The CEA has just released the newest quarterly report on the impact of the ARRA. In addition to tabulating the impacts on output and employment, there’s a special section by Chris Carroll (one of the leading authorities on modeling consumption behavior — I used to teach his papers in my PhD macro course), which concludes in the absence of the ARRA “…consumer spending would likely have continued to fall” (which is consistent with my post from a couple days ago).
From the CEA blog:
To date, there has been more than $200 billion of tax relief and income support provided to households by the ARRA. These funds have had a disproportionately large impact on the incomes of middle- and lower-income families.
CEA estimates that without these provisions, household real disposable income would have fallen substantially in 2009. Figure 6 from the report (reproduced below) shows actual after-tax family income alongside income without the tax relief and income support provisions of the Recovery Act. Without the tax cuts and income support provisions of the ARRA, consumer spending would not have rebounded as it did and, indeed, would likely have continued to fall.
As of 2010:Q1, the tax relief and income support provisions of the Recovery Act have saved or created between 1.1 and 1.4 million jobs, or roughly one-half of the total number of jobs saved or created by the Act.
Figure 5 decomposes the augmentation to disposable income arising from ARRA; Figure 6 presents the impact on disposable income.
Figure 5 from CEA, THE ECONOMIC IMPACT OF THE
AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 THIRD QUARTERLY REPORT
APRIL 14, 2010.
Figure 6 from CEA, THE ECONOMIC IMPACT OF THE
AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 THIRD QUARTERLY REPORT
APRIL 14, 2010.
After some discussion of various recent analyses of consumer behavior, the report concludes:
Together with the spending dynamics from the extra income in 2009, the $73 billion in tax relief and income support in 2010:Q1 directly raised household spending by $47 billion (not at an annual rate)…
Interesting question, we had all these libertarian/conservative economist claiming that Keynesian stimulus never works. Yet we are looking at another example of it working almost exactly as
the salt water school of economics claims it would.
I wonder what types of excuses and rationals they are going to come up this time to explain away the failure of their theories and analysis.
I would be interested in knowing how much of the increase in personal disposable income is due to homeowners who are underwater diverting their mortgage payments to consumables.
spencer,
Anyone can increase consumption by consuming capital. That is what we’ve done. The stimulus was paid for with debt, and they debt must be repaid. We are selling our future to consume today.
“Interesting question, we had all these libertarian/conservative economist claiming that “Monetarist” stimulus never works. Yet we are looking at another example of it working almost exactly as
the salt water school of economics claims it would”
Sorry Spencer, but I had to fix that word for you.
The problem with free enterprisers is that they live for the European Gold Merchants and the profitting from deflation they prey. The crime of 1873 is a must read and evil that the “Dave’s” of the world commence. In the long run Dave, we are all dead. Whining about some mythical line of “debt” that must be repaid shows you don’t understand the values of economics, but a intellectual internationalism of the gold merchants.
The main problem for the US economy has been the tight money supply/loose credit/bailouts to save the system since Volcker. The Reagan consensus. Loosen the money supply and restrict credit(FDR consensus) and watch the “real” economy grow rapidly while the credit driven economy contracts rapidly. Short term, we wouldn’t get to far ahead, but long term, it would be a major rebuilding of the US economy. The longer we wait, the more and more the “real” economy contracts and the false credit based economy grows. Eventually, we will only have about 2-3 trillion of “real economy” left if they don’t stop it and when the political will isn’t there to run 6-7 trillion dollar deficits to bailout another credit bust, the whole country will die and basically liquidate into nothing.
Sounds like we should only be listening to liberal economists, judging from spencer’s comment. Why don’t we just do that, and ignore all these “conservative” and “libertarian” economists, who are clearly, again, wrong.
Menzie, “Together with the spending dynamics from the extra income in 2009, the $73 billion in tax relief and income support in 2010:Q1 directly raised household spending by $47 billion…” is this the multiplier at which we are looking? Isn’t it negative?
@ Spencer
Few graphs rather than a long story (Of course! I would be delighted to offer the same for Europe should the same quality of information be available!)
