January 10, 2009
Estimated Impact of "American Recovery and Reinvestment Plan"
The estimated impact on unemployment is shown below, in a figure from the document.
Update 10:10am Pacific Sunday, 1/11/09 For purposes of comparison, here is CBO's projection of unemployment (standard measure), by calender year.
Figure 2: Unemployment rate (%), by calender year. Source: Up to 2007, from FRED II, converted from monthly to annual by averaging. From 2008 onward, from CBO, Economic and Budget Update January 2009.
Posted by Menzie Chinn at January 10, 2009 02:34 PMdigg this | reddit
So if this Keynsian free lunch works so well, why not double or triple or quadruple it? We could have full employment.
Posted by: all the T-bills in China at January 10, 2009 08:25 PM
I don't know how plausible the base ("Without Recovery Plan") scenario is.
As Prof. Hamilton has pointed out several times here, the path of the unemployment rate over the course of a recession is almost always asymetric - with a sudden and steep rise followed by a gradual decline. The base scenario as graphed is close to symetric, which would be very different from what we have seen in past recessions.
Is it possible that they did not want to show the possibility of unemployment exceeding 10%?
Posted by: gelboak at January 10, 2009 08:34 PM
Posted by: Anonymous at January 10, 2009 10:35 PM
The U-6 went from 8.7% to 13.5% within a year. How does this compare with the 1930s?
Posted by: Anonymous at January 10, 2009 11:43 PM
It's astonishing how economists, that in majority didn't see the crisis come, try to estimate its effect on a single number with high accuracy.
I don't want to sound to Austrian here, I do thing making models makes sense and thank you for publishing it. Just I mean, for the sake of forthrightness, we should also consider the estimation errors of this calculation. It is likely to be 5% or more with the risk on the upside.
Furthermore, the unemployment rate is a number that is more of political than economic concern. The economist should focus on the hours worked (per inhabitant).
Posted by: ketzerisch at January 11, 2009 01:31 AM
Jobs in manufacturing, retail trade, and leisure/hospitality among the largest noted.
Menzie, I am assuming this opens the door to greater union involvement in order to guarantee wage parity?
Posted by: Babinich at January 11, 2009 04:00 AM
The result is based on asinine projections. Since when are cyclical unemployment rates gaussian?
I have no hope for idiotic, generalized, recycled Clintonian / Keynesian economic programs.
Get you wallet out, the end point is the same but at a cost of several trillion dollars.
It's all 'contained', right?
Posted by: barkingtribe at January 11, 2009 06:15 AM
Well barked barkingtribe...it does take a bit of suspension to read this graph litterally (ok, Spellchick wants me to type "literally")...which is the point of graphing...character strings can only take you so far until you just must strap on the graphon crampons.
I don't mind. I usually appreciate the relief and can easily resist the temptation to ask for the record of past projections, you? You wanna see that pencil line balloon out to a 4" brush stroke after a year or 2?
But you B such a fancy pants with that remark about the stretch itiz to cram unemployment rates into a gaussian distribution. This place is crawlin with mathematicians...I better warn you.
The interpretation I get is that the Plan starts the recovery a whole year earlier than no Plan..(you see how itiz with graphs people?) and that could mean the financial gang continues to get more of the same or...we are struck by a comet...and only some of them are able to receive. Is there a similar graph for the transfers from gov to Finance?...I needs it right about now.
Posted by: calmo at January 11, 2009 06:52 AM
This document is a political statement, not an economic analysis. It does not include an estimate of unemployment reaching 10% or more in a non-plan environment because that would be perceived as "sowing fear." It does not ever return to a 4% "full employment" level because that would appear to be too unrealistic (even over five years). And the notion that unemployment will turn around before the end of this year is absolutely ridiculous, yet necessary to win public acceptance. When this doesn't happen, and it won't, the Obama Presidency can blame the still-increasing unemployment on "previously unknowable events."
It's all political theater. And as enthusiastic as I was about an Obama Presidency, I am already discouraged by his business-as-usual approach to the issues of the day--and he hasn't been sworn in yet.
Posted by: Terry at January 11, 2009 07:46 AM
Where did I just read that Obama has one thing goin for him: political capital...FT somewhere (Martin Wolf?) and I immediately thought of the 46% that constitutes a chunky political liability.
But mullin it over, I do think that he can motivate his audience in a way that Jr Bush could not, despite all the media help (such a southern expression).
The difference between bein compliant with a request and doin it with feelin...to characterize the "political capital" that Obama has.
..so, I am hopeful, Terry, and glad that some wealth-creatin Maverick is not about to take the first few steps as President.
