July 11, 2009
Ed Lazear on the Stimulus Package
From the WSJ editorial page:
Only a small share of the spending will occur in 2009, even though Keynesians would argue that stimulus spending should be frontloaded to kick-start growth. The Congressional Budget Office estimates that the largest share of the spending will occur in 2010, with the amount in 2011 being slightly larger than in 2009. Again, the timing exacerbates the problem: It will be tough to cut back on spending written into budgets as far out as 2011.
CBO Director Elmendorf provides an interesting counterpoint in his comments from June (I believe the same document Professor Lazear drew his statistics from):
- Many forecasters expected a large gap between actual and potential output to persist for some time. (In CBO's forecast the output gap was 7 percent of potential in 2009 and 2010 and 5 percent in 2011.) Therefore, policies that provided stimulus for an extended period of time seemed appropriate.
- Moreover, fiscal stimulus that ends before the economy has started to regain its footing runs the risk of exacerbating economic weakness when the stimulus ends.
Thus, Professor Lazear must believe the recession will be over soon, and -- more importantly -- that we will revert to potential GDP in short order. He's certainly free make that prediction. But when considering his record on predictions, I'm reminded of this quote from WSJ May 2008.
"I would be very surprised if the NBER, looking back at this period, would date this as a recession," Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. "The optimists seem to have been closer to right on that than the pessimists," he said.
As many readers might recall, most indicators that the NBER Business Cycle Dating Committee (BCDC) pays attention to had plateaued or started to decline by April of that year (see this April 23, 2008 post); and in fact the NBER declared the beginning of the recession to be December 2007.
Here is CBO's assessment (June 2) of the impact of the ARRA on the output gap, using the mid-point of range of estimates of multipliers.
Figure: "Effect of ARRA on the Output Gap," from D. Elmendorf Implementation Lags of Fiscal Policy (IMF conference, June 2, 2009).
[Update, 2:15 Pacific]
Here's a useful set of points to remember when assessing the stimulus package, from CBPP, yesterday.
Posted by Menzie Chinn at July 11, 2009 12:44 PMdigg this | reddit
You mean "talking points"?
Posted by: GWG at July 11, 2009 02:39 PM
GWG: You can call them anything you want. Sometimes talking points summarize observations that are valid, sometimes invalid. So calling something one thing or the other is not in this case a particularly useful endeavor.
Now, if you want to make some argument that contests these specific observations, well that would be constructive in my view.
Posted by: Menzie Chinn at July 11, 2009 03:26 PM
Fair enough, that was a non-constructive comment. But I seem to recall you dismissing a study by the Heritage Foundation, and the CBPP doesn't appear to be non-partisan.
I think the issue of the timing of the stimulus is important, even if the economy will remain below potential for some time. Is the purpose of the stimulus bill to help pull the economy out of recession or is to promote faster growth in the near-term even after the recession is over? Yes, this is a very bad recession, perhaps the worst since the Depression. But the '73 and '81 recessions were also quite severe, and it seems that we are injecting far more stimulus (both monetary and fiscal) than we did in those cases, and certainly far more than we did for the '01 recession.
From the link you provided: "The nation faces a very serious long-term budget problem, but the recovery law will exacerbate that problem only a very small amount...That’s because the tax cuts and new spending in the law are temporary". I think it can be debated how temporary the spending will be and temporary tax cuts are probably saved anyway.
Loading up on more debt might work out ok, I hope it does. But I fear that our actions are just accelerating the demise of the dollar as the world's reserve currency. And if rising long-term interest rates are at least in part due to concerns over our ability to repay the debt, are we really getting the level of stimulus we think we are?
Posted by: GWG at July 11, 2009 04:18 PM
GWG: Here's my skepticism regarding the Heritage Foundation's work on climate change. For the life of me, I can't figure out from the Heritage webmemos etc. how they calculate the figures they obtain. They state that they use the Global Insight long term model as the baseline, but not specifically to generate the estimated impacts.
I also note that the GI long term model (essentially the descendent of the DRI long term model) seems ill-suited to tracing out the impacts of climate legislation. In contrast, IGEM and ADAGE used by EPA are CGE's. CBO uses similar models, as described on page 16 of this document.
I think the stimulus portion of the debt accumulation is relatively small; most will occur due to revenue shortfall. See Reinhart and Rogoff.
Posted by: Menzie Chinn at July 11, 2009 08:05 PM
I want to know how printing off dollars and giving them to people to do non-value adding work leads to economic growth.
