Three pictures and three quotes
GDP growth is slackening:
Figure 1: Real GDP from 2011Q1 2nd release (blue bars), monthly GDP from Macroeconomic Advisers (red line) and from e-forecasting, all in billions of Ch.2005$. NBER defined recession dates shaded gray. Source: BEA, 2011Q1 2nd release, Macroeconomic Advisers (6/13), e-forecasting (6/21).
The output gap remains large, and will still be -3.6% in 2012Q4, according to the mean WSJ June survey.
Figure 2: Real GDP from 2011Q1 2nd release (blue), mean forecast from June WSJ survey (red) and potential GDP, all in billions of Ch.2005$. NBER defined recession dates shaded gray. Vertical line at 2009Q1. Source: BEA, 2011Q1 2nd release, CBO, Budget and Economic Outlook (January 2011), NBER, and author’s calculations.
Finally, on the spending side, government expenditures on goods and services are a negative component of overall GDP growth, in an accounting sense.
Figure 3: Real GDP growth 2011Q1 2nd release (blue bars), contributions from state and local government spending (red bar), and Federal spending (green bar), all in billions of Ch.2005$, SAAR. NBER defined recession dates shaded gray. Vertical line at 2009Q1. Source: BEA, 2011Q1 2nd release, NBER, and author’s calculations.
This figure reminds us that the Federal stimulus was largely offsetting contraction from the state and local governments. This point was highlighted in Aizenman and Pasricha‘s analysis of spending (on both goods and transfers).
So, I think I understand where PIMCO’s Bill Gross is coming from (The Hill):
Bill Gross, the head of PIMCO, the world’s largest bond investor, on Tuesday lambasted politicians who claim deficit reduction will lead to job growth and called for new stimulus spending.
Gross is often cited by House Budget Committee Chairman Paul Ryan (R-Wis.) as having said the U.S. had only a few years to rein in the deficit to avoid a debt crisis. Gross sparked a lot of attention by dumping his holdings of U.S. Treasuries this spring.
“Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem,” Gross wrote in PIMCO’s July Investment Outlook.
“Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed,” he said.
…
And from Fed Chair Ben Bernanke’s press conference yesterday (h/t Ezra Klein):
I have advocated that the negotiations about the budget focus on the longer term, say 10 years, which is the budget window, or even longer if you’re taking into blth entitlement reform, for example. By taking a long run aspect we can help the economy by reducing interest rates that may rise suddenly, we may help increase confidence in the households and businesses so ink it’s desirable that we take strong action to lower our budget deficits over the longer term. In doing that I think it would be best not to, in light of the weakness of the recovery, it would be best not to have sudden and sharp fiscal consolidation in the near term.
That doesn’t do so much for the long-run budget situation, it’s a negative for growth … . I hope that the congressional negotiators will take a longer-term view.
I don’t think that sharp, immediate cuts in the deficit would create more jobs. I think in the short run that we’re seeing already a certain amount of fiscal drag coming from state and local governments from the withdrawal of previous federal stimulus, so I think in the short run, you know, the fiscal tightening is at best neutral and probably somewhat negative for job creation.
I think what people will understand, should understand is that our budgetary problems are long-run in nature, the projections made by the CBO, for example, talk about where our debt to GDP ratio will be in 2020, 2025 and so on. That doesn’t mean we should wait to act, the sooner we can act the better.
The most efficient and effective way to address our fiscal problems
longer run perspective not to focus the cuts heavily on the near term but by taking a perspective and making a credible plan for reducing future deficits will lower interest rates or prevent them from rising and we will increase confidence and that could be constructive.
If it’s entirely focused on the near term I don’t think that’s the optimal way to proceed.
