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Martin Feldstein Now Skeptical of the Stimulus Package

Initially Martin Feldstein was a supporter of the stimulus package. However, he is now opposed to the current pile of pork that has come out of the House of Representatives.

As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake.

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

In other words the Bush tax rebates failed…so lets do it again. Repeating Bush’s mistakes is not a very sound strategy for getting the economy back on track.

Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.

Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.

This seems somewhat reasonable. A tax credit on purchasing a new car, for example, will lower the cost of purchasing said car. And basic economic theory tells us that when the price of something goes down the more people will buy.

On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment. Computerizing the medical records of every American over the next five years is desirable, but it is not a cost-effective way to create jobs. Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt?

This also makes sense. Computerizing medical records is not a bad idea, but it doesn’t strike me as a way to get new jobs created in the economy quickly, which is what we need. Perhaps computerizing medical records should be encouraged and maybe the federal government can play a role, but it strikes me as yet another item in this stimulus package that is there more out of pork barrell politics than an actual desire to raise employment this year.

And we are reminded that once again, incentives matter,

The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse.

Wouldn’t that be ironic, a plan designed to help the unemployed actually goes about leading to more unemployed people. And how do you go about telling the person who has loses their job in 23 months that the following month they wont get all the nice benefits people who were unemployed a few month previously enjoyed? My guess is that this aspect of unemployment benefits will quickly become permanent which will mean an permanent shift upwards in spending.

Now maybe that is something to consider, but the idea that this is a temporary increase in spending is not true. Further, we still have to consider the longer term fiscal imbalances facing the U.S. government. These imbalances are enormous and failure to take them into consideration could make them very, very difficult to deal with.

Think of this possible scenario: You just watched your 401k or equivalent retirement fund take a big hit. But in 9 years the economy has recovered and your 401k has been growing and you are starting to feel good again about retiring someday. But wait, Medicare now needs money. Where to find it? Why look, those 401k’s are nice and ripe for the picking.

A large fraction of the stimulus proposal is devoted to infrastructure projects that will spend out very slowly, not with the speed needed to help the economy in 2009 and 2010. The Congressional Budget Office estimates that less than one-fifth of the $50 billion of proposed spending on energy and water would occur by the end of 2010.

We can add another person to the growing list who have noted this problem. Oh, and another we can add to this list? Christina Romer, President Obama’s head of the Council of Economic Advisers. Her paper, with her husband David Romer, looks at changes in tax rates and concludes that using tax rate changes for counter-cyclical policy isn’t too effective. If this is indeed the case, as her research supports, then it is even more true for spending. Why? Changing tax rates is relatively simple compared to building bridges, repairing roads and building new buildings. The latter all have to go through the bureaucratic/regulatory process which in some cases can take quite sometime. There will need to be a bidding period, bids evaluated, various types of impact studies, and so forth, and then if things work really fast 6 months later work actually starts.

And Feldstein isn’t totally opposed to fiscal stimulus. His view is that if we are going to do it, lets do it right.

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

I’m more skeptical than this. I think that even taking some extra time to get it done still wont result in timely stimulus to the economy, at least for the spending aspects of the bill. Things like extending unemployment benefits, tax relief and such will get into the economy quickly, but all spending aside from that really wont have any stimulative impact at all. We should cut that part fo the bill out.

But, as Rahm Emmanuel said, you can’t let a good crisis go to waste when trying to implement your political objectives.

“You never want a serious crisis to go to waste,” Emanuel declared last week.

“It’s an opportunity to do things you could not do before. If there’s a silver lining, it is: you can do big, bold things — throw long and deep.

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About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. Dave Schuler says:

    I’m not surprised, Steve. I suspect that most economists could support a perfectly engineered stimulus plan, enacted at exactly the right moment for exactly the right amount and to be spent on exactly the right things. Unfortunately, such things do not exist in nature.

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  2. just me says:

    I am coming to the conclusion that I would rather do nothing than take on almost a trillion dollars in debt for something that probably isn’t going to work anyway.

    I suspect it might be a good idea to consider tax codes-I wonder if there aren’t tax incentives for small, mid sized businesses that may not in the long run do more to stimulate the economy than tax rebates, stimulus checks or worse spending on stuff that isn’t really stimulating.

    I think part of the problem with this bill is that the democratic congressional leaders got together with other democrats and started tossing in every pet project, want, desire right down tot he kitchen sink and labeled it “stimulus.”

    Some of those wants may be good law and good policy, but they aren’t stimulus and should be advocated for separate from this.

