) approach to libertarianism and markets. For instance, what Kevin Carson advocates is at odds with what the business uber alles libertarians advocate, but also far more radical, and arguably “harder” in that sense.
So, some definitions might help us here.
Comment by Nell —
February 1, 2009 @ 11:28 pm
OT: Congratulations on your Steelers’ pulling that off! San-toe-nio redeemed quite a few of those hyperaggressive offensive linemen…
Comment by SomeCallMeTim —
February 2, 2009 @ 12:21 am
A bubble deflating will hurt somebody. There is nothing that can be done about it
Sure, but the speed of deflation matters a great deal, I think. You can imagine someone who can afford to lose $100/wk for a couple of years, but not $10400 tomorrow.
Comment by joe from Lowell —
February 2, 2009 @ 9:54 am
I wonder about this. We’re always told that people aren’t saving, but those numbers are based on estimates that exclude investments. Contributions to 401ks and IRAs were going strong over the past decade or so.
There’s probably a good lesson about building up actual savings in addition to a retirement account, but I don’t really buy the moral scolding about people blowing all their money on consumer goods because the nominal savings rate is down.
Comment by Barry —
February 2, 2009 @ 9:55 am
“As it is, recovery was never impressive except for the upper crust – no real increase in employment or median wages.”
IIRC, median real household income was flat for the 2001–07 economic cycle, the first time in, um, since they’ve been keeping statistics on it. Which means for several economic cycles, at least.
Comment by ern —
February 2, 2009 @ 11:17 am
“I wonder about this. We’re always told that people aren’t saving, but those numbers are based on estimates that exclude investments. Contributions to 401ks and IRAs were going strong over the past decade or so.”
Joe – are you sure about this? 401k & IRA contributions are part of the savings rate calculation according to this website: http://www.frbsf.org/education/activities/drecon/2005/0508.html. It is a little dated though.
Comment by joe from Lowell —
February 2, 2009 @ 11:22 am
Linky no worky.
But no, I’m not certain. I believe the savings rate is calculated in different ways by different sources.
Comment by ern —
February 2, 2009 @ 11:39 am
Sorry, That period at the end got me.
http://www.frbsf.org/education/activities/drecon/2005/0508.html
Comment by dhex —
February 2, 2009 @ 12:36 pm
“The next time things are good, maybe it would be better if people save a lot of what they’re getting. Hell, maybe it would be good if people start saving right now”
to be honest, i don’t have a lot of hope for this, if only because that kind of national frugality is a pre-credit economy type of thing, and more importantly, took a serious economic depression to scare the hell out of people.
we’ll see, of course. i’ve been heartened, in the anecdotal, by talks with friends about their largely successful effort to get out of the being in debt to credit card companies thing.
Comment by joe from Lowell —
February 2, 2009 @ 1:17 pm
I just hope there’s a happy medium between permanent HELOC payments and everyone cashing their pay checks and putting the money in a coffee can.
Comment by Eric the .5b —
February 2, 2009 @ 1:52 pm
Yeah, I wouldn’t mind definitions of the latest libertarian dichotomy, either.
Comment by Thoreau —
February 2, 2009 @ 1:52 pm
Me too, joe, but clearly we’ve gone too far toward one of those extremes and a bit of correction is in order. That sort of correction will lead to a more sustainable recovery, but also a slower recovery, and all sorts of people will be insisting that what we need is immediate spending NOW!
Fortunately, I think that having touched the hot stove, most people will be more cautious in the future, despite all the dumbasses telling them to spend for the good of the economy.
Comment by Barry —
February 2, 2009 @ 2:43 pm
Comment by joe from Lowell —
“We’re going to have an awful lot of debt to pay down in the 2010s. Here’s hoping that the anti-stimulus people fretting about the size of the national debt remember what they’ve been saying, and don’t revert back to “let’s cut everyone’s taxes because Reagan proved that deficits don’t matter†the next time we run a surplus. ”
We will, but hopefully not before 2017, when the next GOP presdident takes office, and governs not only by that slogan, but also by ‘look how bad Bush II screwed things up, and he was reelected’.
Comment by Eric the .5b —
February 2, 2009 @ 3:06 pm
Well, let’s look at the past trend and what we can expect from the future.
At any given point, one party will determine the budget, and it will produce a deficit budget. The other party will decry this deficit and the growing national debt. When power switches, the other party will produce deficit budgets, and the first party will decry the deficit and growing debt. This will continue until something makes the behavior impossible.
(During the late 90s, this open hypocrisy was disguised a little by the accounting fiction that let a Red Congress and a Blue president claim a “balanced” budget. This aberration was corrected when the next Red president attempted to use the same dodge, only to be berated for raiding a “lockbox”.)