Number of insured FDIC “problem institutions” (Must be a mixed product of MEW,House pricing)
http://www2.fdic.gov/qbp/grgraph.asp
Quality of C&loans 2004 2009 source FDIC
http://www2.fdic.gov/qbp/grgraph.asp
Not to omit FRED
Nonperforming Total Loans, Banks with Total Assets over $20B
http://research.stlouisfed.org/fred2/series/NPTLTL5
Those loans were not allocated for R&D.space programs, education,industries but for what was eaten and digested.
I much prefer Rudyard Kipling to Keynes
CoRev,
No because people do not spend every dollar they get their hands on in a single period. They may spend the bulk in Q1, but some of that added Q1 income will also be spent in Q2 and Q3 in decreasing amounts.
Also, what you speak of there is mostly an mpc question rather than a multiplier question. This does not speak to the multiplier effects. This was just a translation of stimulus related income into direct household spending.
Rage,
What you have offered is at odds with a good bit of standard thinking. Monetary policy at zero rates, bank lending falling – why should we allow for your insistence that monetarist rather than Keynesian policies are at work? Both are being tried, but there is direct evidence that households have money through fiscal policy that they would not otherwise have, and the article in question argues that consumer spending is higher as a result. The most straightforward mechanisms by which households could hope to get money to spend through monetary policy are bank lending (falling), employment (falling in all but one relevant month) and asset values (no longer falling, but down sharply from pre-crisis levels).
So, with the fiscal mechanism for stimulating consumption clear, the monetary mechanism not at all clear, and the point in question whether ARRA supported consumption, I don’t see that you’ve done anything but insisting on an unsupported point of view. If you have data to support your position, please let us know. If all you have is (non-standard) theory, well, that’s what I thought.
Menzie wrote:
there’s a special section by Chris Carroll (one of the leading authorities on modeling consumption behavior — I used to teach his papers in my PhD macro course), which concludes in the absence of the ARRA “…consumer spending would likely have continued to fall” (which is consistent with my post from a couple days ago).
And in an age of massive monetary stimulation that led to the greatest contraction in recent history and is leading us right back into the conditions that created the problen in the firt place, this is good because…?
Corev: I believe if you divide a positive number by a positive number, you still get a positive number. I think what you were getting at is that the implied multiplier is less than unity. But the multiplier (in common usage) pertains to ΔY/ΔG, not ΔC/ΔG (or in this case, ΔY/ΔT, not ΔC/ΔT, respectively). Finally, I think you need to recall the data are quarterly, and we usually assume there are lags in the multiplier process (going from G to AD=Y to C).
Actually, I just noticed that Brian Quinn said this more succinctly than I did.
Is it a long lasting a multiplier when consumers are drawing on their savings for consumption?
Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income
(DPI) increased $1.6 billion, or less than 0.1 percent, in February, according to the Bureau of Economic
Analysis. Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent.
http://www.bea.gov/newsreleases/national/pi/2010/pi0210.htm
Interesting. A couple observations:
1) The CEA understandably focuses on jobs and GDP in this report, but there’s another leg to the stool — financial markets. This was a housing crisis that turned into a financial panic, and then a jobs crisis. So what impact did ARRA have on financial markets? In the 1 month period between passage of the stimulus bill and the Fed’s announced expansion of its MBS purchase program to $1.25T, the S&P 500 pivoted from a 54% decline to a 77% rebound, corporate bond yields began to drop quickly, and secondary yields in the CLO markets started coming down from 16% to under 5% now. If you’re a private sector company, you can’t create jobs if you can’t get capital. It’ll be interesting to see how the economics profession untangles the complicated cause-and-effect of this whole episode…
2) This report is written by the people who designed the stimulus, right? That’s not to dismiss their analysis, which seems in line with others I’ve seen, but it does constrain them a bit. I’d be curious which portions of the bill they think didn’t work very well. Any opinions?
Tom writes:
If you don’t start with the right premises, you won’t reach the right conclusions. There was a credit mania with a huge level of embedded fraud. Everything else is secondary.