    At this point I am leaning towards the “do nothing, ride it out, and yes it is going to hurt” end of the spectrum-because I am not convinced this stimulus is going to do anything but saddle the US with more debt-something the GOP didn’t seem to get when they were in power and something the Democrats don’t seem to be getting.

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  3. Joe says:

    His ideas sound like a great way to give people with money some extra money, but not people who need money…

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  4. Dave Schuler says:

    I’m a little more sympathetic than that, just me. I think that imperfect, inefficient plans are an intrinsic implication of the political process just as self-serving, half-baked plans without political support are intrinsic to plans that are produced by technocrats.

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  5. Raoul says:

    Germany’s GDP is 50% consumerism; here it is 70%. Both countries are considered advanced industrial nations with a good quality of life. If $500 dollars goes to retire debt and increase savings and in the same vane change some of our consumerist driven approach, well, I for one, welcome the approach.

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  6. [...] at OTB Steve Verdon points to a Washington Post op-ed in which Martin Feldstein reveals that he was for the stimulus plan [...]

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  7. Steve Verdon says:

    Shorter Raoul:

    “I want to be worse off.”

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  8. Brett says:

    The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand.

    I’m not sure I entirely follow Feldstein on this one. Is he saying that by giving the unemployed better health insurance, it will make employers more likely to fire employees?

    Is that like some type of appeal to sentimentality? Are employers supposed to think “Well, I wasn’t going to fire John since he’d lose his health insurance if I did, but now? Off he goes!”

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  9. odograph says:

    I am coming to the conclusion that I would rather do nothing than take on almost a trillion dollars in debt for something that probably isn’t going to work anyway.

    I think you need to add another four trillion

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  10. Raoul says:

    SV: The problem with the current consumer driven approach is that we are feeding the money towards the end of its velocity probably to be shipped abroad and thus continuing the unbalances that are one of the roots of the current problem. Savings on the other hand places the money in the early cycle of transactional movement and thus stabilizes currency (banks) and does stir investment. This is not to say one or another is right or wrong- the key is to find right balance- the current consumer driven society, probably in its last legs, is wasting assets by sheer expenditure of crap (for lack of a better word) created by short term goals. A post consumerist society would improve the standard of living by improving quality. Instead of purchasing disposable goods that last 1-2 years- with a little more effort we can have to same goods but better produced lasting twice/three times as long-this goes to PCs, light bulbs, automobiles and toasters- not to mention edibles-medication, etc. The better (surviving) companies strategized long term-so should consumers. Part of the problem is that instant gratification is easy to market and sales is what we do best in an open society but these approaches affect us all in the long term- tactics (sales gimmicks) such as teaser rates merely serve to push back a much needed balance. The bottom line is that the economy has been due for a substantial contraction and the issue really is whether we have a soft landing or a crash. How is that for a diatribe.

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  11. Steve Verdon says:

    Raoul,

    This nonsense about consumerism is just that nonsense. The bottom line is that people are better off when their consumption goes up. You can fool yourself if you want by moving what you currently consume into government expenditures while you still consume said items (e.g. health care provided by government), but in the end you are still consuming.

    There is a corollary to this: less consumption make people worse off. So I don’t think this stuff about moving away from consumption is really going to get you too far.

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  12. Raoul says:

    SV: Perhaps you advocate 90-99% consumer driven GDP? Consumption is not good or bad per se. It is the type of consumption that is affecting the economy. The numbers show an imbalance seen nowhere else, in part because of the twin deficits. The point is that we can consume and maintain our standard of living, but it is going to require a different approach; the current approach is deteriorating our quality of life as evidenced by the fact that a majority of Americans have not seen earning growth in thirty years. What part of the unsustainable part of the word you do not understand? The “un” part? Do you honestly believe a society can go on forever with $720 yearly bill trade deficits (to be sure- that’s an absolute number- in real economic terms-the number is 5% and that is what should be considered). As long as GDP growth is sub par to trade deficits it will be economically necessary (meaning it WILL happen) to suffer a contraction down the line.

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  13. odograph says:

    There is the obvious economic relationship that one man’s spending is another man’s income.

    But beyond that I think that Steve is speaking from the economists’ faith that ever purchase is perfect. In that framework we are all effective maximizers of utility. The crap we’ve got stored in the garage, the stuff we never use anymore, was perfect (even if we only used it once and wish we had time to sell it on craigslist, or eBay, or just give it to GoodWill).

    I don’t believe in rational consumers. I think we do buy a lot of crap, in the vain hope that it will change our lives in long-term and less transient ways.

