January 28, 2009
Posted by Menzie Chinn at January 28, 2009 05:57 PMdigg this | reddit
This is the end of Republican embrace of the CBO analysis of the stimulus plan.
Posted by: Sam Conner at January 28, 2009 07:47 PM
How does a transfer payment from the federal government to the states have any multiplier effect assuming it is just funding existing programs?
Posted by: Tom Lindmark at January 28, 2009 09:24 PM
If I assume that a dollar tax cut is used to repay debt (ultimately) to a Chinese Bank, which will not reinvest it in the US, I get a multiplier is 0. If I assume the municipal government spends it to build a playground using nature's materials, the builder buys food from a farmer, the farmer buys a plow from a miner, ..., there is a large multiplier. The truth is somewhere in between and sensitive to assumptions. But notice the fundamental truth that wealth is produced by the builder, farmer, miner, etc not by financial paper pushers.
Posted by: Anonymous at January 29, 2009 04:53 AM
A transfer to the states would prevent either tax increases or cuts in service.
Most states have to run balanced budgets and unless there is enough savings to cover the gap they must either increase taxes or decrease spending when a recessions hits.
This makes state fiscal policy on its on pro-cyclical.
Posted by: Karl Smith at January 29, 2009 05:00 AM
Do engineers create fundamental wealth? How about school teachers? How about scientists?
If those people provide the knowledge, some might say the recipe for production, how about the financier who effectively provides the cookware.
That is, resources have to be organized into production. This requires that people put in time, effort and materials in the hope that they will get something back later.
But, how can they do that unless they have money to live on until the rewards come? Financial paper pushers arrange for them to take some of their reward upfront, thus creating the opportunity to put resources towards an effort that will only pay off later.
Posted by: Karl Smith at January 29, 2009 05:07 AM
If the multiplier is truly 1.5 as some suggest, then why stop at $500 billion or $1 trillion? Let the government spend $10 trillion or $100 trillion.
Posted by: Tom at January 29, 2009 05:31 AM
I am not sure that the CBO ranges are much better than a wild guess. I know a lot of people here who could have made these estimates off the top of their heads for half the pay.
I couldn't make these estimates. My estimate is that CBO is high. H.R. 1 will hurt economic recovery and generate more unemployment other than government (government employment, as we have seen, is not dependent on the economy; it always increases) rather than "stimulate" it.
CBO has developed a range of estimates of the effects of H.R. 1 on GDP and employment that encompasses a majority of economists’ views. According to these estimates, implementing H.R. 1 would increase GDP relative to the agency’s baseline forecast by between 1.2 percent and 3.5 percent by the fourth quarter of 2010 and increase employment at that point in time by 1.2 million to 3.6 million jobs (see Table 4). In that quarter, the unemployment rate would be 0.7 percentage points to 1.9 percentage points lower than the baseline forecast of 8.7 percent. The effects of the legislation would diminish rapidly after 2010. By the end of 2011, H.R. 1 would increase GDP by 0.5 percent to 1.4 percent, would raise employment by 0.7 million to 2.1 million jobs, and would lower the unemployment rate by 0.4 percentage points to 1.1 percentage points.
Posted by: DickF at January 29, 2009 05:48 AM
Are you suggesting that the "law" we learned in econ 101, that GDP = C + I + G + NX and the MPC = .7 might not work in the real world, with people who know that the government has a printing press, plan for the future, and change their behavior to incorporate new information?
I like how Cochrane put it, that the debate is not about whether the multiplier is above 1, but rather is it above zero.
Posted by: MikeR at January 29, 2009 06:00 AM
Gosh, a government report that says the government should buy more stuff. Wow.
Posted by: wally at January 29, 2009 06:02 AM
I can't believe how someone like DickF continues to state that tax cuts are especially stimulative to economic growth. Average U.S. GDP growth during Bush's presidency will be lucky to be greater than 2% after 4th quarter GDP comes in. That is unusually poor. Even prior to that, I believe its average was lower than any president since Herbert Hoover. Employment growth was also especially weak at an average annual growth rate of less than 0.4%. The argument that tax cuts produce more growth in the out-years due to higher rates of investment is even weaker.
I don't necessarily think that all of the stimulus package is ideal. I think the most effective parts are the state bailouts to prevent states and localities from cutting or taxing away what the federal government is trying to do and the infrastructure portions. However, the latter is nowhere near large enough. Hopefully when the GDP and employment figures come out this week and next , policymakers will realize the gravity of the problem.
