Archives For stimulus debate

Another of Russ Roberts’ and John Papola’s brilliant “Keynes vs. Hayek” rap videos is now online.  (If you missed the first one, it’s here.)

Whereas the first video focused largely on monetary policy, this one looks mainly at fiscal policy.  Both are truly masterful.  I’m amazed that Roberts and Papola were able to incorporate so much of the substance of the debates into such short videos.  I’m also amazed at the resemblance between “John S. Papola, MD” (producer Papola’s father maybe?) and Ben Bernanke.  Uncanny.

Alan Greenspan has been revered in political and media circles since his benevolent reign over times of fortune as the Chair of the US Federal Reserve. Now Mr. Greenspan has acknowledged what many of us have been saying for a long time: fiscal stimulus didn’t work. (insert gasps of surprise here)

Now, to his credit, Mr Greenspan was not an avid proponent of the fiscal stimulus plan (that I have seen) and more often pointed to concerns about the financial markets and the debt (and politics) associated with fiscal spending (for instance, see here).  However, Mr. Greenspan’s newly restated appreciation for normal market forces is welcome, especially given the reverence with which he is typically held by the political masses.  From today’s Wall Street Journal “Real Time Economics” blog (see the full post here):

“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself, former Fed Chairman Alan Greenspan told a gathering held at the Council on Foreign Relations in New York on Wednesday.

At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan said.

(Again, gasps of surprise, indeed shock: You mean, we should just let the markets work?!)

According to the article, Greenspan claims that “fiscal stimulus efforts have fallen far short of expectations and the government now needs to get out of the way and allow businesses and markets to power the recover.”

I would suggest a different interpretation.  The fiscal stimulus efforts have had no less effect than expected…at least by the expectations of reasonable economic thinkers. For example, see the posts here and here from my pre-TOTM days.  But as to his conclusion that government needs to get out of the way? Preach it, Brother Greenspan!

My colleague Tom Hazlett, along with George Bittlingmayer and Arthur Havenner, provides some economic wisdom on why they don’t call it stimulus anymore:

Counter to the predictions put forward a year ago by the Administration, when it claimed that “more than 90 percent of the jobs created are likely to be in the private sector,” U.S. companies employed 3.9 million fewer workers in January 2010 than they did one year earlier. Public employment bucked the trend, staying constant even as governments contended with sharply reduced tax revenues. While the jobs held by those 22 million public workers helped support many families, the “stimulus” failed to trigger private sector employment growth.

In late 2009, the Congressional Budget office pegged employment gains due to the American Recovery and Reinvestment Act (A.R.R.A.) of 2009 at 600,000 to 1.6 million, while estimating its full cost at $862 billion.

This implies a price tag, at the median estimate, of about $800,000 per job. These forecast job gains are not permanent, but temporary. The Administration’s January 2009 forecast was that the A.R.R.A. was needed to reduce the path of unemployment for five years, when the unemployment rate – if we did nothing – would decline to the level projected with the “stimulus.” Using this five-year time horizon projects annual costs of approximately $160,000 per job.

That’s a rich bonus payment. The system is borrowing heavily to finance it. Deficits last year and this are running at 10 percent of GDP, easily the largest in post-WWII U.S. history. They are projected by CBO to remain at three percent of GDP in 2020 – when over 3% of GDP will be devoted to simply paying interest on the national debt.

The term “shovel ready” seems to have disappeared from the language just as quickly as it arrived. The idea that greater public borrowing would leverage capital expenditures to put the U.S. back to full employment is now replaced by boasts that Washington has saved Albany, Springfield and Sacramento from laying-off government workers. Whatever the value of that gold-plated jobs program, it is not “stimulus.”

Like a rain dance that produces no clouds, we are now into our fourth round of federal deficit creation – the automatic “stabilizers,” followed by the Bush (2008), Obama I (2009), and Obama II (2010) versions. With each dry day, the deficit dancing intensifies. When the rain finally falls, we will be told that the recovery is a tribute to the Keynesian Gods. But it’s already clear that something has gone wrong: the “stimulus” chant has fallen silent. Our dance on a fiscal cliff has lost its theme music.

Steve Horwitz writes a short, lay piece on crowding out and job creation.

Brad “smacks down” Steve Horowitz.

Russ Roberts amplifies Horwitz with a nice point about the dangers of aggregation.

David Henderson notes that Brad misses what Horwitz is really saying.

Brad DeLong “smacks down” Steve Horwitz again, not acknowledging any of the criticisms.  Brad writes:

Me: I don’t think so. Take

Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy…

and replace “government” by “Larry and Sergei’s internet company.” It then reads:

Larry and Sergei’s internet company can only spend what it gets from other businesses and consumers one way or another, either through sales or borrowing. For every dollar that Larry and Sergei’s internet company spends, there is one less dollar being spent somewhere else in the economy…

Brad’s claim is that Horwitz wouldn’t make the second claim and thus, he doesn’t really mean to make the first claim because they are equivalent.  So Horwitz is a partisan hack.

Brad, Brad, Brad, Brad.  This is so revealing.  Brad really believes, I guess, that the government randomly spending money digging ditches or the equivalent (without regard to Russ’s well-highlighted concerns about where money is being spent, among many other things) is as productive as Google spending money inventing, making and improving its products for sale in the market.  Brad really believes, I guess, that when Google engages in voluntary exchange with customers that it is offering value exactly equivalent to the value the government offers in exchange for an equivalent amount of involuntary taxation or inflation.  Apparently Brad believes that the two cases are equivalent, so anyone who disagrees with the second must disagree with the first (and is thus being disingenuous in supporting the first claim).  But anyone who would claim that these two cases should be treated equivalently and who would disregard the obvious and essential differences between government action and private exchange is an ethics-free partisan ass and shouldn’t be taken seriously.