Posted by: Anonymous at July 12, 2009 05:00 AM
GWG: "But the '73 and '81 recessions were also quite severe, and it seems that we are injecting far more stimulus (both monetary and fiscal) than we did in those cases, and certainly far more than we did for the '01 recession."
The '73 and '81 recessions were entirely different beasts than this recession. Look at the prime interest rates in 1973 and 1981: about 15 to 16 percent in'73 and almost 21 percent in '81. In 1981, Volker was wringing out the double-digit inflation from the oil-price shocks and other issues. As soon as inflation was tamed and the Fed began cutting interest rates, the recession ended and jobs came back.
Today, it's the opposite. Interest rates are essentially zero (and in real terms, maybe even negative) , but nobody is spending and jobs are disappearing. This is the 1930s again, not the 1970s and early 1980s. Shiller, Roubini and Krugman are right: we need a lot more stimulus ASAP. Or soon we may be looking back with fondness for a time when the jobless rate was "just" 9.5%.
Posted by: TGG at July 12, 2009 06:43 AM
Lazear was an excellent economics professor at the Stanford Graduate School of Business. Probably wishes he'd stayed there.
Posted by: Nostradoofus at July 12, 2009 07:24 AM
Menzie: can you address why the graph shows actual output ABOVE max potential for about 1996 to 2002, and what that says about the accuracy of the output gap reported now?
Don't get me wrong, I think the gap is larger than is shown and that well-targeted fiscal stimulus is essential, although I'm not big on throwing more money at the wealthy via tax cuts or poorly-conceived development.
Posted by: benamery21 at July 12, 2009 10:05 AM
benamery21: No reason that output can't go above potential GDP. Conceptually, potential GDP is the level of output generated when factors of production are at their normal levels of utilization. Implementing that concept has always been difficult. See infra , , .
Posted by: Menzie Chinn at July 12, 2009 10:39 AM
You mean returning our economy to "non-value adding work" such as house-flipping and mortgage swapping? Uhh, no thanks.
My concern is that much of the stimulus was delayed into FY 2010 (which starts Oct. 1), and that the aid to states and localities was dramatically cut. The economy had deteriorated so drastically in the first half of the year that the punch was needed up front with direct spending. And instead of federal tax cuts, there needed to be more done to shield taxpayers from the tax increases that result from lower revenues at the state and local level in recessions- and especially in this recession. The state and local government changes may keep growth down below what it should for the next 12-18 months, as many states have just started their first fiscal cycles since this recession started.
For 2010-2011, the stimulus should do its job, but there's such a long way to go just to get back near our economic potential that many won't feel a recovery as much as they will have the lack of fear.
Posted by: J.Miller at July 12, 2009 11:12 AM
What we going to stimuate the army of house-flippers, real-estate agents, loan originators, loan financial swindlers, SUV sellers, Leasure Boat sellers, granite counter top sellers, mall workers, etc... to do?
Other than illegal-immagrants, who has desire to actually WORK at shovel-ready stimuation?
Posted by: NOTaREALmerican at July 12, 2009 02:40 PM
«You mean returning our economy to "non-value adding work" such as house-flipping and mortgage swapping? Uhh, no thanks.»
But that was supposed to be the future of first world economies!
In what I have called the strategy of "headquarterization" first world economies were supposed to be the financial centres of the world, repackaging mortgages and so on and selling them for huge fees and thus profits to 2nd and 3rd world exporters stupid enough to work hard to produce useful things like machinery and food for cheap in exchange for expensive fees for managing their savings.
In some essential way, the imaginary "Asian savings glut" was exactly the plan: stupid asians working hard to save money, sending it to USA banks and paying high fees for the privilege.
Too bad it was wily Asians exporting USA productive capital and jobs to their country.
Posted by: Blissex at July 12, 2009 03:29 PM
FCC said "Shiller, Roubini and Krugman are right: we need a lot more stimulus ASAP. Or soon we may be looking back with fondness for a time when the jobless rate was "just" 9.5%".
Ok, Let's assume that more stimulus would promote a faster recovery. But what is the risk that we take on by doing so? The rest of the world is already quite nervous about our ability to repay what we've already borrowed. Piling more on top of that doesn't make sense to me. You are correct that the prior recessions were different, but if the Blue Chip forecast is correct the recession should end this quarter. I don't think we needed the current stimulous package and we surely don't need massive stimulus after the economy has recovered.