Posted by: Brian Quinn at January 29, 2009 07:30 AM
Brian, you may have heard, the Bush years also had a lot of government spending.
In fact, the Bush years are a perfect natural experiment on fiscal stimulus.
Bush did it all. Demand side tax cuts (the rebates). Supply side tax cuts. And unprecedented levels of spending.
Throw in never before seen low interest rates, so monetary policy was incredibly stimulative through much of the Bush years, and you have to wonder why the numbers were not better.
Posted by: Buzzcut at January 29, 2009 07:40 AM
"so monetary policy was incredibly stimulative through much of the Bush years, and you have to wonder why the numbers were not better"
Here are a few reasons:
2. SARS Scare, Anthrax Scare, Sniper Shootings
3. End of dot com bubble
4. Enron/Worldcom, etc, Sarbox regulation (permanent drag on business)
5. Iraq War
6. Mainstream Media daily war casualty scoreboard
7. Two election cycles - constant gloom and doom, gore - green scares, talking down the economy for political gain
9. And Bush's early tax cuts (2001)deferred any incentives to save and invest. Upper income rates phased in over many years. No cap gains reductions. With cuts for the poor and middle class it was closer to what Obama is offering again.
Posted by: Dean at January 29, 2009 09:33 AM
Yes Dean, Bush is the only President in US history that managed to throw a war that did not stimulate the economy.
Posted by: spencer at January 29, 2009 11:40 AM
Dean, thanks for the history lesson. But remember, Clinton had to face the first WTC bombing and the USS Cole bombing. ;-)
Over the past 8 years, if taxes were raised instead of cut, if government spending were more constrained, if regulators were more strict, if Greenspan had raised rates in January of 2004 instead of July, would it have mattered much? Would it have been materially different under Gore?
Perhaps the only difference would be that, in our current situation in 2009, fiscal policy would have a better chance to work (cyclical deficit vs structural).
Posted by: MikeR at January 29, 2009 12:48 PM
The experts in this case are economists and while there's a range of opinion basically when you are in situation with a lot of spare capacity it looks like stimulus will help some. Is it going to help a huge amount - probably not - the problem in the finance markets and that is not easy to fix. Basically the banks are bankrupt or likely to go bankrupt without government support. So far this problem has been contained and a meltdown has been prevented but the problem is still there.
Will the stimulus create problems in the future to unwind and payback - yes, hopefully economic times are better then. Should the government say confidently that it's going to help a lot - yes - confidence is important.
For my money the stimulus is a sideshow - the main issue is still the solvency of the financial system.
The problem was in the boom - we can bitch as much as much we want about what the government is/isn't doing now.
If you live beyond your means for a long time you will have a problem. If a whole country does it you will have a big problem. The last 15 years has seen consumer saving every year below "normal levels" of around 5%. On top of that you have large government debt and unfunded commitments. 15 years of spending more than you earn (and need to save for retirement etc) might mean 15 years of hardship.
I blog on this boom/bust stuff http://reflexivityfinance.blogspot.com/
Posted by: Steve van Emmerik at January 29, 2009 07:37 PM
First , is question about ex-ante versus ex-post effects of government spending. I have seen a fair amount of people using economic models where they argue that an increase in government spending raises GDP by more than the increase (this CBO example included). However, the ex post evidence of past increases in government spending offer little evidence that increases in government spending lead to multipliers greater than one. Thus, I remain skeptical that the lack of real world evidence of government multipliers should be overturn by the ex-ante predictions of a reduced form model.
Second, I guess the macroeconomic framework in my head is more similar to Cochrane's. I start from the basis that a dollar's worth of public spending increases GDP by one dollar. Then I ask to what extent does the expenditure substitute for private spending, to what extent does the a misalignment of proper incentives result in inefficient delivery of goods, to what extent does the increase in government spending crowd out private investment through higher interest rates or current or future tax distortions, and finally does the expenditures represent the purchase of public goods that raise aggregate productivity. It seems like most of these impact suggest that we should back off the multiplier being greater than one; that is, a dollar's worth of government spending increase GDP by less than one dollar.
Posted by: Newton's_second_law at January 30, 2009 03:58 AM
You will not find one of my posts that says that tax cuts "are especially stimulative to economic growth." As a matter of fact I have stated over and over that if you think "tax cuts" when you hear supply side economics, you don't understand supply side economics.