Posted by: calmo at January 11, 2009 08:04 AM
barkingtribe: With respect, I have no idea what you're writing about. Just because the time series plot of the projected unemployment rate has a "bell shaped" curve, does not imply that the distribution for unemployment rates is Gaussian (and anyway, I can't usually eyeball distributions well enough to determine whether any bell shaped curve is leptokurtic or not to be Gaussian or not).
I would guess in fact the unemployment rate is not distributed Normally given well documented persistence and possibility of mean shifts. That being said, the annual data over the 1948-2008 period fails to reject a Normality test (Jarque-Bera) at the 15% msl.
I have added a plot of the CBO projection data (Figure 2) in the post, for purposes of comparison.
Posted by: Menzie Chinn at January 11, 2009 10:24 AM
you might also want to check out this forecast:
quote John Mauldin:
"...Just to give you a picture of what
economists think about the effect of the stimulus, let’s turn to the Levy
Economics Institute of Bard College, which is one of my favorite sources for
original economic insight (http://www.levy.org/). They are a rather
conservative lot. The graph below shows what two different levels of government
stimulus will mean to the economy. They graph unemployment at no stimulus (top
black line) and at two levels of “shock” or stimulus. Shock 1 is about $380
billion and shock 2 is about $760 billion. The dotted lines are what is known
as “output gap,” or the measure of the difference between the actual output
(actual GDP) of an economy and what it could produce at its most efficient
(potential GDP)...“The implication of these
projections is that, even with the application of almost unbelievably large
fiscal stimuli, output will not increase enough to prevent unemployment from
continuing to rise through the next two years."..."
chart is here: http://www.investorsinsight.com/images/011009/jm011009image004.gif
Posted by: GreenAB at January 11, 2009 11:11 PM
From a simple statistical analysis perspective, the proposed plan is fundimentally flawed. Labor distribution for the key markets targeted under this plan do not support the targets. Using BLS data presure test the construction job growth target highlight my point. How construction workers in US? 7.6M Current sector unemployment rate? 9.5% If you add the plans jobs back in at 600k - Unemployment rate is still 7M or with unemployment rate still above 7%. What am I missing here?
Posted by: Randall Platt at January 12, 2009 11:13 AM
I'm starting to wonder if Krugman - and apparently many of his fellow travelers - might actually be mentally ill. The numbers being thrown around as "necessary" to stimulate the economy are so preposterously large that one can only wonder. And what does it take to disprove this Keynesian claptrap? (Where's Dick F when you need him?!) Just because one WANTS to do something (read, politicians) does not mean that one can or should. And now I read that some knothead named Anatole Kaletsky thinks it would be a good idea to tax savings (not interest but the savings themselves!) To his credit he admits that he and nearly every other economist has been terribly wrong to date which hardly lends credence to anything they might have to say.
Perhaps this mental illness thing is contagious.
Posted by: Footwedge at January 12, 2009 12:19 PM
Footwedge - Thanks for the smile
Yeah. I'm still wondering about the episode where ('banging head on table') PK attributes the decline in the multiplier during WWII to rationing. Seems to me the rationing was just a symptom that capacity constraints were getting hit (which would cause the multiplier to go to zero - another dollar of government spending has no effect on total output). And I've long been disappointed that he compares economic growth during different administrations. He says the other side is always doing that when it suits their purpose, but two wrongs don't make a right.
I would like to see some graphs showing the U.S. debt and its projected growth and sustainability under various assumptions (the value of recent fed purchases, the coming entitlement tsunami, and the cost and effectiveness of the stimuli (how much leaks away through the trade balance).
The Levy Institute assessment is very close to my own. After the dotcom bust, the U.S. trade deficit was driven largely by government policies (U.S. government deficit and foreign currency interventions). If no action is taken, I expect similar results from the stimuli.
Posted by: don at January 12, 2009 02:44 PM
Question. Why do both keep unemployment so high as late as 2014? That's 5 years from now. The recession in the early 80's didn't take that long.
Posted by: Clark Goble at January 12, 2009 04:04 PM
There must be some assumptions about the response of currency policies abroad in the above. I wish I knew what they were.
Posted by: don at January 14, 2009 10:15 AM
Quite an interesting debate. However, HOW the helicopter money arrives, where it arrives and who decides what to do with it will likely determine the results. The simple model proposed assumes that it goes to good effect. That means it lands largely in the right places at the right time with the right decisions being made. Too many assumptions that, to date, do not describe the situation.
