A report card for the 2009 Stimulus Bill.
So, back in March 2009 I wrote this post about prognostications about the growth of the U.S. economy. It centered mainly about how robust growth will be due to the economic stimulus package. Some rather fantastical claims were made regarding the growth rate of GDP. Namely that GDP would grow between 2009 and 2013 by 15.6%. That implies an average growth rate on an annual basis of just under 3.7%. That is a significant amount of growth by recent historical standards. If we look at the data for the Bureau of Economic Analysis for 20 years prior to 2009 we see that the average growth rate is around 2.5% and even if we eliminate years with negative growth it is still only 3.2%. Granted, the period from 1996 through 2000 saw growth rates in excess of 3.7%, but we also know that period was during the tech bubble, so that growth is something one should not anticipate in the future.
Further, at the time there was reason to believe that growth would not be so strong. As Greg Mankiw pointed out at the time, was GDP trend stationary or was there a possible unit root issue. The latter implies that when the economy deviates from its current trend it need not return to that trend.
Paul Krugman responded in his usual fashion by calling Mankiw evil and obtuse. Here is the problem that Krugman failed to realize. What did we do throughout much of the 2000’s? Did we invest in plant and equipment? Or did we invest in housing? If it were the latter how productive can we expect housing to be? Does an increase in the stock of housing increase our ability to make cars, lathes, or airplane engines? Do we get more service oriented jobs due to an increase in the housing stock? I think we can answer “No,” to all of those questions. Yes, we get an increase in construction jobs and the industries that supply the raw materials for housing, but housing itself is not a productive asset. It does not lead directly to additional productive capacity. This is not to imply that housing is without value, please do not jump to that rather…well…stupid conclusion. We value lots of things that have little or no productive value. A basket ball hoop attached to your garage has no productive value, but it still has value none-the-less.
So, this is why Krugman, Brad DeLong, Christina Romer, Jared Bernstein, and all the rest that claimed high growth was imminent were wrong. They were wrong because like good neoclassical economists they saw investment as simply investing in a glop of K (for capital–i.e. plant and equipment) and did not stop to think about what it means to invest in different types of capital or if housing should be considered K at all. Since housing is not part of K that is productive that one sees in most macroeconomic models these days the notion of slack capacity would become doubtful, at least to the degree they imagined it was. Yes, later on these guys all walked back their rhetoric, but the point still remains, they made bad predictions, realized they were bad and walked them back…but failed to apologize for their asinine behavior and even worse acknowledge that maybe their models have a fundamental flaw.
Moreover, I’d like to argue that much of modern day macroeconomics is just complete nonsense. You start with basically a GDP factory (thanks to Arnold Kling for this idea), that is the supply side is modeled as,
GDP = Y(L,K).
You have “one output” known as GDP. You have two inputs known as labor and capital. There is no real distinction between investing in say lathes vs. computers and that investing in either will have the same effect on output. The latter is errant nonsense in that it assumes that only investing in computers can get you the same level of output even in goods where you need lathes.
Further, by assuming things like a representative agent model remove all issues with incentives. Yet, incentives can have strong macro effects (see the 2008 Financial Crisis). If you weaken the standards for loans across the board, you’ll get more loans to people who are at greater risk of default. For example, equity reduces the risk of default on a mortgage. The higher the level of equity the homeowner has the lower the risk of default. The move to 10%, 5%, 0% down payment loans would bring more risk into the the MBS (mortgage backed securities) market. Macroeconomics pretty much ignores incentives at all levels. In searching through the IDEAS data base for moral hazard and monetary theory the results are rather stark. Incentive theory is thought of not just micro-economics, but almost “micro-micro”-economics. That is, taking economic theory not down to just the market level, but beyond it into the firm or household and modeling how things work inside the firm.
And when I stop to consider my job it makes me realize that macroeconomics/monetary theory is probably way too simplified. I work in the energy industry, but I do not produce energy. I produce information. I go into databases and extract data and analyze it and send the results to management, regulators and even special interest groups. The information is used not only in the day-to-day operations of the company, but it is also used in various proceedings before regulatory bodies–i.e. it has a political element to it which is again, completely ignored by macro-economist/monetary theorists. And when you bring in politics and you have voting it becomes much, much harder to look at analytically. I have pointed out in previous writings Arrow’s Impossibility theorem when it comes to voting. The implication of this result is that the results of voting are the product of a game, as in game theory (another thing that macroeconomcis/monetary theory tends to ignore) and in game theory one of the more problematic aspects is that there are no mechanisms by which to ensure optimal outcomes. That is, the results are heavily dependent on the institutional frame work one is operating in. Or to put it more starkly, “good” policy in Canada will be different than “good” policy in the United States because we have different institutions. Yet, you see nothing like this in mainstream macroeconomics/monetary theory.
Yes there are macroeconomic phenomena and effects, but in my view there are only microeconomic solutions and policies and the sausage grinder that is politics makes such solutions even harder to implement. And this goes for macroeconomics done by those on the Right or the Left. I think it is all silly nonsense that tries to base theories on economic aggregates that are not really a thing in and of themselves, but are created by men. GDP is a construct by people trying to measure what is going on in the economy. It is not a thing that exists itself. Thus, noting correlations between GDP and say labor is probably not that helpful since those models are purely statistical in nature–i.e. in the future that statistical relationship can change and since you cannot easily foresee such changes it is hard to use such models for policy. And the very nature of labor changes. Back 150 years ago, labor was pretty much confined to the agriculture sector for the most part (at least that is where most workers were working). Then labor moved into manufacturing. Now it is services and information. These types of labor almost surely require different types and amounts of human capital. Thus, what might have been true in the 1930’s (when Lord Keynes was writing about business cycles) may no longer apply as we shift from manufacturing to a new type of economy where labor does something very different.
Welcome back, Steve. We’ve missed you.
Of course Krugmans response is that the stimulus was too small, but that’s usually his response whenever GDP doesn’t perform as expected.
I think I’d say “economics has been historically nonsense”. The original economists looking at the economic output of the US couldn’t figure out how to measure the contribution to the economy by unpaid “women’s work”, so they left it out. I would argue that a heck of a lot of the so-called “increase” in the GDP simply happened as tasks which used to be done inside the household (making of clothes, meal preparation, taking care of kids and elders) came out of the household and were shifted over to being done by enterprises.