Finally, I know there is a group of people who believe in fiscal contractionary expansions, despite recent econometric work highlighting the quite specific instances in which such episodes occur [1] [2] [3] (that’s why a little econometrics is a dangerous thing). In fact, JEC had a recent hearing, entitled “Spend Less, Owe Less, Grow the Economy”. Here’s the concluding paragraph from Chad Stone’s assessment of the expansionary fiscal contraction thesis:
The United States faces a serious long-term deficit problem and an immediate short-term
problem of slow growth and high unemployment. Current economic and budget conditions in the
United States do not look at all like the conditions in countries that have experienced successful
deficit reduction through short, sharp fiscal contractions. Non-partisan experts like Fed Chairman
Bernanke and the Congressional Budget Office warn against cutting deficits too fast. And as the
non-partisan Congressional Research Service concludes from its analysis of the international
evidence, cutting budget deficits too rapidly under current U.S. economic conditions is most likely to
hurt the economy and ultimately be unsuccessful. If we go down this path, I’m afraid the lesson will
be “Spend Less, Grow Less, Slow the Economy.”
By the way, here is the nonpartisan Congressional Research Service’s assessment of contractionary fiscal expansions. (If only our Congressional members read these reports…)
Menzie-
Can you give me three examples of a successful fiscal stimulus in the US?
Rich:
1) The New Deal, FDR’s 1st term had the fastest peacetime growth rates in real GDP and Industrial Production in US history.
2) The 1980’s as Reagan both cut taxes and increased spending
3) the ARRA. Look at the GDP growth rates in the charts above. As soon as it started to take hold, the economy started to grow again. The rate of job loss slowed from 3/4 of a million per month before it was bassed, to a small fraction of that a few months later as it rolled out. Clearly ti was too small and was being offset by S&L contraction, but relative to where we would have been without it, it was a smashing success.
Personally, based on the research I’ve read I’d say that the government spending multiplier is somewhere between 0.5 and 0.8. But just for the sake of argument, let’s say it is over 1, so that an increase in government spending would stimulate the economy. That assumes that government spending is actually spent in a timely fashion on things that matter, like roads and bridges. But do you really think Washington bureaucrats could actually agree on what to purchase with the money in an honest, fair way that doesn’t involve needless politicking and countless “Cornhusker kickbacks” and “Louisiana Purchases”? Even if government stimulus works on paper or in a computer model, you are neglecting the fact that we are dealing with people in Washington!
Rich,
Fiscal stimulus is automatic, as in “automatic stabilizers”. Automatic stabilizers work every time. So the right answer to your question is that fiscal stimulus has worked in every recession since the New Deal. Every one.
Not a bad record.
All of this is fine and dandy.
But, WHY is there a slowdown after ALL that fiscal and monetary stimulus that has been thrown the economy’s way? 700 billion in TARP, 820 billion in ARRA, tera-zillions in monetary stimuli, deficit spending galore, cash for clunkers, house purchase tax credits, “clean energy credits”, etc etc etc.
And after ALL these tera-bazillions of dollars, the economy is still in a slump? Really?
Please, explain why.
Wait, I have an explanation: the regulatory monster tsunami, plus all this deficit spending, plus all of this money stimulus, to which the current administration subjects the private economy has probably something to do with it (ObamaCare, Dodd-Frank, EPA bullying, expectations of way higher taxes etc).
Oh no, wait again, silly of me, to think that regulation has costs! And even more silly of me to think that economic agents form expectations about the future! Of course not, not at all, everything is free in economics, (this is the New Economics taught in elite schools, it seems), even when you print tera-bazillions of dollars and regulate the private sector to death, no effect at all, it’s all free.
The Bush tax cuts
The Reagan tax cuts.
The Kennedy tax cuts.
Last time I counted that is three examples of successful fiscal stimulus in the US.
Now, can you give us three examples of failed fiscal stimulus in the US?
To add to Rich’s comment, the CRS report that Menzie references simply argues that the current U.S. economic situation is very different from the economic situation in which previous episodes o fiscal contractionary expansions occurred.
Thus, while it can be argued that promises of fiscal contractionary expansions are overblown, it can just as easily be argued that “non is not the right time to cut spending” are equally as overblown.
Can you give me three examples of a successful fiscal stimulus in the US?
1985 – 1986 – Gross private domestic investment was a drag on growth and govt spending more than made up for it.
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1985&LastYear=1986&3Place=N&Update=Update&JavaBox=no#Mid
Manfred, TARP did not cause the current slump. The economic conditions that made TARP necessary have allowed the slump to continue. The govt has not regulated the private sector to death. If anything it has been deregulated to death.
