Feb 1st 2012, 15:05 by M.S.
BEFORE his big speech last week, liberals advised Barack Obama to stay away from arguing about the merits of the American Recovery and Reinvestment Act (ie, the stimulus bill of 2009). While independent economists generally agree that the stimulus saved or created somewhere in the neighbourhood of 2m jobs, it remains unpopular with the general public; the sense was that there was no point engaging on this issue, regardless of the merits. Now ProPublica's Mike Grabell is out with a book-length investigation of the stimulus, titled "Money Well Spent?"
In an interview last week on NPR's Fresh Air, Mr Grabell said the stimulus effort had its good points and its bad points. On the one hand, money funneled to states to forestall budget cuts saved huge numbers of jobs for teachers, firefighters and other employees, and delayed cutbacks in infrastructure spending. He subscribes to the general wisdom that unemployment probably would have hit 12% in 2009 rather than 10% without it. On the other hand, the administration had to drop an idea that almost certainly would have made sense—building a national electric smart grid—because the jurisdictional and red-tape problems made it impossible to implement fast enough. Instead the administration decided to invest in clean energy; but those investments placed their bets too heavily on individual companies, some of which then went bankrupt. In an excerpt from the book on the electric car and battery industry jump-started by stimulus funding, Mr Grabell says the jury is still out: without a rapid pickup in demand for Leafs and Volts (which in turn depends on a big increase in electric charging stations), America's electric-car industry will probably fail to hit critical mass, and it'll wind up relocating to South Korea or China like every other manufacturing industry has.
So, here's the thing. The debate we had about the stimulus probably should have been a lot like the book Mr Grabell has written: a detailed investigation of what does and doesn't work in stimulus spending and whether the government really can jump-start a promising industry through investments, tax breaks and industrial policy. But that wasn't the debate we had. Instead we had a debate about the very concept of whether the government ought to spend money counter-cyclically during a recession in order to keep the economy from collapsing, or whether it should tighten its belt along with consumers and businesses in order to generate confidence in the financial markets and allow markets to clear. We had a debate about whether governments should respond to recessions with deficit spending or austerity.
That was the debate we had. And what's interesting about this particular moment is that while Mr Grabell is writing about what did and didn't work in the stimulus, and Mr Obama is staying away from the topic for political reasons, out there on the barricades what's happening is that the entire argument that governments should engage in austerity appears to be collapsing.
Item 1: Over the past month, Paul Krugman, Brad DeLong, and Simon Wren-Lewis engaged in an interminable duel with Tyler Cowen, Scott Sumner, sort-of Karl Smith (occupying as usual an esoteric position not easily placed on the ideological grid), and probably some other people I'm forgetting—over an old argument by John Cochrane claiming that the multiplier effect of government stimulus spending probably ought to be zero. The argument by Mr Cochrane was a critical document in the stimulus debate, because it was an articulation in more-or-less public discourse by a well-respected economist of a mechanism through which increased government spending could fail to raise GDP or increase employment at all. Essentially every working practical economist and forecaster believed that the stimulus, like any other government spending, would raise aggregate demand, GDP, and employment. Republican politicians were arguing that it would not, and Mr Cochrane backed them up.
Two weeks ago, Mr Cochrane responded to the argument in a fashion that suggested that either he has changed his mind, or he never thought what the expansionary-austerity people claimed he did in the first place.
Let's be clear what the "fiscal stimulus" argument is and is not about.
It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits—one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.
Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it... Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work.
Okay. There's a lot of nuance here. But as Noah Smith pointed out in response, if the basic gist is that governments should run deficits in recessions to smooth consumption, deliver social insurance, and take advantage of low interest rates to invest in infrastructure...then the policies Mr Cochrane is recommending here are to the left of anything Congress is contemplating passing right now.
Item 2: Niall Ferguson has spent the last three years arguing, contra Paul Krugman, that America is courting disaster by allowing deficits to balloon its national debt to such high levels, and will have to reign in spending or face a crippling rise in interest rates. Last week, in an interview with Henry Blodget, he admitted defeat.
BLODGET: That is a shockingly optimistic view of the United States from you. Are you conceding to Paul Krugman that over the near-term we shouldn't worry so much?
FERGUSON: I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it's no longer credible. But I didn't think that point was going to be this year or next year. I think the trend of nominal rates in the crisis has been the trend that he forecasted. And you know, I have to concede that.