Your conclusion is that all Macroeconomics is bunk because in this instance some wildly over-optimistic predictions were made? We can see that stimulus did work, at least partially, because nations (and states) that enacted some sort of stimulus are doing relatively well and those that went with austerity are struggling and crashing. At the time their were numerous statements that the US stimulus was too small and poorly directed – which were fair because it wasn’t intended to be well thought out; it was an quick emergency measure to staunch the bleeding… and politics.
You are almost certainly right about why the predictions were off – housing not a great investment, incentives, etc. But the whole point of science (as much as that can be applied to economics) is to take an infinite number of variables and get a working tool. So now they take the existing model and modify it against the observed effects, possibly using these insights, and, hopefully, next time we’ll be better prepared.
Let me start by saying that unlike every other person on the internet, I actually do not understand economics. I do have the sense that much of the economic stuff that we are told arises out of theories convenient to one of the political factions that then goes looking for some facts to support the theory rather than doing things the other way around.
My recollection of the 2006-2008 period is that there were big negative shocks with lots of business failures and fears that things would get worse. Fairly responsible people like the chair of the Fed feared a replay of the 1930’s. There was a stimulus package, and I recall Dr. Delong saying that it was too small at that time. The current analysis that Mr. Verdon conducts in this posting shows that our economic growth since the troubles of the 2000’s is back to our long term baseline. I don’t know if the stimulus was too big, too small, or just right, but to me it seems that we did avoid Scylla and Charybdis and are enjoying a stable journey along our country’s longterm line. I am grateful that our country has been led by a cool steady hand for the past eight years that appears to have hit targets that reasonable people can expect the country to hit.
There has been a lot of screaming about our leadership by some people; Dr. Carson for one. One of my friends took it all seriously and sold all of his stocks in November of 2012 and bought gold because he was convinced that the reelection of Obama was going to lead to an apocalypse. I wish he knew then what Mr. Verdon knows now.
Thanks, Obama for your calm, cool hand on the tiller.
Every so often the topic of the infamous stimulus bills of 2009 come up. The exact amount is still a matter of argument. A billion or so of the money cannot even be accounted for. What is clear that the taxpayers did not get a good deal when looking at the number of jobs created per dollar. There are untold weird, ridiculous, and just unbelievable ways that the money was spent. To be sure, some jobs were created and some communities helped.
The bill also included: funds to pave a backup runway at a seldom used airport
University studies of squirrels, Twitter, and video games.
The infamous tunnel for turtles.
Road improvements for Microsoft !
A guard rail around an empty lake !
Now, I am not just out here throwing rocks and complaining. I have made some specific ideas on how that money could have been spent to help the country and provide long term jobs:
Rebuild, modernize the interstate highway system: use of more technology, imbedded lighting, fog blowers. Eliminate all railroad crossings.
Upgrade and rebuild the aging electrical grid and transforming system: vulnerable to disastrous collapse or attack.
Research into new forms of energy: thorium, hydrogen, fusion, magnetic field, ion engine, antimatter fuel.
“You spend a billion here, a billion there and it starts to add up” Senator Dirksen
I’m not sure that you (Steve) agree, but I’m glad that stimulus spending was there rather than the alternative of real spending reductions.
The economy was on the precipice of plunging from great recession to great depression. At the time Obama was inaugurated we were shedding jobs at a rate of over 700,000 per month – the stimulus spending such as it was, was indirectly a benefit to millions of Americans because it slowed and ultimately stopped the bleeding.
Many Americans don’t think that taking as much debt as we did was worth it, however further collapse of the financial and labor markets would have caused those same Americans who hate our national debt to question those politicians who would wait for the ‘markets’ to work this out. The fact is that we had (and have) the capacity to take on that debt, and it strictly a matter of political will as to whether or not we will meet our ongoing debt service obligations.
Huh. This is odd. Krugman specifically predicted that economic growth would not be robust because the stimulus was too small. Where do you get the idea that Krugman thought that the stimulus would quickly lead to robust growth? He wrote many columns arguing the opposite.
Did the stimulus nonetheless work? Yeppers. When you deny that, you are not only going up against Dr. K-you are going up against the consensus in the economics profession, including MANY Nobel Prize winners.
Now, I’m sure in the circles where you move, your analysis seems convincing. But real life economists have drawn their conclusions from the data and moved on. Let me guess- you think the climate scientists have got it wrong, based on the analysis of some isolated scientist somewhere, right?
Rule of thumb: when some non expert concludes that some major scientific theory is wrong, because it leads to a conclusion they don’t like, they’re probably wrong. See also: young earth creationists.
Is that fair, though? The better macroeconomic models are build as aggregations of micro models.
Steve, what do you say to the argument that, unlike every other modern era recession, Federal outlays remained flat and State outlays actually declined? I don’t think you should hold it against Krugman or anyone else for failing to predict that. It’s hard to believe that removing the by now normal pump priming from the mix didn’t have a negative effect on the recovery.
“I don’t know if the stimulus was too big, too small, or just right, but to me it seems that we did avoid Scylla and Charybdis and are enjoying a stable journey along our country’s longterm line. I am grateful that our country has been led by a cool steady hand for the past eight years that appears to have hit targets that reasonable people can expect the country to hit.”
This, plus noting that by comparison to other major developed countries, we did very well. Far better, than Germany or Britain, which went the austerity route.
If you want to dwell on forecasting errors, then I would think that you would find all of the Austrian and freshwater forecasts of rapid inflation to be far more galling, as they were far more inaccurate. Delong got the timing wrong, while the conservatives got, well, everything wrong.
What the orthodox economists on both sides missed is that this last crash was a balance sheet recession/ pre-depression, not just a severe cyclical downturn. A more rapid recovery would have required a massive orchestrated writedown of debt so that borrowers could have resumed normal economic behavior sooner than they did instead of scrimping in order to pay off past obligations that don’t create current growth.
In the absence of purging that excess debt from the economy, the growth that follows will necessarily be slower due to all of the money that ends up being (mis)allocated to pay for yesterday’s excess leverage instead of today’s GDP. Stimulus won’t do that much to cure a balance sheet recession, although it helps to keep things from getting worse. However, the solutions that I presume that you would favor (tax cuts, reduced tariffs, etc.) would have been far less effective than that — George W. Bush’s 2008 stimulus refunds were essentially useless, and tax rates don’t matter much if you don’t have any income.