    … of course, one man’s crap is another man’s income. Which works out ok, when we don’t drown ourselves in debt, or destroy the seas or forests to make our crap.

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  14. Drew says:

    At the end of the day its ALL consumerism.

    And Raoul, we don’t need you pegging the “right” amount.

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  15. odograph says:

    I see a difference between food, clothing and shelter on one had, and the fluff that we buy for the heck of it on the other.

    Why do I have a $3000 mountain bike? Because I can, what the heck. I was basically as happy riding a $500 mountain bike though.

    (Hydraulic disc brakes are a trip. A luxury, but a trip.)

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  16. odograph says:

    ^ the bike wasn’t a “use it once” thing. I’m up to at least 100 rides on it.

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  17. What’s the opposite of consumerism? Governmentism? Subsistencism?

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  18. odograph says:

    Buddhism. (Not that I think we all have to go that far, but I think we can be … er … enlightened by the ideas.)

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  19. Raoul says:

    GDP value is the national economic growth minus imports plus exports plus other stuff: here is WIKI entry of the formulation: Components of GDP
    Each of the variables C (Consumption), I (Investment), G (Government spending) and X − M (Net Exports) (where GDP = C + I + G + (X − M) as above). To be clear- the issue is not whether consumption is bad (though I do think importing cheapo products does no one but the merchant any good)- the issue is balance and proportionality-(does over-spending crowd out investments?) I cannot say ipso fact that 70% consumer spending bad- I can say that importing goods more than economic growth allows will lead to dislocations.

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  20. odograph says:

    Raoul, there is the common observation that at the end of the home-investment bubble we have a lot of granite countertops, but less productive capacity than we might have had. (Why that happened is in a sense the foundation of the problem. Why was the US oversupplied with credit? Why didn’t it find a home in productive enterprise? … the answer seems to center on Greenspan plus the business cycle. 1% rates goosed an economy that should have contracted even then, to levels from which we only fall harder.)

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  21. Steve Verdon says:

    SV: Perhaps you advocate 90-99% consumer driven GDP?

    I don’t advocate any range. However, a very high personal consumption expenditure percentage does indicate that there will be problems in terms of investment. If percentages in the 90-99% range occur something is most likely wrong. My initial guess would be that the government did something to distort incentives.

    It is the type of consumption that is affecting the economy.

    Bullcrap. Personal consumption expenditures (PCE) is more like 70%. Is that high? By historical standards I’m pretty sure it is.

    The numbers show an imbalance seen nowhere else, in part because of the twin deficits.

    Explain the underpinnings of this argument. I’m not seeing it.

    My own view is that the increase in wealth households experienced due to the bubble in the housing market led to increased PCE. This is verifiable in that we can get PCE and GDP data from BEA and graph the ratio and see if it steps up sometime after housing prices took off.

    The point is that we can consume and maintain our standard of living, but it is going to require a different approach; the current approach is deteriorating our quality of life as evidenced by the fact that a majority of Americans have not seen earning growth in thirty years. What part of the unsustainable part of the word you do not understand?

    If you really believe this then the stimulus is bad policy. We need to get used to living within our means–i.e. belt tightening. We have to take the hit to wealth (e.g. lower housing values, banks making write downs, etc.) and that will be a painful transition.

    Borrowing lots and lots of money to try and get back to where we were is precisely the wrong approach based on what you’ve outlined since it is unsustainable. And trends that are not sustainable are not sustained, as the late Herb Stein used to say. Further, we will be worsening our position when it comes to dealing with other fiscal imbalances such as Medicare.

    As long as GDP growth is sub par to trade deficits it will be economically necessary (meaning it WILL happen) to suffer a contraction down the line.

    Again, to me it sounds like you are making the case for the following:

    1. There has to be an adjustment to the economy.
    2. Given number 1, the stimulus package, if it works is delaying the inevitable and if doesn’t saddles us with lots of debt making it harder to tackle other serious issues that are rapidly approaching (e.g. Medicare).

    Somehow I don’t think you really mean this. I think you are extremely confused.

    Odograph,

    But beyond that I think that Steve is speaking from the economists’ faith that ever purchase is perfect.

    I have no such faith. Sure after the fact a transaction can look very bad. I see the market and the activities that take place there as dynamic and a function of strategies. I also think of it in evolutionary terms, strategies that work continue on for at least another round or two, those that don’t are eventually kicked to the curb.

    In that framework we are all effective maximizers of utility.

    No, we are all maximizers of expected utility within a frame work of bounded rationality–i.e. we often don’t make use of all available information since doing so is costly.