Menzie-
I think you left Canada out of the expansionary fiscal contraction examples.
I know you are busy, but I am still curious to hear about the successful fiscal stimuli. BTW, I was looking for an example of spending stimulus, like the benighted ARRA. We already know that cutting marginal tax rates is effective.
@Manfred: Why is the economy still in the tank? Because the stimulus wasn’t big enough. Romer said that right from the start. We needed > 1 trillion back in 2008/2009. We got half that.
Claiming that stimulus didn’t work is like taking half the prescribed dose of antibiotics and then blaming the doctor when you don’t get better and the infection becomes resistant.
Brian Many of the historical multipliers included both spending increases and tax cuts. We know from the basic math that ceteris paribus tax cuts have a smaller multiplier. But more to the point, in many cases fiscal stimulus was deliberately sterilized by the Fed in order to prevent an overheating of the economy. When you’re in a liquidity trap, as we are now, there is (or at least shouldn’t be) any concern about the Fed sterilizing fiscal stimulus. You also need to look at the effects of fiscal contraction, because that too is part of the Keynesian explanation. There are certainly plenty of examples of fiscal contraction hurting the economy. It cuts both ways.
That assumes that government spending is actually spent in a timely fashion on things that matter, like roads and bridges.
Well, no. It assumes no such thing. It would be great if congress critters did actually use fiscal stimulus as an opportunity to rebuild the capital infrastructure “on things that matter, like roads and bridges,” but that is not a necessary condition for fiscal stimulus to do its job.
Manfred You said you grew-up in a 3rd world country. Sounds to me like you got a matching 3rd rate education in economics. You should first learn the difference between an Aggregate Demand curve and an Aggregate Supply curve. I think that will clear up a lot of your confused questions.
Short-term deficits are a strawman.
Spending and interest rate risk are the issues. Borrow all you want at these low rates if you invest in it cost reduction. Don’t borrow more for your coke party.
Dirk’s claim that Reagan cut taxes in the 1980s is of course provably false. Reagan massively increased taxes with an enormous hike in FICA taxes to make up for the lost revenue.
Reagan raised many other taxes as well, as laid out here.
All told, Ronald Reagan presided over 132.7 billion dollars in tax increases during his presidency. Before you make these kinds of assertions, Dirk, you’ll want to get your facts straight.
Anonymous said:
” Automatic stabilizers work every time. So the right answer to your question is that fiscal stimulus has worked in every recession since the New Deal. Every one. ”
Well I farted in each of the previous recessions and the economy recovered after after one. Clearly farting is the real answer here.
J. S.
Crude, but clever. Sort of a reductio ad methane.
“Biggest peacetime squeeze on household disposable incomes since 1921 – updated Cebr forecasts show real household disposable incomes down 2.0% in 2011.
New Cebr forecasts show that 2011 is likely to show a fall in real household disposable incomes of 2.0%. Taken in conjunction with the 0.8% fall now recorded as having taken place in 2010, the new estimates show that the UK is now seeing a bigger fall in real household disposable incomes than in the 1930s and the biggest fall excluding WW2 and the General Strike since 1921.”
http://www.cebr.com/wp-content/uploads/UK-Prospects-Press-Release-Apr-2011.pdf
Anyone who still believes in expansionary contractionary policies needs to look down the aisle where they keep the unicorn steaks and the confidence fairy dust.
Rich Berger I think you left Canada out of the expansionary fiscal contraction examples.
Oops, you kind of stepped on it with that one. Bad example. Canada had interest rates well into positive territory and they were able to have a strong export market. That’s exactly the case when Keynesian economics would say that you SHOULD NOT have an expansionary fiscal policy.
If you want to criticize Keynesian policies, my recommenation to you would be that you first try and learn what they are. Your post an example of what Krugman means about the Dark Ages. People either don’t know what old fashioned macro actually said, or if they did know they have long since forgotten, just like the medieval age forgot what the ancients knew.
aaron Borrow all you want at these low rates if you invest in it cost reduction. Don’t borrow more for your coke party.