@MarkedMan: “unlike every other modern era recession, Federal outlays remained flat and State outlays actually declined.”
I predicted that here at OTB. The States were broke and do not have the power to print money. The federal government implicitly recognized this problem by limiting outlays to state and local governments for infrastructure to only new, unplanned projects. Without such a condition states would have tended to reduce their own infrastructure spending, offsetting the stimulus effect from federal outlays. Still, there was no requirement that states continue spending levels, and most couldn’t. It was predicted and predictable.
At the time the legislation was being debated, I advocated some sort of one-time block grants to states to allow them to maintain spending levels and prevent layoffs at least for a time.
Krugman, as always, hedged. When economies do well, he credits stimulus. When they do poorly, he blames austerity. Sometimes simultaneously (e.g, the UK economy which he blamed austerity for when it looked headed to a second recession and then praised “ending austerity” when that didn’t happen.) According to him, both the UK and US should be back in recession right now because of austerity and Japan should be booming.
Keynesian can not fail. It can only be failed.
The stimulus bill was merely a drop in the bucket. Majority of it would not contribute much to GDP growth as the majority was not investment in improvements that would help facilitate business growth. You had 272 Billion in “Aid” which at least 237 Billion was just payments, many of which were to bailout failing state budgets, you had 217 Billion in spending, which some of which was not investment spending, so really maybe like $200 Billion in spending projects, where half went to education, energy and health and human services…and then the $301 Billion in tax provisions. When you break it down, it was weak, outside of filling some pockets to replace lost money, what did we actually do to improve, better and advance our infrastructure and invest in? Very little.
You contradict yourself, sir:
Is clearly contradicted by:
I think you understand economics perfectly.
Krugman argued persistently and consistently that there wasn’t enough stimulus and that the Fed and ECB inflation targets were too low.
I don’t always agree with Krugman, but I find that his critics frequently attack a strawman version of Krugman instead of his actual positions. Often this reflects their inclination to read conservative misinterpretations and distortions of Krugman’s writings rather than what he actually said.
@Pch101: Krugman has to be evaluated based upon what he said and when he said. What he said before the stimulus bill passed was fairly mild and admitted a lot of uncertainty.
The most significant thing he said at the time, I believe on Face the Nation, was that the biggest problem was not going to be the number, but finding enough to spend on. And even the money appropriated in the stimulus bill was not necessarily spent, or spent in the timeframe thought necessary to calm the animal spirits. Greater spending would most likely have had to come either through checks to taxpayers, or a dedication to a longer “stimulus time frame.”
@Hal_10000: As @Pch101: points out, this was a “balance sheet” recession, not the usual Fed induced interest rate recession. Recognizing it as such, Dr. K predicted a slow recovery, an “L shaped” recovery, from the get go. Criticism of Krugman carries more weight if it reflects what he actually said.
As a general note, there’s more to stimulus than “the stim”. What would have happened had GM and Chrysler collapsed does not bear contemplating. And please don’t claim an orderly, normal bankruptcy with private lending was possible at the time. It was bailout or collapse. And god bless extensions of unemployment benefits.
Sounds like Krugman’s rather familiar with Mankiw’s work.
Shmacro /shmicro. The Obama admin. dumped zillions into crap projects. Remember the “shovel-ready projects? Can you name one? Money for teachers? They are still striking for more. General Motors would have been better off going Chapter 11 and the less talk about bailing out Wall St. the better.
Blamewise, the housing bubble was perpetrated by the No Credit Needed policies of Bill Clinton, greedy banks AND borrowers who knew they couldn’t afford the payments they agreed to.
The “new” Obama economy consists of crap jobs at the low end of the pay schedule and has the once-proud middle class hoping to get a temp job at McDonald’s just to make ends meet.
Indictments of Wall St. crooks to date? Zero..
I recall Krugman arguing that worries about spending inefficiencies were overblown because there were plenty of worthwhile projects and that the importance of stimulus spending should take priority should take precedence over minimizing waste.
I actually obtained a fair amount of stimulus money for a client, and found the process to be inefficient: even though we had a “shovel-ready” project ready to go within weeks of the stimulus package being approved by Congress in January 2009, we couldn’t get started until mid-2010 due to the cumbersome nature of how these programs are administered. (Even thought the programs are already approved, the need for various federal and state agencies to sort out the details slowed things to a crawl.) The goals of keeping the process legit often gets in the way of getting things done.
Good to see you, Steve. (Aka Drew)
As you can see, not much has changed here. Obama saved the world (but for some confounding reason this economic Superman has been satisfied to preside over the most tepid, unbalanced performance for years now). Krugman is great. Spend more money. And, spend more money.
The thread is only some 30 long, but sadly no one seems to have acknowledged a central point you make: that all investment is not equally valuable, especially over time. This in spite of the fact (see recent Schuler/GE essays) that a dominating variable in the nineties was finally realizing the once in a lifetime payoff to a wave of IT investment. These same types would have you believe digging holes and then filling them up is just fine if it creates a job.
Anyway, hope to see you here more frequently.
No. Considering that the second half of my post described why I think macroeconomics is nonsense and I don’t reference the bad prediction, that is a very slanted reading.
This post makes 2 separate, but related points.
1. The predictions of the stimulus were way too optimistic.
2. Macroeconomics is bunk because [see reasons in my post, starting with the paragraph out the GDP factory].
And arguments that the stimulus was too small are also nonsense. The claims about the effects of the stimulus were for the stimulus that was passed and made into policy, not some other fictional number. If you say, “Doing X will get us Y.” It is a very dishonest rhetorical tactic, IMO, to say, “Well we should have done Z to get Y.”
Thank you Dave.
That’s lovely, but nobody claimed that all spending has equal value..
@Pch101: Krugman was not talking about inefficiencies. Here is the Krugman on a panel with George Stephanapolous and Gwenn Ifill in December of 2008:
He did elsewhere, including in his blog. In one interview with Charlie Rose:
KRUGMAN: “Basically, any kind of spending cut right now is going to hurt the economy. Now — “
ROSE: “Whether it’s entitlements or not?”