Second, you imply that Bush was a supply sider. You couldn't be farther from the truth. Like almost all presidents he did suggest some supply side policies, but that was by accident. Bush doesn't know what supply side is and that is illustrated to the extreme in his TARP proposal.
Concerning the "stimulus" package, can you tell me where the money to support it is coming from? That is the 900 lb. gorilla that everyone keeps stepping around.
Posted by: DickF at January 30, 2009 06:44 AM
Throw in never before seen low interest rates, so monetary policy was incredibly stimulative through much of the Bush years, and you have to wonder why the numbers were not better.
You may be aware of this but presidents with a weak dollar during their administrations were generally failures. For most of the 2 Bush administrations he favored a weak dollar. His lack-luster economic performance was due in large part to his weak dollar policies.
There is some hope that the Obama administration will not favor a weak dollar with Summers and Volker, but Geithner has already spoken in favor of a weak dollar by attacking the Chinese monetary policies. If Obama wants to succeed economically he should make sure that he has a sound dollar (He must take care that he does not push the dollar into deflation, as done by Volker in the early 1980s.)
The recent posts on trade declines by Menzie illustrate the results of a weak dollar policy on trade. A weak dollar robs citizens of value and though they do not always understand why they do understand that the president and his Treasury are the problem.
See this article http://spectator.org/archives/2009/01/27/weak-dollars-weak-presidents by Steve Moore and John Tamny.
Posted by: DickF at January 30, 2009 07:07 AM
Any multi-billion dollar, multi-year goverment spending program without clear & effective prevention against waste, fraud, graft and nepotism will have a "multiplier erosion" that makes its multiplier lower than the theoretical model will predict.
Posted by: Mario Sanchez at January 30, 2009 08:43 AM
Hey Dick, I'm not arguing that Bush wasn't defacto for a weak dollar. But he and his treasury secrateries certainly talked up a strong dollar.
What policies would Bush have needed to implement for a strong dollar? Seems like the Fed has more influence over that than Bush. And other external factors are way more important, like outright currency manipulation.
It seems to me also that the dollar was both strong and weak during his term. The Euro was 89 cents in '02. It was $1.60 last year. The yen was 120 to the dollar not too long ago, now it's 90.
Posted by: Buzzcut at January 30, 2009 09:02 AM
Can someone tell me what "currency manipulation" is? It sure sounds bad, but doesn't the FED conduct both "currency manipulation" and "interest rate" manipulation? What about the government and TARP, isn't this "financial market manipulation", auto bailouts are "auto market manipulation"... you get the idea.
If the chinese want to use "currency manipulation" to make it cheaper for me to buy plastic trinkets at Wal-mart, so be it.
Posted by: MikeR at January 30, 2009 09:42 AM
Since this is "multipliers again", perhaps I can ask again the basic question I asked on the first multipliers post, and hopefully get a more convincing answer this time.
I would like to understand (this is not a rhetorical question) why it matters whether a fiscal stimulus is spent or saved. Surely, in order to save, it is necessary to find someone to lend to (even just holding a banknote is effectively an interest-free loan to the government). And they are not going to borrow unless they have a use for the money, so any money that is saved must be spent anyway.
I suppose, since I am asking how there is any net additional spending (I am assuming that the stimulus is not monetarily financed as that would be monetary policy), I am asking why there is any stimulus to multiply in the first place!
Posted by: RebelEconomist at January 30, 2009 10:36 AM
I understood where you were coming from. My comments were more for general discussion.
Bush should have taken a much stronger stand as a fiscal conservative. The FED actually has much less impact on the economy than most people believe especially the FED governors. That is why when they take action and nothing happens they always go to the extreme. They actually have to make a very significant change in base money to have any impact at all.
The biggest impact to the economy and actually to the value of the dollar comes from congress. When the Republicans were talking and passing pro-growth policies the economy was improving and the dollar was relatively stable. The most serious problems came when the congressional house of cards funding bad risk loans fell apart. But that was not the worst part.
The reaction of congress to the crisis made things significantly worse. Guys like Schumer and Frank shot their mouths off and pushed the dollar down while unnerving the markets, remember Schumer bringing IndyMac down with a crash at the beginning of the crisis.
But perhaps the worst thing that happened was the TARP. If you will remember when the TARP was announced the markets crashed. The voters set the phone lines to congress on fire with opposition. The House listened and voted it down. The markets rallied. The congress worked out an end run by having the Senate vote for the bill loaded with pork and the House was intimidated into following. The markets crashed almost immediately with financials falling around 30% in one day.