That’s a very dishonest comparison, wouldn’t you say? (I assume you meant a different time period than one month, as well.)
Thus proving that you don’t understand what real capital is. Hint: It’s not dollars of debt.
Also, the last 10 years of U.S. economic history have demonstrated that the private sector is no longer creating jobs even when it has unlimited access to debt. Furthermore, the debt-service costs, which are generally delivered to unproductive segments of the population, make it much more difficult to accumulate actual capital that might be used to create new productive jobs.
The economics profession hasn’t untangled most other previous episodes, so why should this one be any different? I suppose they could start by beginning with adequate premises (e.g. including the fact that people are not rational even in aggregate) and accepting upfront that economic systems are intrinsically complex/chaotic systems (in the mathematical sense)…
But, instead, we’ll have to choose between saltwater debt-suicide vs. freshwater fallacies…
Wisdom Speaker: You state: “…economic systems are intrinsically complex/chaotic systems (in the mathematical sense)… “. Do you literally believe that the economy is well-characterized as a determistic nonlinear system?
/CoRev: Beyond the points made by Menzie and Brian Quinn, you also need to keep in mind that the $73B in tax relief and income support represents the end-of-quarter value. So over the quarter the average amount of tax relief and income support was about #36.5B.
Spencer said: “we had all these libertarian/conservative economist claiming that Keynesian stimulus never works. Yet we are looking at another example of it working…”
If you give poor people borrowed money of course they will spend it. This is not “stimulus working”. The real question is “What happens when you remove this money?”, as indeed it must be removed because the country simply cannot sustain this level of deficit spending for long.
Smith,
You have made two statements, and both represent you defining the issues at hand in a way that allows you to insist on your own view – begging the question, in other words.
Stimulus “working” is people spending the money you given them, if that is the proximate goal identified by those who crafted the policy. It was. You may want to demand some other definition, but I want to be skinny as I was at 16, and that ain’t working, either. “The real question” is an expression which generally means, “what I’d rather talk about”. Certainly, that is the case as you have used it. There are lots of issues, and one of the things that makes policy so tricky is the need to balances those many issues. Insisting that there is only one “real question” is to avoid all the hard work of balancing policy. All it is is stomping one’s little feet and demanding that one’s very favorite issue get all the attention.
Wisdom Speaker, you say my premises aren’t right, my comparison is “dishonest” and that I “don’t understand” what capital is. Let me respond.
My premises: I agree that the housing crisis was precipated by an overexpansion of credit, some of it generated fraudulently. I was simply making the narrow point that the response to the crisis (ARRA and other policies) had an impact not only on consumer spending and GDP growth, but also on the capital markets.
My comparison: The month-long period between Feb-March 2009 was a turning point for the financial markets. The negative trends of the prior 18 months were reversed, and in the 13 months since then, the trends have been positive. During that same one-month period, the ARRA was signed and the Fed announced an expanded MBS purchase program. These are simply factual observations. It’s reasonable, I think, to conclude there was a cause-and-effect relationship.
My understanding: Whatever happened during that month to reverse the trends seemed to have affected multiple forms of debt and equity capital, as seen in market prices, yields and spreads.
It sure seems to me that the policies put in place during that month have achieved much of their intended results. Of course you can argue that they had the wrong goal, or that it cost too much, or that the positive results would have happened anyway eventually, but I don’t think you can dismiss the facts with an ad hominem argument.
Dear Menzie –
First, while I don’t comment here often, I want to say that I appreciate your site greatly and I apologize for the harsh comments yesterday. But I think a lot needs to be rethought and sometimes you have to really hit people with a stick to get off the old tracks and start blazing new trails.