KRUGMAN: “Whether it’s entitlements or not. Even if it’s defense, even if it’s wasteful defense spending, it’s going to hurt the economy if you cut it right now. It doesn’t mean that we shouldn’t look for ways to cure waste but right now to a large effect, spending is spending. So, do the kind of reform I want, and stop overpaying for Medicare, stop paying for unnecessary treatments. That’s clearly what we want to do in the long run. But right now, it’s going to mean less income for hospitals — that is going to be a problem for the economy.”
Krugman said many things, and the points were not contradictory.
@Guarneri: Please explain things to me. The unemployment rate is under 5%, inflation is 2%, the Dow is 17500, and gasoline is $2.50 per gallon. The economy is growing at 3.7% which Mr. Verdon, not an Obamaniac, says is good by recent standards. You call the economy “tepid” which means not too cold and not too hot in my dictionary. What would you like to see done differently and how would that impact the numbers I listed?
As I always mention when this subject come up, when I took economics (now roughly 50 years ago) Keynes was king and we learned Keynesian economics. I think I’m a little more favorably disposed to it than Steve is.
One of the problems that we have is that the structure of the U. S. economy is a lot different from its structure in 1936. Because we import so much of what we consume, the Keynesian multiplier will be quite small and a lot of any fiscal stimulus will end up in the hands of the .1% of income earners.
Go over to the St. Louis Fed’s FRED site and look at U. S. industrial productivity. It’s quite clear that sector has become smaller since 2008 and it certainly looks permanent. We still have millions of people unemployed who are likely to stay that way. The 5% unemployment rate doesn’t take these people into account.
A properly constructed stimulus applied in time could have avoided this. Unfortunately, the only stimulus that could have been applied in time was ideologically anathema.
@Slugger: I can help. There’s a Democrat running the White House. @Guarneri doesn’t like this.
Krugman, January 2009:
Seems to me DR. K hit the nail on the head, politically & economically. He got the maximum unemployment rate wrong, but he predicted the political and economic effects of the stimulus to a T.
@Pch101: How about this, I didn’t say anything about economic inefficiencies.
But if you can find Krugman explaining how he found $2.9 trillion in real world spending, when he thought it would be for the government to find $600 billion to spend in December of 2008, I’d love to read it. Because if one’s theory is to do the impossible, that theory has no practical application outside of cults.
Wait…Steve is Drew? The worlds most consistently wrong businessman? Well it now makes sense why this makes no sense.
How can you even talk about the stimulus and it’s effects without considering that the Bush Contraction, for which it was designed, was far worse than imagined at the time???
The Q4 contraction in 2008 was -8.9%, not the -3.9% that was estimated at the time. For the mathematically challenged, like Drew, that means the recession was more than twice as bad as estimated.
So how in the fvck do you write a tome about the effects of the stimulus not being what was predicted without mentioning that the stimulus was designed for a recession half the size of actual.
But now that I know it is Drew…it makes perfect sense.
I know absolutely nothing about Steve Verdon, except that he doesn’t even remotely understand economics, yet thinks his opinions on the subject should be broadcast. (See also: Dunning, Kruger.)
No. Guarneri was just telling Steve that he used to comment as Drew.
Oh…well OK…I apologize to Steve for that mix-up…but my overall criticism stands.
You did a fine job of showing that you don’t really understand GDP.
One way to express GDP is as the aggregate of consumption, investment, government spending and trade, or GDP=C+I+G+(X-M).
Did anyone argue that all investment produced equal results or was equally profitable? No. (Some investments even produce negative returns.)
Did anyone argue that all consumption produces equal utility for all consumers or equal profits for the producers of those products? No.
Did anyone argue that all government spending has an equal fiscal multiplier? No.
Did anyone argue that all trade produced equal results or was equally profitable? No.
In other words, you knocked over a strawman of your own creation. The question isn’t whether all of the spending produces equal benefit — no one claimed that it did – but one of whether additional spending produces marginal gains or reduces marginal losses.
Imagine that you have a wagon that is stuck in a ditch. There are several guys of varying strengths and talents for wagon pulling who can contribute some ability to tug on a rope to get the wagon moving. However, no single individual among them is strong enough to pull the wagon out by himself.
If the goal is to get wagon moving, the solution is to deploy enough manpower to get it moving. That does not necessarily require all of the men to be equally strong or talented; they only need to be collectively strong enough to get the job done. That may make you feel better, but that won’t do much good for the rest of us.
Of course, if you want to be an Austrian economist, then you would lecture the wagon for getting stuck while nitpicking about the haircuts and clothing choices of the guys who could pull on the rope.
@john430: Um, if Chrysler had gone Chapter 11, I don’t think the effect on all of the companies making the components downstream would have been….good.
@grumpy realist: Indeed! I was in Korea at the time and Hyundai/Kia, Honda, and Toyota were predicting a loss of up to 90% of their productive capacity over 10 years time as the consequences of losing the subcontractor network connected to the bankruptcies of GM, Ford, and Chrysler.
On the other hand, as Lars Larsen noted on a CNN panel (and John 430 probably endorses) “at least we’d be able to get rid of all these high paying jobs.”
This is very true. Politicians use economic theories, to copy a phrase from Bill James, the way a drunk uses a lamppost: for support not illumination. They use them to justify the policies they want to put in place. So Democrats love Keynesian theories because they call for more spending (although, oddly, they never get around to that part that says you cut spending during good economic times). Republicans love supply-side economics because they call for more tax cuts (although in that case, they’ve gone from a reasonable “lower taxes are good for the economy” to an insane “tax cuts pay for themselves”). The ultimate embodiment of this was the Great Inflation of the 1960’s and 1970’s, when Western governments deliberately inflated their currencies because the Keynesians assured them it would keep unemployment minimal. That, uh, didn’t happen either.
the major car companies are really researchers, engine/transmission designers, and final assemblers. The components of the cars are made by several thousand subcontracting companies. This is why Ford testified to congress to save its competitors–if gm and chrysler had gone under, all the subcontractors would also and then ford immediately after. Several million US jobs would have evaporated in the middle of the worst recession since the great depression.
In other words, you’d have to be a total moron or rabid marxist to want the car bailout not to happen.
@Pch101: It is implicit in macroeconomics. Spending is spending, what it is spent on doesn’t matter.
@C. Clavin: That the Bush contraction was “worse than expected” is a cop out that completely makes evaluating these claims impossible. At which point you should just admit you are talking about something very much like religion and nothing more.