Comment by frank —
February 2, 2009 @ 3:40 pm
Eric- When would counting the Social Security surplus as income have balanced the budget for Bush?
Comment by Eric the .5b —
February 2, 2009 @ 3:55 pm
Googling around, frank, up until August of 2001; things went rapidly downhill from there, of course.
Comment by frank —
February 2, 2009 @ 4:54 pm
So up until the time his first budget took effect. The budget that he had been talking about since he started running for President.
Comment by Eric the .5b —
February 2, 2009 @ 6:29 pm
We’ll never know, frank. Up until that point, they’d been talking up a budget “balanced” by the Social Security surplus. They might have randomly thrown a few more tens of billion on the pile to go over – who can say? But then September of 2001 rolled around, with its tragedies and wild-spending justifications.
Comment by joe from Lowell —
February 2, 2009 @ 7:58 pm
Correct me if I’m wrong, but if the government takes in $X00 billion more than it spends, it is in surplus, correct?
The “accounting fiction” is to pretend that some of the money the government takes in isn’t actually money the government takes in.
Comment by Barry —
February 3, 2009 @ 11:04 am
If one looks at a graph of the federal deficit from the 80’s and 90’s, the change started during the Bush I administration, and improved more with the first budget of the Clingon administration – which was passed with 0 GOP votes. And numerous (Gramm, WSJ) cries of the horror it’d bring us to).
The GOP gaining Congress in 1994 is not reflected in any change in the federal defecit trajectory at that time.
Bush I started it, Clinton continued and improved it, and the GOP Congress didn’t do visible jack to it (until Bush II).
Comment by joe from Lowell —
February 3, 2009 @ 11:22 am
To add to Barry’s point, I’ll note that the change that took place under Poppy Bush was a result of the budget deal he struck with Congress – the one that caused a revolt in his party.
Comment by Eric the .5b —
February 3, 2009 @ 1:21 pm
I love the way people jump in to try to get defensively partisan on a bipartisan trend.
Case in point: Note carefully that I didn’t in any fashion say it was. I didn’t so much as hint at either some farcical “Team Red balanced the budget” claim or some dubious “divided government” argument. I only noted the political affiliations of both Congress and the President at the time, but you felt the need to jump in and argue against a un-raised point.
Comment by Eric the .5b —
February 3, 2009 @ 1:23 pm
Heh. I know you’re a big fan of the it’s all one big pot for us to play with view of federal taxation, joe, but the funny thing is that certain taxes, like FICA, are intended for certain purposes and not the general revenue. Hence, all the “lockbox” yammering by Blues after Bush took office.
Comment by Barry —
February 4, 2009 @ 7:49 am
Eric, your original comment was clearly painting a bipartisan picure: “At any given point, one party will determine the budget, and it will produce a deficit budget. The other party will decry this deficit and the growing national debt. When power switches, the other party will produce deficit budgets, and the first party will decry the deficit and growing debt. This will continue until something makes the behavior impossible.”
Supply-side economics was clearly introduced by the GOP, at a particular time, and clearly adopted as a core doctrine by the GOP.
Comment by Barry —
February 4, 2009 @ 7:50 am
Jim, in case that you didn’t know, John Quiggin on CT has answered some of your questions:
http://crookedtimber.org/2009/02/04/the-global-spread-of-the-financial-crisis/#more-9449
Comment by joe from Lowell —
February 4, 2009 @ 12:39 pm
Facts that make one party look better than the other are too “partisan” for some people.
We need to pretend that the last 30 years of economic history don’t show much worse deficits under Republicans, or they get a tummy ache. Even if – no, especially if – it’s true.
Heh. I know you’re a big fan of the it’s all one big pot for us to play with view of federal taxation, joe, but the funny thing is that certain taxes, like FICA, are intended for certain purposes and not the general revenue. Another uncomfortable fact: The Social Security Act REQUIRES the federal government to put FICA surpluses in the general fund. It is illegal for them not to.
Hence, all the “lockbox†yammering by Blues after Bush took office. Did you just write “after?” Seriously? Do you really know this little about a subject you decided to lecture me on?
Al Gore proposed a lockbox for Social Security surpluses DURING THE PRESIDENTIAL CAMPAIGN. If you think back hard enough, you might be able to remember him bringing up the idea during the debates.
What’s more the reason he made this proposal was specifically BECAUSE Social Security surpluses are, under federal law as I mentioned above, REQUIRED to be put into the general fund. Gore proposed to include an item in the budget that would have used those funds – once again, coming out of the general fund – to pay down the national debt.