I could go on. This comes on top of criticisms of austerity policies from the IMF, intense pressure at Davos on the German government to countenance increased spending by northern European countries and looser monetary policy at the ECB, and so forth. To some extent what we're seeing here is the backwash from the euro-zone crisis hitting the American economic debate. If you think that the German-led European solution to the euro-zone crisis is deeply confused, and a lot of Americans do, then you have to be troubled by the ways in which it resembles what austerity proponents would have liked America's response to the financial crisis to have been. Americans are starting to recognise that our recovery is further along than other advanced countries' in part because the way we handled the financial crisis wasn't really so awful. And that includes the stimulus.
The presidential election this year is in large measure a referendum on Barack Obama's economic policies. In the broad terms in which it is seen by the electorate, it's a debate over Keynesian deficit spending versus expansionary austerity. The 2010 elections took place at a moment when people seemed to have lost faith in Keynesianism. The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity.
(Photo credit: AFP)
In this blog, our correspondents share their thoughts and opinions on America's kinetic brand of politics and the policy it produces. The blog is named after the study of American politics and society written by Alexis de Tocqueville, a French political scientist, in the 1830s
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Speaking about stimulus being not so efficient do not forget what markets feel when they face: political instability, social unrest (with possible riots included), sharp increase in crime and prison population... and long term costs associated with all these nice things. Do we want it or not since September 2008 America and the World had to deal with a return of "Depression Economics" as Mr.Krugman calls it. As I feel it we all must give him a credit for at least finding a proper name to the stuff we are discussing here.
So Ferguson disagrees with a more knowledgable 'liberal' commentator, makes a bunch of provocative comments, gets a load of publicity, then when it turns out his arguments are nonsense, claims that he's been misrepresented. His self-publicising tricks are getting tiresome.
There seems to be a lot of confusion about what Keynesians believe. They do believe that money spent on even worthless projects increases aggregate demand in depression-like economy, and that government spending to increase aggregate demand is valuable or even essential to returning the economy to state with a full employment equilibrium.
Keynesians do NOT believe however, as some allege, that money should be thrown away on worthless projects just to create greater aggregate demand.
Instead they argue that the added benefit of aggregate demand moves a whole lot of spending from the negative marginal value to the positive. They also argue that we should be quick and aggressive about seeking these spending opportunities, since the economy will only slowly if ever return itself to full employment equilibrium without additional stimulus.
Now ... is that so complicated?
All good stuff. Although the term "expansionary austerity" ought always to be preceded by "the myth of"
M.S. has conveniently left out the next part of Cochrane's post:
'Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course. A good test: If China offers to deliver an infrastructure project at half price, but no "jobs" will be "created," do you still want it? If you say "yes, even more" than it's infrastructure. If you say "no, we need to create jobs" then it's stimulus.
The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare. Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. Yes, endorsed by Krugman because it "feels like a job" (his back must not hurt like mine does) and by DeLong: "anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all."
The "targeted," "infrastructure," and the whole worthy apparatus to monitor the wisdom of "stimulus" spending (see John Taylor) is, in the Keynesian model, beside the point, or at best a smokescreen to befuddle the ignorant masses. It would in fact be better if the money were stolen. Thieves have high marginal propensity to consume, and they can get that "spending" out fast in an economy with few "shovel-ready" projects.'
Cochrane goes on to point out that vocal Keynesians like Krugman and DeLong talk as if there were no such thing as the "broken window fallacy" whilst having the audacity to claim that they are disciples of a "general theory" of the economy, when indeed it would take a very "special theory" to explain why such a basic and universal law of economics sometimes ceases to hold, putting us in a "topsy-turvy world" (Krugman). He also emphasises that the New Keynesian models that they draw upon for intellectual justification have little to do with Keynes' original dogma - they simply take the basic insight of short-run monetary non-neutrality and demand-side recessions and attempt to justify it in a thoroughly modern and rigorous way, leaving us with something that can hardly be presented as populistically as a "Conscience of a Liberal" column.
"If you think that the German-led European solution to the euro-zone crisis is deeply confused, and a lot of Americans do, then you have to be troubled by the ways in which it resembles what austerity proponents would have liked America's response to the financial crisis to have been. Americans are starting to recognise that our recovery is further along than other advanced countries' in part because the way we handled the financial crisis wasn't really so awful."
