Re-Examining that “Massive Stimulus”

I keep on seeing references to “massive stimulus”, so much I have this feeling of innumeracy everwhere. Here’s one example, provided by a commenter on Free Exchange the day before yesterday, responding to the linked article of Brad Delong:

Why doe someone have to keep reminding Krugman and Delong of recent history? It’s absurd that PhD economists ignore what actually happened in the history of the recent crisis.

The US tried massive fiscal stimuli in response to the crisis and the Fed did not raise interest rates at all to stop price inflation. Nevertheless, the multiplier was close to zero. All the likes of Krugman and Delong could say was “it would have been worse.”

It constantly amazes me that people throw around words like massive without really thinking about the fact that the relevant things to normalize by are also massive. So, I thought I would plot total nondefense spending in the US (ex-interest), and normalize by potential GDP, to obtain the following graph.

Figure 1: Ratio to potential GDP of Federal nondefense outlays ex.-interest payments (red) and of state and local outlays ex.-interest payments (blue). NBER defined recession dates shaded gray. Source: BEA, 2011Q4 second release, CBO Budget and Economic Outlook (Jan. 2012) supplemental information, NBER, and author’s calculations.

Total nondefense spending at all levels rose from 27.2% of potential GDP in the last quarter of the Bush Administration (2008Q4) to a shocking 29.9% by 2010Q4, before declining to 28.4% in the last quarter for which data are available for.


That’s not to say that the Federal government did not increase spending; merely that to a large extent it was offsetting the contraction at the state and local levels of government, as I pointed out in this March 2010 post. The fact that real interest rates have zoomed toward negative merely confirms the fact that government spending could not compensate for the massive (here the adjective is correctly used) collapse in private consumption and investment spending.

Figure 2: Ten year constant maturity yields, nominal (blue) and real, from TIPS (red). Source: St. Louis FRED.

Even if the state and local governments had not contracted expenditures, the fiscal stimulus arising from the ARRA (spending and tax provisions) would not have been particularly large, when expressed as a ratio of GDP. As I noted on February 16, 2009, as the bill was close to being signed:

I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.

But then, it was clear that many of the critics never wanted to do the hard work of long division. (Oh, and I still want to talk to all the critics of the bill who said the spending would kick in long after the economy had recovered…).


A parting observation. The impact on the budget (tax reductions and outlays) can be placed in context by comparing to other major undertakings.

Figure 3: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; cumulative budget authorization for operations in Iraq (Operation Iraqi Freedom, not including incremental debt servicing costs) through FY2012; for Patient Protection and Affordable Care Act; for American Recovery and Reinvestment Act, all in billions of FY2010$, deflated using CPI. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); and CBO, “H.R. 4872, Reconciliation Act of 2010: Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010,” (March 18, 2010), Nominal figures from Amy Belasco, “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,” RL33110, Congressional Research Service, March 29, 2011, Table 3. Data for FY2011 Iraq operations is for continuing resolution, for 2012 is Administration FY2012 request (see notes to Figure 2 of this post for calculations); for ARRA, CBO Budget and Economic Outlook (January 2012), Box 1-1, page 9; for CPI, historical from FREDII, and forecasts/projections from CBO (January 2012), Table 2-1 (using calendar year forecasted inflation for FY inflation).

(EGTRRA is the Economic Growth and Tax Relief Reconciliation Act of 2001, and JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act of 2003 (aka Bush 2001 and 2003 tax cuts); PPACA is the Patient Protection and Affordable Care Act; ARRA is American Recovery and Reinvestment Act.)


While the expenditures in the Iraqi theater of operations (including searching for WMDs) surely had some stimulative impact on the economy, it is debatable whether those expenditures were the best way to undertake military Keynesianism, given the peak of Iraq-related expenditures was in FY2007-08, when the economy was at or near full-employment, and before the collapse in GDP beginning in 2008Q4 (that is, “real” believers in counter-cyclical stabilization policy believe that you undertake stimulative policy when you are below potential GDP…).


38 thoughts on “Re-Examining that “Massive Stimulus”

  1. 2slugbaits

    Perhaps you didn’t recognize it because the more familiar acronym is EGREGIOUS.

