Category Archive for: Fiscal Policy [Return to Main]

Tuesday, May 13, 2014

'Asymmetric Misinformation'

Paul Krugman:

Asymmetric Misinformation: A follow-up to my post about Jaime Caruana at the BIS. One other thing that struck me was his claim that

policymakers respond asymmetrically over successive business and financial cycles, hardly tightening or even easing during booms and easing aggressively and persistently during busts

Is this true? Anyway, is symmetry in policy responses inherently desirable?

The claim that policymakers have an easy-money bias is one of those things usually said with an air of worldy wisdom; of course people don’t want to take away the punchbowl when everyone is having fun. But the reality doesn’t look at all like that. After all, if policy were consistently doing too much to fight slumps and not enough to curb booms, what you would expect is a steady ratcheting up of inflation — which isn’t at all what has happened over the past 35 years. This supposed piece of wisdom is actually a cliche from the 1970s, which hasn’t been remotely true for a generation. ...

Incidentally, the fake wisdom on monetary policy resembles a corresponding piece of fake wisdom on fiscal policy — the claim that fiscal stimulus inevitably turns into a permanent rise in government spending, because the programs never go away. That didn’t happen this time... And in fact it has never happened in the United States, as far as I can tell...

Beyond that, there are in fact good reasons for asymmetry in the response to booms and slumps...

He goes on to explain why. I'd add another reason why "symmetry is not a virtue," the difference in costs between inflation and unemployment. I believe that the costs of unemployment are much higher than the costs of inflation running a point or two (or three of four) above target, so if there is a mistake to be made, it's best to err on doing too much in a recession.

Saturday, May 10, 2014

'Wrong Debates'

Gloomy European Economist Francesco Saraceno:

Wrong Debates: Paul Krugman has a short post on the Eurozone, today (I’d like him to write more about us; he has been too America-centered lately), pointing out that the myth of fiscal profligacy is, well, just a myth. in fact, he argues, the only fiscally irresponsible country, in the years 2000 was Greece. It is maybe worth reposting here a figure that from an old piece of this blog, that since then made it into all my classes on the Euro crisis: 


The figure shows the situation of public finances in 2007, against the Maastricht benchmark (3% deficit and 60% debt) before the crisis hit. As Krugman says, only one country of the so-called PIIGS  (the red dots) is clearly out of line, Greece. Portugal is virtually like France, and Spain and Ireland way better than most countries, including Germany. Italy has a stock of old debt, but its deficit in 2007 is under control.
So Krugman is right in reminding us that fiscal policy per se was not a problem before the crisis; And yet, what he calls fiscal myths, have shaped policies in the EMU, with a disproportionate emphasis on austerity. And even today,... continued fiscal consolidation is taken for granted. I will write more on this in the next days, but it is striking how we aim at the wrong target.

Friday, May 09, 2014

Why Do Economists Still Disagree over Government Spending Multipliers?

Daniel Carroll:

Why Do Economists Still Disagree over Government Spending Multipliers?, by Daniel Carroll, Commentary, Cleveland Fed:  Public debate about the effects of government spending heated up after record-large stimulus packages were enacted to address the fallout of the financial crisis. Almost as noticeable as the discord was the absence of consensus among prominent economists on the issue. While it seems a simple problem to estimate the effect of government spending on output—the size of the government multiplier—it is anything but.

Paper here.

Wednesday, May 07, 2014

Tax Miles?

Tim Haab at Environmental Economics:

Tax Miles? I still think I have a better idea...:

The California Legislature is looking at a voluntary program that would tax motorists for every mile they drive.

KCAL9’s Bobby Kaple reports that Sen. Mark DeSaulnier, D-Concord, introduced a bill to test out the vehicle miles traveled (VMT) tax because the state’s gas tax was no longer bringing in the revenue it used to due to people driving more fuel efficient vehicles. [via]

It's been almost exactly 7 years now (May 8, 2007) and people still aren't listening to me. 

Taxing miles creates perverse incentives for fuel efficiency. ...  In words, a mielage tax increases the tax per gallon the more fuel efficient the car.  Now granted, with higher mpg you use fewer gallons to drive an equivalent number of miles, and in the end, everyone driving 100 miles will pay the same tax.  And from a revenue perspective, that might be OK.  But there might be a way to kill fewer birds with one stone.

As I have written a number of times, a more straightforward proposal is to simply raise the gas tax.  Reaising the gas tax accomplishes a number of things 1) It raises revenue, 2) It discourages miles driven, and 3) It increases the incentive for higher fuel efficiency. ...

It's really simple.  Why worry about complicated milage programs?  The gas tax infrastructure is in place.  Raise the gas tax and meet multiple public policy and economic goals simultaneously.

Monday, May 05, 2014

'Britain’s Economic Growth is Not a Sign that Austerity Works'

Larry Summers:

Britain’s economic growth is not a sign that austerity works, by Lawrence Summers, Commentary, Washington Post: The British economy has experienced the most rapid growth in the Group of 7 over the past several months. ... Naturally enough, many have seized on Britain’s strong performance as evidence vindicating the austerity strategy that the country has followed since 2010 and rejecting the secular-stagnation idea that lack of demand constrains industrial growth over the medium term. ... Unfortunately, properly interpreted, the British experience refutes austerity advocates and confirms Keynes’s warning about the dangers of indiscriminate budget-cutting in the midst of a downturn. ...
Britain’s growth reflects a combination of the depth of the hole it found itself in, the moderation in the trend toward deeper and deeper austerity and the effects of possibly bubble-creating government loans. It may be better for the citizens of Britain than any alternative. But it certainly should not be seen as any kind of inspiration for other companies or countries. ...

Saturday, May 03, 2014

'Pareto, Inequality and Government Debt'

Simon Wren-Lewis:

Pareto, Inequality and Government Debt: Or is economics inherently right wing?
I noted in passing in an earlier post that Pareto efficiency was obviously not a value free criteria. So those who argue that economists should only look for Pareto improvements – changes where no one is made worse off – are making a value judgement. One, and only one, of its implicit normative assumptions is that inequality does not matter. For others see, for example, Elizabeth Anderson (pdf, HT Anon). ...
The only possibly original point I wanted to make here is that the absurdity of restricting policies to Pareto improvements becomes immediately apparent if we think about government debt. Measures to reduce currently high levels of debt will almost certainly make current generations worse off, because they will have to pay the taxes (or whatever) to get debt down. Yet I do not often hear people arguing that we have to let debt stay high because the government can only implement Pareto improvements. ...
Why is there this emphasis on only looking at Pareto improvements? I think you would have to work quite hard to argue that it was intrinsic to economic theory - it would be, and is, quite possible to do economics without it. (Many economists use social welfare functions.) But one thing that is intrinsic to economic theory is the diminishing marginal utility of consumption. Couple that with the idea of representative agents that macro uses all the time (who share the same preferences), and you have a natural bias towards equality. Focusing just on Pareto improvements neutralises that possibility. Now I mention this not to imply that the emphasis put on Pareto improvements in textbooks and elsewhere is a right wing plot - I do not know enough to argue that. But it should make those (mainstream or heterodox) who believe that economics is inherently conservative pause for thought.

[There is quite a bit more detail in the original.]

Friday, May 02, 2014

Paul Krugman: Why Economics Failed

Why didn't fiscal policy makers listen to economists?:

Why Economics Failed, by Paul Krugman, Commentary, NY Times: On Wednesday, I wrapped up the class I’ve been teaching..: “The Great Recession: Causes and Consequences.” ...I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?
I don’t mean that economics was useless to policy makers. ... While ... few economists saw the crisis coming..., since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well. ...
In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand ... and a depressed economy. ...
And the diagnosis ... had clear policy implications: ...this was no time to worry about budget deficits and cut spending... We needed more government spending, not less, to fill the hole left by inadequate private demand. But... Since 2010, we’ve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.
So why didn’t we use the economic knowledge we had?
One answer is that most people find the logic of policy in a depressed economy counterintuitive. ... And even supposedly well-informed people balk at the notion that simple lack of demand can wreak so much havoc. Surely, they insist, we must have deep structural problems, like a work force that lacks the right skills; that sounds serious and wise, even though all the evidence says that it’s completely untrue.
Meanwhile, powerful political factions ... whose real goal is dismantling the social safety net have found promoting deficit panic an effective way to push their agenda. And such people have been aided and abetted by what I’ve come to think of as the trahison des nerds — the willingness of some economists to come up with analyses that tell powerful people what they want to hear, whether it’s that slashing government spending is actually expansionary, because of confidence, or that government debt somehow has dire effects on economic growth even if interest rates stay low.
Whatever the reasons basic economics got tossed aside, the result has been tragic. ... We have, all along, had the knowledge and the tools to restore full employment. But policy makers just keep finding reasons not to do the right thing.

