I see a pattern. For some people, the answer to every question is…a tax cut! From WSJ on 29 January:
There’s a serious debate in this country as to how best to end the recession. The average recession will last five to 11 months; the average recovery will last six years. Recessions will end on their own if they’re left alone. What can make the recession worse is the wrong kind of government intervention.
Jim covered the salient aspects of the 2008Q4 advance release in an earlier post. A few additional points: (i) exports for sure are not adding to growth, (ii) the positive contribution from decreasing imports does not augur well for future growth, and (iii) nonresidential investment has now followed residential investment with vigor. But the key point is consumption is now collapsing at a rate comparable to the 1980 recession…
From CBO Director Doug Elmendorf’s testimony yesterday, some numbers relevant to the ongoing debate over fiscal policy efficacy [1] [2]:
Well, that’s the IMF Survey title, describing the IMF’s World Economic Outlook.
The CBO has posted an actual “cost estimate” on HR 1 (not just a partial examination of Division A, as explained in the Director’s Blog, the locus of great disinformation in previous discussions, as recounted by Dean Baker). Here is a graphical depiction of what CBO believes will be the impact on the deficit (once again, recalling that there is an explicit omission of repercussion effects on tax revenues and transfers that would arise from elevated aggregate demand; in other words, this is the estimated impact on the full employment budget balance).
It’s been frustrating to me that so much virtual ink has been spilled about why the fiscal package will or will not be effective, with so little clarity. Lots and lots of words are being thrown around, [1] [2] when a lot of the arguments can be summarized pretty easily in terms of four cases, and hence four graphs (I won’t deal with the fifth, in detail). There are numerous excellent critiques; here in the interest of specificity, the exposition will be fairly dense.
1. With prices predetermined, the interest sensitivity of money demand is zero, or the income sensitivity of money demand is infinite.
2. With prices predetermined, the interest sensitivity of investment or the sensitivity of net exports to interest rates are infinite.
3. With prices predetermined, the sensitivity of money demand to wealth is high.
4. Output is at full employment levels.
5. Neo-Ricardian equivalence, as put forward by Barro, holds.
From “Economic Setbacks That Define the Bush Years”:
“No matter who took office in 2001, they were destined to oversee dashed expectations regarding the economy, the markets and the geopolitical outlook,” said Robert Barbera, the chief economist of ITG. “It was all captured in the lunacy of the $5 trillion surplus on the horizon. That vision required no wars, no recessions and a nonstop spectacular bull market for equities.”
That said,” he added, “it certainly did not have to come to this.”
…
From Bloomberg:
Jan. 22 — China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.
Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.
Perhaps I’m overstating it, but I think this is the abridged version of the Bush Administration’s perspective on how we got into the financial mess we find ourselves in. You might ask why I focus on the ideas of the outgoing government. Well, it’s because I’m confident that this will be a thesis pushed by some commentators eager to absolve previous policymakers of blame [1]. And indeed (as Mish points out), this view has apparently adherents in high places.
The Bush Administration’s last Economic Report of the President [large pdf] (Link updated 1/21/09 12:35pm Pacific) was released on Friday. From Chapter 1:
The Administration’s forecast calls for real GDP to continue to fall in the first half of 2009, with the major declines projected to be concentrated in the fourth quarter of 2008 and the first quarter of 2009. An active monetary policy and Treasury’s injection of assets into financial institutions are expected to ease financial stress and to lead to a rebound in the interest-sensitive sectors of the economy in the second half of 2009.