    The crap we’ve got stored in the garage, the stuff we never use anymore, was perfect (even if we only used it once and wish we had time to sell it on craigslist, or eBay, or just give it to GoodWill).

    No not perfect, see above. Further getting things listed on Craigslist, Ebay or schlepped off to GoodWill has its own costs. When storage costs exceed the costs of selling/donating we sell/donate.

    I don’t believe in rational consumers. I think we do buy a lot of crap, in the vain hope that it will change our lives in long-term and less transient ways.

    How is this not rational? This describes the underlying thinking in all purchases. When you buy a new car do you buy what you think will be the best all around car for you or just the most basic car to get you from work to home? Do you look at the stero, performance, comfort, AC and power windows? If so, then you are buying something that will make your driving more pleasurable and improve your life. Now after said purchase you might find the car wasn’t what you thought it was (i.e. a lemon, or your circumstances change and car no longer fits our life), but that doesn’t mean you are just buying a car based on some irrational criteria…and how do you describe that? How do you describe irrational?

    Seriously think about that last one. If you are out looking to buy a new car to replace your old one, that is a rational act. Irrational would be suddenly buying a 2nd, 3rd, and 4th car. Maybe buying the car unseen. Or buying to park in your backyard so you can sit in your back yard with the AC on and listening to music. Please don’t say it is random because even random has its own internal logic, and with a large enough number of people we might even be able to make predictions. Truly irrational is something that is beyond quantification. Yet we see people responding to how theory predicts. Prices go down…people buy more. Income goes down and people buy less of all goods. Sure people do not correspond at all times to Homo economicus, but that does equate to irrationality.

    Seriously, try reading some of the stuff by Herb Gintis on game theory.

    And that you buy luxury good does not equate to irrationality either. Seriously, I can probably get buy on skim milk, legumes, a few eggs, and some assorted vegetables and cut my grocery bill to a fraction of what it currently is. It would also be a horrible depressing diet after awhile and simply not for me. If Buddhism works for you great, but stop trying to cram it down my throat ffs. Kindly goose step off to your ashram and meditate.

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  22. odograph says:

    Thanks for the detailed response Steve. I only have a moment. I’ll use that to say that the auto-choice is something I’ve considered. (I am on the fringes of the auto business now.)

    I don’t think car buying is remotely rational. It is a complex psychology of image-making and identity-group binding.

    Why do two people who make the identical commute in sunny southern California choose (1) a Toyota FJ Cruiser, and (2) a Toyota Prius?

    It isn’t about what they do, it is about who they want to be and what they want to project. That kind of soft need, and soft rationality(I say soft, but I don’t think most buyers introspect at all about what drives their decision) is the theme, not the exception.

    (I forget what SUV maker ran a “be spontaneous” campaign, but it was classic.)

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  23. Raoul says:

    SV: First of all, I appreciate you responding. Twin deficits = fiscal, trade- the impact is evident in monetary policy and hence the overall economy. Government spending that exceeds revenues plus growth rates does have a long term deleterious effect; short term, it may cushion the effect of a bad economy. Giving individuals $500.00 refunds helps ameliorate the times we are in. A lot of what I posted was in reference to this particular point. I think the rational/irrational aspect of the conversation loses the big picture which is the overall state of the economy. Let’s put it this way: not all consumer spending is good for the economy, regardless of the “rational” arguments one may come up to justify such spending. One thing we need to keep in perspective when saying we are borrowing too much – Government debt is 50% of GDP which is higher than average but not insurmountable by any stretch. Long term-we need to run some surpluses (a la Clinton)- realistically by raising revenues so that interest in the debt is less than 10% of fiscal outlays.

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  24. Drew says:

    I see we have a resident psychiatrist.

    So, odo, I own a Porsche. Am I “image making” and “identity group binding?”

    LOL

    Has it ever occurred to you that its just simply fun to drive certain cars?

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  25. odograph says:

    I owned a Porsche (a 928S in the 80′s, 5spd thank you, no auto for my gentleman’s Porsche). Part of my introspection (not psychoanalysis) comes from that I’m sure.

    Sure it was fun, that was a component. As was signaling success in my 20′s.

    … but it was not exactly Buddhist happiness, just choosing to have fun or be happy with simpler things.

    I paid cash for mine though, and carried no debt forward.

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  26. odograph says:

    Note: never under estimate “signaling” as a factor in consumer purchases, esp. in affluent societies.

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  27. Steve Verdon says:

    I don’t think car buying is remotely rational. It is a complex psychology of image-making and identity-group binding.