Thursday, April 24, 2014

'Gasoline Tax, Unchanged Since 1993, is Due for an Increase'

Barry Ritholtz:

U.S. on Highway to Flunking Out, by Barry Ritholtz: Roads are crumbling, bridges are collapsing, and what was once considered one of the greatest achievements of any government anywhere has fallen into embarrassing disrepair. I am of course discussing our nation’s infrastructure. ... How did this happen? Credit a combination of benign neglect and anti-tax ideology run amok. ...
Since 1993, the U.S. federal gasoline tax has been 18.4 cents a gallon, which finances the Highway Trust Fund. Adjusted for inflation, the tax is now about 10 cents a gallon. ...
The U.S. interstate highway system, once the envy of the world, is in mediocre and deteriorating condition today ... putting the U.S at a competitive disadvantage. ...
The solution is simple. Raise the federal gasoline tax five cents a year for the next five years. Index it to inflation starting in the fifth year. It's the least the U.S. can do to keep up.

Thursday, April 03, 2014

The Downward Drift in Real Interest Rates

David Wessel reports on the IMF's World Economic Outlook:

The Downward Drift in Inflation-Adjusted Interest Rates: Why? And So What?, by David Wessel, WSJ:


...Two economists writing in the International Monetary Fund’s new World Economic Outlook note that inflation-adjusted interest rates have been coming down for more than three decades and suggests they may remain lower than normal for a very long time. ... But the important point is the trend towards lower interest rates began long before the Great Recession and advent of the Fed’s quantitative easing...
Why does this matter? ... It also would pose a big challenge for the Fed. For one thing, it boosts the risk that investors will do foolish things to get a little extra yield and provoke the much-dreaded “financial instability.”
It also increases the likelihood the economy will spend a whole lot more time with nominal rates ... uncomfortably close to zero, where it’s much harder for a central bank to use interest rates to steer the economy out of recessions.  ...
If so, that argues ... for worrying a lot less about government budget deficits and a lot more about using government spending to give the economy a lift that monetary policy cannot provide. ...

And at the same time, "Governments Scale Back Spending on School Construction, Public Safety."

Friday, March 21, 2014

'The Counter-Factual & the Fed’s QE'

I tried to make this point in a recent column (it was about fiscal rather than monetary policy, but the same point applies), but I think Barry Ritholtz makes the point better and more succinctly:

Understanding Why You Think QE Didn't Work, by Barry Ritholtz: Maybe you have heard a line that goes something like this: The weak recovery is proof that the Federal Reserve’s program of asset purchases, otherwise known as quantitative easement, doesn't work.
If you were the one saying those words, you don't understand the counterfactual. ...
This flawed analytical paradigm has many manifestations, and not just in the investing world. They all rely on the same equation: If you do X, and there is no measurable change, X is therefore ineffective.
The problem with this “non-result result” is what would have occurred otherwise. Might “no change” be an improvement from what otherwise would have happened? No change, last time I checked, is better than a free-fall.
If you are testing a new medication to reduce tumors, you want to see what happened to the group that didn't get the test therapy. Maybe this control group experienced rapid tumor growth. Hence, a result where there is no increase in tumor mass in the group receiving the therapy would be considered a very positive outcome.
We run into the same issue with QE. ... Without that control group, we simply don't know. ...

The Fool on the Icy Hill

As a follow-up to Krugman's article, this is something I wrote in January of 2009:

...I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level, but that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car -- the possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some. Essentially, I am arguing that there are crucial economic and psychological "tipping points" that must be reached in order for the economic recovery package to be effective (or at least, there's enough of a chance that they exist that they cannot be ignored when formulating robust policy). ...

Paul Krugman added:

I’d add that there may also be a political tipping point: if the stimulus package is too weak, conservatives will pile on after it fails to deliver, claiming that the whole concept has been discredited.

Paul Krugman: The Timidity Trap

When policymakers are overly cautious, it can backfire:

The Timidity Trap, by Paul Krugman, Commentary, NY Times: There don’t seem to be any major economic crises underway right this moment, and policy makers in many places are patting themselves on the back. ...
Unfortunately, that ... just goes to show how accustomed we’ve grown to terrible economic conditions. We’re doing worse than anyone could have imagined a few years ago, yet people seem increasingly to be accepting this miserable situation as the new normal.
How did this happen? ... I’d argue that an important source of failure was what I’ve taken to calling the timidity trap — the consistent tendency of policy makers who have the right ideas in principle to go for half-measures in practice, and the way this timidity ends up backfiring, politically and even economically.
In other words, Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.
About the worst: If you’ve been following economic debates these past few years, you know that both America and Europe have powerful pain caucuses — influential groups fiercely opposed to any policy that might put the unemployed back to work. There are some important differences between the U.S. and European pain caucuses, but both now have truly impressive track records of being always wrong, never in doubt. ...
So what has been the response of the good guys?
For there are good guys out there... But these good guys never seem willing to go all-in on their beliefs.
The classic example is the Obama stimulus, which was obviously underpowered... Some of us warned right from the beginning that the plan would be inadequate — and that because it was being oversold, the persistence of high unemployment would end up discrediting the whole idea of stimulus in the public mind. And so it proved.
What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out the kinds of monetary policies most likely to work — in particular, anything that might signal a willingness to tolerate somewhat higher inflation, at least temporarily. As a result, the policies ... have fallen short of hopes, and ended up leaving the impression that nothing much can be done. ...
You might ask why the good guys have been so timid, the bad guys so self-confident. I suspect that the answer has a lot to do with class interests. But that will have to be a subject for another column.

Thursday, March 20, 2014

Turning Their Backs on the Unemployed

The Fed:

Fiscal policy is restraining economic growth

Congress, implicitly:

We don't care

Maximizing the fortunes of the wealthy backers of political campaigns -- e.g. cutting their taxes so they don't have to pay for programs that help "those people" after the financial wizards on Wall Street cause the economy to crash -- is not the same as maximizing economic growth and employment. The wealthy think it's the same -- in their minds they are the job creators, what's good for the wealthy is good for America! -- but it's not.

Thursday, February 27, 2014

The Obama Stimulus

Jeff Frankel says the stimulus worked:

Guest Contribution: “The Obama Stimulus and the 5-Year Anniversary of Market Turnaround”, econbrowser: Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office. Those who don’t like Obama are still asking “if the fiscal stimulus was so great, why didn’t it work?” ... Listening to these arguments, one would think that no effect of the Obama stimulus could be seen by the naked eye in the U.S. economic statistics of 2009. Nothing could be further from the truth. ...
If one judges by the economic statistics, the effect could not have been much more immediate, whether one looks at job loss, GDP, or financial market indicators. Look at the graphs below. ...
Of course there are always a lot of things going on. One cannot say for sure what was the effect of the Obama stimulus. And one can debate why the pace of the expansion slowed after 2010 (my own prime culprit is the switch to fiscal austerity). But whether looking at indicators of economic activity, the labor market, or the financial markets, one cannot say that the fiscal stimulus of February 2009 had no apparent impact in the graphs.

Friday, February 21, 2014

Paul Krugman: The Stimulus Tragedy

The stimulus package was more effective than people realize:

The Stimulus Tragedy, by Paul Krugman, Commentary, NY Times: Five years have passed since President Obama signed the American Recovery and Reinvestment Act — the “stimulus” — into law. With the passage of time, it has become clear that the act did a vast amount of good. It helped end the economy’s plunge; it created or saved millions of jobs; it left behind an important legacy of public and private investment.
It was also a political disaster. And the consequences of that political disaster — the perception that stimulus failed — have haunted economic policy ever since.
Let’s start with the good stimulus did..., most careful studies have found evidence of strong positive effects on employment and output.
Even more important, I’d argue, is the huge natural experiment Europe has provided... You see,... austerity led to nasty, in some cases catastrophic, declines in output and employment. And private spending in countries imposing harsh austerity ended up falling..., amplifying the direct effects of government cutbacks.
All the evidence, then, points to substantial positive short-run effects from the Obama stimulus. And there were surely long-term benefits, too: big investments in everything from green energy to electronic medical records.
So why does everyone ... except those who have seriously studied the issue ... believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.
There’s no mystery about why: America was coping with the legacy of a giant housing bubble. ... And the stimulus was both too small and too short-lived...
There’s a long-running debate over whether the Obama administration could have gotten more. The administration compounded the damage with excessively optimistic forecasts, based on the false premise that the economy would quickly bounce back...
But that’s all water under the bridge. The important point is that U.S. fiscal policy went completely in the wrong direction after 2010. With the stimulus perceived as a failure, job creation almost disappeared from inside-the-Beltway discourse, replaced with obsessive concern over budget deficits. Government spending, which had been temporarily boosted both by the Recovery Act and by safety-net programs like food stamps and unemployment benefits, began falling... And this anti-stimulus has destroyed millions of jobs.
In other words, the overall narrative of the stimulus is tragic. A policy initiative that was good but not good enough ended up being seen as a failure, and set the stage for an immensely destructive wrong turn.

