Just a quick post to highlight the OECD’s recent forecast [0] for the US (-7.2% SAAR decline in 2009Q1), and e-forecasting’s latest take (6.8% SAAR decline in 2009M03).
Figure 1: Real GDP from BEA (blue bars), and Macroeconomic Advisers 3/13 (red), e-forecasting 4/3 (blue). Tan shaded area indicates OECD 3/31 forecast for 2009Q1. Source: BEA, GDP release of 26 March 2009; Macroeconomic Advisers [xls], e-forecasting, OECD, and NBER.
Note that forecasted GDP (in the tan shaded area) is above the level implied by e-forecasting. E-forecasting’s estimate is that GDP will be down by 9.9% (SAAR) in 2009Q1. If this more dire forecast proves accurate (Deutsche Bank predicts -8.0% SAAR), then — as Brad Delong likes to say — we’ll need a bigger stimulus package.
See also Calculated Risk’s discussion of the employment report: [1], [2], [3].
Side note: for those wanting to hear my take on the G-20 meetings, Minnesota Public Radio had an hour with me on the air yesterday (link here).
Technorati Tags: GDP, macroeconomic advisers,
e-forecasting, OECD, and stimulus package.
The OECD report really was rather optimistic with sluggish turnaround starting early 2010 all while assuming the stimulus bites.
I don’t understand how you can come to the conclusion that any of these stimulus packages can be beneficial? And then that you should scale them up as they continue to fail?
Putting the Japanese experience aside, how can government spending push the economy to an equilibrium state that can help lead to private sector growth? All it will do is further distort all price signals.
eg. If the government spent $5t on housing then we would have even more bad investments in housing in construction. When the “stimulus” is reduced, then we would have an even worse distorted economy.
If we can focus on clearing away dead companies as quickly as possible then we will see the private sector take us where GDP can expand the most in a way that adds value beyond the simple digging of ditches.
Joshk: Hmmm. Sounds a lot like “Liquidate labor, liquidate stocks, liquidate farmers.” (Andrew Mellon, in 1929). That worked well, didn’t it?
“Putting the Japanese experience aside”
Why didn’t you tell me we could ignore evidence? That makes things so much easier!
“how can government spending push the economy to an equilibrium state that can help lead to private sector growth?”
How does anything push the economy to an equilibrium state that can help lead to private sector growth? Supply and demand. If, due to market inefficiencies (or failures), a large portion of the workforce is unemployed, the government can return them to employment by–surprise–employing them. Whether it would be better for the private or the public sector to employ them is worthy of discussion, but that’s not the choice we have: our choice is between government employment and no employment. I’d like you to tell me which one of those is closer to the optimal.
If you want to know the effects of doing nothing, just look at the employment numbers for the past six months or year.
“If we can focus on clearing away dead companies as quickly as possible then we will see the private sector take us where GDP can expand the most in a way that adds value beyond the simple digging of ditches.”
What exactly do you think happens when people go out of work and start spending less? Demand shrinks. Is shrinkage growth?
In an economy where most people’s jobs depend on discretionary spending, what happens when discretionary spending plummets? Is that an equilibrium you can believe in?
Menzie wrote:
Joshk: Hmmm. Sounds a lot like “Liquidate labor, liquidate stocks, liquidate farmers.” (Andrew Mellon, in 1929). That worked well, didn’t it?
Menzie,
It may not have been the most carefully crafted political statement, but it would have worked if the government had actually taken Mellon’s advice, but Hoover marginalized Mellon because Hoover though Hoover was the smartest man in the room.
Mellon’s disagreement with Hoover became so frustrating for him that at the end of his tenure he refused to take the reports to congress in person, sending his deputy instead. Hoover kept Mellon as window dressing because he was popular because his policies engineered recover during the 1920s, but Hoover was a central planning Republican all the way back to the Wilson administration.
It is this kind of myth based, out of context statement that that replaces real debate from those who wish to trash the free market.
“Joshk: Hmmm. Sounds a lot like “Liquidate labor, liquidate stocks, liquidate farmers.” (Andrew Mellon, in 1929). That worked well, didn’t it?”
It depends on whether you think think that the old growth model, with cheap and abundant credit powering consumer consumption as a key foundation block, is still workable, or whether we’re going through a sea change and looking for a new model.
GM is a good example. The company seems to be utterly committed to selling vehicles that are high-priced and expensive to run, with no Plan B. If you think that things are going to go back to “normal” and this plan will make sense in five years, then lending/giving GM some government money to get through the current emergency is arguably a good idea.
