Professor Casey Mulligan says (and yesterday unequivocally reiterates) the stimulus program would not stimulate the economy. The nonpartisan CBO says otherwise:
…CBO estimates that in the fourth quarter of calendar year 2009, ARRA’s policies:
- Raised real GDP by between 1.5 percent and
3.5 percent,- Lowered the unemployment rate by between 0.5 percentage
points and 1.1 percentage points,- Increased the number of people employed by between
1.0 million and 2.1 million, and- Increased the number of full-time-equivalent jobs by
1.4 million to 3.0 million compared with what those
amounts would have been otherwise (see Table 1).
From the paper:
Um, sure, if you throw around hundreds of billions of dollars you’re bound to get some economic activity
The question is whether this is sustainable and not just kicking the can down the road, and a lot of economic data suggests that it was merely kicking the can down the road.
Unless of course you’re supposing that the Federal government spend $700 billion annually just to prop up things, which won’t work because when you pull demand forward all your accomplishing is cannibalizing future demand. Seriously, anyone who really thinks that the stimulus worked and didn’t just merely kick the can down the road is really in far left field–as sales tax revenue and withholding tax revenue continue to collapse.
Further, it wasn’t just the $700 billion because we also have a backdoor stimulus with all the people staying in their homes and not paying their mortgages–and once that’s also gone and the housing market is cleared, it is axiomatic that the money spent of living arrangements will be pulled from the retail sales.
So, what do we do now: keep millions on unemployment permanently–and where does the money to do this come from? The printing press?
Well, looking at some of the purchasing and government data, some in power may have changed their mind–as the recent Non-manufacturing ISM New Orders are growing, yet Inventory sentiment is that inventory is too high: how does this get resolved? Producers are going to be stuck with a lot of product they can’t sell.
Also, it seems that a lot of government agencies are spending their money now and putting in orders, as opposed to when they do it closer to the end of the fiscal year. Massive budget cuts coming? Or is the bond market about to blow up?
Mr. Bernanke, as I have warned, may have seen the light and is not so willing to monetize the debt–let us keep in mind that the only thing the Federal Reserve has to sale are Dollars. And as I said to Mr. Hamilton, Mr. Bernanke has to try to stop the banks from going into the Greek and other Furo countries bond market; not to buy bonds, but buy CDSs on bonds they don’t even own.
I realize that you might want to distinguish fiscal and monetary policy, but so far the two have acted in concert, and until otherwise, I don’t see the value is creating a distinction where one doesn’t exist, that is, as of yet; that may change going forward.
Well, Ms. Chinn, if your so certain about your assessment that the stimulus is actually going to be effective going forward, then I’m sure you’re just taking your money and piling right into munnis; after all, the yields are high and they’re tax free, that is, of course the revenue will still be there to pay them out.
The problem I see is that there is a misleading categorization going on here, that is, many economists are acting as if reality operates in neat categorical aspects, and not in a continuous change, where as cause and effect are metaphorical tools we use to help us model the world, but lose sight of the fact that causation is an artificial imposition onto the reality–a helpful and necessary one, albeit, but a metaphorical tool nonetheless. what does this mean under the current economic situation? That the current economic down turn is a second dip recession/depression that is only a continuation of the 2000 downturn–merely creating a credit bubble shouldn’t any kind of “recovery”, especially since we have a net job loss over the last ten years.
Technical word games can be played, but as long as one thinks that a recovery merely entails GDP turning positive I suspect will be wrong in their assessments at every turn.
completely off topic, and idle speculation-
what result if several highly indebted first world countries (greece, italy, ireland, spain) which do not raise funds mostly from other countries central banks (true?), decide to repudiate or reschedule some debt at the same time? Sort of an international governmental revolt against international financiers?
Mulligan is arguing that stimulus doesn’t work, in part by saying that –
“President Obama has a vision to spend more on health care, largely for its intrinsic value. Its stimulation value is minimal because unemployment is low in that sector…”
Mulligan is mixing temporal apples and oranges. Stimulus is now, health care is mostly future. Mulligan notes that it is the intrinsic value of health care that justifies (mostly future, mostly not current) spending on health care, which pretty clearly implies it is not a stimulus effort. Why is he tossing this apple in among the oranges? Apparently because it seems to strengthen his employment-rate based argument. But it is an entirely different argument for another time. We need to train more medical personel to make health care reform work – a medium term endeavor at minimum.
Mulligan says a program likely to hire more women than men doesn’t match well with a recession in which men have been more likely to lose work than women. That is far from saying that stimulus hasn’t worked. From January 2009 to January 2010, the unemployment rate among adult women rose from 6.4% to 7.9%. There are millions of women who’ve lost jobs, millions more of new entrants unable to find jobs. It is simply not true that stimulus which would differentially benefit women, but which would also benefit men, could have no effect due to greater job loss among women.