@Pch101: Wow, you are methodologically so wrong it is laughable. You do NOT derive theories or hypotheses from accounting identities. That is just bad.
Of course, when you measure GDP via national accounting identities it is
Y = C + I + G + (X-M).
But that is an accounting identity and from the stand point of economic theory is not going to tell you much. Economics is about models and theories that are behavioral. That is, you want to know why the above holds, not simply that it does (and it does by definition). Try looking at something like a Solow type growth model, or a real business cycle model to see where there is essentially a “GDP factor”.
And yes, when you look at macro-econometric models like Romer and Bernstein used (they used the CBO macro-econometric model BTW) you get a single coefficient for things like investment. That is investment of any type has the same effect irrespective of what that investment is. So yes, very much they are saying that investment has the same effect.
You have clearly demonstrated you just do not know what you are talking about.
Oh, and guys like Krugman, DeLong, and and most of the macro guys…they don’t really believe in these macro-econometric models. They never use them in their research.
BTW, this is EXACTLY the same macro-econometric model that the Amherst economist, Gerald Friedman, used to analyze the effects of Bernie Sander’s economic policies….which people like Krugman and Romer called nonsense.
Happy to be of help…
Steve, welcome back.
Hey pal, two can play this game. Since you got an Economics degree from UCLA in the 80s, we must discount much of what you argue since that department at the time was to the right of the Chicago school and of course, were wrong about just about everything.
So, Steve two can play this game. Lets look at the great economic wingnut prognosticators on another stimulus plan, the Clinton Omnibus Tax Act of 1993, where you guys were so off its laughable. Just to refresh your memory, how about these famous opinions of the supply side morons?
Rep. Newt Gingrich (R-GA), February 2, 1993: We have all too many people in the Democratic administration who are talking about bigger Government, bigger bureaucracy, more programs, and higher taxes. I believe that that will in fact kill the current recovery and put us back in a recession. It might take 1 1/2 or 2 years, but it will happen. (Congressional Record, 1993)
Rep. Bill Archer (R-TX), May 24, 1993: I would much rather be here today supporting the President and I would do so if his proposals could expect to increase jobs and the standard of living for Americans, but I believe his massive tax increases will do just the opposite. (Congressional Record, 1993)
Rep. Bob Goodlatte (R-GA), July 13, 1993: Small businesses generate the bulk of this Nation’s new jobs . And they will be the hardest hit by the Clinton tax-and-spend budget. Because, when you raise taxes, you kill jobs. (Congressional Record, 1993)
Rep. Thomas Ewing (R-IL), February 21, 1993: The Clinton plan will hurt the economy and kill new job creation…By crippling small- and medium-sized businesses, the plan will kill jobs. (Congressional Record, 1993)
Rep. John Kasich (R-OH), August 5, 1993: Do you know what? This is now your package. We will come back here next year and try to help you when this puts the economy in the gutter. And virtually every major economic estimating firm in this country says your bill is going to kill jobs. (Congressional Record 1993, Page: H6249)
Rep. Robert Dornan (R-CA), August 5, 1993: The problem with our economy is that there is too little employment and too little growth. This plan will do nothing to improve that condition and will actually make it worse. (Congressional Record, 1993, Page: H6148)
Rep. Christopher Cox (R-CA), May, 27, 1993: This is really the Dr. Kevorkian plan for our economy. It will kill jobs, kill businesses, and yes, kill even the higher tax revenues that these suicidal tax increasers hope to gain. (Congressional Record, 1993, Page: H2949)
Rep. Jim Ramstad (R-MN), March 17, 1993: These new taxes will stifle economic growth, destroy jobs, reduce revenues, and increase the deficit. Economists across the ideological spectrum are convinced that the Clinton tax increases will lead to widespread job loss. (Congressional Record, 1993, Page: H1355)
Rep. Phil Crane (R-IL), March 18, 1993: The budget proposal offered by the Democrats is a recipe for economic and fiscal disaster…It proposes to increase taxes at a time when we have a fragile economy–higher taxes will only stifle job creation and economic growth.(Congressional Record, 1993, Page: H1454)
Rep. Dick Armey (R-TX), August 2, 1993: The impact on job creation is going to be devastating, and the American young people in particular will suffer a fairly substantial deferment of their lives because there simply won’t be jobs for the next two to three years to go around to our young graduates across the country. (CNN)
Rep. Joel Hefley (R-CO), August 4, 1993: However Clinton wants to spin his tax plan, the bottom line is this: It will raise your taxes, increase the deficit, and kill over 1 million jobs. (Congressional Record, 1993, Page: H5745)
Also, its funny how Steve characterized Clinton’s economic success due to the “bubble” but I doubt will refer to Reagan’s as the “deficit spending fake recovery”. Or the Bush recession as “idiots cutting taxes on the rich, while engaging in huge off the books deficit spending to finance the greatest phuck up in American history”.
Except that Keynesianism has been shown to work, while supply side economics has failed every time. The American recovery from the Great Depression completely vindicated Keynes, as did our stimulus fueled recovery from the Second Great Depression. You don’t want to admit it, because you are a believer in conservative economics, but among actual practicing economists,the data arising from the 2008 recession and is aftermath t’s vindicated Keynes.
Forget Krugman. Almost every economist in the survey referenced above said the stimulus helped. With all due respect, we have to accept their conclusions (backed up by data) over your non expert opinion. To repeat, when a non expert asserts that the experts are wrong, because expert opinion contradicts his pet theory, it is the non expert who is probably wrong. .
Put another way, extraordinary claims requires extraordinary evidence-and your assertion that 36 eminent economists , expressing the consensus in field, are mistaken is an extraordinary claim.
@Hal_10000: the 90s are calling the 50s through 81 are calling take a look at debt to GDP ratios, went down in good times, up in recessions and war.
Somehow there was a discontinuity by magic from 81 to 90 (why bush sr broke his no new taxes pledge), the 93 budget deal and then a decking debt ratio until 2001 and a 2000 Presidential campaign premised on holding large surpluses to pay for retirement of the boomers….and then the ACA which bends the cost curve while covering more people so no interest at all in pay as you go or better budgeting.