Posted by: Anonymous at July 12, 2009 06:38 PM
Let me see if I have this right.
1: The recent rise in unemployment does not mean the law is not working.
Just because it is not working doesn’t mean that it won’t work. Just because it has never worked does not mean that it might work in the future. Just because insanity is defined as doing the same thing over and over expecting a different result doesn’t mean that doing this over and over expecting it to give us a different result later doesn’t mean the policy is necessarily insane.
2: The Administration and Congress expected the stimulus money to be spent gradually over the next two to three years, and what’s been spent to date is stimulating the economy and helping millions of Americans.
Please do not pay attention to talking point 1.
3: The nation faces a very serious long-term budget problem, but the recovery law will exacerbate that problem only a very small amount.
Yes, we admit that the law will “exacerbate that problem” but, hey, it is only a small amount – of course small is relative.
4: The law was specifically designed to help states close their budget shortfalls.
Since this is the purpose of the law get off of our case about it not reviving the economy. That was never the designation. It was designed to fund bloated state budgets. Don’t you get it? All that rhetoric about recovery was only a cover for funding state budgets.
5: States are properly using stimulus funds for short-term projects.
Just because the short-term projects line the pockets of political constituents makes no difference. The important thing is to spend, spend, spend. We will spend our way out of our economic crisis, and we will borrow ourselves out of our credit crisis, and we will pour water on a drowning man, and throw matches at a man caught in a fire. So what’s your problem?
Posted by: DickF at July 13, 2009 06:50 AM
We can push all the paper around that we want but unless we have some results producing tangible benefits we are still swimming against the current. Things are looking up though, in the world of profit margins. The 10-Qs haven't produced these kind of results since '07 and early '08. Still not where we should be but a (+) step in the right direction....
Posted by: Vintage Filings at July 13, 2009 12:41 PM
Menzie, it is such a shame how partisan bickering wastes so much time and space. The facts of the Republican congresses economic destruction have clearly not been embarrassing enough to shut some people up. Thankfully, the true string-pullers and a solid majority are enough to go forward with the right plans regardless of the legacy dreams of the elephants. Their only goal is obviously to hope the economy worsens for the next election, in hopes that they can baffle the American electorate enough to regain some clout.
But they are truly outdated and looking more foolish and sour-grapish every day. It looks more and more that the GOP is gone for good. Sarah?? Good God. I'll tell you what, GOPers, when you are finally mature enough to erect your tombstone, I'll be sure to come around and, uh, let's just say I'll 'water' the flowers on your grave for you.
Not RIP, but good riddance!!!
Posted by: cc at July 13, 2009 01:10 PM
What was the Obama administrations projection for unemployment? And, when did the bulk of the stimulus kick in?
Why was the stimulus designed to kick in after projected unemployment had peaked and was falling?
Posted by: Charley2u at July 13, 2009 07:58 PM
It seems to me that there is no real evidence that stimulus ever works. The Keynesian Clowns like to point to the stimulus in 1934-37 "working" with significant GDP growth - with the ultimate proof being that when stimulus was withdrawn in 1937 the economy tanked again. They say "the stimulus was withdrawn too soon".
Probably the right way to look at the 1934-37 period was that stimulus caused unnatural and unsustainable economic activity and as soon as the stimulus was withdrawn (as it must inevitably be at some point) the economy reverted to its natural position. And today we are doing the same thing - kicking the can down the road at a massive cost to the future with all the money being spent and wasted. The Keynesian Clowns just aren't funny any more.
Posted by: John at July 14, 2009 03:57 AM
Oh, John, you couldn't create a more hollow argument. You see, the stimulus of 34-37 was necessary to offset the debt deflation created by stupid greedy capitalism earlier. And this time around the false economic stimulus came during YOUR government, when mortgage equity extraction and a lax lending housing bubble juiced consumption to very unnatural levels in 2003-2008. Then when the fake-money creation could no longer continue, because it was never fundamentally legitimate, the amount of consumption crashed. Sorry, but your skewed motives are too obvious if you choose to cherry pick history. Stimulus is needed desperately, even Bill Gross and Marty Feldstein acknowledge such. But apparently you don't respect them anymore either. Unfortunately, it moves only slightly faster than the evolutionary movement of extinction mechanisms, like the ones that are surely now putting the GOP into the realms of obsolescence.
The GOP was never funny, now they are only irritating as well as being always wrong.
Posted by: cc at July 14, 2009 07:20 AM