It’s certainly hasn’t been especially well-characterized as any other kind of system! I’m not sure about deterministic, but the economy is absolutely a nonlinear dynamical system. It certainly isn’t linear and I also think most equilibrium hypotheses are deeply flawed. I am a Ph.D. physical scientist with experience in complex systems, who took an interest in economics in 2006 when I had trouble selling a house and “woke up” to the real estate crisis -> credit bubble, and then started wondering why so few could see the problems. The nonlinear dynamical nature is easy to appreciate from my background. A system of interacting humans (plus nature) has to have behaviors at least as complex as systems of interacting particles (atoms, ions, gas molecules, liquid molecules…). Except for simple equilibria and some aspects of the solid state, those are generally nonlinear-dynamics systems. A simpler way to put it is that economic systems appear to have “weather patterns”. Current economics does reasonably well at predicting today’s temperature given yesterday’s temperature, but it does very poorly at predicting changes in the weather. I regret that I cannot offer a rigorous proof, but I think over coming years mainstream economists will find themselves paying much closer attention to the dynamical systems folks. Perhaps next time I change fields (and/or retire) I’ll join them; it’s a fascinating arena for though.
Tom Toerpe: (1) Because I think this was a credit mania (society-wide), I don’t think that the prescriptions for dealing with housing crises, financial panics, or jobs crises are going to be adequate in resolving the very broad, very fundamental underlying issue. Too many people have had too much preference for “credit now”, and have undervalued the costs of debt. I don’t think ARRA is going to be money well spent in the long historical view.
(2) You suggested that the ARRA announcement was somehow pivotal in that “the S&P 500 pivoted from a 54% decline to a 77% rebound”. The dishonesty in the comparison is that a 54% decline and a 77% rebound are not comparable; the “rebound” has been smaller than the decline in absolute terms. I admit to bias: like many who anticipated the decline, I believe much of the rebound is fraudulent in nature. But a more subtle dishonesty is to think that the S&P’s behavior is somehow a significant (must less the all-important) metric of policy success. The stock market is not the economy and given the current distribution of wealth, the economic health of the nation’s population has not greatly improved. However, the greatest dishonesty is in concluding from a temporal coincidence that it was some government action which led to the market reversal. There were many prior government actions which failed to reverse the markets. There were also many (a great many) prior financial panics which reversed without government intervention. In complex dynamical systems the traditional cause-and-effect analysis is fraught with perils.
Furthermore, the Fed and ARRA impacts of placing the country trillions of dollars deeper in debt and doubling the money supply by rewarding failed MBS investors (and by extension rewarding foolish and/or fraudulent borrowers) is a very steep price to pay… for what may be simply a band-aid on a cancerous tumor. The public can see that the bankers have been crooked thieves, that the people’s “representatives” in Washington have been abetting fraud, that large swathes of ARRA money were squandered. They cannot see what the Federal Reserve actually bought (there being a shortage of transparency in this regard), but there’s plenty of basis for suspicion (given the fraud rampant in the rest of the mortgage markets) that the Federal Reserve has been covering up criminal behavior in liquifying the MBS market. Then there is the minor matter that, while the Fed doesn’t mind doing so, the Federal Reserve act clearly states that it’s illegal for the Federal Reserve to purchase assets unless it is buying full-faith-and-credit U.S. government debt.
I apologize if you felt my criticism were ad-hominem. I don’t see where I called names or dismissed facts. I simply think that a view of the issue from a wider context makes your conclusions appear invalid.
In response to Menzie and Tom –
First, while I don’t comment here often, I want to say that I appreciate your site greatly and I apologize for the harsh comments yesterday. But I think a lot needs to be rethought and sometimes you have to really hit people with a stick to get off the old tracks and start blazing new trails.
It’s certainly hasn’t been especially well-characterized as any other kind of system! I’m not sure about deterministic, but the economy is absolutely a nonlinear dynamical system. It certainly isn’t linear and I also think most equilibrium hypotheses are deeply flawed. I am a Ph.D. physical scientist with experience in complex systems, who took an interest in economics in 2006 when I had trouble selling a house and “woke up” to the real estate crisis -> credit bubble, and then started wondering why so few could see the problems. The nonlinear dynamical nature is easy to appreciate from my background. A system of interacting humans (plus nature) has to have behaviors at least as complex as systems of interacting particles (atoms, ions, gas molecules, liquid molecules…). Except for simple equilibria and some aspects of the solid state, those are generally nonlinear-dynamics systems. A simpler way to put it is that economic systems appear to have “weather patterns”. Current economics does reasonably well at predicting today’s temperature given yesterday’s temperature, but it does very poorly at predicting changes in the weather. I regret that I cannot offer a rigorous proof, but I think over coming years mainstream economists will find themselves paying much closer attention to the dynamical systems folks. Perhaps next time I change fields (and/or retire) I’ll join them; it’s a fascinating arena for though.