Bush might have been overriden by congress but he should have at least fought for a stable dollar and free markets. Most believe that Bush will be defined by the Iraq War but in truth he history will tag him with the same lable as Hoover, especially when people finally realize how foolishly obsolete Keynesian mercantilism is and return to Classical economics.
Posted by: DickF at January 30, 2009 10:45 AM
Brian Quinn and Buzzcur: Go to Brad Setser's cite and add up the official capital outflows from Japan and China during the Bush years (including a subjective amount for the yen carry trade supported by threat of intervention), take the U.S. share of the implied negative stimulus, and you begin to see why massive fiscal and monetary stimuluses had limited effects on U.S. inflation or real U.S. output.
Posted by: don at January 30, 2009 10:57 AM
I agree with most of your post.
But to say the government should say confidently that it's going to help a lot - yes - because confidence is important.
Such used car salesmanship long ago lost its impact on this economy. Especially in late January such utterings are absolutely meaningless now that enough contra-opinionated academics, bloggers, and TV talking heads have had time to get heard and shine a multi-mega-watt searchlight on the short-comings of the stimulus. Like disbursement delays (true) and the frequency of Ill pay you $100 to dig a whole in my yard, and then you use that to pay me $100 to dig a hole in your yard -type of projects as seen on Mayors wish lists (debatably exaggerated).
Even the psychological aspect from repeating big numbers with lotsa zeros is now about as positively meaningful as when Candidate McCain said the Economys Fundamentals Are Sound, with confidence, vim & vigor!
All that got him was a drop in public opinion polls for that week.
Useless words instill no measurable confidence.
We have a long way to go...[add ditching Keynesian fairytales to the work list]; but the sooner we abandon all this wishing that uttering "confidence" will make a difference, the less distracted our national debate will be. Just ask McCain.
Posted by: Avl dao at January 30, 2009 07:00 PM
"Go to Brad Setser's cite and add up the official capital outflows from Japan and China during the Bush years"
The Bush years are over; it's Obama's show. Let's debate the merits of the house bill.
Posted by: Babinich at January 31, 2009 03:22 AM
Yes. But the let's not forget the lessons from recent history. My point is, $1 or $2 trillion in U.S. fiscal stimulus can be pretty much offset by $1 or $2 trillion of central bank currency purchases in Asia. That is, if the stimulus is funded by Asian Treasury purchases, we would be left with no stimulus, but we would still be stuck with the bill.
Posted by: don at February 3, 2009 10:43 AM
CBO says multiplier for the extension of the tax loss carryback could be ZERO, max 0.4. this must be, bar none, the dumbest of the tax cuts.
this is a pure example of the weakest propped up, their bondholders made good, at taxpayer expense
Posted by: Andrew at February 6, 2009 07:48 AM
Imagine three unemployed or underemployed people are lucky enough to meet and realise they can usefully help each other; this'd depend on their particular skills. So A helps to repair B's shoes, B repairs C's car, and C helps out on A's farm. This is useful work that wouldn't otherwise have been performed and society as a whole is better off for it.
In reality, this wouldn't happen of course. They probably wouldn't meet, and probably wouldn't trust each other unless they knew each other. This is where government steps in. Give B 20 bucks. Then, due to his/her high marginal propensity to consume, B will then buy show repair services from A. Then A will then use that money to buy off C, and C will eventually give the money back to B. Everyone wins; even the government, because this will cause employment and will not stoke inflation.
This shows how a small decision to spend money can cause multiple people to do work they wouldn't otherwise have done. So even if some of the work is a bit silly and wasteful, the productive multiplier can still be greater than 1.0 and could even be 10 or more in theory.
When unemployment is relatively high it's reasonable to assume that most of this activity will be 'new' activity and not simply cause existing activity to be rearranged (and bring inflation). Decades of economic history demonstrate this, not least the wars and the deficits of that secret Keynesian, Ronald Reagan. This is why appropriately sized deficits during high unemployment, and only during high unemployment, are vital to increasing productivity.
Posted by: Aaron McDaid at February 7, 2009 01:32 PM
"especially when people finally realize how foolishly obsolete Keynesian mercantilism is and return to Classical economics"
Rebel, care to expound how you intended this last and to the point pronouncement? That statement is ironic toward current events, please amuse with elucidation.
Posted by: nelson46 at February 16, 2009 05:34 AM
Rebel please excuse my post and Dick F please note it.
Posted by: nelson46 at February 16, 2009 05:44 AM