Mulligan argues that some workers who have lost employment in the housing sector will have moved to non-residential construction. Spending on non-residential construction fell 10.6% over the year to January 2010. Even if some workers have moved from housing to hospital construction, there has been a net decline in activity. Construction employment has fallen in every month since July of 2007, and employment in civil engineering construction – a sector Mulligan suggests home construction workers could have migrated to – has fallen in all but 2 months since the end of 2007. Anyone who cares to know could know these things. Mulligan is simply pretending that these things could have happened, when in fact they have not happened.
What this seems to come down to is that Mulligan, seeing Leonhart’s recent assertions that stimulus is working in the NYT, felt it was time to create some doubt, but didn’t have any legitimate way to do that. So, he just tosses a bunch of half truths and misdirection onto a page, hoping that will mislead at least some of his readers.
It’s good to know what Mulligan’s standards are, in case we run across some of his writing again.
Do these figures take into account the unique monetary policies that have existed since 2008?
Can econometric models estimated using data from a period without these policies be of any use in estimating fiscal policy effects? It seems unlikely. Monetary/credit policy likely had far more impact on jobs saved and these effects are mistakenly attributed to fiscal policy.
I guess we can safely conclude that Professor Mulligan is what Professor Gavin Kennedy of “Lost Legacy of Adam Smith” would call a true ideologue, a man who will never let the facts get in the way of his beautiful ideas. Reading Liaquat Ahamed’s “Lords of Finance” and rereading Schlesinger’s “The Crisis of the Older Order: 1919-1933,” it appears that Mulligan (and most of our Center-Right political and economic elite) appear they want to do the full Hoover and Bruening as far as Fiscal retrenchment. That did not work out so well, but so much has been forgotten these last 80 years.
I think any reasonable person has to admit to a fair amount of uncertainty about this. Period. Or as Leamer once said: Any reasonable scientific methodology has to allow the answer, “we don’t know.”
@ Brian,
State sales and income tax collections have begun to find a bottom. Revenue revisions have in some cases even been higher (Minnesota and Maine for example). There are few large scale downward revisions in expected revenues recently except in states with primitive forecasting models (ex: Missouri and Oklahoma).
Should we read countries GDPs ( Australia excepted ) major economies are in expansion,but should we dig into the details such as Industrial production,income,employment, the economics challenges remain wide open.On a positive note the intra trade is not dormant.
http://research.stlouisfed.org/economy/indicators/summary.pdf
The real investment is positively sloped on short term curves.
http://research.stlouisfed.org/fred2/series/NRIPDC1
http://research.stlouisfed.org/fred2/series/FPIC1
The main issues remain no jobs,lesser income,inflated assets prices, financial papers, commodities. Should one make a breviairy of all actions taken worldwide,they have managed to keep banks and financial institutions afloat.
Where did those CBO employment increases occur? Based on where most of the stimulus money went, I’m guessing state and local government and the services that support them.
Okay, I understand the GDP numbers because they essentially measure government spending, but the increased employment number simply defy logic. If stimulus created employment why in the past have we has such high employment without stimulus? Along the same line of thinking, would $25 or $50 trillion almost guarantee full employment if the “nonpartisan” CBO can be believed?
Let’s get serious. If the people in government actually believed throwing money out into the economy would actually create employment they would be throwing it like crazy. Intuitively they know that their line of reasoning is foolish. They only use it to justify their profligacy.
@ Andy,
There are a couple separate effects. There are the direct employment effects from fiscal stabilization aid that was used to add or retain government positions. These counts can be found at Recovery.gov and the subsequent state recovery sites.
Then there are the indirect effects from the expenditures on capital equipment, contracting services, and the like which are generally not precisely accounted for.
Then, from the increases in transfer payments and reduced withholding provisions that were part of the stimulus bill that have increased consumption above where it would have been in absence of the stimulus. The macroeconomic impact of sustained consumption has accounted for the bulk of the jobs. State and local government job retention is significant, but likely not the majority of what the CBO has estimated.
You know, I guess this comment will never see the light of day because Menzie Chinn and James Hamilton are two classy men and will probably consider this a “hit and run” (although I visit the site pretty regular). It’s ok if they do, I respect them for “staying above the fray”.
But you know all I can say is I know economics better than the “average Joe” and I read this stuff pretty regular, and as far as Casey Mulligan saying this didn’t help save many jobs–even Republican Schwarzenegger has enough brains to observe in fact it has saved over 100,000 jobs in his state. He gives DIRECT credit to the stimulus for that. UNLIKE his Republican peers who bad-mouth the stimulus then pose for photos of ribbon cutting ceremonies of stimulus projects in their state.
I just want to know one thing—is Casey Mulligan a credentialed economist or a National Review hack???