Wednesday, February 19, 2014

'Forget the Minimum-Wage Job Losses: It's Government Cuts That'll GetYou Mad'

Heidi Moore:

Forget the minimum-wage job losses: it's government cuts that'll get you mad, by Heidi Moore: ...Which is worse: 500,000 Americans out of work, or 2m?... 500,000 is an estimate of the number of jobs the country might lose if the minimum wage gets raised to $10.10 an hour, according to a controversial analysis released Tuesday by the Congressional Budget Office. ...
What about those 2m jobs? That’s how much the economy will lose by 2019 because of federal budget cuts, as estimated by the Center for American Progress. And, well, I hate to break it to you, but Congress already voted on those last year, and it didn’t spur one fired shot.
Budget cuts, also known as austerity, are the most damaging economic decision Congress has made since the financial crisis. Former Federal Reserve chairman Ben Bernanke warned lawmakers several times that austerity measures would hurt the economy, but they largely ignored his warnings. Jobs lost to government budget cuts are part of the reason why the economy still looks so weak...
The cost of austerity doesn’t stop at 2m jobs, either. There could be as many as 7 million jobs that are never even created because of Washington budget cuts, according to the Economic Policy Institute. Those 7 million jobs would be the difference between the unhappy economy we have now ... and an actual recovery.
So, here’s the not-so-simple question: if everyone’s so angry about losing 500,000 jobs while paying the average worker more per hour, where’s the unstoppable outrage about the 2m jobs that already seem lost to austerity? ...

Monday, February 17, 2014

The Stimulus Success

Calculated Risk (aka Bill McBride):

The Stimulus Success: It is important for the future to set aside ideology and recognize that the American Recovery and Reinvestment Act of 2009 helped the economy.
The stimulus could have been structured differently, for example, why have tax incentives for businesses to invest when their is already too much capacity? And research suggests the cash-for-clunkers program was not very helpful.
And more importantly - knowing that recoveries from financial crisis are slow - investment in infrastructure could have been larger and lasted longer (not just "shovel ready" programs).
It is the details that should be debated - understanding what worked and what didn't work would be useful during the next financial crisis (when the next generation of financial wizards think they've discovered how to turn lead into gold) - but overall the program was obviously helpful.  ...
It is sad today that extremist ideologues are arguing the stimulus failed. This is very dangerous for the future. ...
We should debate the actual impact of the stimulus. We should debate the effectiveness of each component of the stimulus. But we should also ridicule the ideologues ...

Sunday, February 16, 2014

The Permanent Scars of Economic Pessimism'

As a follow-up to the post below this one, Antonio Fatas:

The permanent scars of economic pessimism: Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical.
It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance...
But it is important to understand that the permanent effects are the consequence of the recession itself. If we could manage to reduce the length and depth of the recessions we would be minimizing those permanent effects. And in that sense, accepting these changes as structural and unavoidable is too pessimistic, leads to inaction and just makes matters worse. If you read the evidence properly, you want to do the opposite, you want to be even more aggressive to avoid what it looks at a much bigger cost of recessions.

Thursday, February 13, 2014

Debt and Growth: There is No Magic Threshold

New paper from the IMF:

Debt and Growth: Is There a Magic Threshold?, by Andrea Pescatori ; Damiano Sandri ; John Simon [Free Full text]: Summary: Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility.

[Via Bruce Bartlett on Twitter.]

Tuesday, February 11, 2014

Keynesian Economics in Abnormally Slow Recoveries

We are, as they say, live:

Keynesian Economics in Abnormally Slow Recoveries, by Mark Thoma: In theory, Keynesian stabilization policy should “shave the peaks and fill the valleys.” That is, when the economy falls into a recession the government should use deficit spending to lift the economy back towards the full employment level. It should then pay for the policy – increase revenues or reduce spending – during boom periods when the economy is overheated and needs to be slowed down. But what if, like now, there is no boom following the bust? How should we pay for the programs that were put into place during the recession in that case? ...

Monday, February 10, 2014

'Our Military is Irrationally Large'

James Kwak:

Why We Have a Debt Problem, Part 23: So, we have eleven aircraft carrier groups. No other country in the world has more than one. Everyone who has looked at the issue has agreed that we could do with fewer than eleven while still achieving our national security goals: Bush/Obama Defense Secretary Robert Gates, Obama Defense Secretary Chuck Hagel, and think tanks on the left and the right.
But apparently we can’t retire even one–even though we would save not just the annual operating costs, but most of the $4.7 billion it will cost to refurbish over the next five years. Instead, the Obama Administration has promised the Pentagon that it can simply have more money and not comply with the spending limits set in the 2011 debt ceiling agreement (and modified by Murray-Ryan).
Why? Well, legislators from states with Navy bases don’t want to reduce the Navy’s budget. More important, though, few people want to be for a smaller military–even when our military is irrationally large, given our other national priorities (healthcare, education, infrastructure, etc.). Instead of asking whether we need eleven times as many aircraft carriers as any other country, defenders insist that any reduction is a sign of weakness–conveniently overlooking the fact that we used to have fifteen carriers, and the world hasn’t ended.  ...

Tuesday, February 04, 2014

'Confronting Old Problem May Require a New Deal'

Eduardo Porter:

Confronting Old Problem May Require a New Deal, by Eduardo Porter, NY Times: ...As he delivered his fifth State of the Union address, President Obama, not unlike President Franklin D. Roosevelt early in his second term, seemed to have given up far too early in the game on trying to stimulate the recovery. ...
The Obama administration’s boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars’ worth of lost gross domestic product.
This is not just the president’s doing. The bipartisan cooperation that would be needed to start a jobs program of the scale of what was tried during the New Deal — not to mention the World War II production explosion that finally ended the Depression — is out of the question today.
Perhaps more important, however, is that even among Democrats there remains little appetite for the kind of aggressive government action that was popular in F.D.R.’s day.
The fear, however, seems overdone. ...
There are potentially great benefits to government investments in public works at a time like this. ... And it would not even be very expensive. With the borrowing costs of the federal government below the rate of inflation, investments would actually help reduce the nation’s debt burden. Lenders are, in effect, paying the government to borrow money. ...
[T]he path favored by many Republicans in the House..., slash government spending and let the economy run its bedraggled course..., would probably transform our economic emergency from a painful though temporary setback into a permanent feature called stagnation.
And yet this is essentially the policy the nation is following.

I am not fully sold on the secular stagnation argument (see the article for more, Keynes worried about the same thing), but there's no excuse for turning our backs on the unemployed. We could have, and should have done more. Even now, it's not too late.

Wednesday, January 29, 2014

'The Fading of the Deficit'

Paul Krugman comments on the SOTU:

... I think the fading of the deficit both in reality and as an issue is important... Obama isn’t afraid of the big bad deficit any more, and he knows that there won’t be a Grand Bargain, so there’s nothing he can or should do on the front that absorbed so much of his energy for three years. ...

Glad thsi issue is falling off the political radar, but given how many households were hurt by the premature turn to deficit reduction endorsed by Obama, I have a hard time granting much credit to Obama for letting this issue fade.

Wednesday, January 08, 2014

Rubin: Sound Government Finances will Promote Recovery

I don't have time to address this properly, hopefully you can do that in comments, but I'm kind of annoyed with Robert Rubin. He appears to believe in the confidence fairy:

Sound government finances will promote recovery, by Robert Rubin, Commentary, Financial Times: ... The US recovery remains slow by historical standards – even if recent signs of improvement are borne out. One reason is that our unsound fiscal trajectory undermines business confidence, and thus job creation, by creating uncertainty about future policy and exacerbating concerns about the will of Congress to govern. Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.

Yes, but  they cite lack of demand as the biggest factor by some margin.

He's also worried about monetary policy:

Unconventional policy decisions by central banks are sometimes justified as the only available tools in the absence of necessary government policies. The right criterion for action, however, is not the absence of alternatives, but an assessment of costs and benefits. ...
In the US, there are widely posed questions about the benefits of QE3, but the risks are significant. ...
Confidence generated by a sound fiscal regime could help ameliorate ... risks. Such a regime should be enacted now to stabilise, or preferably reduce, the ratio of debt-to-gross domestic product over 10 years...

