March 15, 2010
What Do Business Economists Think the ARRA Accomplished?
Or, counterfactuals, yet again.
From the WSJ March survey survey of forecasters, the results indicate that instead of the 0.15% growth rate recorded in 09Q4 y/y growth, the growth rate would have been -0.93%. For 2010Q4 Q4/Q4 growth, they forecast 3% growth, and in the absence of the ARRA, they would have predicted 2.2% growth.
In addition, 75% of the respondents believed the stimulus plan was a net positive for growth, 12% a net negative, and 14% neither.
In Figure 1, I depict log GDP, the implied path for GDP according to the WSJ survey, along with the 20% trimmed hi/low, and the levels of GDP implied in the absence of the ARRA (i.e., the "counterfactual").
Figure 1: Log GDP in Ch.2005$ (blue), mean WSJ forecast (red), and 20% trimmed high (pink) and trimmed low (gray) forecasts, mean predicted GDP in the absence of ARRA (purple square), and CBO estimate of potential GDP (black). Trimming removed the top 5 and bottom 5 forecasts out of 54 responses. NBER defined recession dates shaded gray, assuming recession end is 2009Q2. Source: BEA 2009Q4 2nd release, WSJ March survey, CBO, NBER, and author's calculations.
Posted by Menzie Chinn at March 15, 2010 09:08 PMdigg this | reddit
I'm curious to know how they can accurately evaluate the impact of something that didn't happen. I mean, the stimulus DID happen, but how can you really evaluate what would have happened had that money NOT been injected in the economy? I mean, there's a million directions one could take with this.
I'm not saying that the stimulus didn't have a positive effect (my personal opinion is that it did), but how do you realistically measure that?
Posted by: The Personal Finance Blog at March 15, 2010 10:49 PM
If I'm interpreting the forecaster's prediction correctly that means that they believe that the stimulus will add in level terms 1.9% to GDP in the fourth quarter of 2010. That compares with about 2.25% in the fourth quarter of 2010 and 3.1% at peak in 2Q in 2010 according to the CBO.
I could not help but notice that according to the WSJ that the forecaster's also attributed the vast majority of the macroeconomic stimulus effect to monetary policy. Based on Joe Gagnon's assessment of the Fed's model the $1.75 trillion in quantitative easing that's been done by the Fed (beyond ZIRP) might add about 2.6% to GDP at peak. That's not terribly different.
Moreover, correct me if I'm wrong, Gagnon's assessment does not attempt to correct for the fact that the Fed's model does not assume that the Fed would be paying 0.25% interest on excess reserves as it has been since October 6th 2008 for the first time in history helping to convert $1 trillion into inert dust covered moth eaten bank vault cash.
My take on all of this is that whatever recovery we are experiencing right now is entirely due to the discretionary fiscal stimulus as the Fed is sitting, to put it politely, with its thumb in its mouth.
What do we want? Inflation!
When do we want it? Now!
Posted by: Anonymous at March 15, 2010 11:15 PM
There is one thing the stimulus package bought
and it is the most important ingredient..it bought
time....tangible common equity for the major banks
doubled,,,losses and reserves were taken...inventories brought down (way too Much) to
meet new demand levels....and many more items...Time is so important...it was worth every penny....
Posted by: bill at March 16, 2010 02:54 AM
Yes, fiscal stimulus lifts AD. The problem is that when it ends, it also depresses AD. If the economy has not achieved self-sustaining growth by the end of the stimulus tailwind, then it must try to do so in the face of a stimulus headwind. Good luck with that.
So much ink spent on whether we should enter into stimulus, so little on what happens once we exit...
Posted by: David Pearson at March 16, 2010 07:30 AM
Actually, a good many professional up-and-down economists have been quite closely focused on the big downward suck as stimulus spending slows. When you hear talk of a double dip, you are hearing talk of the fiscal suck.
That's why a fair number of economists are calling for more fiscal stimulus, even as the political windes blow contrary to that idea. Self-sustaining growth sufficient to overcome the suck is not in evidence.