I thought theirs was a different financial crisis, rooted ultimately in the fundamentally unstable nature of the current Eurozone arrangement itself. Calling the response to it thus far confused, as many indeed do, was supposed to be a comment on how none of the countries can be safe from the storm until the basic problems are addressed - Democracy in America has itself remarked on this.
"The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity."
We'll see about that.
Saturos, your reference to the broken windows fallacy is a complete mischaracterization of the Keynesian position. That's not at all what they believe...
I should be more specific. Nobody is advocating spending with no concern for value or advocating thievery or any of the other nefarious things Saturos claims Keynesians believe.
As Krugman, Delong and Keynes himself all explained explicitly, the burying money in holes plan isn't meant as a serious proposal but rather an illustrative one, and that it is quite desirable to buy valuable things vs not valuable things with stimulus money. Where Saturos sees a smokescreen he's in fact looking at a straw man, in this case one Cochrane has thrown up to hide the fact that he's completely changed his position without admitting his previous one was incorrect.
To argue the stimulus saved the unemployment rate 2% is a bit like arguing about the butterfly effect--theory, not proof.
Even if it did, however, to spend billions and only shave 2% off of unemployment is a wretched return on investment. No one can credibly argue that the billions spent on the stimulus would not have been more effectively put to use in the business community.
The author almost hits the mark in his mentioning of the inability of government to work on electric smart grid and its failure at venture capitalism. Government is not suited for quick, decisive, and risky projects.
Government is good at paving roads and setting up regulatory schemes which promote growth. If it would focus on reinvigorating its expertise in those areas rather than dissipating its energies elsewhere we would all be better off. This does NOT mean overregulation.
And here I thought you were going to say: "No one can credibly argue that the billions spent on the stimulus would not have been more effectively put to use [by]...sending checks directly to taxpayers"
The 'business community' DID get the lion's share of of the stimulus, whether from the Fed's discount window, or from one-off tax breaks. How well has that worked? I think you answered that yourself.
Also, I recall a particularly decisive and risky project (if not quick) that changed world history: a little shindig called The Manhattan Project. That project illustrates what we *should* be talking about: Rather than argue what government is good at, we should be arguing about how best to build public institutions of quality, so that ANYTHING the government does is 'good'.
> Even if it did, however, to spend billions and only shave 2% off of unemployment
> is a wretched return on investment.
What an amazingly informative sentence. It tells everyone reading it many things at one time:
1) You have no idea of the scope of a 2% unemployment difference.
2) You know absolutely nothing about economics.
3) You have absolutely no empathy.
4) You haven't the foggiest idea how deficient you are in any of these areas.
Oh, and lest we forget, 5) You're a Republican.
Oh... but I repeat myself.
Question to Krugman and the other neo-chartalists:
If fiscal stimulus is such a success why is it that the unemployment rate is higher in fiscally stimulated USA than in the UK?
Why is it Krugman, when commenting on the UK, harps on about the 1930s. There wasn't a depression in the UK in the 30s - it was worse in the 20s.
I suspect Krugman is yet another superannuated witch doctor.
Are you sure there wasn't a depression in the UK?
"By the end of 1930, unemployment had more than doubled from 1 million to 2.5 million (20% of the insured workforce), and exports had fallen in value by 50%"
I should probably be crucified for citing wikipedia, but this is a quick response to a bad comment.
http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom
You should be crucified for more than that.
The UK economy started to stabilise in 1931 (after dropping the gold standard) and recover properly in 1933. It should be in your article.
"The industrial areas spent the rest of the 1920s in recession, and these industries received little investment or modernisation. Throughout the 1920s, unemployment stayed at a steady one million."
"This led to a modest economic recovery, and a fall in unemployment from 1933 onwards. Although exports were still a fraction of their pre-depression levels, they recovered slightly."
"Unemployment began a modest fall in 1934 and fell further in 1935 and 1936, but the rise in employment levels occurred mostly in the south"
Saying there was no depression at all in the UK is disingenuous. Instead of telling me what should be in there why not actually read it first.
Uh, because there are hundreds of other relevant differences between the UK and the US acting as variables?
Uh, because there was still a depression in the UK in the 30s, even if it was not as bad as it was in the 20s?
Neither yours nor Frank O's answers cut the mustard.