At least there's this (though I left out his call for entitlement reform as that annoyed me too):

Fiscal discipline could provide room for reasonable stimulus to create jobs. The partially cancelled sequestration should be fully rescinded to eliminate its fiscal drag. Fiscal funding should come largely from revenue increases...

He ends with:

Unconventional monetary policy and stimulus can be part of a successful economic programme for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform.

So let me turn this over to you. Have at it...

Tuesday, January 07, 2014

How to Tell if Fiscal Policy Works

I have a new column:

How to Tell if Fiscal Policy Works: There is a raging debate in the econo-blogosphere concerning the effectiveness of fiscal policy when the economy is in a deep recession. This question is important because monetary policy loses much of its effectiveness in severe downturns. ...

It's about how to determine if fiscal policy is effective, and the importance of establishing defensible baselines.

Monday, January 06, 2014

'Monetary versus Fiscal: An Odd Debate'

Simon Wren-Lewis is puzzled by the opposition to the use of fiscal policy. His bottom line:

I remain mystified where this desire to downgrade the usefulness of fiscal policy at the ZLB comes from. I suspect I am missing something, and would like to know what that is.

I've become weary of arguing about the usefulness of fiscal policy in deep recessions after years of doing so, so it's nice to have fresh bloggers to take up the fight, especially ones who know what they are talking about as much as Simon Wren-Lewis does.

Wednesday, January 01, 2014

Meanwhile, in Australia...A Call for Expansionary Austerity!

The push for "expansionary austerity" lives on:

Austerity in Australia, 1980s style, by John Quiggin: The Sydney Morning Herald has an editorial praising the expenditure cuts introduced by the Hawke-Keating government in 1986 and 1987, and suggesting that Abbott should copy this example. ...
This argument carries a great deal of force, because, as we know, the Hawke-Keating cuts restored the budget to surplus, leading to Keating’s famous declaration that the 1988-89 Budget was “the one that brings home the bacon”. Leading scholars like Alesina and Ardagna have pointed to this exercise as one of the great success stories of “expansionary austerity”.
What’s that you say? The economy fell in a heap in 1989, leading to a decade of deficits and fifteen years of high unemployment? To quote another Keating aphorism, that was “the recession we had to have”. I guess we are about due for another.

Monday, December 30, 2013

Paul Krugman: Fiscal Fever Breaks

The deficit scolds have been discredited:

Fiscal Fever Breaks, by Paul Krugman, Commentary, NY Times: In 2012 President Obama, ever hopeful that reason will prevail, predicted that his re-election would finally break the G.O.P.’s “fever.” It didn’t.
But the intransigence of the right wasn’t the only disease troubling America’s body politic in 2012. We were also suffering from fiscal fever... Instead of talking about mass unemployment and soaring inequality, Washington was almost exclusively focused on the alleged need to slash spending (which would worsen the jobs crisis) and hack away at the social safety net (which would worsen inequality).
So the good news is that this fever, unlike the fever of the Tea Party, has finally broken. ... What changed?...
First, the political premise behind “centrism” — that moderate Republicans would be willing to meet Democrats halfway in a Grand Bargain combining tax hikes and spending cuts — became untenable. There are no moderate Republicans. ...
Second, a combination of rising tax receipts and falling spending has caused federal borrowing to plunge. This is actually a bad thing, because premature deficit-cutting damages our still-weak economy... But a falling deficit has undermined the scare tactics so central to the “centrist” cause. Even longer-term projections of federal debt no longer look at all alarming.
Speaking of scare tactics, 2013 was the year journalists and the public finally grew weary of the boys who cried wolf... — for example, when Erskine Bowles and Alan Simpson ... warned that a severe fiscal crisis was likely within two years. But that was almost three years ago.
Finally, over the course of 2013 the intellectual case for debt panic collapsed. ... For ... several years fiscal scolds ... leaned heavily on a paper by ... Carmen Reinhart and Kenneth Rogoff, suggesting that government debt has severe negative effects on growth when it exceeds 90 percent of G.D.P. ...
Then Thomas Herndon, a graduate student at the University of Massachusetts, reworked the data, and found that the apparent cliff at 90 percent disappeared once you corrected a minor error and added a few more data points. ...
Still, does any of this matter? You could argue that it doesn’t — that fiscal scolds may have lost control of the conversation, but that we’re still doing terrible things like cutting off benefits to the long-term unemployed. But while policy remains terrible, we’re finally starting to talk about real issues like inequality, not a fake fiscal crisis. And that has to be a move in the right direction.

Thursday, December 26, 2013

British Economic Triumphalism in Perspective

Menzie Chinn: 

British Economic Triumphalism in Perspective, by Menzie Chinn: Prime Minister Chancellor of the Exchequer Osborne has lauded the recent UK growth numbers as validation for the policy of austerity [1] (recently relaxed, although he doesn't mention that). ...
I think it useful to compare the US and the UK. The former embarked upon a policy of fiscal stimulus, and then retrenchment, but nothing compared to the retrenchment implemented in the latter. And in the US, per capita GDP growth was much more rapid than in the UK.

Figure 1: Log per capita US GDP, in Ch.09$ (blue) and per capita UK GDP, in Ch.2010£ (red). UK population is annual midyear data from IMF WEO, interpolated using quadratic match. Source: BEA, ONS, IMF WEO (October).

The gap between the two series is 7.3% as of 2013Q3. So, the growth in the UK now is merely digging the economy out of a big hole dug for itself in the search of expansionary fiscal contraction. [2].

Friday, December 13, 2013

'IMF Admits it Underestimated the Fiscal Multiplier'

Via Eurointelligence:

IMF admits it underestimated the fiscal multiplier: Speaking at the EU’s Economic and Social Committee, IMF Managing Director Christine Lagarde said on Tuesday that the IMF made a mistake on Greece and Portugal, and that these countries should have had been given more time to reduce their deficits, reports portuguese Público. Specifically Lagarde said that, for lack of studies, the IMF had estimated the fiscal multiplier at 1 or below when in reality it proved to be about 1.7.

I have a 15 hour travel day ahead of me, so one more quick post after this one, then not much more for a while.

Paul Krugman: The Biggest Losers

Fiscal policy has been "deeply destructive":

The Biggest Losers, by Paul Krugman, Commentary, NY Times: The pundit consensus seems to be that Republicans lost in the just-concluded budget deal. Overall spending will be a bit higher than the level mandated by the sequester... Meanwhile, Democrats avoided making any concessions on Social Security or Medicare. ...
But if Republicans arguably lost this round, the unemployed lost even more: Extended benefits weren’t renewed, so 1.3 million workers will be cut off at the end of this month, and many more will see their benefits run out in the months that follow. And ... since Republicans took control of the House of Representatives in 2010..., a triumph of anti-government ideology that has had enormously destructive effects on American workers.
First, some facts about government spending..., the actual numbers show that over the past three years we’ve been living through an era of unprecedented government downsizing. Government employment is down sharply;... government spending..., has fallen almost 3 percent since 2010 and around 5 percent per capita. ...
There are three things you need to know about these harsh cuts.
First, they were unnecessary..., markets have never shown any concern at all about U.S. creditworthiness..., borrowing costs have stayed at near-record lows...
Second, the cuts did huge short-term economic damage. ... The recent cuts ... took place at the worst possible moment, the aftermath of a financial crisis. Families were struggling to cope with the debt they had run up during the housing bubble; businesses were reluctant to invest given the weakness of consumer demand. Under these conditions, government cutbacks simply swelled the ranks of the unemployed — and as family incomes fell, so did consumer spending, compounding the damage.
The result was to deepen and prolong America’s jobs crisis. Those cuts in government spending are the main reason we still have high unemployment, more than five years after Lehman Brothers fell.
Finally, if you look at ... major areas that were cut, you’ll notice that they mainly involve investing in the future. So we aren’t just looking at short-term harm, we’re also looking at a long-term degradation of our prospects, reinforced by the corrosive effects of sustained high unemployment.
So, about that budget deal: yes, it was a small victory for Democrats. It was also, possibly, a small step toward political sanity...
But the larger picture is one of years of deeply destructive policy, imposing gratuitous suffering on working Americans. And this deal didn’t do much to change that picture.