Posted by: kharris at March 16, 2010 10:24 AM
Let's see what the stimulus has really given us. Great news from the big three!
The proportion of Americans who can’t find work is likely to “remain elevated for an extended period,” Treasury Secretary Timothy F. Geithner, White House budget director Peter Orszag and Christina Romer, chairman of the Council of Economic Advisers, said in a joint statement. The officials said unemployment may even rise “slightly” over the next few months as discouraged workers start job-hunting again.
Posted by: RicardoZ at March 16, 2010 10:25 AM
Well, let's see. Professional economists who simply want their employer to make a profit say ARRA has helped. The CBO says it has helped. The IMF says it has helped. RicardoZ makes rude noises from the peanut gallery. Who to believe? I just can't decide...
Posted by: kharris at March 16, 2010 11:39 AM
Here's how the question is viewed by Scott Sumner, not a business forecaster but a specialist on the Depression, Japan's slump and such downturns...
~~~ quote ~~~
Everyone wants to set the debate up as follows:
1. Do you favor massive deficits or are you content to have the economy self-correct, risking high unemployment for several years?
... that is not the issue. Rather there are two distinct issues:
1. Is more AD desirable, or should we let the recovery take its natural course?
2. If we need more AD, is monetary expansion preferable to massive budget deficits?
Let's review a few simple ideas. Fiscal stimulus does not boost AS, it boosts AD ... So if fiscal stimulus is to help the recovery, it does so by exactly the same method as monetary stimulus - boosting AD.
I happen to favor more stimulus, although I understand that some thoughtful economists disagree with me.
I happen to think monetary stimulus is preferable to fiscal stimulus, and in this case there aren't any thoughtful economists who disagree with me. Not one.
If there was going to be one, it would be Paul Krugman. But even he admitted late last year that monetary stimulus is the first choice, and you only move on to fiscal stimulus is the Fed won't play ball...
We are running up trillions of dollars in debt precisely because the elected leaders of our country think we need more AD, and the Fed doesnï¿½t.
I understand the need for the Fed to be independent, but how about some honesty at least. If these inflation hawks really believe what they are saying, show some guts and come out and say "We are not doing more monetary stimulus because we feel a need to offset what we regard as excessive fiscal stimulus, and prevent it from raising the expected inflation rate." If they really have the courage of their convictions, then why not admit what they are doing?...
In February I said fiscal stimulus wouldn't work, as the Fed had some sort of nominal aggregate target in mind, and was going to simply offset the fiscal stimulus. And that is what happened.
When things looked scary, like a Depression was possible, the Fed announced its big program of buying Treasuries and MBSs.
Later in the year when things picked up a bit, and we were clearly going to avoid a depression, the Fed started furiously back-peddling. They started talking about ending the bond buying program and "exit strategies." Ask yourself this; what does that back and forth behavior tell you?
It tells me the Fed has some sort of implicit nominal target, and if the economy seems to fall short they'll pull out all the stops and flood the economy with liquidity.
That's why the $800 billion dollar fiscal stimulus was a complete waste of money; the Fed wasn't going to allow NGDP to fall much further than the actual 2.5% it fell. Shame on us for not figuring that out, and shame on the Fed for not explaining that to us...
Don't anyone answer "liquidity trap". As Krugman and Bernanke both long pointed out during Japan's deflation, a government can always depreciate the currency a bit to cure that. And monetary policy worked potently in the US during the Great Depression, as pointed out by Romer (and Sumner, visually), amid supposedly the worst liquidity trap of all.
Right now the Fed is cutting back its support for bond and mortgage security markets...
"The big question is how much mortgage rates will rise and how quickly as a result"
... which clearly is de-stimumative.
Yet the spending stimulus lumbers on, not half done.
Fed policy is offsetting it.
All the "professional forecasters" evaluate stimulus results assuming ceteris paribus, Fed policy is inert. (How could they do otherwise?)
But if the Fed steers to hit its policy targets, and in doing so acts to offset effects of the stimulus, what's the effect of the stimulus then?