    That doesn’t make it irrational. First you should define irrational or at least rational. Is it irrational to buy an expensive car? What if it is a signal to others that you find useful? This guy is successful, therefore I’ll listen to his investment pitch. If he pulls up in a Geo Metro on the other hand you might think he is a bit of crank.

    Why do two people who make the identical commute in sunny southern California choose (1) a Toyota FJ Cruiser, and (2) a Toyota Prius?

    Could be image…in which case they might be buying the Prius. Seriously, I’ve read that hte Prius is often the hybrid of choice because it is different looking and signals something to others…something people want to signal.

    Signalling is part of economics and is used in “rational” models.

    Just because you don’t agree with something does not make it irrational.

    Another aspect could be function. We used to have an SUV. We miss it now. Because we have a large number of children or I need to move lots of equipment? No. We do have large dogs, two of them. And the SUV made going places with them easier, which we often like to do, much easier. Does that mean I want to project an image of an anti-envirnmental asshole? I don’t think so. Oh, and it came in damn handy for swim meets, but I have managed to get by with the Mini cooper for that as well.

    Sure it was fun, that was a component. As was signaling success in my 20′s.

    Explain why this is irrational. You have failed so far.

    You are, I think, confusing Homo economicus and its failure in certain contexts that people are irrational. Nevermind that when economists use, say, Homo reciprocans the problems that they had with Homo economicus are now explained. Failure to meet one definition of rationality does not mean people are thus irrational.

    Let me put it this way, is altruism always a bad thing? No. If atruism enhances group survival and the group enhances individual survival then altruism can be rational. So can punishment even if it is costly.

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  28. Steve Verdon says:

    Why do two people who make the identical commute in sunny southern California choose (1) a Toyota FJ Cruiser, and (2) a Toyota Prius?

    Oh and the obvious answer is that they don’t have the same objective function they are trying to maximize subject to the relevant constraints…and the constraints might be differnt as well. If you had exactly the same set of constraints, the exact same objective functions you’d get the same solution. But we don’t live in such a world, so what you see as prima facie evidence of irrationality I see as a normal outcome of a rational process.

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  29. odograph says:

    I think we might have a misunderstanding about the word “rational” (and irrational).

    Irrational doesn’t mean to me “bad.” It just means something that comes organically out of “other parts” the human mind -something that was not reached by the strict rational rules of logic and token manipulation.

    If someone (strangely) sits down with a blank sheet of paper and calculates that a Porsche (or a Honda Insight) will maximize their utility through class signaling, then OK that was rational.

    If on the other hand they feel the vague pull of a Porsche, the need to abandon financial prudence for a 5 year lease …. maybe not.

    When you get to “Homo economicus” there we are back to how conscious and rational folk are, and how emotional and opaque their own motivations are to they themselves.

    Did you hear about the study that looked at neighbors of lottery winners? They bought more new cars (by some fraction) than neighbors of non-lottery winners. Go ahead, ask them for reasons they bought a new car, and see how many were aware that the neighbor-of-winner affect had its emotional pull.

    (I’ll give homo reciprocans more time later)

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  30. odograph says:

    Oh and the obvious answer is that they don’t have the same objective function they are trying to maximize subject to the relevant constraints..

    A naturalist could say the same thing about a Chimp’s decision to eat a bug … if he wanted to be silly.

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  31. GM says:

    Steve, it’s interesting to see how the definition of what is a good stimulus is evolves. There are definitely better ways to creates jobs and growth than giving tax rebates to individuals as you so eloquently pointed out. Job creation is definitely key to real growth here.

    However I think Raoul raises a good point, that there should be more focus on the the flows of money in and out of this country because it should affect our stimulus policies. For the time being the dollar is used in a lot of global trade and so is able to buy goods and services outside of America. This is unsustainable. Sooner or later China is going to need to convert those dollars to renminbi or the saudi arabia to the riyal and it’s going to affect the dollar negatively.

    When the dollar was dropping value early last year there wasn’t any kind of corresponding American manufacturing export increase.

    This is all not necessarily a bad thing, because the American economy is so diverse and would be able to increase in response to Americans buying more domestic product. However the budget deficit would be difficult to sustain once foreign countries/ companies lose interest in the dollar. The US gov employs a large number of people and so we’ll go right back to where we are now – high unemployment.

    In light of that, gov subsidies/ tax breaks on manufacturing and research and certain kinds of purchases (like you noted) would be the best route to take at this point. At the same time, the government needs to take steps to reduce the budget deficits each year.