Two major instanced in post 1900 us history where debt to GDP increased consistently and significantly while at relative peace and not in a liquidity trap. And in both cases supply side Republicans were in the white housr
@Hal_10000: Had the bad judgement to be born in 1945 and so got the full course on the ’60s and ’70s including the inflation that you mention. There were a couple of other things going on besides cockamamie liberals running gov’ts. There was a war; those things are always inflationary, ya know. There was that little oil embargo thing. Thought you’d like to know.
You have to forgive me but I’m not seeing any evidence whatsoever that you know more about economics than Paul Krugman.
The fact that you are so confident that you do in spite of said lack of evidence is an indication of your lack of self-awareness.
The fact that you didn’t understand the reason why I outlined the components of GDP after I explained it is also not helping your case. You offered a strawman argument, and I showed how your argument was a strawman. The point wasn’t so much about GDP per se as it was about your decision to put words into the mouths of others.
Garbage. We had eight years of uninterrupted “stimulus” in the 1930’s that did nothing. After a brief respite, we had eight more years that did nothing. In 1946, the Keynesians predicted a huge depression because of spending cuts. That didn’t happen. Throughout the 60’s and 70’s, they claimed the Phillips Curve meant we had ended unemployment. That didn’t happen. In the 90’s, they said failing to pass Clinton’s stimulus would doom the economy. That didn’t happen. For twenty years, they’ve been telling us Japan is JUST HIS FAR AWAY from turning around its economy. The track record of Keynesian economics is pathetic.
So there are only 36 economists in the world? And the ones who took out an ad opposing the stimulus don’t count? And all the anti-Keynesians don’t count? This is one of the most annoying things about the Keynesians, including Krugman. You claim “everyone agrees with X” when demonstrably everyone does not. Simply claiming a consensus does not magically create one.
@An Interested Party: I thought “nutty conservative anti-Keynesian” was implicit in my phrase “total moron” 🙂
You need to type “1937 recession” into a search engine, and learn about the deficit concerns that caused it.
In any case, the US had double-digit economic growth during much of the 1930s. However, there was a lot of pain in spite of such growth because it wasn’t enough to offset the ~50% hit to GDP that occurred under Hoover’s watch. It would have better if the economy hadn’t been allowed to implode in the first place.
“We had eight years of uninterrupted “stimulus” in the 1930’s that did nothing.”
For definitions of “nothing” which exclude consecutive years of GDP growth of 10.8%, 8.9% and 12.9% in 1934-36.
“After a brief respite, we had eight more years that did nothing.”
Again, for definitions of “nothing” which exclude consecutive years of GDP growth of 8.0%, 8.8%, 17.7%, 18.9%, 17.0% and 8.0% in 1939-44
“In 1946, the Keynesians predicted a huge depression because of spending cuts. That didn’t happen.”
And again, for definitions of “huge depression” which exclude a decrease of GDP of 11.6% in 1946.
Damn that liberal reality bias.
What nonsense. The stimulus was designed to cope with a 3.9% contraction. That the contraction was actually more than double that is not a cop out, it’s fact. Pertinent fact. But to ignore facts that weaken your partisan view is certainly very religious of you.
I’m familiar with 1937. So eight years of uninterrupted stimulus and one year of retrenchment and the whole thing falls apart? According to the theory, the economy was supposed to be recovered by then and we’re supposed to reign in spending to pay off debts. Is Keynesianism so delicate that even one small diversion can derail an entire decade worth of stimulus?
1) Stimulus spending began immediately under President Hoover (despite false claims to the contrary). The economy continued to massively contract in 1929, in 1930, in 1931, in 1932, in 1933. From 1929 to 1939, despite government spending tripling, the economy grew … 10%. For the entire decade, unemployment was 15% or more. That’s … not an economic boom.
2) The War years look good because it’s easy to make the economy look good when there’s a war on and you can draft people and build tanks on credit. The Germany economy had great economic numbers during the 1930’s but the lot of Germans did not improve because all that economic growth was an illusion, plowed into weapons and monuments. The War Years saw severe shortages, escalating debt and rationing. That’s … not an econonomic boom.
3) 1946 saw a contraction. By 1948, we were beginning a massive economic expansion. Between 1946 and 1956, the economy expanded 42%. That’s four times the growth under the glorious stimulus regime of the 1930’s.
And you did not address the wreckage produced by the Phillips curve, the 90’s economy or the failure of two decades of Keynensianism in Japan.
My point here is that the record of Keynesianism as poor. At most, you can say it’s mixed. But the utility of Keynesian policy is presented as though it is unquestioned, like the law of gravity, despite being absolutely questioned by hundreds of economists.
FDR became president in 1933.
Your claim that there was some sort of stimulus program since 1927 makes zero sense.
You don’t seem to realize that it is extremely difficult for a country to recover from losing half of its GDP, particularly when the rest of the world is in similar straits. That’s why it’s important to avoid that kind of devastation in the first place.
What got the country back to full employment was a massive deficit spending program in response to the armed conflict in Europe. In retrospect, FDR didn’t spend nearly enough when he should have, but they were in virgin territory and didn’t know then what we (or at least some of us) know today.
Nominal GDP helps to tell the story:
Year – GDP ($B) – Change
1929 – 104.6 – n/a
1930 – 92.2 – (11.9%)
1931 – 77.4 – (16.1%)
1932 – 59.5 – (23.1%)
1933 – 57.2 – (3.9%)
1934 – 66.8 – 16.8%
1935 – 74.3 – 11.2%
1936 – 84.9 – 14.3%
1937 – 93 – 9.5%
1938 – 87.4 – (6.0%)
1939 – 93.5 – 7.0%
1940 – 102.9 – 10.1%
1941 – 129.4 – 25.8%
Prior to the New Deal, GDP kept falling.
The situation was so dire that it took eight years of the New Deal just to get GDP back to 1929 levels.
The real growth began in 1941, when the country began to gear up for war. Worries about fascism began to take precedence over worries about excessive spending, and that turned out to be fortuitous for the economy.
Reading Hal, I had the feeling I was seeing someone post from an alternate universe. Indeed, this is exactly what I was seeing. It’s the universe universe created by Amity Shlaes, a right wing ideologue who wrote a screed called The Forgotten Man. It is a book specifically written to attack the New Deal and all things Keynesian. It is reviewed here. An example of how the Forgotten Man argues:
Hal’s arguments seem of a piece with this sort of tendentious nonsense. It’s especially telling that Hal, like Shlaes and every conservative, skips over just how the Great Depression ended. More from the review:
During the entire period from the mid 1930s to the 1970s, the economy was under the stewardship of economists who followed and applied Keynes. So the expansion during that period can be credited to the influence of Keynesian economics.