Thursday, December 12, 2013

'Hoovernomics Explains the Economy'

Michael Froomkin:

Hoovernomics Explains the Economy,  by Michael Froomkin: This one chart tells you much of what you need to know about the fiscal side of the US economy: we’re dealing with a recession/depression Herbert Hoover style — by cutting government spending just when we would have needed a strong counter-cyclical push from government.


What’s good about this chart, lifted from Krugman, is that it aggregates federal, state, and local spending...
Something to consider as you look at the ugly budget deal coming out of Congress — the one that doesn’t extend unemployment benefits and, as far as I can tell, doesn’t fix the recent vicious cuts to food stamps either. (Please correct me if I’m wrong about that.)

Wednesday, December 11, 2013

'Budget Deal Does Little to Address the Needs of the Economy'

Larry Mishel of the EPI:

Budget Deal Does Little to Address the Needs of the Economy: While all the details have yet to be released, it seems clear that the budget agreement announced by Senator Patty Murray and Representative Paul Ryan, which sets discretionary budget authority limits for fiscal years 2014 and 2015, will do essentially nothing to alter the disastrous trajectory that has characterized fiscal policy since 2011. I support reaching an agreement that will end the culture of periodic crises that has driven policy in recent years. However, this deal addresses the wrong set of priorities: deficit reduction ten years out rather than a stronger recovery now, and tweaking domestic spending for a few years as we continue to ignore the public investments our country needs.
The worst part of the budget deal by far is what it doesn’t address: unemployment insurance for America’s four million long-term unemployed workers. This deal asks essentially nothing of the richest Americans while placing terrible burdens on new federal employees and the unemployed, and continuing the fiscal policy drag on our still-unfinished recovery.

Public and Private Sector Payroll Jobs: Reagan, Bush, Clinton, Bush, Obama

Calculated Risk takes a look at public and private job growth for recent presidents:



Tuesday, December 10, 2013

Fighting Deficient Aggregate Demand with Infrastructure Spending

Brad DeLong is "Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!":

I Am Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment!, by Brad DeLong: But the rest of his column leaves me puzzled…
Martin Feldstein calls for the U.S. to fight deficient aggregate demand by spending an extra trillion dollars on infrastructure over the next five years–and then to keep that program from worsening the government debt-to-GDP ratio by also enacting tax increases and spending cuts that would bring the debt down to its baseline level between, say, years five and fifteen, by, say, 2028.
With idle labor and slack capacity at their current levels, the best bet is that such a program would boost total real GDP by at least $2 trillion over the next five years–and actually raise the government’s debt five years hence by at most $333 billion because of the federal, state, and local taxes that would be paid on the added income from higher real GDP.
But there is no need to also find the political will to reach agreement on longer-run tax increases and spending cuts in order to keep this program from worsening the long-run debt outlook..., an extra trillion dollars of infrastructure will boost U.S. national income in the long run by at least $40 billion a year–and the U.S. government will then collect $13.3 billion a year in extra taxes because of higher levels of income.
Thus Feldstein’s short-run program alone, without the hard-to-pass long-run component, would free up more than $7.8 billion a year of debt-amortization capacity: it would all by itself improve the long-run fiscal picture.
So why the focus on the need for a hard-to-pass long-run deal, and the unnecessary claim that it must be coupled to the short-run before what makes sense makes sense? It remains a mystery to me…
Also a mystery to me: just what is it that makes quantitative easing so risky? Keeping the U.S. economy in a situation of slack aggregate demand–yes, that is risky. But how is the Fed’s buying government bonds and holding them to maturity–even a lot of such bonds–risky? What is the risk? What might happen that would be bad, and couldn’t be neutralized? ...

He also points to Krugman's comments: My Favorite Martian.

Saturday, December 07, 2013

'By George, Britain’s Austerity Experiment Didn’t Work!'

A quick one before heading out:

By George, Britain’s Austerity Experiment Didn’t Work!, by John Cassidy: George Osborne, the patron saint of austerity enthusiasts on both sides of the Atlantic, was in the House of Commons on Thursday, reveling in the fact that the U.K.’s economy is finally growing again, and claiming that “Britain’s economic plan is working.” Delivering his annual Autumn Statement—he was a bit late—the Chancellor of the Exchequer pointed to forecasts from the quasi-independent Office for Budget Responsibility, which point to G.D.P. growth of 1.4 per cent this year and 2.8 per cent in 2014.
For Britons who have been laboring through more than five years of recession, or near recession, that is welcome news. By some measures, the U.K. has been through a worse slump than the one it experienced during the Great Depression, and now, at last, it appears to be over. Recent figures from the Office for National Statistics show that the economy has expanded for three quarters in a row, with manufacturing, services, and construction all sharing in the growth. Small wonder that Osborne was smiling.
It’s a clever political line, and it appears to be having an impact. The rebound in the economy, which caught by surprise most forecasters, including those at the Office for Budget Responsibility, has transformed the political situation at Westminster and given the Conservative-Liberal coalition, which has been lagging badly in the opinion polls, new hope of winning reëlection in May 2015.
But from an economic perspective, Osborne’s argument is hogwash. ...

Monday, December 02, 2013

'Taxes, Transfers, and State Economic Differences'

Israel Malkin and Daniel J. Wilson in the latest FRBSF Economic Letter:

Taxes, Transfers, and State Economic Differences, by Israel Malkin and Daniel J. Wilson, FRBSF Economic Letter: U.S. states collect their own taxes and determine their public spending. But they also pay taxes to and receive transfer payments and public services from the federal government. Many commentators have argued that this system of federal taxes and transfers provides not only considerable redistribution among regions, but also stabilization (see, for example, Krugman 2012). These commentators suggest that if the European Union (EU) had developed a similar system among member states, it might have avoided its recent fiscal and economic crises. In fact, as the EU was formed in the early 1990s, many economists doubted its viability because it lacked a stabilization system similar to that in the United States (see, for example, Sala-i-Martin and Sachs 1991).
Still, the size and mode of action of redistribution and stabilization in the U.S. system are not well understood. Stabilization implies that even a very high-income state whose economy temporarily worsens would receive some short-term relief through transfer payments or lower tax payments to the federal government, a kind of insurance offsetting temporary negative shocks. A system that provides redistribution from richer states to poorer states does not automatically provide stabilization. In other words, stabilization is separate from redistribution, in which over the long term the federal government collects more taxes from higher-income states and provides less support through transfers or public goods, regardless of temporary state-level economic problems. Thus, the extent of stabilization provided by a given tax-and-transfer system can’t be measured using simple cross-state correlations between average state income and taxes paid or transfers received by a state. 
In looking at the U.S. system as a guide for how the EU or other cross-country economic unions might achieve stabilization, it is important to know how much stabilization in the United States results from taxation and how much from transfers, and what kinds of transfers best promote stabilization.
This Economic Letter looks at how much total redistribution and stabilization the U.S. system provides and how much is due to taxes and how much to transfers. We find substantial redistribution and stabilization, both driven entirely by the tax system. Surprisingly, federal government transfers to states—either to governments or to individuals or businesses—provide virtually no redistribution nor stabilization. This holds true whether we measure transfers broadly, including for example salaries of federal workers living in a given state and federal contracts with businesses in the state, or narrowly, including only grants to state and local governments and direct federal transfer payments to individuals, businesses, and nonprofits. One exception is federal emergency unemployment compensation, which rises when a state’s income falls and its unemployment rate increases. Rather, we find that the tax system has the most impact in stabilizing states in the short run, consistent with other research (see Asdrubali, Sorenson, and Yosha 1996, Sala-i-Martin and Sachs 1991, and Feyrer and Sacerdote 2013). ...
Implications for Europe
The key implication of our findings is that the U.S. tax-and-transfer system provides considerable interregional redistribution and economic stabilization. But what might these findings imply for the European Union? The EU lacks a comparable system of redistribution and stabilization among member countries, and that is often cited to explain why differences in economic performance among EU countries in the aftermath of the global recession have been so much greater than differences among U.S. states. A simple back-of-the-envelope calculation based on our results suggests that if the European Union had a system similar to that of the United States, Greek nominal disposable income per capita would have fallen 6.9% from 2008 to 2011 instead of the actual 11.2%. Income in Germany would have risen 3.7% instead of 5.9%.
This analysis is limited to quantifying the degree of stabilization that could be achieved in Europe if it had a U.S.-style tax-and-transfer system. How much stabilization among countries would be optimal is a separate and much more difficult question. Among other things, it depends on the costs and benefits of centralizing the allocation of resources and any moral hazard due to insuring countries against negative economic consequences resulting from poor policy decisions. Nonetheless, understanding the role of taxes and transfers in the United States could help guide European Union discussions about policy reforms. 