1930-31 was still part of the 20s depression. After that there is no way you can still call it a depression with a straight face if you have a grasp of the facts - even if it is a subjective definition. The UK experience was significantly milder than in the US and growth recovered much earlier. The UK even achieved record (to that date) growth in the latter part of the decade. Sorry if the truth hurts but Krugman needs to be busted on his mythical datapoints.
This article (http://elsa.berkeley.edu/~cromer/great_depression.pdf) is much better:
"The British economy stopped declining soon after Britain's abandonment of the gold standard in September 1931, though genuine recovery did not begin until the end of 1932."
Hope that helps.
According to table 1 in the linked article recovery began in the US and Canada in 1933. Although Britain didn't experience as heavy a drop, at 17% compared to over 40% in the North American countries, due to its already recession afflicted economy starting from a comparative low point that doesn't mean it did not experience a depression as well. That is an excellent article though, thank you.
Britain also had extensive military build up in '37 and onward which influenced its recovery.
The stimulus in America might have been effective if it had been "Top Down" and generated to primarily small banks for mandatory distribution to "Small Business" for local not offshore consumption. Unfortunately more than half of the Stimuls went to Public employees and Unions while the rest went to big business or dissappeared with little effect.
Greece is an interesting comparison because they have more than 50% hired by Federal Government and increasing debt. America has hired more Federal Governemt employess at a historic pace and acquired historic debt. Hello greece
Eh? That's a Mythtake. America has been shedding Federal workers at a rapid clip. Public sector employment has been declining and it's been private sector employment that's increasing. If public sector hiring was at the same pace as private sector we'd have knocked another point off the unemployment rate by now.
Eh? That's a Mythtake. America has been shedding Federal workers at a rapid clip. Public sector employment has been declining and it's been private sector employment that's increasing. If public sector hiring was at the same pace as private sector we'd have knocked another point off the unemployment rate by now.
Would it kill you to use an internet search before making such claims?
Neither of them is true. Not even close...
Stimulus I and II were not great examples of fiscal legislation, and they expanded or created "programs" not "projects". They were good to the extent that they saved some number of teacher/firefighters/police jobs, if the folklore is to be believed. All in all, those who read the bills could see stimulus for what it was - that's why we're done with it, as citizens. The thing that didn't happen was a failure to get construction/housing turned around. You can pour stimulus money down every rabbit hole, but when housing tanks and our political leaders can't summon the will to deal with it, it's just good money after bad.
Both stimulus and austerity (in the sense of so-called ‘expansionary austerity’) in the above sense aim at encouraging the aggregate demand to increase whether directly or eventually.
The biggest flaw lies in there. It is completely wrong to try to target the aggregate demand as long-run policy. The flaw comes from applying the loanable-funds theory to analyses of long-run determinants of interest rates, analysis that overlooks or makes light of speculation or the propensity to hoard.
According to the classical economics tradition, the aggregate demand is the aggregate-supply function, and thus every single level of employment, whether full employment or under employment, is considered to be at a neutral state of equilibrium. The tradition thus insists that an economy can get close to the only stable state of equilibrium, which is at the state of full employment, through encouraging competition towards the state of full competition. That thought completely overlooks how and why full competition is an unreal state, or a state that should not be materialised, in the real world.
One of the most important determinants that hinder the economy from encouraging competition is irreversibility of durable capital-goods such as capital equipment. Those durable capital-goods could not be eliminated further than a certain extent as part of the essential characteristics of the real world. That is why there are the notions of the marginal efficiency of capital and user cost. When the schedule of the marginal efficiency of capital has not shifted much, a lower marginal efficiency of capital requires a lower interest rate that would add upward pressures to the speculative-demand for money or, in other words, the propensity to hoard. This discourages the transactions-demand for money, which is considered to be an increasing function of NGDP when the income velocity of money is considered to have been unchanged. Unless the money supply increases in some sufficient manner to make the transactions-demand for money outrun the speculative-demand for money, the NGDP will stagnate by that much. Still, monetarists, such as Ben Bernanke, insist that the transactions-demand for money may increase in any way as long as the NGDP growth is targeted. But, monetarists are then overlooking how the increasingly encouraged speculative demand for money will result after the interest rate (i.e. complex of all the nominal interest rates in the present open market) has reached the lowest possible level in an attempt to meet a marginal efficiency of capital at a point that would prop up the aggregate investment. The situation is a true liquidity-trap in a closed economy and a pseudo liquidity-trap, which Paul Krugman calls a liquidity-trap, in an open economy. In an open economy, the pseudo liquidity-trap encourages speculative asset-lending abroad or speculative asset-purchasing relative to foreign assets, which will someday face insolvencies in the long run, because interest rates cannot count the insolvency risks in full. (Uncertainty lies in here). Still, the economy at home, and either employment or wages, will keep stagnating despite the low interest rate. That as a whole is what Japanisation really is. A long period of Japanisation is foreseen unless we shake off the classical economics tradition.