In reply to Tom Toerpe:
(1) Because I think this was a credit mania (society-wide), I don’t think that the prescriptions for dealing with housing crises, financial panics, or jobs crises are going to be adequate in resolving the very broad, very fundamental underlying issue. Too many people have had too much preference for “credit now”, and have undervalued the costs of debt. I don’t think ARRA is going to be money well spent in the long historical view.
(2) You suggested that the ARRA announcement was somehow pivotal in that “the S&P 500 pivoted from a 54% decline to a 77% rebound”. The dishonesty in the comparison is that a 54% decline and a 77% rebound are not comparable; the “rebound” has been smaller than the decline in absolute terms. I admit to bias: like many who anticipated the decline, I believe much of the rebound is fraudulent in nature. But a more subtle dishonesty is to think that the S&P’s behavior is somehow a significant (must less the all-important) metric of policy success. The stock market is not the economy and given the current distribution of wealth, the economic health of the nation’s population has not greatly improved. However, the greatest dishonesty is in concluding from a temporal coincidence that it was some government action which led to the market reversal. There were many prior government actions which failed to reverse the markets. There were also many (a great many) prior financial panics which reversed without government intervention. In complex dynamical systems the traditional cause-and-effect analysis is fraught with perils.
Furthermore, the Fed and ARRA impacts of placing the country trillions of dollars deeper in debt and doubling the money supply by rewarding failed MBS investors (and by extension rewarding foolish and/or fraudulent borrowers) is a very steep price to pay… for what may be simply a band-aid on a cancerous tumor. The public can see that the bankers have been crooked thieves, that the people’s “representatives” in Washington have been abetting fraud, that large swathes of ARRA money were squandered. They cannot see what the Federal Reserve actually bought (there being a shortage of transparency in this regard), but there’s plenty of basis for suspicion (given the fraud rampant in the rest of the mortgage markets) that the Federal Reserve has been covering up criminal behavior in liquifying the MBS market. Then there is the minor matter that, while the Fed doesn’t mind doing so, the Federal Reserve act clearly states that it’s illegal for the Federal Reserve to purchase assets unless it is buying full-faith-and-credit U.S. government debt.
I apologize if you felt my criticism were ad-hominem. I don’t see where I called names or dismissed facts. I simply think that a view of the issue from a wider context makes your conclusions appear invalid.
I said “you can argue that they had the wrong goal, or that it cost too much, or that the positive results would have happened anyway eventually.” You are arguing all three, which is fine. However, that doesn’t make my observation untrue or dishonest. Factually, reversing the slide in stock and bond markets was an important goal of the policies, the market pivoted right at the time those monetary and fiscal stimulus measures were put in place, and a case can be made that one caused the other, or at least contributed substantially to it. As any market-watcher knows, the rebound still leaves us well under peak levels, but the arithmetic works out to -54% and +77%, so I quoted the stats.
Yes, these policies were costly, but I can’t help but wonder what other set of policies would have had a subtantially better outcome. Falling tax receipts caused by joblessness and mounting corporate losses contributed something like $1 trillion to cumulative deficits, so doing nothing, waiting for the market to correct itself, has a cost as well. In early 2009, companies who had no role in the crisis were paying for it anyway, in the form of higher interest and capital costs, illiquidity, and falling revenues. I have yet to hear a compelling case that there was a better way out of this, and saying “we never should have been here in the first place” is really a way of sidestepping the question.