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  32. Steve Verdon says:

    A naturalist could say the same thing about a Chimp’s decision to eat a bug … if he wanted to be silly.

    You really don’t know what you are talking about do you? You ask a question:

    Q. Why do two different people who have the exact same commute buy different cars?

    A. They have different tastes and different circumstances (i.e. income, credit, etc.).

    To this you offer up a sophmoric response that that is exactly what a chimp does in deciding to eat a bug. That’s it? That tells me you just are completely ignorant of the actual topic of conversation.

    I think we might have a misunderstanding about the word “rational” (and irrational).

    No, I think it is fair to say that you have a problem with the word rational. Often in common language people use the notion of rationality for:

    Well thought out, planned, smart, etc.

    I think of it is following a process that can be described somewhat briefly and works in a variety of settings.

    In the common language usage of the word if a person makes a bad investment becuase they didn’t have full information then many people would say, “Oh that wasn’t rational of him to do that.” However, in my approach it might have been rational. Why? Because gathering all the information might be costly. As such people often make decisions only on partial information. Or they might use a rule-of-thumb, but the rule has broken down and the person didn’t/doesn’t know it. Now it isn’t irrational.

    Irrational doesn’t mean to me “bad.”

    If you look back over your posts in this thread it sure as Hell can be read that way. About how we buy lots of crap that ends up in our garage.

    If someone (strangely) sits down with a blank sheet of paper and calculates that a Porsche (or a Honda Insight) will maximize their utility through class signaling, then OK that was rational.

    No economist, anywhere, argues that people do this. You really need to read more on economic methodology. Almost all economists subscribe to Milton Friedman’s “As if…” approach. In his article Friedman describes that the expert pool player plays as if he were a brilliant mathematician/physicist who is calculating how to do each shot. The reality is that the pool player is not doing such calculations, but is doing things “organically” as you might say. But the fictional construct is useful in that it allows us to ask questions about whatever it is we are interested in.

    More broadly, your attack on economics and rationality really is an attack on using models (in all of science and like endeavors). That models are too simplistic and/or not reflective of the actual object of interest. Well no kidding, that is why it is called a model. It is by definition and abstraction and simplification of reality. To try and make a “realistic” model you’d end up with a model that is totally unworkable.

    And models are what form the basis of empirical research. This model X, which is actually an extension of a theory, predicts these outcomes. Gather data and test these predictions. Upon seeing the results you return to theory and fine tune it.

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  33. Steve Verdon says:

    However I think Raoul raises a good point, that there should be more focus on the the flows of money in and out of this country because it should affect our stimulus policies.

    That’s true, but if we have a large trade deficit then that argues against stimulus since it reduces the multiplier. The short answer is that stimulus legislation for the American economy ends up actually stimulating the Chinese economy as we buy chinese goods with that stimulus money.

    Raoul is generally undermining his own position that we need some stimulus. With each post I can’t, for the life of me, see why he thinks that.

    For the time being the dollar is used in a lot of global trade and so is able to buy goods and services outside of America. This is unsustainable. Sooner or later China is going to need to convert those dollars to renminbi or the saudi arabia to the riyal and it’s going to affect the dollar negatively.

    If you really think this way, then the stimulus is bad. Why? Because it isn’t that the Chinese and Saudis and others hold huge amounts of U.S. dollars, but that they hold huge amounts of U.S. government debt. If they are going to convert to the renminbi or riyal they will sell that debt. Adding to the debt that they hold, if you are correct, is probably not a good thing.

    The only way I see this working for you is if you have some plan where the stimulus will allow the U.S. to reduce future debt obligations. Problem is we have things like Medicare sitting out there like Jabba the Hutt waiting to do exactly the opposite.

    Really, I can’t, for the life of me, see how Raoul gets from the views he’s expressed here, to the view that the stimulus will be good. He closes out by noting we need surpluses, but we are seriously adding vast amounts to the national debt. I just don’t see the underlying logic in his arguments.

    I’m not trying to be a jerk, I’m honestly just not seeing how his argument works.

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  34. Drew says:

    OK, cash paying introspector………….

    I’m not enthralled with the 2003 body styles. The recent models are much better looking. And, horror of horrors, the the auto trannies are actually good now. (I wonder, what does that say about my manhood. Am I balding? Is my bank account big enough….not to even mention….)

    So……introspectively, should I go with flat black, or basalt black. Skip the red, that’s just speeding tickets waiting to happen……plus all that identity group thingy….