The central authorities (i.e. the government and central bank) should not benchmark NGDP or aggregate demand when it comes to long-run policy and so called fine-tuning. It should instead prioritise how to improve the schedule to the marginal efficiency of capital as long-run policy, because the notion of NGDP cannot be sufficiently precise with no common physical unit to measure all the goods and services or calculate the net increment of capital equipment within a period. And, there is no such convenient physical unit – in the real world. Attempts to improve the marginal efficiency of capital are what the US should really do – whether by the team Obama or that of a Republican president.
Still, the central authorities must make the most of stimulus and austerity, or aggregate-demand targeting, as short-run policy only to regain market-confidence at large market-fluctuations. They should be implemented with severity and compactness to provide a sufficient surprise to change the then market sentiments. Austerity for short-run policy may sound bizarre, but we may expect austerity with some determined severity, compactness and meticulosity (i.e. meticulosity as a policy that, unlike monetary stimulus typically, requires a certain length of agenda) to work efficiently if we compare the case of Poland (i.e. The Balcerowicz plan) with that of Russia during the early 1990s. The US economy needn’t implement this form of austerity at all, but Italy and Greece must as part of the first step to later move to the second step that is a long-run policy package to improve the marginal efficiency of capital.
I cannot help supplementing my above post:
Worse, the Fed has announced that it should more closely benchmark inflation at around two percentage points.
The inflation targeting will not work efficiently as a long-run policy. The reasons are what I have just said above: It will, instead, work as part of the Bernanke put, attempt of encouraging either NGDP or employment. The NGDP and employment may or may not grow at a sufficient pace with the policy, but it will certainly encourage the speculative-demand for money to outrun the transactions-demand for money at the same time. Much of the increment of the money supply will be used for purchasing speculative foreign assets and speculative domestic assets relative to speculative foreign assets. That policy will thus only exacerbate the Japanisation, or pseudo liquidity-trap, of the US economy.
The Fed needn’t go that far. It has only to maintain the low interest policy without benchmarking NGDP or inflation in a clear manner, and help maintaining liquidity at occasional large market-fluctuations that will come all of a sudden. That is what the Bank of Japan has been doing since Governor Masaaki Shirakawa assumed the office despite attacks by his opponents. That is the maximum that a central bank could and should do. Monetarists get too far instead.
As I stated in the above post, it is the government that should do the further jobs: Improving the schedule of the marginal efficiency of capital is an act of resource reallocation (e.g. geographical restructuring at home and institutional reform on financial- and capital-markets) to eventually achieve a more marginal-efficient state of economy, act that market mechanism or the invisible hand cannot conduct by itself. It is largely because of irreversibility of durable capital-goods such as capital equipment and various fixed factors of production such as your personal lives and even families. The classical economics tradition may insist on reducing irreversibility of durable capital goods and cutting fixed factors of production to some sufficient level to get close to the state of perfect competition, but one with common sense must understand that assertion is as impractical in the real world as communism is – in the sense that both the assertion and communism are based on the unreal state of perfect malleability in which one can move without delay or conflict every single economic variables relative to real factors such as rare resources, wages, people, family, local community, country, etc.
In the process of policy-making, we should not talk of an unreal task such as how to get close to perfect competition to an extent theoretically considered sufficient but actually further than the realistic range. When the extent is required, its background theory, no matter how coherent it may be within itself, is based on some unrealistic presumptions that cannot be true for the real world.
"jump-start"
If I never hear this over used term again, it wont be soon enough. The financial markets are too big for their britches. The tail wags the dog. Too much of the eocnomy consists of money circulating in the casino market which has nothing to do with the economy that sustains people's lives and prosperity.
BTW isnt expansionary austerity only established to work under full employment, when gov borrowing competes with private borrowing?
Progress can't always be measured, for instance when it consists of policemen or teachers NOT losing their jobs, but it is still an important type of rescue. Perhaps the word "stimulus" is misleading for such actions that help to sustain the status quo, but the money serves a vital purpose nevertheless.