The question is, will the ability to use stimulus wear out (fiscal credibility wear too thin) before sustainable recovery comes. I think we had better start conserving our stimulus spending, applying it only where the employment bang-for-the-buck is greatest, because it may be a very near thing.
RicardoZ “If stimulus created employment why in the past have we has such high employment without stimulus?” Well, first off, you have to have a counterfactual. Secondly, though, you may have a point. Employment post-dotcom-bubble, may have been due to stimulus (tax cuts, military spending). Too bad we wasted fiscal resources at a time when monetary policy seems to have cured the problem by blowing the housing bubble and setting us up for our current malaise and fiscal stimulus need. Much of the earlier stimulus was wasted through a ballooning current account deficit.
In my humble opinion, the “nonpartisan” CBO has on occasion shown attitude. Alice Rivlin is not my idea of straight down the middle.
From the intro to the December CBO report-
“First, it is impossible to determine how many of the reported jobs would have existed in the absence of the stimulus package.”
Gives you confidence in their findings, doesn’t it?
Ted K: Thank you for the compliment. We don’t edit comments save to remove profanity, and occasionally for length.
I can attest that Casey Mulligan is a credentialed economist, with a Ph.D. from the University of Chicago, and a tenured faculty position in the Economics Department. See here.
Mulligan is also a bit of an embarrassment. He publicly spouts ideas that have appeared in theoretical models when they are empirically ridiculous and totally inappropriate. So, early in the recession he publicly supported the old Lucas idea (also at Chicago, although I gather Lucas knew better than to push it himself) that all unemployment is voluntary, and that the rise of unemployment was due to a shift of the relative demands for labor and leisure by lots of workers. In short, they were becoming unemployed because they were suddenly having fits of laziness.
Oh, and Brian: can you not figure it out that Menzie Chinn is male, as well as being a professor with a Ph.D. Continuing to call him “Ms.” makes you look like someone about whom one should use the sort of profane language that gets censored on this site. Are you doing this consciously to try to put Professor Chinn down or are you just completely out of it?
Dave Backus: I agree completely. We should all have a bit of humility in making our pronouncements about how the economy works. At the same time, one has to make a stand at some time about what the preponderence of evidence suggests. And to me it suggests some impact of discretionary government spending on GDP. The magnitude and timing are indeed legitimate subjects of debate.
“At the same time, one has to make a stand at some time about what the preponderance of evidence suggests.”
Not only does one have to make a stand, one must also act on one’s beliefs to the best of their knowledge. Uncertainty is not a excuse for doing nothing because doing nothing is an active choice that has real and significant consequences for the economy and human welfare. One could make the same argument about climate change.
@ Brian Quinn
Looking at the Treasury’s Daily Statements at their FMS web site seems to suggest that withholding taxes are still continuing to decline; with corporate taxes getting a little bounce.
On the state level, the Rockefeller Report is still claiming state revenue is declining, with some variations across various states; however, there are many distortions in the numbers–for instance CA raised withholding taxes by 10%, and like all taxes that take immediate effect, it causes a temporary boost in government revenue only to decrease revenue somewhere else later. Also, many sales taxes didn’t begin to bottom or jump a little until the stimulus took effect, especially in full, with the transfer payments–yes, sales taxes went up because the people receiving transfer payments have to spend that money; and many states in their kindness raises sales taxes just as they got those checks.
This is the problem with the stimulus, as Mr. Chinn is so ready to overlook, that it does nothing for long term planning except send a false signal as much of that stimulus spending has probably become structural: so, if the Federal government doesn’t do another stimulus then what is more than likely to happen is that once those transfer payments begin to dry up, then it’s axiomatic that the state revenue derived from them will as well. We are already beginning to see this in some of the incoming data, as we will see savings decrease, and personal income decline (since the BEA counts transfer payments in its personal income reporting; and sales taxes do not really align with consumer spending because interest payments are counted under interest payments, so consumer spending will not be a good leading indicator for sales taxes as the banks have up credit card rates significantly, and it is that that’s being reflected in increased consumer spending).
It would be my guess that any state that plans its budget along the lines of assuming that tax revenue will bounce up or remain flat are going to face some serve budgetary problems
As for income tax revenue, that’s hard to predict as until tax season comes, income tax is only a trickle until then.
Let’s presume it did create/save 3M jobs. Are you really going to sell us that roughly 1T is worth spending to save 3M jobs? Seriously? 300K+ per job is wise? Get a clue.
I’m not quite sure if I’m reading this right, but if I understand correctly, the CBO data is comparing, in the left two columns, the incremental GDP to what it would have been without the stimulus. Is that correct?