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  35. odograph says:

    I’m saying irrationality is not necessarily bad, but sometimes it leads us to foolish consumption. For some unfortunate souls, it leads them to $60K credit card balances.

    ^ disagree with that simple statement if you can.

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  36. odograph says:

    Porsches are fun Drew, but being post-Porsche is fun in its own way.

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  37. odograph says:

    Almost all economists subscribe to Milton Friedman’s “As if…” approach.

    The older generation does, until it dies off. The younger incorporates Thaler’s work.

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  38. Bithead says:

    Steve;

    Just because you don’t agree with something does not make it irrational.

    Quite so.
    And that’s a point that a lot of folks seem to miss, often as not by intent.

    Just an offhanded example: I drive a Buick Rainer. There’s quite a bit of particulars that go into that choice. It’s an sure bet that the eco-nutz won’t think my choice a rational one. But as you can see, there really IS a very well consdiered rational choice at the root of it all.

    And it’s those kind of chocies that the left in general, and government nanny-state regulators in particular, never account for.

    I point out once again that while the government tries to regulate us out of full sized vehicles, the biggest selling vehicle, even at the hight of the recent gas price spikes, was the Ford F-150 pickup.

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  39. Raoul says:

    SV: Simple- everything has to do with the short term and the long term- short term we stabilize the economy- long term we fix it. Tools used short term will not work long term. Maybe Brad DeLong can step in and provide an opinion.

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  40. Drew says:

    “I’m not trying to be a jerk, I’m honestly just not seeing how his argument works.”

    So I’ll be the jerk. Raoul’s comments are disjointed, at times in conflict and bordering on incoherent.

    Let’s get real people, the “stimulus” package is turning into a garden variety pork-laden spending bill……that will be ill timed at best.

    Further, given its predicate, we need to acknowledge that the GDP number suggests that – given everything we know today – “the worst economic downturn since the Great Depression” needs to be modified to “the sorta worst downturn, kinda, maybe, well not so much, yeah pretty bad, but well….not THAT bad…..”

    Government behaving badly. Same as it ever was.

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  41. Raoul says:

    Drew: very eloquent- why didn’t it occurred to me earlier- government behaving badly.

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  42. Drew says:

    I’m truly afraid, odo, of what you might think of my outrageous expenditures on a high end audio system.

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  43. odograph says:

    The weird thing Bit, is that the vast majority claim rational choice while choosing all kinds of things – consider an alternate explanation, that humans tend to bond with and defend the car they drive.

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  44. odograph says:

    Drew, I’ve been delaying my HT upgrade – for not entirely rational reasons.

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  45. Bithead says:

    The weird thing Bit, is that the vast majority claim rational choice while choosing all kinds of things – consider an alternate explanation, that humans tend to bond with and defend the car they drive.

    Well, there is that, too. It should be also said, however, that the conversion van I had before I bought this rig was cause for far more bonding. And you know, this one I have now is superior in every possible way… It’s done everything I’ve ever asked of it, which is a lot… and yet I’ve never really bonded with this one, yet as I did with that van.

    Drew;
    Given that situation, it is perhaps time to delve into the motivations behind labeling this the mother of all downturns.

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  46. odograph says:

    Actually this spending bill is not ill timed. Government is supposed to spend counter-cyclical with the business cycle. That’s the way they get lower costs and cause less crowding out.

    The real problem is that the Bush administration spent like they were in a downturn, and now leave us without surpluses when we do actually need them.

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  47. Ah, it’s still Bush’s fault. Must be a corollary of Godwin’s law to terminate any further discussion.

    But seriously Steve and Drew, you’re wasting photons arging with someone who is going to gainsay whatever argument you make and, of course, blame it on Bush.

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  48. Drew says:

    “Drew, I’ve been delaying my HT upgrade – for not entirely rational reasons.”

    Then for what reasons?

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  49. Drew says:

    “Actually this spending bill is not ill timed. Government is supposed to spend counter-cyclical with the business cycle.”

    Oh, I think before its over we will see that the effect of much of the spending bill..excuse me, “stimulus bill,” will be ill timed, coming on after the problem has subsided.

    “That’s the way they get lower costs and cause less crowding out.”

    Crowding out? The Chinese obviated that issue years ago.

    “The real problem is that the Bush administration spent like they were in a downturn, and now leave us without surpluses when we do actually need them.”

    Spent like they were in a downturn? How about like drunken sailors? I hold no brief for the spending posture of Bush. But every bone in my body tells me we’ve seen nuthin’ yet. The Democrats are in charge, after all……..and now we are talking spending pros. Amateurs step aside please.