Spending it on a coke party at least keeps it in the flow. The problem today is that people want to save too much for the given income level, which means incomes have to shrink in order to accommodate the desired spending. Put another way, and thinking in terms of the old flow diagram, spending is a flow variable and trying to save when no one wants to borrow is a leakage from the system. You can’t be a saver unless someone else wants to be a borrower. So whether it leaks away or is snorted up your nose in a coke party, the end result is the same…it’s gone forever. Might as well enjoy the coke party.
2slug: Canada had interest rates well into positive territory and they were able to have a strong export market. That’s exactly the case when Keynesian economics would say that you SHOULD NOT have an expansionary fiscal policy.
What exactly is your argument here. That Keynesian economics in fact predicts a fiscal contractionary expansion??
Jeff The preferred tool for stabilizing aggregate demand is monetary policy. That’s standard Keynesian stuff for anyone that took macro in the last 40 years. Fiscal policy has lots of drawbacks and the Fed usually sterilizes fiscal actions. The one exception is when you’re in a liquidity trap and monetary policy loses traction. That was not the situation Canada found itself in. Canada lifted itself out of recession the old fashioned way…through monetary policy, exchange rates and export growth. Keynesian economics would not recommend fiscal expansion in that context. The proper policy in that context is to go about the business of fixing long run debt problems as long as the Fed is able to do the heavy lifting. And that should be our policy too once we get to the point where the Fed can take over. Right now the Fed can’t (or at least won’t), so we’re stuck with fiscal policy. Clear?
It all boils down to an epidemic of uncertainty: what will Obama do next to dislocate markets, change the course of U.S. internal and external policies, and establish more onerous regulations and corporate requirements. Given that, businesses tread water when it comes to hiring or capital investments.
The latest example of contradictory and ineffective “stimulus”… trickle out some oil from the strategic reserves while the EPA holds energy companies hostage with regard to oil extraction and power plants.
So, employment stagnates while population grows and the dole role increases, housing flounders, and local tax bases evaporate.
Stimulus funds? Mistargeted, ineffectual, narrowly applied, and only shifting demand from one period to another… not generating new real demand [cash for clunkers, credits for home buyers]. Yeah, the government knows how to run business and the economy.
Multiplier effect? How about shredder effect?
Being Canadian, I can confirm from first hand experience that in the ’90s we had a large fiscal contraction but it was offset by the Bank of Canada. Expansionary monetary policy dropped the exchange rate with the US and we experienced an export boom.
The situation today in the US is not at all analogous.
So even Menzie has lost faith in Obama….
….unless he is willing to explain why he actually still HAS faith in Obama.
GK: I leave the issue of “faith” to the believers in deities. I have never had blind faith in all the policies of the Obama administration, which you would know if you’d read my posts on ARRA. But actually, you misread my post — the policymakers I speak of are the Boehners and Cantors and McConnells of the world.
But enough about me. I was wondering about your assertion that Federal revenues never exceeded 19%. CBO Director Elmendorff, who should know the data better than both of us, presents a graph on page 5 of this presentation indicating the contrary. If you demonstrate such innumeracy, why would you have faith in anything you yourself write?
By the way, who wrote a comment in January 2009: “The housing correction is mostly behind us…”?
“CBO Director Elmendorff, who should know the data better than both of us, presents a graph on page 5 of this presentation indicating the contrary”
According to the CBO’s historical tables (page 35 at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2009/pdf/hist.pdf), the maximum revenue received by the federal gov’t was 20.9% of GDP in 2000. While GK is a bit low during four dot com boom years, he is correct for all remaining years from 1970 to present.
The fact that the U.S. can pull in revenues of 20.9% of GDP during a once (or maybe twice) in a lifetime economic boom is hardly consoling given our current fiscal problems.
The Fed presentation is pretty interesting:
– The primary driver and component of Fed spending is transfer payments
– Under the President’s plan, spending on major healthcare items rises from the historical rate of 2.9% of GDP to 7.1% of GDP in 2021. (And Obamacare is going to save us what, exactly? Even by the President’s own budget, it’s a vast entitlement program.)