Posted by: Jim Glass at March 16, 2010 04:56 PM
Jim Glass: I don't know how you "know" all the forecasters were imposing ceteris paribus? I don't know that, and it's not one of those things that is written down in the survey. In point of fact, the forecasters are likely assuming some sort of Fed reaction function, not a ceteris paribus assumption. If Prof. Sumner had read actual private sector reports, he'd realize that.
See also Jim's comments on Sumner's worldview.
Posted by: Menzie Chinn at March 16, 2010 05:18 PM
I like Scott Sumner and I have a lot of respect for his views but in my opinion Scott confuses what the Fed can do with what it is actually doing which is essentially nothing. In the absence of monetary stimulus fiscal stimulus is effective.
Should we get a Fed that is willing to stimulate the economy by some miracle I'll be all in favor of it and I'll gladly advocate withdrawing all the fiscal stimulus pronto, but I'm not holding my breath.
P.S. I was anonymous (by accident).
Posted by: Mark A. Sadowski at March 16, 2010 06:04 PM
You appear to validate Jim's point. If the fed could do, but chose not to, then maybe its choice was to offset the effect of fiscal stimulus.
I think Scott confuses what the fed can do with what some wish it could do.
Posted by: don at March 16, 2010 07:20 PM
The Fed chose not to offset the fiscal stimulus at the zero lower bound. The QE it chose was not for stimulus but for sectoral effects thanks to IOER.
As James Hamilton once said to the effect, "if the Fed doesn't know how to inflate hand me the printing press and I'll show them how."
Posted by: Mark A. Sadowski at March 16, 2010 07:33 PM
Would these "economists" that you refer to be the very same "economists" that claimed at the end of 2007 that we would have growth for 2008 and beyond?
Posted by: Brian at March 16, 2010 08:56 PM
Brian:. No, these are the economists (by and large -- the sample changes slightly) that predicted a slowdown in 08Q1, and came pretty close (in mean) to hitting 08Q2 growth...
Posted by: Menzie Chinn at March 16, 2010 09:21 PM
This is from the WSJ Nov 2007 Survey of economic forecasters, which I know you're aware of because on this very blog you performed a very good analysis of it.
But here is some of things it claimed in the WSJ 2007 article:
Over half of the polled said that we were more than half way through the credit crisis; and 15% said that we were mostly through it--and it wouldn't even be until Feb of 2008 that Northern Rock went into state ownership.
Only 28% said that the credit crunch was the biggest downside risk, and only 30% cited housing--now of course the cause of these low percentages could be simply economists arguing subtleties that distort the survey due to the generalized questions. However, what it shows, in my opinion, is that many of these economists either didn't recognize the banking exposure or looked the other way (after all, there's always political pressure).
And this: despite the risks, economists are still not expecting the worst, and on average, they see just a one-in-three chance of a recession.
Now, in all fairness, it is very extremely to time the collapse of an asset bubble--actually a credit bubble that seeped into the housing market. But my issue here is that they didn't seem to be thinking that the housing bubble, along with the overall expansion of credit would lead to a severe recession. So, it's not that they got the timing wrong, it's what they expected the fall out to be, which seems to be that they thought the fallout would have been mild.
However, the timing defense also cuts both ways, and I can say that they may have gotten the Q22008 close, but that was mainly luck simply for the credit bubble had yet to collapse--which is why the short sellers began putting shorts on real estate and the financials in '05/'06 because the prevailing belief in the hedge community was that the collapse would be in '06--which of course they were off in their timing. So timing is difficult and so it's better to be a year year than a day late; but it doesn't just show that timing is difficult, but the different expectations of the inevitable outcome.
It is in severely under estimating the outcome, not in timing, I think that was/is the ultimate failing of economists (for the most part); and to make things worse, the outcome had become obvious, and even then they thought the outcome would be "mild"?
It was one of the largest credit expansion/bubble in the history of the world, so it is disturbing that the the inevitable fallout seemed to catch so many professionals off guard. And so now we should believe that their vision has improved?