[I omitted the sections with the supporting evidence, graphs, etc. showing the stabilization, tax, and transfer results for each state.]

Sunday, December 01, 2013

The Netherlands "Depressingly Predictable Path"

Simon Wren-Lewis documents the austerity insanity:

Here we go again:
1) Government embarks on austerity, to try and maintain the confidence of the bond markets. We must preserve the AAA rating for our government’s debt, says the finance minister.
2) Austerity reduces demand, helping create flat or negative growth.
3) As a result, deficit targets keep being missed. Additional austerity is imposed, and growth declines again.
3) Country loses its AAA rating, and the credit rating agency gives concerns about poor growth as an important factor for the downgrade.
4) This confirms our fears, says the finance minister. We must redouble our efforts to reduce our debt.
This will sound familiar to UK ears, but it is also what has just happened in the Netherlands.
I do not like using decisions by the credit rating agencies as an excuse to write posts, because when it comes to the major economies they have no particular expertise. (Typically markets show no reaction to the ‘news’ that a country like the Netherlands has been downgraded.) This useful post by Bas Jacobs (HT MT) argues that the S&P analysis for the Netherlands does not deserve any serious attention. On credit rating agencies generally, see Jonathan Portes. The media report what these agencies say because downgrades are convenient hooks to hang existing stories on, and it is a shame and a continuing source of puzzlement that officials and politicians bother with them.
So why am I writing this post? Because it seems important to record the progress of another country beside my own that is going down a depressingly predictable path. ...[continue]...

Wednesday, November 13, 2013

'Pushing on a String: US Monetary Policy is Less Powerful During Recessions'

I found a similar result long, long ago in a Journal of Econometrics paper:

Pushing on a string: US monetary policy is less powerful during recessions, by Silvana Tenreyro, Gregory Thwaites, Vox EU: Most industrialized countries have been trying to cut public borrowing without impeding recovery from the Great Recession. Central banks have attempted to square this circle by loosening monetary policy. For example, UK finance minister George Osborne has stated that “theory and evidence suggest that tight fiscal policy and loose monetary policy is the right macroeconomic mix” for countries with excessive private and public debt (Mansion House speech 2012).
A number of recent studies have found that fiscal policy is particularly powerful in recessions – tax hikes and spending cuts harm growth more when the economy is already weak (Auerbach and Gorodnichenko 2012, Jordà and Taylor 2013). But if monetary policy is still effective, these big negative effects could in principle be offset by lower interest rates. In our new paper (Tenreyro and Thwaites 2013) we find that, at least in the US, this is not the case: official interest rates have no discernible effect on the economy during recessions. This means a crucial ingredient – the ability to stimulate a recession-hit economy by cutting policy rates – may be missing from the prevailing policy mix. ...

Monday, November 11, 2013

Paul Krugman: The Plot Against France

Fiscal scolds -- the same people who have been wrong about the virtues of austerity -- have made France their next target:

The Plot Against France, by Paul Krugman, Commentary, NY Times: On Friday Standard & Poor’s ... downgraded France. The move made headlines, with many reports suggesting that France is in crisis. But markets yawned...
So what’s going on here? The answer is that  ... there really are a lot of people trying to bad-mouth the place —... one clear demonstration that ... fiscal scolds don’t really care about deficits. Instead, they’re using debt fears to advance an ideological agenda. ...
Given such rhetoric, one comes to French data expecting to see the worst. What you find instead is a country experiencing economic difficulties — who isn’t? — but in general performing as well as or better than most of its neighbors...
Meanwhile, French fiscal prospects look distinctly nonalarming. The budget deficit has fallen sharply since 2010... By the numbers, then, it’s hard to see why France deserves any particular opprobrium. So again, what’s going on?
Here’s a clue: Two months ago Olli Rehn, Europe’s commissioner for economic and monetary affairs — and one of the prime movers behind harsh austerity policies — dismissed France’s seemingly exemplary fiscal policy. Why? Because it was based on tax increases rather than spending cuts — and tax hikes, he declared, would “destroy growth and handicap the creation of jobs.”
In other words, never mind what I said about fiscal discipline, you’re supposed to be dismantling the safety net. S.& P.’s explanation of its downgrade, though less clearly stated, amounted to the same thing... Again, never mind the budget numbers, where are the tax cuts and deregulation?
You might think that Mr. Rehn and S.& P. were basing their demands on solid evidence... But they weren’t..., research at the I.M.F. suggests that when you’re trying to reduce deficits in a recession, the opposite is true: temporary tax hikes do much less damage than spending cuts.
Oh,... when people start talking about the wonders of “structural reform,” take it with a large heaping of salt. It’s mainly a code phrase for deregulation — and the evidence on the virtues of deregulation is decidedly mixed. ...
If all this sounds familiar to American readers, it should. U.S. fiscal scolds turn out, almost invariably, to be much more interested in slashing Medicare and Social Security than they are in actually cutting deficits. Europe’s austerians are now revealing themselves to be pretty much the same. France has committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky. And it must be punished.

Sunday, November 10, 2013

'State and Local Government Austerity is Over'

Calculated Risk has good news:

State and local government austerity is over, by Bill McBride : ... This "good news" is ... a significant change from state and local governments being a headwind for the economy to becoming a slight tailwind.

Here are two graphs that show the aggregate austerity is over. The first graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.
State and Local Government Residential Investment GDPClick on graph for larger image.
The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has been adding added to GDP growth.

The red bars are the contribution from state and local governments. ... Now state and local governments have added to GDP for two consecutive quarters, and I expect state and local governments to continue to make small positive contributions to GDP going forward. ...

[The second graph shows that in] 2013, state and local government employment is up 74 thousand through October. ...
I think most of the recession related state and local government layoffs are over, and it appears state and local government employment has bottomed.  Of course Federal government layoffs are ongoing, but it appears state and local government austerity is over (in the aggregate).

Friday, November 08, 2013

Paul Krugman: The Mutilated Economy

Policy failures can be very costly:

The Mutilated Economy, by Paul Krugman, Commentary, NY Times: Five years and eleven months have now passed since the U.S. economy entered recession. ... Official unemployment remains high, and it would be much higher if so many people hadn’t dropped out of the labor force. Long-term unemployment ... is four times what it was before the recession.
These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can’t spend more money on jobs, say these voices, because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!
The bitter irony, then, is that it turns out that by failing to address unemployment, we have ... been sacrificing the future, too. ... Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them. ...
According to the paper..., our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.
What’s more, the authors ... suggest that economic weakness has already reduced America’s economic potential by ... more than $1 trillion a year ... for multiple years. ... The ...evidence is overwhelming that ... by not even making unemployment a major policy priority ... we’ve done ourselves immense long-term damage.
And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt. ...
Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.
It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.

Tuesday, November 05, 2013

DeLong on Blinder's 'After the Music Stopped'

Brad DeLong reviews Alan Blinder's new book:

You Got Me Feelin Hella Good So I'm Gonna Keep on Dancing: Alan Blinder: "After the Music Stopped": Tuesday Book Reviews Extended Version Weblogging: A Review of Alan Blinder's After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin Press), J. BRADFORD DELONG is Professor of Economics at the University of California at Berkeley

Properly edited shorter version in Foreign Affairs, July/August 2013

Alan Blinder is the latest economist out of the gate with an analytical account of the recent economic downturn. His 2013 After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin) is, I think, the best of accounts--at least the best for those without the substantial background and experience in finance needed to successfully crack the works of Gary Gorton. It is the best for four reasons:

  1. The narrative is very good--it is, from my perspective at least, clear and correct.
  2. Alan Blinder has a deep understanding of macroeconomics--thus he can place the events in context, and explain just how it was that the housing boom and its crash had such catastrophic effects on the American economy while, say, the dot-com boom and its crash did not (and was in fact a net plus for the U.S. economy as a whole: a lot of research and development got done, a lot of useful business-model experimentation took place, and a lot of very valuable twenty-first century virtual infrastructure got built--the housing boom brought us no analogous benefits).
  3. Alan Blinder has a very clear sense of the policy options, both in the past and now: what did work, what would have worked, what might have worked, and what would still work were we to try it to get us out of the current fix we are in.
  4. As noted, the book is very readable, even for those who have not been marinated in finance enough to grasp the technicalities and even for those who find topics like "the fall of the rupee" sensational and interesting. For those who do and have worked in or near Wall Street or it equivalent, I recommend Gary Gorton. For everybody else, I recommend Alan Blinder.The topic is certainly enormously important. The economy is today, still, four and a half years after the crash of 2008, six years after the emergence of the first signs of significant trouble in Wall Street, and seven years after the peak of the housing boom, deeply depressed.