– The average tax rate of the highest quintile of taxpayers is within historical norms (from 1979)
– The average rate for every other tax payer group has trended down
– The President’s 2021 Budget Estimate for Federal spending 3.4% of GDP higher than the 1971-2010 average (As I recall, the unusually high tax reciepts under Clinton were in large part a result of historically unusual capital gains)
– Paul Ryan’s spending proposal is 0.65% below the historical average
– The deficit under the President’s plan for 2021 is an eye-popping 4.9%(!), for Ryan, 2.0%
– Ryan’s spending on soc sec and healthcare is somewhat below the President’s plan (conceivable); other spending components are well below either historical or President’s proposal (hard to believe)
I don’t think the Fed presentation (albeit, a very useful one) really tells us anything new. The questions remain:
i) are we going to structurally increase government spending levels well beyond those seen historically,
ii) will the US–like Italy and Spain–be run increasingly for the benefit of its retirees, or for the productive or developing sectors of the economy; and
iii) will the highest quintile continue increase its share of total tax payments relative to other quintiles, or will historical rates applied to lower four quintiles be restored.
Menzie –
In a friendly interview with The Browser here , Paul Krugman was asked the following question and gave the following answer:
Q. But how strong is the proof that fiscal stimulus works? At the beginning of the crisis, I asked my sister and her husband, both former colleagues of yours at Princeton about it. They said it wasn’t certain it worked, but given the lack of alternatives, it was better than doing nothing. Is the evidence stronger than that?
Krugman: I think it’s stronger. We can’t do controlled experiments with economies. You can’t prove something the way you can prove something in physics. But we have a number of pretty clear cases. We have the Great Depression, which was ended by a very large fiscal stimulus, otherwise known as World War II. The 1930s is, in many ways, the best laboratory. You can see that when Mussolini did a military build-up, it expanded the Italian economy exactly as a Keynesian would have predicted.
Of course it’s not as clear-cut as one would like. It’s not as if you can find someone who is doing a fiscal expansion while holding everything else constant. Life doesn’t work that way. But compared to a lot of other things people believe in economics – about the efficiency of the markets, or what will happen if you raise taxes – it’s a lot better established. There are a lot of propositions in economics that are held with great firmness that actually have no clear historical evidence behind them. Fiscal policy is, if anything, actually a bit better grounded in the evidence.
Doesn’t sound that solid to me? Do you have any better examples of the efficacy of fiscal stimulus in the US? Is Mussolini a role model for the US economy?
Menzie,
Imagine a scenario in which (fiscal and monetary) stimulus does not produce self-sustaining “trend” growth. Instead, each stimulus measure helps the economy to return to trend, only to be followed by a deceleration as the measure expires. The result would then be fresh calls for yet more stimulus, and the process would repeat itself.
How probable is such a scenario? How does it compare to our experience since 2001?
And if it is probable, what would be the inevitable result in terms of out-year deficit projections?
JasonR: In my dictionary, “never” is “never”. By the way, 1944-45 is another instance.
Anonymous aka Rich Berger: Well, going back to my undergraduate days, I watched military Keynesianism plus work pretty well for Ronald Reagan…If you want to equate him to Benito Mussolini in your mind, well, that’s your prerogative.
David Pearson: That outcome would be consistent with a linear model of the economy, with no attractor forces associated with potential GDP. It is, for instance, inconsistent with Markov-switching models of GDP growth.
Menzie-
Yes that was me. Too much cut and paste, no ID. Regarding the evidence for the efficacy of fiscal stimulus, my conclusion is that there isn’t much. I do not buy the Reagan/WW2 examples. If defense spending worked the Iraq/Afghanistan/Libyan wars should have the economy humming.
J.S.
have read this (June 23, 2011 02:18 PM). You are rude.
Anyway : Davis Axelrod has taken over, and the plan for 2012 is obvious : kill Bin Laden and make a great show out of it, end Afghanistan operation “surge” and make a great show out of it, raise lots of campaign $$$ and make a great show out of it.
Axelrod is Obamas golden bullet, so to say. Guess it will end like last time : Give you hope and change. Yes we can.
2slug: If you want to argue that we’re in a liquidity trap and expansionary fiscal policy is our only option, that’s a certainly debatable argument but an argument nonetheless.