To further extend my response to a more personal direction: the post where you assessed the Nov 2007 survey was very well done and conducted with a professional objectivity, whereas this doesn't seem to be the case here. Of course we're not robots, and many times objectivity can even be a hindrance; this time, however, you seem to be looking for shelter in the justification of majority consensus. I'm not saying this says anything detrimental about your character, quite the contrary; but it does effect how one perceives, discriminates, and presents evidence. And, yes, this does not just apply to stimulus opponents, but to all of us. Yet, hopefully we don't invoke this to simply make contemplation easier for ourselves.
Posted by: Brian at March 17, 2010 03:06 AM
Brian: Thank you for your assessment of my objectivity.
Note first, since you referred to end-2007, I was looking at the December forecasts, off the spreadsheet. I didn't look at the November article, in responding to your query.
Second, thank you for your compliment regarding my November post on the survey. I am puzzled, however, by your interpretation of that study as an indictment of looking at the "consensus", as defined by conventional measures of central tendency. In fact, you'll note that I was surprised that there was little evidence of correlation between recession probabiity and forecaster affiliation. Furthermore, Figure 5 is interesting in that it shows an approximately 1 in 3 recession probability, which is remarkable when the US economy is in recession on average at a much lower frequency.
Posted by: Menzie Chinn at March 17, 2010 07:44 AM
I'm loathe to quote Krugman (it usually brings out the Neo-Classical/RBCers, Austrians and other liquidationists) but by odd coincidence he essentially stated today what I attempted to say above. However he said it mainly in reference to a different issue: underevaluation of the of the renminbi.
"In my analysis, you're in a liquidity trap when conventional open-market operations purchases of short-term government debt by the central bank have lost traction, because short-term rates are close to zero.
Now, you may object that there are other things central banks can do, and that they actually do these things to some extent: they can purchase longer-term government securities or other assets, they can try to raise their inflation targets in a credible way. And I very much want the Fed to do more of these things.
But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy.
Consider the Fed, which under Bernanke is more adventurous than it would have been under anyone else. Even so, it has gone nowhere near engaging in enough unconventional expansion to offset the limitations created by the zero lower bound."
"The point is that while you can think of things the Fed can do even at the zero lower bound, that lower bound is in practice a major constraint on policy. By all means let's yell at the Fed to do more, but when you're considering other issues like the effects of fiscal policy or the effects of renminbi undervaluation you have to assess them in terms of the central bank you have, not the central bank you wish you had."
If we had a Fed that was delivering sufficient monetary stimulus instead of sitting contentedly at the zero lower bound, apparently thinking that it has done all it reasonably can do, then discretionary fiscal stimulus would be both unnecessary and ineffective. But we have to assess the discretionary fiscal stimulus in terms of the Fed we have, not the Fed we wished we had. Given that, it's not surprising that ARRA has probably been very effective.
Posted by: Mark A. Sadowski at March 17, 2010 08:48 AM
That is the one issue on which I would disagree with our esteemed host. I think the spinning tire on snow is the best analogy - no traction or too much are probably the only choices.
Posted by: don at March 17, 2010 11:19 AM
Let me try to persuade you that monetary policy can still be effective at the ZLB by using your own analogy. Suppose we attempt to gain traction by moving up the yield curve by purchasing securities of longer term? Wouldn't that be the equivalent of putting a two by four under our wheels? We may not be as stuck as you think.
Posted by: Mark A. Sadowski at March 17, 2010 04:51 PM
Mark A. Sadowski:
The concern is that the 2x4 board whizzes back from the spinning tire and hits poor old Uncle Ben in face. Quantitative easing, if done on a large enough scale, would work; but to change metaphors, I suspect the Fed would prefer drinking the poison for which there is a known remedy (viz., fiscal policy) rather than try a new exotic tonic from Fed Pharma.
Posted by: 2slugbaits at March 17, 2010 05:45 PM
Ooops! Sorry Uncle. (He should be all right.)