On the other hand, if you think that people are going to remember $4.00 gas and 8% unemployment and be very slow to buy SUVs, then the sooner GM goes bankrupt or at least has a wholesale change of management the better, and government money should be directed to helping ex-GM employees to survive and adapt rather than trying to prop up a company chained to an obsolete way of doing business.
Too much of the stimulus seems to be aid to GM supersized. We want to prevent people from losing their jobs without asking if they could be better employed elsewhere. That’s reasonable and decent in the short run, but at some point we have to change emphasis and let the old jobs go.
I’ll admit that many of us stimulus critics haven’t talked enough about how to help average people do the adapting and surviving, but I do see stimulus advocates acting as if the government’s job was to prevent the economy’s evolution to a new normal, rather than facilitating it.
David Allen
@DickF
Perfectly correct!
I believe that the question JoshK is asking is: Is the solution to too much lower and middle class debt more gov’t debt?
“Joshk: Hmmm. Sounds a lot like “Liquidate labor, liquidate stocks, liquidate farmers.” (Andrew Mellon, in 1929). That worked well, didn’t it?”
It seems to me that there are 3 “markets” out of balance (probably then too). I’m wondering whether the central bankers actually know what they are or they already know but do not tell us because it would lead to the abolishment of all the central banks.
Odd analysis, or perhaps better said, odd rhetorical approach, to follow up “would have worked if it had been tried” by calling the other side “myth based”. The claim that Mellon’s approach would have worked is necessarily “myth based” since there are no do-overs in history. What we have, though, are a number of data series, such as industrial production, unemployment and GDP, which improved while the government ran an expansionary fiscal policy, then backed down after that policy was abandoned in 1937 out of concern over the deficit.
Facts are facts. Stories are stories. Let’s try to keep the stories consistent with the facts. Let’s especially do that on the way to calling the other guy’s story “myth based”.
kharris,
Nice try at diversion but the myth is that Hoover took Mellon’s advice.
While Mellon’s approach worked to generate recover from the 1919-20 recession and all through the 1920 is a good indicator that it would have worked after 1929, especially since the market after the crash was still higher than the previous year. But it is possible that Mellon’s approach would not have worked this time, not likely, but possible, so I will give you that. But then to claim that the data concerning the Great Depression proves that “expansionary fiscal policy” works when the policy gave us the longest decline in history is really a stretch.
“Joshk: Hmmm. Sounds a lot like “Liquidate labor, liquidate stocks, liquidate farmers.” (Andrew Mellon, in 1929). That worked well, didn’t it?”
It worked great in 1920-1921 but was never permitted by Hoover/FDR in the 1930s.
“I don’t understand how you can come to the conclusion that any of these stimulus packages can be beneficial? And then that you should scale them up as they continue to fail?”
I don’t think that any logical analysis will conclude that using borrowing and spending to fix a crisis caused in large part by too much borrowing and spending can be beneficial.
“Putting the Japanese experience aside, how can government spending push the economy to an equilibrium state that can help lead to private sector growth? All it will do is further distort all price signals.”
It always has. Japan’s reluctance to allow the market to liquidate malinvestments caused Japan’s economy to remain stagnant for two decades.
“eg. If the government spent $5t on housing then we would have even more bad investments in housing in construction. When the “stimulus” is reduced, then we would have an even worse distorted economy.”
Correct.
“If we can focus on clearing away dead companies as quickly as possible then we will see the private sector take us where GDP can expand the most in a way that adds value beyond the simple digging of ditches.”
This is the lesson taught to us by history. Harding allowed the market to liquidate malinvestments as did previous presidents before him. By clearing away the dead companies resources moved into the hands of efficient ones that could kick-start the recovery. While the advantages of allowing liquidation is obvious there is no political incentive to permit such a liquidation so you are unlikely to see it unless the system collapses and the government is powerless because it can no longer create purchasing power out of thin air.
DickF,
You’re kidding right? I’m attempting “diversion” by calling your argument-by-assertion into question? What nonsense. I raised your use of the word “myth” to emphasis the utter gall behind your use of that word when you are engaging in such extensive myth-making of your own. I’m not diverting anybody from anything. I’m trying to point out how utterly silly your version of history is.
You’ve got your little Amity-Shlaes-lite story all ready, but it doesn’t fit the facts. It fits your view, but why should anybody else let your view outweigh the facts?