However, it’s beside the point. “Expansionary fiscal” policy is not the same thing as “fiscal contractionary expansions”. This is what the post and Rich Berger’s Canadian reference were all about. Admittedly, it a clumsy phrase, but it is not the same thing as “expansionary fiscal” policy. Clear?
I don’t think the war spending worked because of the money spent, but rather the experience and training profided and work ethic instilled.
Menzie Chin –
Fair enough. But as I hinted at, the bigger issue is that this data shows the chances of significantly raising revenues – at least enough to cut into the deficit – is unlikely.
“(As I recall, the unusually high tax reciepts under Clinton were in large part a result of historically unusual capital gains)”
Capital gains tax receipts were 119 billion dollars in 2000. Income tax receipts were 1.2 trillion. Total capital gains net losses in 2000 was 603 billion. In 2007 capital gains net losses was 900 billion. Tax revenue in 2007 was 2% of GDP lower than in 2000.
“If defense spending worked the Iraq/Afghanistan/Libyan wars should have the economy humming.”
Defense spending has fallen for the past two quarters. Defense cuts reduced Q1 GDP growth by .69%.
Forgive me for stating the obvious… real economic growth is impossible unless the credit drag on the economy is reduced. “Pump Priming”, “Stimulus Spending”, “Investment in the Future” … whatever you call it, Federal Deficit Spending serves as a social palliative, time shifting economic pain from the present to the future. The problem is that the future is NOW.
Discussions would be be more fruitful if they focused on specific social welfare supports vs other government spending; removal of supports and subsidies of impaired securities; enforcement of security fraud; real regulation and supervision of capital markets and banking. The financial sector accounts for 30% of corporate profits in America, and is an unsustainable drag on the real economy.
Menzie,
True, except of course if trend GDP has changed.
And what does “trend” gdp mean in the context of a decade of low-to-negative real interest rates and multiple, failed, stimulus plans? Since 2001, when did we achieve real, self-sustaining trend growth?
So yes, my scenario does not fit with the theory (assuming stable trend growth). It does fit with what happened.
Joe-
Nice cherry picking there – I like how you select the years and switch back and forth from absolute numbers to % of GDP. You have a source for that information? – from what I can see defense spending has been rising. I can’t make any sense of your capital gains flim-flam.
David Pearson: You really should read the CBO documentation for potential GDP calculations more closely. They allow for changes in the growth rate of this variable; you can read more about alternative approaches in this post.
The only stimulus needed is the elimination of all income and employment taxes. Put in place a 5% transaction tax at all levels of the economy and it will generate over 5 trillion dollars. Please do the math on this Menzie. Pretty easy, to get the total number of financial transactions per year in these Untied States and multiply by 5%. If the Government cannot run and meet all requirements including the paying down of the national debt with this, then maybe we should just shut it down and send everyone back to their individual States and call it good! A small standing army of well trained nuclear weapons specialists ought to work for the provision of the national defense. Target all adversaries and put the folks on notice.
Steve: Are you talking about all transactions or only financial transactions? Your first sentence seems to indicate something like a VAT, but your second sentence seems to indicate a transactions tax (I guess, you are stating there are a $100 trillion worth of financial transactions per year).
I’m not against a transactions tax. Last time I heard of it being implemented was Argentina 2001.
@slugs:
“Manfred You said you grew-up in a 3rd world country. Sounds to me like you got a matching 3rd rate education in economics. You should first learn the difference between an Aggregate Demand curve and an Aggregate Supply curve. I think that will clear up a lot of your confused questions.”
You may be right, slugs. I may have a 3rd rate econ education. True enough.
But wait, slugs – if what you say is true, so do John Taylor at Stanford, Robert Barro at Harvard, John Cochrane at Chicago, (how about the people at Cafe Hayek?) all of whom have arguments along the lines I asserted (with nuances, of course, but along the general lines). You see, slugs, out there in the world, there are people who are much, much, *much* smarter than you or I, who do not share your simple Keynesian AD/AS views. Those are people, unlike you, who still believe that expectations matter, that Econ made some progress in the late 70s and the 80s, where there is something called “opportunity costs”, where there is something called “moral hazard”, all of which for you (and the New Economics apparently propagated in some elite schools) are non-existent.