The passage you quote from Cochrane's blog looks strikingly similar to the introduction to his November-2010 paper entitled "Stimulus RIP".
This paper is linked from the post you refer to, and seems to argue against any recent change of mind.
Yes, and also I believe Cochrane's quoted statement
"Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it."
is misunderstood by the article writer. He's saying if something is valuable to do, do it if its really needed. And low interest during recessions may be taken advantage of for valuable projects.
I do not see where he is implying that projects should be undertaken just for the sake of stimulus.
This is a little off topic, but its possible if the banks and AIG had not been bailed out, home mortgages could have been picked up by smaller banks for pennies on the dollar. The smaller banks would have been more than happy to reduce the principles and still made a killing.
Home prices would have crashed to levels that people could afford, and the recovery in housing would be fully underway today. Instead, the government tries to keep housing prices propped up. Houses are not worth as much as the government induced bubble made them, so let them fall dimwits.
Right on. And the Federal Government would have had an auto-pilot stimulus plan eating the GSE's share of the losses. Unemployment--at least for lawyers and accountants--likely would have been nonexistent. The bankruptcy process would require armies of those folks and the clerical support that comes with them.
State and local governments, on the other hand, would probably be melting even more quickly given their shortsighted dependency on ever-increasing property tax revenues (and tobacco settlement money). Perhaps the Fed might have seen fit to deploy the many trillions it used to prop up banks instead to a reasonably long (but finite) series of municipal debt purchases.
The beauty of all this is that the debt destruction would have cleared the way for expansionist Fed policy with far less risk of inflation.
Banks are put into receivership. That process already exists via the FDIC. Its a much quicker settlement of a bank's assets than bankruptcy.
So as house prices shot the moon, state and local taxes shot the moon too? Too bad for state and local governments then. They should cut back expenses. Bad idea for the FED to bail them out.
Economic disaster resulting from bank failure is way overblown by the so called financial elite. Its a form of extortion. (visions of Treasury Secretary Hank Paulson insisting TARP had to be passed THAT DAY). Even if they are right, better to let the big banks fail now and take our pain before they get even bigger. The 6 largest banks are now 40% bigger than before the financial crash. So now they are even more too big to fail. Great.
The socialist Obamic Health care is a gigantic black hole.
What a very nuanced and thoughtful non sequitur...
Keynes has never been given a fair trial. His advice to the UK for post-war government finance called for separate operating and capital budgets. The operating budgets were to be balanced on average. Any necessary jobs stimulus was to be part of the capital budget, thus spent on projects with a real return. If he had lived to see what was done in his name, I am certain that he would have said, "If that is Keynesianism, I am not a Keynesian."
That we have run huge deficits in good times and then monstrous deficits in bad would have horrified Keynes. Austerity is for the fat times, when government ought to be pulling back to ease the pressure on available funding to avoid crowding-out. I have found it incredible, usually nonsensical, that anyone can seriously argue that government ought not behave counter-cyclically in both good times and bad.
bampbs, Surely you understand the risks of "counter-cyclical spending". Some countries (especially those with proportionately large banking industries like in the UK) cannot afford to be so exposed to the vagaries of the bond market. Just a 2% rise would rattle the market.
You are right that Keynes has never been put into practice with 100% consistency, but I will let you in on a secret--it never will be. Human nature unfortunately results in people being less concerned with spending during the good times prompting governments to run deficits rather than pay back their recession debt.
bampbs, is there a primary source that I can refer to for this? Is it in his General Theory?
I read it in the Cambridge Companion to Keynes. I'll find it and post another reply.
Yes, but markets are rattled by economic collapse, too. If governments had some credibility that they would follow through for the entire cycle, it would be better, on average, for everyone.
But we are talking about politicians . . .
There may be a way of imposing budget discipline over an entire cycle. Not that I'm betting on it. 100% consistency isn't necessary, but until the '80s we did a lot better than we've done since. So long as debt grows no faster than GDP, the situation is sustainable, and from the end of WW2 until 1981, the debt as a percentage of GDP decreased through every administration of both parties, down to around 30%.
Keynes as economic symbol is a diversion from the real problem. It's politicians, Left and Right and in between, who make a financially prudent economic balancing role for the government impossible. And behind them, their contributors and constituents.
As you point out, it is the fiscal restraint when times are good that has always been ignored.