If so, then here’s how the math adds up to me: The low estimate for the cumulative GDP benefit is 3.2% (1.0+1.4+0.7+0.1) over the four year forecast period (and afterwards?); the high estimate is 8.3% for GDP benefit and the average of the two is 5.7%.
The cost of the stimulus was $787 bn or 5.6% of GDP.
So, if the actual benefit is at the average of low and high, then the stimulus was a net wash. If the actual is below the average, then Mulligan is correct: the stimulus will have reduced welfare over time by ‘crowding out’ alternative uses of those funds.
On the other hand, if the benefit is materially above the estimated average for the next four years, then, in fact, we can say the stimulus had a positive multiplier effect overall.
But once again, the presentation of data does not permit us to assess the efficacy of the stimulus. It does not tell us whether the stimulus was a good idea, only that it had an effect.
I have to admit a certain frustration with these he-said-she-said posts. There is no learning in them. It’s all about already knowing the answer and looking for data to justify it. But if you already know the answer, well then you’re perfect and there’s nothing to learn. All knowledge has been obtained, every answer is known.
Still, we’ve just come through the worst recession in decades, with first real, global financial crisis in the modern era. You might think that this would generate a plethora of interesting questions: If the stimulus has a positive benefit, should we have borrowed more? If so, how much? What represents the reasonable limit of such a program? How do we demonstrate that? Could the stimulus have been targetted better? Did the stimulus prevent the necessary adjustment of certain markets? Which ones? In what ways?
There are many fascinating questions begging analysis and insight, and to me, these seem rather more interesting than ideological debates.
Right.
Summers would neva work for that pittance.
And damn that kh for bein so ruthlessly analytical.
Another comment on the nonpartisan nature of the cbo. They are required to score what they are given. They cannot correct for assumptions they know will never happen and they cannot correct for double taxation or counting if it is cooked into the premise. They only score based on “the law.” There have only been a few times that CBO has actually distorted one of its findings for other than the data it has been given.
A prime example of this is the scoring of the health care bill. CBO just scores what they are given. Democrats have worked long and hard into the hours of the night to come up with ways to twist cbo scoring to fit their desired results.
Just for the record the Republicans do the same thing. Can you blame the cbo for being a tool of the politicians? That is for you to determine.
As is the case, the prudent should always watch for the government to slip in economic information, that is, not so good economic information on a Friday afternoon.
Here come the discrepancies and revisions I had warned you of Mr. Chinn.
I expect many more to come…and it also seems that there’s some data not matching up with the BEA’s upward revision of the GDP–I suppose we’ll have to wait for the next revision to come out as once again we are followers of the government’s Church of the Third Revelation.
Ugh, Brian, you linked to the CBO scoring of the White House FY 2011 Budget that was proposed/released in January 2010. Its not a revision of anything, the CBO never scored the budget prior to this report…
Not only does one have to make a stand, one must also act on one’s beliefs to the best of their knowledge. Uncertainty is not a excuse for doing nothing because doing nothing is an active choice that has real and significant consequences for the economy and human welfare. One could make the same argument about climate change.
Plato’s Fire Insurance? Doing nothing is often better when facing high uncertainty. With this stimulus program the downside is very clear:
1. Crowding Out
2. Missallocation of resources.
3. Debt
4. Crisis Exacerbation (states that are in crisis will put off needed reforms b/c of new short-term funding).
You should have a high degree of certainty of the benefits when the risks are clear.
I thought we were done with faith-based policies. Oh well.
JoshK,
If all you are going to do is list what you imagine to be the risks, then the conclusion you will come to is clear. They are an odd batch of risks, though. States need to rationalize their budgets, its true, but doing so now will further reduce aggregate demand, add to unemployment and (ask anyone who drives around my neck of the woods) leave lots of necessary work undone. Crowding out is not a problem when savings are higher, borrowing is low and the barrier to credit is quality, not cost. Misallocation of resources? Well, not using them at all is a pretty poor allocation, and that’s what is happening in a lot of cases right now. Debt? Yes, there is that.
So we are down to one serious risk and a bunch of silly push-back talking points, without ever bothering to list the potential benefits of fiscal expansion. On this basis, the argument for fiscal expansion may not need to be made at all. The argument against hasn’t made it into the ring.
There is always a marginal cost. The cost idling resources, will on a free market, be less than the value of having those resources ready at a moments notice to allocate to their proper role.
By forcing them to be used on something inefficient you subtract from their value creating capacity in the future, and thus are a net drain on an economy.
DrLong/Krugman/etc. can play word games all they want. It doesn’t change basic truths about the choices on the margin in an economy.
Do you really believe that an increase in GDP accurately reflects economic growth? You should get out more.
All it does is measure spending. Where that spending comes from (i.e., borrowing from saved capital to fund gov’t programs) is completely ignored. Any fool can improve GDP.
A phenomenon to which we are currently witness.