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  50. Raoul says:

    The level of erudition increased exponentially when you steeped in DREW- perhaps you will be well versed to visit a deficit spending chart over the last fifty years and then you can share with us minions what you learn.

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  51. Drew says:

    “Drew;
    Given that situation, it is perhaps time to delve into the motivations behind labeling this the mother of all downturns.”

    Oh, I understand it: P-O-L-I-T-I-C-S.

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  52. Drew says:

    “The level of erudition increased exponentially when you steeped in DREW- perhaps you will be well versed to visit a deficit spending chart over the last fifty years and then you can share with us minions what you learn.”

    Did I strike a nerve, Rahdrool?

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  53. Raoul says:

    I knew you were going to say that- we should play poker sometime.

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  54. Drew says:

    “The level of erudition increased exponentially when you steeped in DREW”

    I know. (blushing)

    “perhaps you will be well versed to visit a deficit spending chart over the last fifty years and then you can share with us minions what you learn.”

    Uhhh..I have one in front of me….So, minion, its ugly under all conditions and political regimes. Do you have a point, or are you pointless?

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  55. Drew says:

    “I knew you were going to say that- we should play poker sometime.”

    I don’t play poker, you’d kill me.

    Want to tee it up????

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  56. odograph says:

    It is worrying that Democrats have economic cover for spending. Roughly half (the liberal half) of macroeconomists say “spend” and they say “oh boy.”

    That said, go to fact check org on the Clinton years.

    It feels right that the Dems are the spenders. It is facty. But it is not actually factual.

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  57. Steve Verdon says:

    The older generation does, until it dies off. The younger incorporates Thaler’s work.

    Thaler’s work (and that of most people wroking behavior economics/finance) is not on irrationality. And I think you are overstating the case in regards to behavioral economics/finance.

    It is only “irrational” in that people’s behavior is deviating form Homo economicus. For example, Kahneman’s Prospect theory is designed to explain why people buy car insurance and buy lottery tickets. Homo economicus would say that people should buy car insurance and not buy a lottery ticket while at the same time invest their wealth conservatively.

    If you want to call that irrational, deviation from Homo economicus, then fine. I disagree in that it is still rational, it just fit the definition many economists use.

    Oh, and Kahenman, et. al. in the behavior school….they use the “as if” approach too.

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  58. gwmc7e says:

    It is quite likely that all that is really needed is a fix on the financial system itself. This recession is do to the embedded moral hazard we built into our mortgage market. While we have made some steps to bringing some level of liquidity back into the credit market, more is needed to be done. After this difficult chore is completed, the economy will recover naturally. We don’t need any stinking stimulus plan and certainly not a porkulus plan.

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  59. odograph says:

    Thaler’s work is about irrationality, by my definition of it. Indeed his work shaped my image of it.

    Consider the classic ultimatum game. People go with their gut, and accept what’s fair, or reject what’s unfair.

    They don’t do that “rationally”, but we can rationalize it. We can sat that evolutionary game theory would lead to that kind of outcome, where our behavior is meant to shape the (tit for tat) the response of people we’ll probably meet again, in a day or two.

    I find Thaler’s book (Winner’s Curse) loaded with brain-rules that work, and in many cases are positive and compassionate, without being actually “rational.”

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  60. odograph says:

    Note: the “unexpected fairness” and generosity in Thaler’s anomalies are very much the good news in irrationality and divergence from Homo economicus.

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  61. odograph says:

    BTW, I saw that video with Kahneman and Taleb in Germany just a day or two ago. I think Kahneman talked about “system one” and “system two.”

    Possibly my “rational” is his “system two.”

    A young colleague and I recently reviewed the experimental literature, and concluded that the empirical controversy about the reality of cognitive illusions dissolves when viewed in the perspective of a dual-process model (Kahneman and Frederick, 2002). The essence of such a model is that judgments can be produced in two ways (and in various mixtures of the two): a rapid, associative, automatic, and effortless intuitive process (sometimes called System 1), and a slower, rule-governed, deliberate and effortful process (System 2) (Sloman, 1996; Stanovich and West, 1999). System 2 ‘knows” some of the rules that intuitive reasoning is prone to violate, and sometimes intervenes to correct or replace erroneous intuitive judgments. Thus, errors of intuition occur when two conditions are satisfied: System 1 generates the error and System 2 fails to correct. In this view, the experiments in which cognitive illusions were “made to disappear” did so by facilitating the corrective operations of System 2. They tell us little about the intuitive judgments that are suppressed.

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