@the Q: I can read dude, I have read the more recent literature. And to be fair macroeconomics is in a complete crisis. The reason why is that everyone believed the Great Moderation, then the Great Recession ruined those beliefs. Further, modern macro was really Monetary Theory–i.e. everyone had largely given up on fiscal stimulus because of the lags, the uncertainty about the multiplier, etc. Then look, when everyone felt monetary policy was not working they panicked and went back 80 years or so to try and use policies that are very dubious.
As for your citations about the Clinton policy, irrelevant I’m pointing out the claims about the last round of stimulus were wildly optimistic.
And really, you are going to deny that we had a tech bubble? Really?
Maybe you should go read Krugman, he also points out that reasoning, like you did is faulty when it comes to economics. Accounting identities are true by definition thus tell you virtually nothing…at least nothing about how the economy is working. For example,
GDP = C + S + G + (X-M).
Suppose G goes up, does GDP have to go up? Maybe is the honest answer because C could go down so that the increase in G is exactly offset. Or both C and S go down. You don’t know anything about how other factors can respond to change in G. So your entire point about the income accounting identity is worthless ramblings by somebody who knows nothing about economic reasoning. And I know you wont believe me, so let me quote Joan Robinson (Keynes protege by the way, so before you rubbish her you might want to google her first),
And Paul Krugman,
Lastly your personal attacks indicate you have nothing left to argue with.
Oh and regarding your GDP data and the supposed “stimulus” by FDR…
Yeah, that stimulus was very small. What was much more likely the reason for the turn around in economic growth was abandoning the gold standard in 1933. And look, the next year GDP goes up. Because the Fed could start expanding the money supply vs. contracting it.
And you accuse me of not knowing economics when you make such a spectacular display of ignorance. Well done you.
As for the notion that WWII got us out of the depression, the problem is you are counting war production as part of GDP, even Simon Kuznets, the father of income accounting was troubled by that. A tank or guns do not make consumers better off. In fact, building a tank and using it makes people worse off. People die, real property is destroyed and consumer goods have to be given up to make the tank. Trade offs dude, you know that primary thing economics is concerned about. If you take out war spending during the 1940s GDP was flat or declined. That is by the latter years of the war of the war, people were generally worse off than before the war started in terms of GDP that went to them.
So can we lay the stagflation of the 70’s at their feet due to the misuse of the Phillip’s curve and also the failure of the S&Ls?
I know you are probably not going to get that last one, but a number of New Deal regulations basically lead to serious problems in the 1970’s when inflation went up. Regulation Q kept them form paying competitive rates on deposits, so deposits started to dry up. The mortgages they had made in the years prior to the run up in inflation, fixed rate mortgages were dropping steadily in value. That last one might confuse you, so let me help.
You have a mortgage, and I’m going to use easy to understand numbers here, and it is worth $100. It is paying out 5%, or $5. Inflation is, for the sake of this example, 0%, so you are good. Your asset, the mortgage, is making money for you. You have to pay your depositors, 2.5%…so still good. Then the Keynesians muck up inflation when the Phillip’s curve goes “vertical” and increasing the inflation rate does not reduce unemployment and all we end up with is, in our example, 10% inflation.
Now your mortgage asset is deeply underwater (remember you are the S&L, not the borrower…the mortgage, as an S&L, is your asset). The only way you can do anything with it is to revalue it at $50 so that the $5 is now 10% of hte value which means you break even. But wait you still have to pay your depositors 2.5%….oh, wait no. The depositors want their money back because 2.5% with 10% inflation sucks and are going to take thier money to better investments. So now, you have to find extra capital because of all of this. This basically started the S&Ls on their long slow slide into oblivion, compounded by attempts to save the day with “Hail Mary” attempts at investments like in junk bonds via Michael Milken and Ivan Boesky. Granted, they didn’t sputter out their last gasps until the mid-1990s, but that is a brief summary of the problem.
If you can’t figure out something as basic as the fact that we use fiscal multipliers to determine the impact of different government spending initiatives because we already recognize that not all spending produces equal results, then you’re pretty hopeless and frankly not worth much effort.
You base your “rebuttals” on positions that your opponents don’t hold. Not exactly the mark of a genius.
Really, you clearly told me I did not understand GDP, when it was quite clear I noted in my article that “the supply side is modeled as:
GDP = f(K,L).”
It should have been obvious I was not referring to national income accounting identities….which is what you referred too. I can only chalk this error up to inability to read well, a lack of understanding economics, or, the more likely scenario, both.
You also claimed it was stimulus spending that got us out of the Depression when in fact FDR was, if anything, a fiscal conservative and any fiscal spending was rather limited. Further, there is widespread agreement that the biggest policy change FDR implemented that had salutary effects was going off the Gold Standard–this allowed for expansion of the money supply (or go find out how much the money supply shrank from 1929 to 1930). This marks you as a clueless poster.
You also ignore the rest of my criticisms, probably because they are beyond your ability to apprehend them.
And yes, I’m aware of spending multipliers. Problem is that careful research yields estimates between 0.8 and 1.2 which means that since 1 is in that range of estimates, the claims of stimulus are highly suspect.
See for example the work of Valerie Ramey,
Yeah, but you seem to have a problem with the comprehension part of the term.
1929. Learn to read. The stimulus began in 1929, not 1933, BEFORE Roosevelt was President. Hoover increased spending so much that FDR denounced him as reckless. In 1932 alone, federal spending increased 30%. So spare me your desperate attempts to parse the years to fit your theory. My point remains. From 1929 to 1939 — those were the peak years of the Depression, federal spending tripled and GDP increased a whole 10%.
So make up your mind. Did all that stimulus spending work or not? This is the problem: Keynesians always have excuses.
You: 1930’s stimulus spending worked!
Me: No it didn’t.
You: Well, recession, the rest of the world, tariffs, ya know.
Really? So which Keynesian was it who kept spending flat through the 50’s? And if you’re going to take credit for that, you can take credit for the giant mess they left us with at the end — massive inflation, massive interest rates and massive unemployment — conditions that they assured us were mathematically impossible.
Well, I can also give our Keynesian masters credit for 25 years of rapid economic growth, untroubled by the frequent panics that were a feature of the laissez faire era that your conservatives idolize.