@Patrick:
As for Patrick’s assertion that “stimulus” was too low: how high had you wanted it to be? 5 tera-bazillions? May 10 trillion? How about 10 times or 100 times the US GDP? How do you know the exact amount, to the cent?
Jeff it’s beside the point. “Expansionary fiscal” policy is not the same thing as “fiscal contractionary expansions”. This is what the post and Rich Berger’s Canadian reference were all about.
I don’t think you understood my point, so let me try again. I explained to Rich Berger that his example of Canadian fiscal contraction was a bad example because Canada actually used a strong dose of Keynesian stimulus to get out of its recession. For the last 40 years there have been two kinds of Keynesian stimulus: fiscal and monetary. The Canadian central bank was able to use conventional monetary tools to lower the interest rate and depreciate the exchange rate, which boosted domestic investment and net exports. That allowed Canada to contract fiscally. This option is not available to US (or British or Greek or Spanish or Irish or Portugese or Italian) policymakers, albeit for different reasons. The Keynesian argument is that you can ONLY have a “fiscally contractionary expansion” if and only if the central bank has sufficient room for action and if you can have a beggar-thy-neighbor export led recovery, ala Mundell-Fleming. Neither of those conditions applies today for the US or for Britain. That’s why Britain is going down the tubes today and why we’ll be headed that way tomorrow.
Anonymous But wait, slugs – if what you say is true, so do John Taylor at Stanford, Robert Barro at Harvard, John Cochrane at Chicago, (how about the people at Cafe Hayek?)
John Taylor’s arguments have become increasingly bizarre. He now insists that there is no unemployment problem and that the numbers just represent a “technology shock” induced change in the labor/leisure trade-off for workers. John Cochrane’s arguments are, quite frankly, unintelligible. Cafe Hayek is big on theories of imminent collapse (when in the last 25 years weren’t the von Mises and Hayek bunch predicting collapse any day?), but short on a coherent theory of recovery. Sorry, but calls for purgatives, laxatives and more bleeding isn’t a theory. As to Barro…well, not to be too impolite, but have you noticed that both Barro and Prescott are quite mad. It’s so bad that even Barro’s son had to apologize for this father’s recent lunatic ramblings. One of those awkward situations where no one wants to comment on crazy statements coming from a Nobel winner, so people just kind of stare at the shoes and shuffle around trying to avoid eye contact with the mad man. That whole RBC/rational expectations adventure of the late 70s and early 80s was misbegotten.
You asked this of Patrick, but I’ll butt in anyway with my own answer. You asked: As for Patrick’s assertion that “stimulus” was too low: how high had you wanted it to be?
The correct answer is that the original stimulus bill should have been $1.4T.
2slugbaits,
You wrote:
“Sorry, but calls for purgatives, laxatives and more bleeding isn’t a theory.”
You left out the stabbing of onseself in the eye with a sharp stick. It’s important to include all of their policy proposals so we know what we’re up against.
Mark A. Sadowski
Oops. My mistake. Thanks for catching that. I heard that Casey Mulligan is working on a new instrumental variable in his latest econometric model. Something about weighting down Keynesian economists with their published papers and throwing them in the tank to see if they float or sink.
aaron: I don’t think the war spending worked because of the money spent, but rather the experience and training provided and work ethic instilled.
I think Aaron is on to something here. Really, this is in good part where David Pearson’s thought experiment above diverges from what we have actually observed in the real world.
It is certainly possible to imagine an economy in which neither stimulus nor recession had any lasting consequences one way or another. But such an economy would have to have workers who saw no lasting increase in productivity or training from actually working, and who saw no decline in productivity, training, or employability from extended periods of not working.
I think the money spent also mattered, in that those workers in addition to being well trained were also well paid and could thus afford in the post war period to spend on the consumer goods which drove the economy as government spending declined. This allowed after WWII for a very rapid withdrawal of government spending with no ill effects on the economy.
Today, with a one year treasury rate of .18%, the financing costs for an additional $1T stimulus would only be $1.8B per year. If there is even a very small permanent effect on worker training, productivity, or employability, that would mean that spending right now would easily pay for itself. Fiscal contraction would actually make it harder to finance the debt.