  2. Bryce

    From fiscal year 2008 through fiscal year 2011, the Federal govt spent $5.7 trillion more than it raised in taxes. Much of that $5.7 trillion in new Keynesian free-lunch debt was monetized by the Fed directly & indirectly through its fascistic banking system.
    Just can’t imagine where anyone would get the idea there was an attempt at a big stimulus.
    The surprising thing is that this stimulus did add so little to short-term demand, if only by borrowing from the future.

  3. Menzie Chinn

    Bryce: You missed the entire point — the net increase in spending was small, so even with multipliers of 1, the impact would be small relative to an output gap averaging 5% of GDP.

    “fascistic banking system”?

    By the way, I see high powered money increasing by $2 trillion, which is not “most” of $5.7 trillion, except in some non-standard math…

  4. Bryce

    Menzie, you are certainly right re $2 trillion increase in base Money (a tripling!). But an awful lot of the money the Fed deposits in its member banks was then loaned to the govt.
    Fascistic banking system in the sense that the intermingling of corporate & govt interest is economic fascism. Banks are virtual creatures of govt in modern America.
    On the one hand, they are so regulated that they must get approval of every product they wish to initiate or every board of director that they desire to appoint. They are forced to do the bidding of the govt. In example, BB&T was forced to take bail-out money against its will. BoA was forced to do all manner of things & not allowed to express any protest. Several banks were forced to go along with turning bankruptcy law on its head so that Obama could give GM to his Union supporters. Had they not taken those losses against their shareholders’ interest, Obama’s chicanery could not have been perpetrated.
    On the other-hand, banks are hugely subsidized/bailed-out at the expense of the ordinary Americans, who in consequence must endure >3% inflation & 0.4% taxable yield on their CD. For the benefit of the banks & govt, the Fed systematically screws savers. How nice. Occupy people have a point.
    Fascism it is.

  5. Nick

    I may be enduring 0.4% taxable yield on my CD, but certainly not any 3% inflation (core).

  6. Charles

    Haven’t you heard, Menzie? Government spending is Armageddon, Ragnarok, and the end of the Mayan calendar rolled into one?
    To put this into the familiar terms of the family budget, it’s as if in a family earning $50,000, Mom gets laid off. So the family decides to borrow $3,000 to send her to community college for two terms so she can qualify for a better job (the parallel is to 3% of GDP for two years). The $3,000 is not a big problem. The problem is that Mom isn’t working, so the household has lost much more than $3,000 due to the loss of her salary.
    One more example of why people who rely on TV for their news know less than people who don’t watch TV at all. And why people who read Econobrowser to learn rather than to hector know more than just about anyone, including most of our so-called leaders in government.

  7. Ricardo

    Why do you assume that massive increases during the Bush administration make massive increases during the Obama administration okay? I have never understood why everything bad seems to be justified if the Republicans do it too. Don’t you realize Republicans do stupid things too?

  8. KeithOK

    You make an excellent point. A lot of people seem to be equating the size of the deficit with the size of the stimulus, even though 1) there was a significant deficit before “the stimulus” 2) increases in the deficit because of lost wages and reduced profits leading to lower tax receipts could hardly be called a stimulus, and 3) increases in safety net program spending, while providing some stimulus effect, were mostly outside of the stimulus program.

  9. Bryce

    Nick, my personal experience is that CPI understates the inflation I face. College tuition, health ins [just went up 17%--thanks Obamacare],cellphone service, homeowner dues, food, gas. Can’t imagine your ‘core’ living.
    The core is absurd. Compare core to CPI over a 10 yr period & you’ll see that it is a stupid concept which merely lets Bernanke print more. It is dishonest in its very essence, as the long-run variance from the already under-measuring CPI manifests.

  10. Nick

    Bryce -
    Some prices go up, some prices go down. I’m not paying any more for gas than I did in 2008. College tuition and healthcare are exceptions. I’m spending a lot less on technology and durable and non-durable goods (housewares, car, etc).
    Put the series codes i list here in at this link:
    CPI-U CUSR0000SA0
    CPI-U-Core CUSR0000SA0L1E
    Doing your 10 year comparison, January 2002 – January 2012, I get a 28% increase in the index level of CPI-U, and a 20% increase in the index level of CPI-U-core.
    I do not think this is dishonest. That 8% differential reflects price increases in food and energy over the period.

  11. Menzie Chinn

    Bryce: To the extent that you have economized on the goods and services that have risen relatively more, do you think it reasonable to use the same category weights that applied in 2002 as today?