"Quantitative easing, if done on a large enough scale, would work; but to change metaphors, I suspect the Fed would prefer drinking the poison for which there is a known remedy (viz., fiscal policy) rather than try a new exotic tonic from Fed Pharma."
I couldn't agree with you more. But let's experiment a little. It could turn out that theory (based on seemingly very sound reasoning) yields better results after all. We might wake up well rested and ready for Morning in America.
Posted by: Mark A. Sadowski at March 17, 2010 06:37 PM
First let me slightly change what I've claimed, or insinuated, and quickly qualify that I only speak of myself, then, in regards to sometimes being unduly influenced by philosophical prejudices, emotional attachments, indoctrination, short sightedness, ignorance, overly hasty thinking, political pressures, and falling victim to the illusions of certainty, and even being played the fool by my own arrogance--I meant no offense here, but could it still not be a valid criticism? I realize that 'criticism' carries a more negative and aggressive connotation, so let me use the word 'observation' instead. After all, these subjects of study, like economics (or mathematics, physics, etc) do not exist in a void and nor do I consider them knowledge from given on high; but that these are human activities that attempt to express our human, all too human understanding.
The Dec 2007 WSJ survey of forecasters isn't really any more of an improvement than the November survey--there was an increase from 33.5% to 38% in regards to a possible recession. Of course one might find these 33.5% or 38% numbers remarkable in light of the US being in recession on average at a much more lower frequency, but is this really an impressive standard to hold a group of professional elites to? However, my quarrel is not so much with the timing of the recession--precise market timing is a fools game--, but with the expected outcome and fall out from the coming recession: the mainstream thought from economists was, or at least seems to be implied, that this was going to be a somewhat typical recession, and not what actually happened: an utter collapse of the financial system and an implosion of the world economy. You would at least, I assume, admit that there is a difference, at least in connotation, between recession and systemic collapse?
So what went wrong? Why was this not obvious to the prevailing thought of economists? Perhaps one may want to counter me by claiming that I'm using hindsight to criticize foresight: fair enough. However, a massive housing bubble wasn't going to lead to a mere recession because what in effect happens besides the banking industry going with it is that it destroys household wealth; and it will take generations for that loss to be absorbed. Further, now there's prevailing talk that we've somehow have avoided another great depression: how? All that has been accomplished is that the problems have been shifted from the banking industry and the private arena to the public sphere; yet, this didn't even cure the problems in the baking and private spheres. The banks are still not recognizing massive losses since mark-to-market was suspended--and this is made obvious to us every week the FDIC takes another bank over and we find they have been over valuating their assets anywhere form 25% to 40%! And not only has the US still have massive deleveraging to do in its credit market, but some countries have yet to have their credit bubbles to burst. And yet, there's actual talk of a recovery.
Amongst all of this, we have this trend of the US being in recession on average less frequently; but why is that? The evidence that I see suggests that we've been pumping credit into the economy to push us through recession, and this trend has been going on at least until 1980--and now aggregate debt (or credit) is turning downward, and that is in spite of all the government intervention. And now we can't pump the credit engine anymore--and this would also explain why we've had these mysterious V-shaped "recoveries" over the last 30 years: that's the behavior we should expect from the over expansion of credit collapsing and the economy being flooded with cheap credit to stem off the collapse. All that's been accomplished is that the can was kicked further down the road.
And now we have the Federal Reserve claiming that minimum bank reserve requirements will not be necessary?! I suppose those reverse repos are not working too well; but it may be even worse: the banks may be having trouble conducting repos between themselves because everyone is holding onto worthless assets, or assets that are impossible to evaluate because they're vastly impaired.
Even all of this aside, let me then only address your presentation in this thread. You present this 72% from the WSJ survey that the ARRA contributed to positive GDP growth. OK, let's grant that; however, what are you implying here? That the 72% of surveyed economists claiming that the ARRA had a positive GDP impact somehow makes it true? Or there's the other implication: GDP is some sort of by all, end all final assessment on the economy. Here's some GDP numbers: in four years there was a leap from a $900 billion GDP to ~$1500 billion GDP--that's an impressive leap. The country was the Soviet Union from 1985 to 1989.