“You’ve got your little Amity-Shlaes-lite story all ready, but it doesn’t fit the facts. It fits your view, but why should anybody else let your view outweigh the facts?”
Actually, the facts are exactly on the side of the story told by Shlaes, Higgs, Powell, Rothbard, Folsom, Adams and many others. It is very clear that Hoover/FDR meddled with the economy by prevented prices from falling and by creating artificial demand by spending on make work projects. But that did not work as all of the spending didn’t produce new jobs and by the end of the 1930s the US still had extremely high unemployment that hovered around 19% of the available labour pool.
The Hoover/FDR approach stands in contrast to the Harding approach, which allowed the market to liquidate the ineffective businesses as the government cut spending and lowered corporate taxes to reduce the burden on the economy.
kharris,
Let’s focus a little. As I stated it, “the myth is that Hoover took Mellon’s advice.” Can you refute this? Can you give me evidence that Hoover took Mellon’s advice?
“kharris,
Let’s focus a little. As I stated it, “the myth is that Hoover took Mellon’s advice.” Can you refute this? Can you give me evidence that Hoover took Mellon’s advice?”
First, Hoover makes it clear in his memoirs that he rejected the advice not to meddle. Second, his actions were clearly those of an economic interventionist. He signed Smoot-Hawley and by doing so started a trade war with the rest of the world. He pushed the banks to form the National Credit Corporation and when that didn’t work he created the Reconstruction Finance Corporation, which distributed around $1.5 billion in 1932. He signed the Federal Home Loan Bank Act, which encouraged new home building, and reduced foreclosures. He signed the Revenue Act of 1932, which doubled estate taxes, increased the top personal income taxes from 25 percent to 63 percent and increased corporate taxes. He pushed for the passage of the Emergency Relief and Construction Act, which diverted tax revenues towards massive public works programs in order to create jobs.
I think that you actually need to read the facts as they are rather than the interpretation of those facts by the lefties who try to paint Hoover as an advocate of the free market. There is no way that a clear examination of Hoover’s writing or his actions can support the view of Hoover as anything but a meddler. Hoover and FDR didn’t fail because they did too little but because they did too much. Had they done what Harding did the depression would have been over just as quickly as the depression that Harding inherited from Wilson.
I would be more than happy to see an analysis of what is deemed the ‘sustainable’ level of US household debt (or debt/GDP) and the path and triggers to get to there. And, of course, all this reconciled with micro-behavior (ie, what is the indebted consumer actually doing?)
“I would be more than happy to see an analysis of what is deemed the ‘sustainable’ level of US household debt (or debt/GDP) and the path and triggers to get to there. And, of course, all this reconciled with micro-behavior (ie, what is the indebted consumer actually doing?)”
What you ask is not possible because such an analysis may yield something of use only at the individual level. We also need to note that in a world of fiat currencies the central banks have the ability to forgive all debts by destroying the purchasing power of the currency.
Forget a bigger stimulus package. We’ll need more shelves for all that canned food & ammunition.
“How does anything push the economy to an equilibrium state that can help lead to private sector growth? Supply and demand. If… a large portion of the workforce is unemployed, the government can return them to employment by–surprise–employing them… [O]ur choice is between government employment and no employment.”
There is clearly a false dichotomy that you have set up in your question. Instead of trying to identify what will lead to expanded economic activity, you have asked what will employ the most people. While the government can provide more people with paychecks, it can only do so at the expense of others, in effect reducing their capacity to consume.
One way of paying for new government jobs is to raise taxes. By raising taxes, you directly reduce taxpayers’ ability to spend money. This is money that would be spent efficiently in the market, going to naturally demanded goods and services. Instead, the money will go to support market inefficiencies, paying for services that are not in demand. Alternatively, the government can pay for new employees (or pay for government ordered projects), by printing more money. In small amounts, this may be effective, as it can be quickly removed from the money supply as the economy picks up. However, the quantity of cash recently infused by the Fed cannot be quickly removed when consumption increases. This will certainly lead to inflation, which in turn will reduce consumers purchasing power for the goods they demand. In either case, American consumers on the whole will be harmed, and the economy will suffer a longer downturn.
While I am not excited about the near-term consequences, I think heeding Mellon’s advice to “liquidate labor, liquidate stocks, liquidate farmers,” will be best for our total economic recovery.
BB: I can’t quite figure out what equations underly your model. It does seem to have some combination of equal marginal propensity to consume, Ricardian equivalence, and a restriction on Fed ability to shrink its balance sheet. Am I right?