    I.e., think Paasche versus Laspeyres.

  12. jonathan

    The stimulus consisted of:
    about 38% tax cuts (which seems to give lie to the idea that tax cuts stimulate the economy, which is of course Romney’s et al plan)
    about 1/3 money spent on stuff, meaning “stimulus” like road projects. The total is about the size of a large highway for a 2-3 year period, which coincidentally is about the length of the stimulus spending. It was a large highway bill in size.
    the rest was payments to states to reduce the cuts they had to make. These aren’t stimulus at all; they just kept spending closer to old levels for a year.

  13. Bryce

    Menzie: I would not assert that adjustments shouldn’t be made for changes in consumer tastes. Yet there if I substitute hamburger for steak because general inflation makes me poorer, such an adjustment mask the true inflation somewhat.
    You’ll note that the things I sited as present inflation sources for me are not readily substituted away from.
    Nick: 20% core vs. 28% CPI is substantial in my view. Even normal CPI under-measures the inflation ordinary people endured. I wouldn’t go as far as the ShadowStats folks, but my experience is more than 28% for the decade easily.

  14. 2slugbaits

    jonathan And a fourth of the tax cut was really just an extension of the AMT, which provided no stimulus at all since it merely extended existing policy.
    Bryce Fascistic? Sounds like somebody’s been listening to too much Glenn Beck. Next you’ll be feeding us Beck’s rant about how Woodrow Wilson was also a fascist because he put the Roman fasces on the back of the Mercury dime. Sorry, but you sound a little over the top today. As to the Fed (another Woodrow Wilson instituton!) forcing down interest rates, this is crazy nuts. The Wicksellian interest rate is negative. Zero rates at the Fed represent an arithmetic floor, but a zero percent interest rate is actually higher than what your beloved pure market says is needed to clear. The equilibrium rate is negative. And you can see how banks are in effect paying depositors a negative rate. For example, banks are now starting to charge you a fee if you want a savings account that is too large.
    Your CPI comments are also off base. Go check MIT’s billion price index. And remember, that’s only goods, not services, so it tends to overstate inflation. But inflation is still too low. You’re impressions about inflation are biased.

  15. ThomasL

    Sidestepping that fact that you attribute an outlandish opinion to someone that said nothing whatsoever on that subject, Wilson wasn’t a fascist because of anything to do with a dime or such nonsense; but Wilson was a fascist, or at least something similar to fascism, because of his beliefs. Just ponder for a minute his theory of government, that, “Government does now whatever experience permits or the times demand,” and “Woe be to the man or group of men that seeks to stand in our way.”
    Or perhaps his musings on leadership, “Only a very gross substance of concrete conception can make any impression on the minds of the masses. [They] are much readier to receive a half truth which they can promptly understand than a whole truth which as too many sides… The competent leader of men cares little for the internal niceties of other people’s characters: he cares much–everything–for the uses to which they may be put… Men are as clay in the hands of the consummate leader.”
    Lest you think he is talking about someone else, you might refer to his statement that, “The President is at liberty, both in law and and in conscience to be as big a man as he can. His capacity will set the limit.”

  16. 2slugbaits

    ThomasL Ah yes. Another true believer. History torn from the pages of W. Cleon Skousen ( and his fellow traveler Robert Welch (,_Jr.). Both of whom went to their graves damning Woodrow Wilson as the source of all evil and a true fascist.
    Meanwhile, back on planet Earth in the 21st century…Bryce If inflation is so high, then you might want to ask yourself how it is that your wages are also not keeping up. It’s a little hard to argue that inflation is rampant without at the same time seeing rising unit labor costs. In fact, unit labor costs have been very restrained, which has helped US competitiveness. Also, Obamacare reduces the growth rate of healthcare…not by a lot, but it does reduce it.

  17. Steven Kopits

    From the Washington Times:
    “The federal government recorded its worst monthly deficit in history in February, according to a preliminary report Wednesday from the Congressional Budget Office that said the deficit in fiscal year 2012 is already more than half a trillion dollars.
    The CBO’s figures show that despite repeated efforts to trim spending, the government has borrowed 42 cents of every dollar it spent during the first five months of this fiscal year.
    The nonpartisan agency projected the government will run a deficit of $229 billion in February, the highest monthly figure ever. The previous high was $223 billion a year ago, in February 2011.
    It is the 41st straight month the government has run a deficit — itself a record streak that dates back to the final months of President George W. Bush’s tenure. Before now, the longest streak on record was 11 months.”