Comment by Eric the .5b —
February 4, 2009 @ 6:52 pm
Yes, it was – just not the one you were jumping at.
You guys are really going to try to pretend deficits only started when Reagan showed up?
Like I said, I’m avoiding the “divided government” line that argues that the only way to slow down debt growth is a Red Congress fighting down a Blue president. The brief slowing of the growth of the national debt towards the end of the 90s and the very early 2000s doesn’t impress me nearly as much as it does the sides who want to take credit for it.
Comment by Eric the .5b —
February 4, 2009 @ 7:06 pm
I’m not uncomfortable with that, joe. I’m uncomfortable with people who treated that as some sort of budgeting victory.
Are you really going to go there…?
Ah, you are.
Yes, I remember; I thought it was hilarious. Anyone paying attention (even the Blues) knew that would go nowhere.
However, I wasn’t talking about Gore’s conveniently late and (in the event of his election) easily-forgettable proposal. I was rather clearly referring to the criticism of Bush by your team after that administration started preparing a budget that would need the SS surplus to “balance”.
Comment by Robert Waldmann —
February 4, 2009 @ 10:45 pm
On question 1
Many stimulus supporters opposed Bush’s deficit spending. A contradiction ? Not at all. Those stimulus supporters almost always oppose deficit spending, but argue that the current situation is extraordinary because the 3 month t-bill rate is almost exactly zero.
Krugman, for example, has been absolutely consistent in denouncing the idea that fiscal stimulus (that means deficit spending) is a good thing in normal times. he called it “vulgar Keynesianism” about a decade ago.
His argument is that the FED decides GNP and the unemployment rate so fiscal stimulus just crowds out private investment (100% multiplier zero just what Fama and Cochrane are claiming about the current stimulus).
However, now everything is different, because monetary policy is pedal to the metal and the economy is still stalling.
He is very explicit that he only supports fiscal stimulus when the safe short term interest rate is zero.
So opposed it in 2001-2007 and supports it now, because the 3 month t-bill rate is different.
This isn’t an argument he made up to suit his current view. He’s been talking about the liquidity trap (in Japan) since the early 90s.
Comment by Robert Waldmann —
February 4, 2009 @ 10:55 pm
On 6
The downturn spreads through trade. The US tanks so it imports less so other countries have a recession. A huge recession in the USA virtually has to cause a global recession.
One would expect a generous welfare system to cushion the aggregate shock by working as an automatic stabilizer. That doesn’t mean that countries wouldn’t have a recession, just that it won’t be as severe. You can’t evaluate relative severity yet.
also people might suffer less if they got money from the government. US poverty rates were huge before the recession and will probably increase relative to Europe.
on 4. Recapitalizing with funny money won’t do any good. Giving bonds to people doesn’t increase national wealth as citizens will have to pay more taxes to redeem the bonds. At most it can create the illusion of wealth causing people to go further into debt.
If debt issued during the stimulus is saved *and* people don’t think about how they are going to be the ones paying themselves (via taxes) will cause increased consumption pretty much until the debt is repaid. Thus it is a very bad stimulus. Not right now when it is needed but also for decades when the increased consumption will crowd out investment.
See comment on point 1 above. Stimulating demand is only good when i=0. Saved sax rebates will drive up consumption in the future when monetary policy can work again. Excess consumption is a large part of how we got into this mess.
Comment by Robert Waldmann —
February 4, 2009 @ 11:04 pm
On 5. I think personal income is measured roughly correctly so the huge incomes of the very richest really happened.
Real wages can be measured accuately.
Profits are made up numbers. The huge profits made by financial firms were illusory because they were based on market prices of assets which were above their fundamental (hold to maturity) value. the huge profits of huge banks could not be distributed as dividends (liquidating the assets for cash would have caused the prices to collapse) back then and are long gone by now.
However, the bonuses were really paid.
National accounts are continuously corrected. However, GNP is national income so it is not true that national wealth changes by GNP – consumption – government consumption – depreciation.
(last because the G means gross of depreciation). There are also national capital gains or losses which are *not* calculated at all (hence no corrections).
(change in wealth is net income minus consumption (private and public) plus capital gains or losses).
So a simple concept without huge revisions, but just because it isn’t at all what we’d like to know.
Big important part of this. The USA is deeply in debt. But so what the debt is in dollars. If we inflate it away we won’t have to send them goods and services to repay our debt.
Accounting in dollars the US gets a huge capital gain on the real assets owned by US residents (in the USA and foreign direct investment). Calculated in inflation adjusted dollars the immense US debt just vanishes — a capital loss for the rest of the world and a capital gain for the USA).
This is the $ 2 trillion scam. Can it happen ? Well it has happened.