The Cambridge Companion to Keynes (2006), ed Roger E. Backhouse and Bradley W. Bateman; Chapter 6, George C Peden, Keynes and British Economic Policy; p 114:
"As in the 1930s, the Treasury stressed the practical problems
of using public investment to offset variations in private
investment. As a group of leading officials concerned with employment
policy noted on Keynes’s support for the Economic Section’s
proposals: ‘the difference of view is between economists assessing
what they think is theoretically reasonable or possible, and
people who have had long experience of guiding, stimulating
and retarding works undertaken by public authorities. The economists
tend to ignore the intractable time-lag’ (Peden 2004: 310).
As for the Economic Section’s suggestion that budget deficits
should be used to stimulate demand, Hopkins commented that
there was a political danger of ‘deficits becoming fashionable on
many occasions and surpluses on none’ (Peden 1983: 293). Keynes
himself preferred balanced budgets for central government’s current
expenditure, with public investment programmes in a separate
capital budget (Skidelsky 2000: 273–6; Wilson 1982). On the
other hand, he was prepared to contemplate deficit finance for
current expenditure, once investment fell to a much lower level
than would occur for some years after the war (Booth 1983: 106,
114–16).
The outcome was the 1944 White Paper, Employment Policy
(Cmd. 6527), which employed a Keynesian analysis of macroeconomic
demand being the sum of private consumption, private
investment, government expenditure, and the balance between
exports and imports. However, it was pointed out that an expansion
of internal demand would not be an appropriate remedy for loss of
exports and might lead to inflation. A successful employment policy
would depend on international collaboration to ensure expanding
export markets, and also on British industry’s ability to compete in
these markets and in the home market. Public investment would be
planned to offset fluctuations in private investment, but the term
‘capital budget’ was avoided, in case politicians were tempted to
place in it current items that ought to be financed from taxation. As
a second line of defence against unemployment, private consumption
could be maintained, perhaps through variations in social
insurance contributions or rates of taxation. It was made clear,
however, that while the budget for central government current
expenditure need not balance every year, it should balance over a
longer period."
I just gave the chapter a quick scan, but the quote above jumped out. I would assume that the most accessible primary source would be the 1944 White Paper, Employment Policy (Cmd. 6527) referred to in the text above.
When is the last time any country's fiscal policy actually involved the anti-cyclical retirement of debt? Really?
New Zealand, actually. From 2005 - 2008 their net public debt decreased from 23.9% of GDP to 17.7% of GDP, before increasing as a result of fiscal stimulus, the recession, and the Christchurch earthquake.
I believe Australia also followed the same pattern.
Norway has done it, and Canada, the only G7 country that never ran a deficit in 30 years, is doing it.
USA: 2000.
I doff my hat to Canada and Norway...and New Zealand...and Korea, Finland and Sweden...and to the rest even though those examples seem less compelling.
Although the electoral cycle temptation for politicians to buy votes with taxpayer money is almost irresistible, there may be enough counter examples to shame the rest of us into good behavior. I hope so, but don't live in hope.
This is all just talk. There is no evidence that stimulating an economy works. In fact it hasn't worked. Why keep trying it? It makes no sense.
http://www.economy.com/mark-zandi/documents/JEC-Fiscal-Stimulus-102909.pdf
I find Zandi more covincing than a GDP graph of one tiny country. Is that really the best you can do to support your argument ?
Is germany a big enough country?
tradingeconomics.com/germany/gdp-growth-annual
There is no proof of stimulus working. Zandi and others opinions doesn't make it so. The problem is, you can show countries that recover doing nothing, implementing stimulus, and implementing austerity. That's the problem with macroeconomics. Its not a science, and the variable keep changing. Peoples reactions to the same stimulus changes over time. Its central financial planning with unintended consequences.
I advocate deficits in the present environment. What concerns me is how difficult tightening budgetary deficits is in practice. This is where the criticism of Obama's should bo focused. Good fiscal stimulus is spent on projects, rather than programs. Projects have a (relatively) fixed budget. Once funds are allocated, that is that (think Interstate). The problem with programs is that once granted, they (think 99 weeks unemployment benefits) are politically very difficult to rescind (groups lose benefits, employees are lost). The end result is a semi-permanent expansion in the size of government, which by design is not responsible austerity. Once deficits are ingrained into system, they are very very difficult to remove.