  18. Bryce

    slug, if you presented any reason why the adjective fascistic is not apt, I missed it.
    You think that negative real interest rates for years on end is a phenomenon that ever happened in an economy before fiat money? Show me some evidence & quit referencing talk show host. Have I ever stooped to this low strategy with reference to you?…not much above name calling.

  19. JohnK

    1-2% of GDP is still a large figure, but yes, that may not be so “massive”. What strikes me is rather that the state and local government spending didn’t contract as massively as e.g. Mark Thoma claimed; As Menzie points out, their share in potential GDP looks very stable from 2006 to 2011, hence even if they didn’t contract at all the total spending wouldn’t have been any bigger. I believe there have been some confusion on both sides, and this post clarify what have been ignored by both sides.

  20. 2slugbaits

    Bryce You were the one who brought up our “fascistic banking system,” not me. I’m trying to help you out with a little consciousness raising. You may not be aware of it, but the Tea Party conservative sea in which you swim has its intellectual roots in a peculiar argument from 1950s right wingers that connected fascism with Democratic Presidents beginning with Wilson. One of their key arguments was the Fed and fiat money. Glenn Beck has openly aknowledged that he takes his cues from those 1950s right wingers. I don’t think you’re even aware of it (hence the call for consciousness raising), but I’ve noticed that your thinking is definitely moving in that direction. Swim in that sea long enough and you’ll absorb the toxins. For a good discussion of the connection between the Tea Party and anti-Wilson-as-fascist (including the Mercury dime and the Fed), see this New Yorker article by Univ of Columbia historian Sean Wilentz:
    And speaking of Sean Wilentz, you also asked about periods without fiat money. Perhaps you should read Wilentz’ book “The Rise of American Democracy: Jefferson to Lincoln.” It covers the period 1800-1860. One of the dominant themes in the book is how recurring bank panics and a gold based monetary system played a huge role in the creation of today’s Democratic and Republican parties. Prior to ~1850 the major issues of the day were all about bank panics, debtor relief, and species currency. The bank panics and how state governments reacted helped shape the slavocrat versus anti-slavery arguments…for example, Missouri vs Kansas. The point is that if you read actual history written by real historians, I think you’ll find that the economic history of a species based monetary system is not what you imagine it to be.

  21. ThomasL

    Did it occur to you at any point that people might have objections to fiat money either abstractly or the Fed’s implementation of it that predate 1950?
    Forget the dime already! Go read the Theory of Money and Credit, Capital and Interest, or even De Moneta instead.
    You don’t have to agree with them in whole or in part to apprehend two small but important details: (1) The have nothing whatsoever to do with Wilson. (2) They predate 1950.
    That said–and despite the fact Bryce has never even once mentioned him–Wilson was at the very least super creepy (and I think accurately described as fascistic). There is a reason that “A Return to Normalcy” was such a winning slogan.

  22. Bryce

    I appreciate the Wilentz reference. Our economic history is too little known. Although we had something of a gold standard, there was all kinds of govt intervention during the period, notably the 1835 debacle.
    Again you produce no example of extended real negative interest rates in a market economy–to wit, one with market-produced money rather than fiat money.
    Nor do you provide any REASON to counter my points that our banking system is fascistic. Again, economic fascism is defined as the intermingling of corporate & govt interest.
    When you look at how the Fed screws ordinary Americans–in fact, does so in proportion to how unsophisticated they are–for the benefit of the banks with accelerating inflation & negative real interest rates, it makes it hard to deny the fascism involved. Govt always justifies itself as looking out for the little guy (whether socialistic, fascistic, feudalistic, et al). What a lucid example of what a lie that is.