As to the 70s stagflation, the Federal Reserve Bank tells me here that there were a number of causes , including the collapse of the Bretton Woods Agreement in 1971 and two huge oil shocks in 1973 and 1979. You leave those out, because it doesn’t fit your narrative of government regulators causing inflation, but there it is(Of course you think you know the Fed’s business better than they do, but I’m not going to indulge the delusions of a Mr. BA. in economics).
I get the savings and loan thing, thank you, but I also get that the real crisis happened not in the 1970s but oddly enough in the late 1980s-AFTER the Great Stagflation.This Wikipedia article puts it this way:
Oops. So maybe your simplistic explanation, where Regulation Q was the main cause of the S&L crisis, was , well, simplistic. Tell you what, sonny boy. Why don’t you go back into hibernation and do some reading. There’s a new bunch of people posting here, and you probably need to raise your game before posting your right wing nostrums, which probably went unchallenged in the old days. Just saying. Anyway, thanks for posting.
You learn to read. Here’s Hoover in his own words:
Does that sound like a guy who is turning on the taps and flooding the economy with deficit spending?
Here is what his Treasury Secretary Anthony Mellon said, according to Hoover:”liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”
That doesn’t sound like fiscal stimulus to me.
Let’s face it, Shlae and McArdle are making stuff up and creating a counterfactual conservative history of the Great Depression. Wake up, buddy, and smell the fiction!
The stimulus spending, including that of World War II, worked just fine. Unemployment was approaching 25 per cent in 1932. by 1945, it was 3 per cent.There’s a reason Roosevelt won four straight elections, and it was not because fiscal stimulus failed.
This is how the Federal Reserve Bank put it:
So, yeah, Keynesianism ruled the economic roost for the three decades following WW2, and various policy mistakes, plus outside economic shocks like the oil price surges of 1973 and 1979, led to the Great Stagflation.
It’s important to realize that there is much more to Keynes than just fiscal stimulus, despite your caricature. Keynesianism isn’t perfect, either. Its just much better and more realistic than Austrian economics and various other conservative economic ideologies.
Federal outlays as a percentage of GDP:
1930 – 3.4
1931 – 4.2
1932 – 6.8
1933 – 7.9
1934 – 10.6
1935 – 9.1
1936 – 10.3
1937 – 8.5
1938 – 7.6
1939 – 10.1
1940 – 9.6
1941 – 11.7
The federal government had a budget surplus in 1930. Not exactly what a Keynesian would have done in response to a depression.
Comparing Hoover to FDR is historical revisionism at its worst.
To be fair, the collapse of Bretton Woods was largely a policy failure. Not a failure of Keynesian per se, but its collapse supports the argument that managed exchange rate regimes have to be market driven if they are to avoid failure. (All things being equal, industrialized nations are better off with floating exchange rates as we have today.)
@Andy: “Of course Krugmans response is that the stimulus was too small, but that’s usually his response whenever GDP doesn’t perform as expected.”
He was saying that beforehand.
Steve, anybody who quotes Kling has clearly lost the argument.
@MarkedMan: “Steve, what do you say to the argument that, unlike every other modern era recession, Federal outlays remained flat and State outlays actually declined? ”
Considering that he’s lying about what Krugman wrote, he says nothing, because it’s an inconvenient fact.
@Guarneri: “As you can see, not much has changed here. Obama saved the world (but for some confounding reason this economic Superman has been satisfied to preside over the most tepid, unbalanced performance for years now). Krugman is great. Spend more money. And, spend more money.”
Ah, Clone of Steve, reciting lies from an alternate universe.
Yeah, and also to be fair, Hoover did a few fiscal-stimulus-type things, like the Reconstruction Finance Corporation. But he cancelled out the benefits of those things by raising taxes. Really sustained stimulus began exactly when most historians say it did-with FDR.
But then we are interested in discussing evidence-based policy-not in creating counterfactual conservative mythology focused on proving that liberal economic programs don’t work.
Note such sentences as these:
Ponder that for a bit. WW2 spending had as its purpose the defeat of Nazi Germany and Imperial Japan. For rational people,defeating Nazism and Imperial Japan was a great good. That war spending eliminated unemployment was a related great good. But all the anti-stimulans can see in the war spending is unproductive government waste that was useless to consumers. That’s how far down the rabbit hole that these guys have gone.
At this point, we have to conclude that the head is dead and that further rational discussion cannot be had with these folks. They are like the YECs of economics.
Re: “As for the notion that WWII got us out of the depression, the problem is you are counting war production as part of GDP…”
The author of this post is doing a great job of establishing himself as being adept at building strawmen and not understanding what he reads.
The 1940s war spending created full employment. A lot of problems get solved when everyone has a job.
Military spending is not the ideal way to get there, but I never claimed that it was. However, the lesson from this was not that military spending is oarsome but that FDR should have spent more during the 1930s to get the economy back on track, rather than waiting for the Nazis to force his hand.
(Hence, my earlier comment: “What got the country back to full employment was a massive deficit spending program in response to the armed conflict in Europe. In retrospect, FDR didn’t spend nearly enough when he should have, but they were in virgin territory and didn’t know then what we (or at least some of us) know today.” Next time, I’ll type more slowly.)
It’s pointless to have a discussion with people who claim that you said Y when you’ve typed X.
It’s that word comprehension that conservatives can’t seem to wrap their mind around. The US educational system does a great job in making sure everyone has the basics down as far as the 3Rs go, however they don’t go far enough with the comprehending portion of educating the populace. If they did a better job we’d far less conservatives.
@Steve Verdon: “It is implicit in macroeconomics. Spending is spending, what it is spent on doesn’t matter.”
Wow! That’s rather bad, actually.
@Barry: Steve is ignoring endogenous growth models for some reason. I guess he’s never built a basic AK model, much less solved for a Hamiltonian. I’d say that his economics is about 30 years behind the times except that Solow was hinting at these things in the 1950’s.
Steve must have dozed through Fiscal Multiplier Day in Macroecon 101.
There are debates over the calculation and applicability of multipliers and there are those who are skeptical of fiscal policy. But nobody who argues in favor of macroeconomic management is claiming that all spending has equal value. If what Steve was saying was true, then no one would bother to calculate the differing multipliers of various programs.