Look at Europe for examples - Greece is going to run a larger budget deficit this year than last. Spain was initially going to have 4.4% deficit in 2012, now 6.7% with 6.3% forecast in 2013 (or maybe that was 2011 and 2012 - doesn't reall matter much). Republicans deserve (some) credit for changing the focus of the discussion in Washington to how the deficit is to be cut. Their rhetoric and tactics were deplorable, but the end result is constructive.
Bottom line is that I will remain extremely sceptical of tough talk on spending until I see some actual follow through (ie see the deficit start falling meaningfully). Assuming trend growth of 1.5% and inflation of 2% implies that a sustainable deficit is 3.5%. Less than that if they want to keep some fiscal room for any future recession/unforeseen shock. That is a long, long ways from the 9-9.5% clip we are presently running.
"Greece is going to run a larger budget deficit this year than last. Spain was initially going to have 4.4% deficit in 2012, now 6.7% with 6.3% forecast in 2013 (or maybe that was 2011 and 2012"
But these are ratios and the denominator - GDP - is falling fast. The absolute deficit - in euros, may be rising because of the 'stabilsers' (lower tax receipts, higher welfare payments) but not by as much as the percentages suggest.
Like others (including Krugman) I find it very hard to see an exit that does not involve quite significant inflation - either within the Euro-zone or outside.
Re: deficit figures, that is a very good point.
Agreed that inflation is the inevitable outcome. Where inflation is going to come from in a liquidity trap is another question altogether..
"Projects have a (relatively) fixed budget. Once funds are allocated, that is that (think Interstate)."
http://en.wikipedia.org/wiki/Big_Dig
Germany, too, will run a larger budget deficit in 2012 than in 2011, as Finance Minister Schäuble recently announced. I would like to see the prosperous Germans to set an example by first REDUCING their own deficits before they expect such action from the much poorer Greeks.
Unemployment in the euro zone is currently 10.4%. While that's high, by European standard it's not disastrous. Structural unemployment is high over here. Prior to the recession, it hit a low of 7.3% in March 2008. So it's elevated by only 3.1%. Meanwhile, unemployment in the US is officially 8.5%. The unemployment rate in March 2008 was 5.1%--a difference of 3.4%. Unemployment rate actually hit a pre-recession low of 4.4% in May 2007. The US is actually a full percentage point behind the EZ in reaching full employment.
It should be noted too that much of the decline in the US unemployment rate came as a result of declining labor participation. As the recent CBO report admits, at a more realistic participation rate, unemployment would be one and a quarter point higher. Participation actually went up in the EZ, in contrast.
Despite the trillions of dollars spent on fiscal stimulus, America is worse off than an economic zone in the midst of an existential crisis. If that's the cure, then I welcome the desease! While austerity led to some short-term hardships, at least Europe's house is in better order financially. By 2013, Italy should have eliminated its budget deficit. Germany is projecting a surplus as well and is planning to cut taxes.
"Despite the trillions of dollars spent on fiscal stimulus."
Exaggeration will get you nowhere. It was, is, and always will be a half a trillion dollars. Unless you are defining dollars spent in terms of the difference between taxes collected and dollars spent, in which case I agree with you that we should not have passed the Bush tax cuts...
What is disastrous is not the 10,4% average unemployment in Europe but its imbalance: 4% in Austria, 22% in Spain. Contrary to the promises of equal prosperity for all that were made 10 years ago at the introduction of the Euro, the imbalance has now spread into all aspects of everyday life: poverty, unemployment, standard of living. The rich countries got richer, and the poor got poorer.
You are right but describing only the symptoms. The underlying problem of "The rich countries got richer, and the poor got poorer" is the decreasing competitiveness in the countries in trouble (except for Ireland). That's why Europe's problems differ so much from those in the US: The US does not have the same problems with closed professions, inefficient welfare, excessive red tape etc. A fiscal stimulus might have solved short-term growth problems in Europe, but not basic ones. Moreover, the US can afford to increase defitits for fiscal stimulus even when deficits are already sky-rocketing due to the dollar currency status, Europe cannot.
Such disparity in unemployment rate exists in the US. It's 3.3% in North Dakota and 12.6% in Nevada. Also, I would take the Spanish figure will a grain of salt. Spain, much like Italy, has a large shadow economy (~20%). High payroll taxes and rigid employment rules mean many choose to be paid under the table. The situation is bad, but not the catastrophe that the numbers indicate.