  23. Jim Glass

    That’s not to say that the Federal government did not increase spending; merely that to a large extent it was offsetting the contraction at the state and local levels of government…
    As Tyler Cowen has pointed out, saying federal stimulus would have worked except that it was undercut by falling state spending is an admission of its failure — no different than saying federal stimulus would have worked but for plunging private sector investment.
    As per John Taylor (.pdf), out of the $862 billion federal infrastructure spending was $5.6b, all of 0.65% (Obama was right, “there’s no such thing as a shovel ready project”) while federal govt consumption was $24.2b, 2.8%.
    The great bulk of the stimulus went to the states and personal transfers (tax cuts, etc). The states *increased* their receipts thanks to the stimulus but nonetheless *reduced* their spending. Which is interesting behavior. Cowen suggests this is due to state and local level politics — when voters have their incomes go down they want local govt spending to go down as well, and local politicians respond. Be that as it may, the stimulus succeeded in increasing state receipts but failed in maintaining state spending. It is hard to describe this as success on net.
    As to all the transfers, nobody ever pretended they had decent multipliers, CBO estimates them all at 0.x.
    So what’s this all come down to? Take the Krugman argument that stimulus wasn’t even really tried at a piddling $862 billion as it was too small amount to offset state spending cuts, etc. OK — but $862 billion being so “small” as to not even being a credible attempt is hardly a tribute to its effectiveness.
    Especially in light of Larry Summers’ planning memo (.pdf) that said there was only about $225 billion of “core” good quality fiscal stimulus available, and the rest would be, his words: “not as effective as stimulus”. So $225b of credible stimulus available … $862 billion spent … and the $862 billion really wasn’t much.
    And I’m not even mentioning the Scott Sumner argument that if their had been no fiscal stimulus there certainly would have been more monetary stimulus from the Fed, at $0 added to the national debt, and to the extent that it true the fiscal stimulus produced nothing on net. (Oooops, I just mentioned it.)
    What would a “decent sized” stimulus have been? Maybe $1.5 trillion? Politically, utterly impossible (adding that the debt), while also going a good $1.2 trillion+ over $225 billion into the declining returns of “not as effective as stimulus”.
    If stimulus must be so big that it *can’t be done* politically, and it so inefficient when tried, I mean, really. Why would this have been anyone’s priority? Especially when there is a textbook alternative.
    The fact that real interest rates have zoomed toward negative merely confirms the fact that government spending could not compensate for the massive (here the adjective is correctly used) collapse in private consumption and investment spending.
    Sounds like a persuasive argument about the futility of fiscal stimulus — which apparently would have to be mega-sized compared to a mere $862 billion to be big enough to be effective, rocketing up the national debt and reducing long-term growth accordingly, as per the CBO — yet even if so *still not work*, for to quote Summers again: “stimulus of well over $1 trillion … would likely not accomplish the goal because of the impact it would have on markets.” (That is, *bad* impact on the markets, of course.) And it seems an equally persuasive argument in favor of monetary stimulus, as per Sumner and the monetarists, adding $0 to the debt.
    For the last 35 years all the textbooks have said real interest rates are fully in the realm of monetary policy. This recent spasm of belief that they have to be worked up by massive govt spending and debt expansion (far in excess of the “efficient” $225b, and regardless of that inefficiency) is an interesting aberrant psychological phenomenon.
    We probably should have listened to one of our best economists warning about the failed Japanese dependence on massive stimulus and denial of the monetary alternative…
    “What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe.
    “Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.
    “Will somebody please explain this to me?”
    Paul Krugman

  24. JohnK

    Thanks, Menzie. So the local and state spending declined, but that decline doesn’t show up when you take a ratio to a particular measure of potential GDP.
    This means that the measure of potential GDP you’re using declined too, during the Great Recession. This doesn’t sound right, when I go back to the definition of potential GDP. Considering there is always a measurement issue associated with potential GDP, I may want to use some other measures. If I use a more optimistic measure of potential GDP, I’ll get declining shares of government spending and this will strengthen the arguments in this post. Is my understanding correct?
    Another question: Are you using the CBO’s estimates of potential GDP here?