Blinder writes that "policy makers are still nursing a frail economy back to health". I am not so sure that is right. It does not look, to me at least, "frail" and "being nursed back to health". To me, it still looks very sick. Blinder writes: "having the national unemployment rate near 8 percent is a lot better than having it near 10 percent, but it is far from good". Blinder is thinking in terms of an economy in which acceptable (although far from ideal or attainable) employment performance has an unemployment rate of 6 percent, and thus that we are halfway back to economic health.

I see an economy in which the share of American adults who were employed was 63% in the mid-2000s, fell to 58.5% in 2009, and is still 58.5% today. We would have expected the natural aging of America's population to have carried the share of adults at work from 63% down to 62% over the past seven years or so--not to 58.5%. And we would have expected the collapse of people's retirement savings either in housing or in stocks in 2008 to have led many Americans to postpone retirement. Given the collapse in the value of retirement savings and their impact on desired retirements, I see a healthy American economy today as one that would still have the same adult employment-to-population ratio of 63% as the economy of the mid-2000s.

From that perspective, we are not halfway back to health. We had a gap of 4.5% points between actual employment and full employment at the end of 2009. We have a gap of 4.5% points between actual employment and full employment today. We are flatlining. It is true that in late 2009 there were still real and rational fears that things might become worse very quickly, and that that possibility is no longer on the menu. But in my view our "recovery" has taken the form not of things getting better but of having successfully guarded against the possibility that things would get even worse. And that is a very feeble recovery indeed. And, in Europe, things are getting worse right now.

Most economists would say that there is a silver lining, in that this is not a Great Depression. I have been calling the current episode the "Lesser Depression". I now think that most economists are--and that I was--wrong in claiming this silver lining. ...[continue to much, much, much more]...

Wednesday, October 30, 2013

'Cash for Clunkers: An Evaluation'

From Brookings:

Cash for Clunkers: An Evaluation of the Car Allowance Rebate System, by Ted Gayer and Emily Parker: The Car Allowance Rebate System (CARS) or “cash for clunkers” program, launched during the height of the recession with the intention of stimulating the economy, creating jobs, and reducing emissions, was actually far more expensive per job created than alternative fiscal stimulus programs. Ted Gayer and Emily Parker have performed a wide-spread evaluation of the various aspects of the program, from numbers of vehicles traded-in to impact on GDP, cost per job, environmental impact and the types of consumers who took advantage of the program. Among other conclusions, they found that:
  • The $2.85 billion program provided a short-term boost in vehicle sales, but the small increase in employment came at a far higher implied cost per job created ($1.4 million) than other fiscal stimulus programs, such as increasing unemployment aid, reducing employers’ and employees' payroll taxes, or allowing the expensing of investment costs.
  • Total emissions reduction was not substantial because only about half a percent of all vehicles in the United States were the new, more energy-efficient CARS vehicles.
  • The program resulted in a small gasoline reduction equivalent only to about 2 to 8 days’ worth of current usage.
  • In terms of distributional effects, compared to households that purchased a new or used vehicle in 2009 without a voucher, CARS program participants had a higher before-tax income, were older, more likely to be white, more likely to own a home, and more likely to have a high-school and a college degree.

Sunday, October 20, 2013

Ideology and Macroeconomics

Arnold Kling:

Ideology and Macroeconomics, by Arnold Kling: Scott Sumner writes,

I am amazed by how many proponents of fiscal policy don’t understand that it’s symmetrical. Fiscal policy doesn’t mean more government; it means more government during recessions and less government during booms, with no overall change in the average level of government. Anyone who doesn’t even get to that level of understanding, who doesn’t think in terms of policy regimes, is simply not part of the serious conversation.

I agree with the first two sentences, but not with the last.

Yes, in theory, there should be economists who, as they argued for more stimulus in 2009, should at the same time have been arguing for entitlement reform or other reductions in future spending. Other things equal, the bigger debt that we have accumulated over the past five years would make a non-ideological macroeconomist want to propose tighter fiscal policy somewhere down the road.

But “nonideological” and macroeconomics are nearly oxymorons. ...

Huh? See here (from 2005, before the recession had even started):

... To use fiscal policy to stabilize the economy however, you have to spend more or tax less in the bad times (increase the deficit) and then do the hard thing which is to raise taxes or cut spending in the good times (decrease the deficit).  To keep the budget in balance the good has to be matched somewhere by the bad.  If you cut taxes for this disaster, or this recession, or this war, and don’t raise them later, what do you do next time?  Cut again?  Okay, what about the time after that?  It won’t work forever.  The priming of the economy during the bad times must be matched by a slowdown during the good.  Borrow when income is low, pay it back when income is high. 

Furthermore, in stabilization policy, it’s also not possible in the long-run to use both government spending and taxation at opposite points in the business cycle.  That is, suppose you cut taxes during the bad times, then cut spending during the good times to pay it back.  That will work for a recession or two, a hurricane or two, but it won’t work forever because eventually there will be nothing left to cut out of government.  The opposite will not work forever either.  If you increase spending during the bad times then increase taxes during the good, the size of government will grow indefinitely over the long-run.  In more graphic form:

G↑ (rec) → T↑ (boom) →  G↑ (rec)→  T↑ (boom)  → G↑  (rec) → T↑ (boom)  →  bloated government

T↓ (rec) → G↓ (boom) →  T↓ (rec)→  G↓ (boom)  → T↓ (rec) → G↓ (boom)  →  no government

These two policies, or some combination of them (increase G and cut T in recessions, do the opposite in booms) are sustainable:

G↑ (rec) → G↓ (boom) →  G↑ (rec) →  G↓ (boom)  → G↑ (rec) → G↓ (boom)  →  sustainable size of government

T↓ (rec) → T↑ (boom) →  T↓ (rec) →  T↑ (boom)  → T↓ (rec) → T↑ (boom)  →  sustainable size of government

The Democrats are accused of adopting the first strategy and bloating the government.  The Republicans claim to adopt the second strategy to shrink government, but they’ve bloated government themselves (take the second line and change it to T↓ (rec) → G↑ (boom) → etc., a clearly unsustainable path).  Neither party seems willing or able to use either the third and/or the fourth lines as a means of stabilizing the economy.  We are seeing that now, and maybe even less stable budgetary variations.  The WSJ and other members of the GOP seems to advocate T↓ (rec)→ T↓ (boom) → etc. which, without cuts in G, cause deficits rise no matter how much they claim otherwise. 

There are, of course, lots and lots of variations on these basic chains of events, e.g. to adjust the size of government the first or second strategies can be adopted temporarily, and you hope lawmakers would put all their cards on the table as they do so whichever direction government size is to be adjusted.  But fiscal policy that is sustainable in the long-run, through recession after recession, natural disaster after natural disaster, war after war, has to adopt some combination of the third and fourth lines.  ...

Or here (from 2008, a bit afer the recession started):

Short-run stabilization policy for the economy during a downturn involves either cutting taxes to stimulate consumption and investment (and sometimes net exports), or increasing government spending. Which of these is used and the specific policy adopted has important implications for the effectiveness of policy, but no matter how it is done it will raise the deficit, and the increase in the deficit is often used to oppose the policy.
Theoretically, however, there is no reason at all why short-run stabilization policy ought to impact the long-run budget picture. Ideally, the deficits that accumulate during bad times are paid for by raising taxes or cutting spending during the good times so that there is no net change in the budget in the long-run.
Historically, we have been pretty good at spending money in bad times, but not so good at paying for the spending when times are better. But if we are serious about stabilization, that's what we need to do. When output is below the long-run sustainable rate we increase economic activity by deficit spending, and when output exceeds the long-run sustainable rate, we decrease activity by running a surplus. Doing this fills the troughs with the shaved peaks from the booms and keeps the economy closer to the long-run trend value.
I've been wondering if the current crisis will change our attitude about paying for stabilization policy, i.e. if it will make us more willing to raise taxes and cut spending when times are good. One of the problems with the last two boom-bust cycles was unchecked exuberance. Any calls to raise taxes or interest rates were met with howls about how it would cut off the boom, and who would want to do that? But tempering the boom might have helped to reduce the size of the meltdown we are experiencing now and left us much better off.
When the next boom develops, will we be more willing to raise taxes, cut spending, and tighten Fed policy? Will we remember what happened when the previous two booms ended and be more willing to step in and slow down the booming economy, will we be less susceptible to the argument that doing so will eliminate creative and productive innovation (as opposed to misdirecting resources during the mania phase)? This doesn't mean creating a recession or slamming on the brakes so hard we hit our heads, it doesn't mean ending innovative activity, it simply means what it says, bringing the growth rate down to its sustainable rate, and attenuating the exuberance that leads to housing and bubbles. Will we be more willing to take the necessary steps the next time the economy begins to boom?
I doubt it.
And the problem is that if we aren't willing to pay our bills during the good times, then it will be much harder to spend the money we need to spend when times are bad -- our hands will be tied when it comes to stabilization policy. ...