Tom, I think you are right in finding the essence of my frustration:
You and others here are certainly better versed in the policy details than I am as an outsider. But I “can’t help but wonder” why it is that the policies that were adopted haven’t actually fixed any of the fundamental weaknesses of the economy.
I do think we would have been better off decapitating the major banks (and policymakers) as part of the conditions for the bailouts. The old saw that one cannot get out of a crisis using the same thinking that got one into it rings true here. Why are we still using the same thinkers?
More pragmatically, I think the Fed’s purchase of MBS riddled with fraud was a poor policy choice. We would have been better off capitalizing new financial institutions with clean track records (and strong regulatory oversight) rather than pumping $4,000 for every man, woman and child in this nation into the existing centers of fraudulent and predatory lending. (Yes, there are fraudulent borrowers as well, and there needs to be stronger regulatory oversight of the underwriting standards as well.)
The ARRA was also a hastily conceived policy, and the misbegotten statistics showing how the money was being spent (in nonexistent locations, even!) served for many as a horrific illustration of how badly the government can waste money even in a good cause. That, and watching so much of the spending flow straight overseas due to our ongoing trade deficits. Perhaps that was the best we could do, but it certainly saddens me that that appears to be the best we can do! While it would have been painful, it might have been worth the cost to take an extra few weeks to a month to put together a more targeted plan. (Better yet would have been to get started on serious ARRA planning in the spring and summer of 2008, when having a real economic contingency plan would have been useful. It’s shocking that we have military contingency plans for all manner of potential situations, and similarly for natural disasters, but nothing for “man-made” economic disasters!)
You wrote:
There were also companies with no role in the crisis which anticipated the situation and took proper precautions. They would not have been “paying for it” for long — indeed, many had raised capital (or at least taken on debt as they could) in advance (e.g. Ford) and should have profited handsomely from their superior business vision. Instead they are getting hurt by government-subsidized and unfair competition. AIG, C, GS, BAC, WFC, GE, GM and Chrysler (among others) have no right to be in business, much less dictating the terms of that business to a captive Congress. So one more element in a “compelling case that there was a better way out of this” would be to ask why haven’t we shut them down, again?
IMHO, a better way out would resolve the following longstanding economic imbalances:
(1) Restore a reasonable balance of trade (even if it requires a temporary reduction of living standards…we are going to have that anyway…), so that wage arbitrage no longer destroys the middle class. This requires actually having an energy policy, since the largest trade imbalance is driven by oil imports. (Remind me again why ARRA doesn’t allocate far more to energy production investments? Energy is ~10% of the economy and the foundation for much of the rest!)
(2) Restore a healthier distribution of wealth (both incomes and assets), and ensure that wealth is more frequently truly earned and not simply inherited or obtained by political favoritism. As a symbolic example, Congress should adhere to the same laws it passes for the rest of the nation. The inheritance tax should be restored and the tax code should be greatly simplified. More should be done to simplify the process of starting a small business (and thus reduce the barriers to entry), and to reduce the unfair advantages (e.g. abuse of the legal system) that the large cap multinationals have against small innovators. To rebuild a productive middle class, we need to better reward real productivity, hard work, and innovation.
(3) Restore integrity to the financial markets, regulate derivatives (the vast majority of which are concentrated in the TBTF banks anyway), and flush out the fraud and insider trading abuses that are currently rampant. We need to restore the markets to the proper function as allocators of investment capital to productive sectors of the economy.
Many of these policy changes do not actually require government spending, but they would greatly strengthen the fiscal position of the government, because labor resources would be freed from unproductive and/or “high friction” activities. We need more people creating wealth and fewer “trading” it or fighting over it in the courts.
Over the long term, I would advocate a Federal balanced-budget amendment with a crisis-reserve accumulation provision as well.
We also need proper food reserves against a potential climate calamity or natural disaster. If the Icelandic volcano had been another Krakatoa, the globe would be in for a sustained round of poor harvests, and the globe’s granaries are apparently depleted for such an event. This would be another good use of ARRA (and a better use of America’s agricultural capacity than subsidizing net-energy-negative “ethanol” production or health-harmful “high fructose corn syrup” produciton).