  25. 2slugbaits

    ThomasL People who object to fiat money are people who are detached from reality. Setting aside the fact that their theoretical objections are wrongheaded, and setting aside the fact that their imaginings of a world without fiat money are ahistorical, we’re still left with the brute fact that we live in a fiat money world. If you want to contribute to a meaningful discussion about today’s economic problems, then you have to condition that discussion in the world of objective facts. One of those facts is that we live in a world of fiat money. Perhaps things are different on the planet Triscallion, but here on 21st century Earth we use fiat money. Ranting about the “fasicist” Fed and the evils of fiat money does not tell us anything constructive about what to do given the world as it is. Instead of dealing with the reality of Wicksellian negative interest rates as a result of too much desired saving relative to planned investment, we get an historically inaccurate lecture about fiat money and some fanciful musings of a 21st century species-based economy. That’s just killing perfectly innocent electrons for no good reason. Bryce does not want to accept the fact that the economy “wants” a negative interest rate. It’s not the Fed that is artificially driving down the interest rate. The Fed is trying to match the interest rate that the economy needs for equilibrium, but the laws of arithmetic and the perfect substitutability between bonds & money do not allow the Fed to go below a zero rate. Inflation would help because it would lift the Wicksellian nominal rate above zero, but Bryce can’t deal with that. That pretty much leaves us with fiscal stimulus as the only remaining policy tool. Fiscal stimulus will soak up all that excess savings. Fiscal stimulus takes money out of the mattress and puts it back into the economy. At this point Bryce usually denies reality once again by pretending that there is no excess global saving and it’s all because the Fed printed too much money and that’s why there’s too much money in the bank vaults, blah blah blah. Then it’s on to confusing stocks and flows.
    As to ancient treatises and Austrian mumbo-jumbo, the less said the better. The thing about the Austrians is that they are always quick with a theory of economic catastrophe and inevitable doom, but they have no theory of economic recovery. Just some some magical thinking about abandoning fractional reserve banking and a return to species money. They’ve predicted every economic collapse, but not a single economic recovery. Contrast that with Menzie’s post, which was all about how critics of “Keynesian” (of whatever flavor) economics are simply out to lunch when they claim the weak recovery proves them right. The numbers show that there was no massive stimulus. The weak economic recovery we got was exactly what old school IS-LM economics would have predicted given the size of the stimulus relative to the output gap. People need to address those facts and not some nonsense about fiat money and the Fed.

  26. 2slugbaits

    Bryce It seems that advocates of a pure species-based monetary system can never actually quite identify a period in history when there was such a thing. Sort of like aging communists complaining that “true” Marxism was never tried. Both apologies might be true, but what does that say about the practical relevance of each of those theories?
    Again you produce no example of extended real negative interest rates in a market economy–to wit, one with market-produced money rather than fiat money.
    for the benefit of the banks with accelerating inflation & negative real interest rates,
    Taken together these two comments tell me that you do not quite understand what is meant by a negative Wicksellian interest rate. You seem to have something like this in mind: the nominal rate is 2% and the inflation rate is 5, therefore the real rate of inflation is 2% – 5% = -3%. That is *NOT* what we mean by a negative Wicksellian or natural rate of interest. A negative natural rate tells you what the nominal equilibrium interest rate would have to be in order to clear labor markets. I am not talking about real interest rates; I am talking about the nominal market clearing interest rate. Today’s problem is that real interest rates are too high, not too low. If the Wicksellian interest rate is -4% and inflation is at +3%, then the real rate of interest is +7%. Since the nominal interest rate cannot go below 0%, one way to get the natural rate into positive territory is to inject some inflation. In this example you would need an inflation rate of at least 7%. Another possibility would be deflation of at least -4%, but deflation means a loss of output and income, and a sustained depression is exactly what we’re trying to avoid. So the deflation strategy is counterproductive. A third option is fiscal stimulus to soak up excess saving.
    Finally, note that when Menzie refers to “real interest rates” zooming towards negative territory, he is using the term in a somewhat different way. His point is that the negative TIPS rate shows that the market is “asking” for a negative nominal rate. In other words, even at 0% the TIPS rate is too high. If inflation is (as you believe 3%) and your CD is only paying 0.4%, then this implies that the true market rate of your CD is actually -2.6%. In other words, your CD is paying a return that is too high.