The Treasury's decisions on where and how to put the money have been quite clearly flawed. The decisions within the banks about what to do with the money have been largely a continuation of the simple-minded approaches that got them there. This is due to the simple fact that the same people are making the decisions.
Non-market solutions to market problems are bound to fail.
Lastly, exactly when and how will the Fed drain the massive increase in money base? Unless rapidly accelerating inflation is no longer of concern in the real economy (see most of Central and South America for examples of this?) any real economic recovery will be slammed down by a sudden jump in inflation or sudden decrease in money supply.
It would have been and still is a better idea to use market outcomes. We do not, as an economy, need Citi, Chase, BoA. What we do need is their activities. Market mechanisms would have wiped out shareholders and removed a failed board and executive cadre. A firesale of assets.
Those assets and activities would then be acquired by well run organizations - like the hundreds of smaller banks in the nation that did not place dumb bets.
The current bailout is punishing well run banks, precluding them from growing and saving badly run banks and their management. How does that lead to recovery?
Posted by: Jon Willner at January 16, 2009 07:59 AM
Terry expresses my feelings: "It's all political theater. And as enthusiastic as I was about an Obama Presidency, I am already discouraged by his business-as-usual approach to the issues of the day--and he hasn't been sworn in yet".
An other good post is by Jon Willner, above.
"It would have been and still is a better idea to use market outcomes. We do not, as an economy, need Citi, Chase, BoA. What we do need is their activities. Market mechanisms would have wiped out shareholders and removed a failed board and executive cadre. A firesale of assets.
Those assets and activities would then be acquired by well run organizations - like the hundreds of smaller banks in the nation that did not place dumb bets.
The current bailout is punishing well run banks, precluding them from growing and saving badly run banks and their management. How does that lead to recovery?" Mr. Wilslner's post leads to the following mussing by me.
Paulson and Bernanke take pride in the fact that the U.S. financial system has not collapsed on their watch. They have been able to stabilize the short term commercial market and they have prevented the collapse of AIG and Citi corp - as of today.
What they do not know, and none of us could know, is whether the U.S. financial system would have collapsed if they had allowed AIG and Citi corp to follow Lehman Brothers into bankruptcy. It seems almost certain that many other financial firms would have also collapsed, due to the panic. The number that would have gone down would have been much larger than would have happened under non-panic conditions.
It is possible that the lack of information about which banks had how much of the toxic assets would have killed all the large, international banks in New York or in the U.S. No one knows what will happen under panic conditions. However, it is far from certain that the worst possible outcome is what would have happened. People like George Soros and Warren Buffett do not panic. I am sure there are many others. These insiders tend to have some knowledge of the likely distribution of toxic assets. These individuals and banks, all over the world, would have used that knowledge to pick up the bargains (valuable parts of the failed banks) that would be available, as various firms collapsed. I have faith that enough uninfected private capital, owned by firms and individuals that had little or no toxic assets, existed in the world, to prevent the total collapse of the U.S.banking system. Some firms and individuals would have been left standing. These "conservative" investors and financiers are the proper base for constructing a new financial order.
The good side of this tsunami is very important. The debts and contracts on the books of these firms that failed would have been destroyed. Removing these toxic assets from the balance sheet of existing banks and insurance firms was the first priority for Paulson. Rightly so. The collapse of all those firms heavily involved in creating and spreading and owning these toxic assets was and is highly desirable. A smaller financial system is required for the emerging economy.
I recommend that Paulson do a public service, in his last days in office, and declare that he is opposed to sending any additional Federal Funds to support either AIG or Citi. The market will then have a few days to work its magic and move the U.S. banking system in the right direction.
After the toxic assets have been reduced or eliminated, Federal Funds can be used constructively to bolster the assets in the Federal Deposit Insurance Corporation.
Posted by: ReformerRay at January 17, 2009 12:10 PM
I am not sure about the idea to tackle the economy crisis without the recovery plan. However, Med Yones, the Economic Oracle who foretold the current US economic crisis, states that “if the objective of President-elect Obama is to lead the economic recovery through the middle class, the job creation initiative through small business and innovation development, would be hitting 3 birds with one stone (sustainable job creation, middle class support, and increasing US businesses competitiveness through innovation development). This initiative would have a significant and immediate positive impact on the national economy.” More background information on the topic can be found at
Posted by: Leonide at February 4, 2009 11:30 AM
Please attend "Obama's Economic Plan" Panel this Monday, February 9, 5-6:30pm at Thurgood Marshall Room in Price Center West. We would love to hear your opinions about his economic plans.
Posted by: Elicia at February 5, 2009 12:17 AM