However, what I find disturbing is that you seem to be in great haste to proclaim by implication a victory for the ARRA--has enough time transpired, though, to be so certain that there are no ill side effects that offset any of the benefits?
There's an old proverb: the truth makes one stupid. It may very well be the case that you are correct, Mr. Chinn; and if not demonstrated presently, the future may well vindicate you; but must you insist on certainty as well?
Posted by: Brian at March 18, 2010 04:04 AM
Those who argue that the ARRA's stimulation of economic growth is countered by the drag on growth when ARRA ends are missing the point. When policies that work end, of course there is a drag. That is why they should not be ended until they are no longer needed.
Nor does it follow that government spending is necessarily unsustainable and that private spending is necessarily sustainable.
The question is not whether the source of funding is public or private, but what the money is going towards doing. The construction of an irrigation ditch in the desert, for example, if it allows more land to come under cultivation, is sustainable growth, regardless of whether it was financed by government debt or private debt. It is sustainable because in the long run, it will more than repay its costs.
On the other hand, the construction of huge skyscrapers in the desert is unsustainable, regardless of whether they are being constructed at the behest of the CEO or the President. Those who insist otherwise are putting ideology above common sense.
Nor is the charge that the stimulus "merely" shifted the problem from the private to the public sector really damning. The stimulus did not merely shift the problem, it actually mitigated and solved the worst of the problem. Whatever debt problems there exist today, whether they lie in the government books or unrecognized bank losses, are nothing compared to what they would be had we entered a depression, which is what would have happened had the problems remained in the private sector and allowed to spiral there into oblivion.
Those who look to complex models and authorities for 'counterfactuals' are simply putting intellectual theorizing above common sense. If you didn't see that the private economy was on the verge of a total collapse in the fall of 2008 you weren't looking. Have we already forgotten the commercial paper run of Sept 2008? The LIBOR at 5%? The TED at astronomical rates? Good lord, folks. Had the government not stepped in and rescued it, we would be looking at 40 percent unemployment. The entire fabric of society would have unraveled. And what would be the consequences-- political, social, human-- of that? Do any of the smug internet commentators of today criticizing the various kinds of government stimulus want to face those consequences?
Posted by: Tony at March 19, 2010 12:28 PM
Also, we know that these guys are never wrong:
Posted by: david at March 22, 2010 07:36 AM
Menzie: I am not saying that we did not get growth. Imagine you had a child that came to you and asked for money because he wanted to improve his life. You gave him 10,000 assuming he was going to use it for college. The next year he came back to you and ased for 10,000. You asked "Why do you need money? I thought you went to college and would get a good job." He said " I asked for the money to improve my life. I went to Cabo and partied for 2 weeks."
That is what we have here. I don't doubt we got growth. Just for 900B (which doesn't include monetary stimulus and bailouts), we should get at least 1T of growth. But we didn't and won't. And the bill will come due as our national debt soars to more than 100% of GDP. I count the debt that Congress has to approve which stands at 14.3T (GDP might be 14.5T this year). I know you leave out part of the liabilities. The accountant in me doesn't allow SIV's. We have many off balance sheet liabilities but the direct ones per the congressional record need to be counted.
We poured almost 1T down the drain and you think we will escape the result. Impossible.
Posted by: tim kemper at March 24, 2010 07:00 PM
tim kemper: I sense you are moving the goal posts. I am rebutting this perhaps familiar (to you) viewpoint:
Oh Menzie, you are right. You mean like the one that promised we would be at 8% unemployment if we passed the stimulus versus 9% if we did nothing. So in my simple mind 9% was the baseline. Where did 10.2% come from? Wouldn't that be the baseline? So then in my fool's mind we passed the stimulus and the unemployment rate went UP to 10.2% against the 9% baseline. ...
That is your comment written 12/25/2009...
Posted by: Menzie Chinn at March 25, 2010 11:02 AM