  27. 2slugbaits

    Jim Glass Krugman was arguing you the Japanese central bank should promise inflation, and that this was a better approach than fiscal stimulus. Krugman has also argued that his first choice today would be a Fed promise of higher inflation. The practical problem is that in order for that to be effective the Fed’s promise of inflation would have to be credible…and it clearly isn’t. Only a few crackpots on the extreme right believe Zimbabwe is imminent. So that leaves us with Plan B, viz., fiscal stimulus. Krugman has consistently said that fiscal stimulus is a second best choice. The preferred choice would be a credible promise of inflation. Bottom line is that you have rather badly misread and misunderstood Krugman’s argument.
    Tyler Cowen’s argument is just plain silly. It’s the equivalent of saying that I shouldn’t exercise every day because if I exercise and eat three donuts everyday I won’t lose any weight. Well DUH!
    As I’ve said here before, Larry Summers is a smart guy, but his judgment is not always equal to his IQ. The availability of immediately “shovel ready” projects was a red herring because it ought to have been clear to everyone by Jan 2009 that this was going to be a very slow recovery. A jump start was the wrong analogy. Also, in early January I was invited to be part of a 2-week ad hoc team to identify projects within DoD that would provide fiscal stimulus. I had some ideas, but they weren’t what the top folks wanted to hear so I declined the invitation. They preferred Marty Feldstein’s approach as outline in his WSJ op-ed. Feldstein was wrong.

  28. Menzie Chinn

    Jim Glass: You must be citing the CBO estimates from the CBO in the alternate universe. Here are the multipliers from our CBO director Elmendorf.

    Am I supposed to bend over and genuflect in response to the Scott Sumner argument (which is, more generically, for those of us who work in the area, merely a re-exposition of the central bank reaction function story) which is examined in one of the CBO Budget and Economic Outlooks. It’s a pretty pedantic (and probably not overly relevant story, quantitatively) to stress.

    Finally, your statement:

    For the last 35 years all the textbooks have said real interest rates are fully in the realm of monetary policy.

    tells me that you read different textbooks than I do. I would appreciate your listing of those textbooks and page numbers so I can cite as abberations, in my lectures.

    JohnK: I am using the CBO’s measure of nominal potential GDP. It’s rising (as is the real measure) during the recession (see this post).

  29. JohnK

    Thanks again, Menzie. I incorrectly thought that the first graph in this post accounts for spending on goods and services only, and that since this part of spending declined the potential GDP measure should have been declining in order to get non-declining share over this period.

  30. Jim Glass

    Jim Glass: You must be citing the CBO estimates from the CBO in the alternate universe.
    Here are the multiplier estimates given by Elmendorf (.pdf, Table 1) — the one who lives in my universe:
    Cumulative effect on GDP
    Dollar per dollar of budgetary cost
    method: estimate low – high – mid
    aid to unemployed: 0.7 – 1.9 – 1.3
    reducing employer payroll tax: 0.4 – 1.2 – 0.8
    reducing employee payroll tax: 0.3 – 0.9 – 0.6
    expensing of investment costs: 0.2 – 1.0 – 0.6
    investing in infrastructure: 0.5 – 1.2 – 0.85
    aid to states (non-infrastructure): 0.4 – 1.1 – 0.75
    refundable tax credit for lower-middle class: 0.3 – 0.9 – 0.6
    reducing income tax: 0.1 – 0.4 – 0.25
    I see 0.x in there for lot of those numbers, in fact for the great majority. Do you?
    Also … you might consider being polite in referring to the universes people live in, when dealing with people who have been polite to you.

  31. Menzie Chinn

    Jim Glass: Apologies for being adamant, but perhaps you will understand my confusion, after I note you did write:

    As to all the transfers, nobody ever pretended they had decent multipliers, CBO estimates them ***all*** at 0.x. [emphasis *** added by MDC]

    In my dictionary, “all” means “each and every one” — not most, not the average, not even the median, but every single one.

  32. Kyle

    Some hopefully harmless nitpicking/questions:
    I believe the combined PPACA/reconciliation (and the CBO link is to the impact of both) are known together as the ACA, not PPACA.
    Did you remove the revenue from the CLASS act from the 2010-2019 ACA net value? That program has been put on ice, probably permanently.
    Thank you for this post,

  33. Kyle

    That link is to the PPACA, but as far as I can tell does not include the reconciliation. This is one reason some people prefer to call the combination of the two the ACA – it differentiates it from one of its parts, PPACA. I know I saw Peolsi interupt another congressman once to correct him, though whether that holds any weight will depend ;)
    Here is a quote from a September 2011 CMS letter I happened to be reading through the other day:
    “. . . for purposes of the requirements of Title XXVII of the Public Health Service Act (“PHS Act”), in light of the enactment of the Patient Protection and Affordable Care Act, Public Law 111-148, and the Health Care and Education Reconciliation Act, Public Law 111-152 (collectively, the “Affordable Care Act”).”
    Which may or may not mean anything, and brings us to a more important question: “Who cares?”

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