I could go on, but I'll just simply note that Krugman has been arguing (more than once) that there is little evidence that expansionary fiscal policy in recessions is permanent.

Oh, and since we are talking about unwillingness to reverse policy for ideological reasons, are conservatives arguing that the tax cuts they call for in recessions ought to be reversed when the economy improves? Why aren't those who are so worried about reversing policy in good times only talking about the spending side of the equation? Could it be -- gasp -- that their ideology, there belief that government is too big, is the reason?

Friday, October 18, 2013

Paul Krugman: The Damage Done

Republicans have made the economy worse:

The Damage Done, by Paul Krugman, Commentary, NY Times: The government is reopening, and we didn’t default on our debt. Happy days are here again, right?
Well, no. ...Congress has only voted in a temporary fix, and we could find ourselves going through it all over again in a few months. ...
Beyond that,... it’s important to recognize that the economic damage from obstruction and extortion didn’t start when the G.O.P. shut down the government..., it has been an ongoing process, dating back to the Republican takeover of the House in 2010. ...
A useful starting point for assessing the damage done is a ... report by ... Macroeconomic Advisers, which estimated that “crisis driven” fiscal policy ... since 2010 ... has subtracted about 1 percent off the U.S. growth rate for the past three years. This implies cumulative economic losses ... of around $700 billion. The firm also estimated that unemployment is 1.4 percentage points higher...
Yet ... the report doesn’t take into account ... other bad policies that are a more or less direct result of the Republican takeover in 2010. Two big bads stand out: letting payroll taxes rise, and sharply reducing aid to the unemployed... Both actions have reduced the purchasing power of American workers, weakening consumer demand and further reducing growth. ...
But why have Republican demands so consistently had a depressing effect on the economy?
Part of the answer is that the party remains determined to wage top-down class warfare... Slashing benefits to the unemployed because you think they have it too easy is cruel even in normal times, but it has the side effect of destroying jobs when the economy is already depressed. Defending tax cuts for the wealthy while happily scrapping tax cuts for ordinary workers means redistributing money from people likely to spend it to people who are likely to sit on it.
We should also acknowledge the power of bad ideas. Back in 2011, triumphant Republicans eagerly adopted the concept ... of “expansionary austerity” — ...that cutting spending would actually boost the economy by increasing confidence. Experience since then has thoroughly refuted this concept...
Are all the economy’s problems the G.O.P.’s fault? Of course not. .... But most of the blame for the wrong turn we took on economic policy, nonetheless, rests with the extremists and extortionists controlling the House.
Things could have been even worse. This week, we managed to avoid driving off a cliff. But we’re still on the road to nowhere.

Thursday, October 17, 2013

'What A Drag'

Teaching, then travel today, so just a few quick ones for now. Let's start with Paul Krugman:

What A Drag: ... The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the “fiscal drag” of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs.
I’ve been looking a bit harder at that report, and while I am in broad agreement with its conclusion, I think it’s missing quite a lot. On balance, I’d argue that the negative effect of the crazies has been even worse than MA says. ...
OK, first thing: I’m not too happy with the report’s reliance on the Bloom et al uncertainty index to measure costs. ... It’s really not something you want to lean on, and if you take it out, MA’s estimates of the Republican drag fall. But we shouldn’t stop there, because there are two important aspects of the story that MA leaves out.
First, part of the fiscal cliff deal involved letting the Obama payroll tax cut — a significant, useful form of economic stimulus — expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers...
Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets... This hurts the unemployed a lot, but it also hurts the economy, because the unemployed ... surely must have been forced into spending cuts as benefits expired.
The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.
In other words, we’d be looking at a vastly healthier economy if it weren’t for the GOP takeover of the House in 2010.

Tuesday, October 15, 2013

'The GOP Tax'

Paul Krugman:

The GOP Tax: Macroeconomic Advisers has a new report out about the effects of bad fiscal policy since 2010 — that is, since the GOP takeover of the House. ... They say that combined effects of uncertainty in the bond market and cuts in discretionary spending have subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized rate of growth, so that we’re talking about almost 3% of GDP at this point; cumulatively, the losses come to around $700 billion of wasted economic potential. This is in the same ballpark as my own estimates.
And they also estimate that the current unemployment rate is 1.4 points higher than it would have been without those policies (a number consistent with almost 3% lower GDP); so, we’d have unemployment below 6% if not for these people.
Great work all around, guys.

But the master's of the universe -- the wealthy supporters of the GOP and a driving force behind the push for austerity -- are doing great. If they get lower taxes as a result of all this, that's allthat matter, right? Who cares about all the other people who are struggling as a result of cuts to social services, higher unemployment rates, and the like?

Tuesday, October 01, 2013

The Trillion Dollar Coin--or, More Sensibly, 1000 Billion-Dollar Coins--Is the Only Way ...

Brad DeLong:

The Trillion Dollar Coin--or, More Sensibly, 1000 Billion-Dollar Coins--Is the Only Way for Obama to Fulfill His Oath of Office: "I, Barack Hussein Obama, do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States."

The Constitution tells us that to faithfully execute the office the President shall:

from time to time give to the Congress information of the state of the union, and recommend to their consideration such measures as he shall judge necessary and expedient;

he may, on extraordinary occasions, convene both Houses, or either of them, and in case of disagreement between them, with respect to the time of adjournment, he may adjourn them to such time as he shall think proper;

he shall receive ambassadors and other public ministers;

he shall take care that the laws be faithfully executed, and shall commission all the officers of the United States.

The appropriations are lawfully commanded by Congress--to fail to spend them is, since the budget reforms of the 1970s, to break the law--the repayment of the debt is mandated by the Constitution's Article XIV, as is the limitation of the government's authority to take property via taxation or otherwise to the amount lawfully commanded by Congress.

There are two ways in the absence of a debt-ceiling increase for the President not to break the law:

  1. Find some other debt of the U.S. government--like, as Bob Rubin did, the debt of the U.S. government to the Federal Employees' Thrift Savings Plan--where the Trustee will not complain if the government does not pay its debts for a while, and then have the government not pay its debts for a while.

  2. Mint the damned coins already.

(2) look strongly preferable to me--the exercise of the government's not paying its debts to people who can't gain standing to sue and then saying that unpaid debts by the government are not part of the debt subject to limit has always seemed ugly.

From an economic standpoint, yes, this could avoid some very bad economic consequences. But I'm less sure of it from a political standpoint, i.e. that the public would understand and endorse it. I suspect that's true of the administration as well, and politics generally seems to trump economics when push comes to shove within the administration.

Monday, September 30, 2013

'Thank the GOP for the Shutdown and Holding the Economy Hostage'

Dean Baker:

Thank the GOP for the shutdown and holding the economy hostage, by Dean Baker, Here we go again: the GOP is ready to stall the US economy and shut down the government in a crusade to cut government spending. Proponents of austerity both in the United States and Europe are eager to claim success for their policies. In spite of economies that look awful by normal standards, austerity advocates are able to claim victory for their policies by creating a new meaning for the word.
In Europe, we have the bizarre story of both George Osborne ... and Olli Rehn ... claiming success for their austerity policies based on one quarter of growth. ...
In the United States, we were treated to the Wall Street Journal (WSJ) boasting of the success of the 2011 debt ceiling agreement on the eve of another standoff on the budget and the debt ceiling. The measure of success in this case appears to be that the sequester budget cuts put in place by the agreement are still in place and that the economy has not collapsed as a result. ...
First, it is worth noting that many of the disaster warnings about the sequester from President Obama and the Democrats were grossly exaggerated. ...
However, this doesn't mean that the sequester is harmless. ...
We ... know the sequester will give us deteriorating government services, higher unemployment, and slower economic growth. That's the track record which prompts the Wall Street Journal's boasts – and the GOP's misguided actions – in favor of even more austerity.

But if the real goal of the GOP is to reduce the size of government, particularly social insurance, and if the fact that it comes at the expense of the most vulnerable in society is not that great of a concern, then it's not at all clear that austerity has been a failure (and Republicans have also managed to undermine the public's faith in the ability of government to solve important problems whch could also be added to the success side of the ledger). The GOP often argues in terms of jobs and growth, but it is usually cover for a broader agenda.