Oregonians, my fellow residents of the Beaver State (and, by the way, the only state in the Union with a different image on each side of its flag), voted yesterday to increase top marginal income tax rates and corporate tax rates, including minimum corporate tax rates and the addition of a tax on gross receipts.  I’m still waiting for Paul Krugman to decry the anti-stimulus measure, but I doubt it will happen (he’s a partisan hack, you know).  But there is a “bright” side: Capital (human and otherwise) flight from Oregon to its neighbors (including income-tax-free Washington to the North and foundering behemoth California to the South) will help those states with their economic troubles!  <sarcasm>And fewer people and less economic activity in Oregon will be good for spotted owl habitat, after all</sarcasm>.  I just hope the local beer industry survives.  I don’t know what I’d do without the ability to drown my sorrows in a few bottles of Terminal Gravity IPA.

Russ Roberts’ brilliant and eagerly-awaited Keynes vs. Hayek rap video is here.  It’s the best economics pop music since Merle Hazzard.  Here are the lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits

Today the Obama administration announced with great pride that its economic stimulus plan created or saved about 650,000 jobs.  “Thank goodness!” reads the subtext.  If not for all those new and protected jobs, the unemployment numbers would be really bad!

It appears no one in the administration’s economic advisory team has heard of Frédéric Bastiat.  He wrote an essay titled Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen).  In his essay, for which he has received some notoriety, he explained the parable of the broken window :

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Is this some new economic insight? Some innovative wisdom that is too fresh to have influenced our federal policies? Sadly, no. Bastiat published his essay in 1850.

Economists of any merit have long rejected the sort of cheap “analysis” fronted by the White House. Opportunity cost (that which is hidden) is one of the most fundamental concepts in economics. Unfortunately, our national leaders and their economic advisers have little care for (or benefit from) taking that most fundamental concept into account when attempting to justify their broken policies.

But if you’re not convinced and wish to further stimulate the economy, follow the Obama administration’s lead (and Bastiat’s foil): Take a brick and throw it through your front window.  Pay someone to fix the window.  You just created a new job!

Capitalism is Good

Josh Wright —  22 March 2009

A friendly reminder from Becker and Murphy:

Consider the following extraordinary statistics about the performance of the world economy since 1980. World real gross domestic product grew by about 145 per cent from 1980 to 2007, or by an average of roughly 3.4 per cent a year. The so-called capitalist greed that motivated business people and ambitious workers helped hundreds of millions to climb out of grinding poverty. The role of capitalism in creating wealth is seen in the sharp rise in Chinese and Indian incomes after they introduced market-based reforms (China in the late 1970s and India in 1991). Global health, as measured by life expectancy at different ages, has also risen rapidly, especially in lower-income countries.

Of course, the performance of capitalism must include this recession and other recessions along with the glory decades. Even if the recession is entirely blamed on capitalism, and it deserves a good share of the blame, the recession-induced losses pale in comparison with the great accomplishments of prior decades. Suppose, for example, that the recession turns into a depression, where world GDP falls in 2008-10 by 10 per cent, a pessimistic assumption. Then the net growth in world GDP from 1980 to 2010 would amount to 120 per cent, or about 2.7 per cent a year over this 30-year period. This allowed real per capita incomes to rise by almost 40 per cent even though world population grew by roughly 1.6 per cent a year over the same period

….

The policies of the Bush and Obama administrations violate the “do no harm” principle. Interventions by the US Treasury in financial markets have added to the uncertainty and slowed market responses that would help stabilise and recapitalise the system. The government has overridden contracts and rewarded many of those whose poor decisions helped create the mess. It proposes to override even more contracts. As a result of the Treasury’s actions, we face further distorted decision-making as government ownership of big financial institutions threatens to substitute political agendas for business judgments in running these companies. While such dramatic measures may be expedient, they are likely to have serious adverse consequences.

These problems are symptomatic of three basic flaws in the current approach to the crisis. They are an overly broad diagnosis of the problem, a misconception that market failures are readily overcome by government solutions and a failure to focus on the long-run costs of current actions.

Definitely read the whole thing.

So says Lucian Bebchuk in the WSJ:

While AIG has thus far been able to cover derivative losses using government funds, the possibility of large additional losses must be recognized. AIG recently stated that it still has about $1.6 trillion in “notional derivatives exposure.” Suppose, for example, that AIG ends up with losses equal to, say, 20% of this exposure — that is, $320 billion. Suppose also that the value of AIG’s current assets, including the shares in its insurance subsidiaries, is $160 billion. In this scenario, the government’s fully backing AIG’s obligations would produce an additional loss of $160 billion for taxpayers. Should the government be prepared to do so?

The alternative would be to put AIG into Chapter 11. In this case, AIG’s creditors, including its derivative counterparties, would obtain the company’s assets. They would end up with a 50% recovery on their claims, bearing those $160 billion of losses themselves.

It is important to understand that the government can also employ intermediate approaches between fully backing AIG’s derivative obligations and no backing. For example, the government could place AIG in Chapter 11, but commit to provide supplemental coverage that would make up any difference between the value that creditors would get from AIG’S reorganization and, say, an 80% recovery. Such an approach could allow setting different haircuts for different classes of creditors. The government, for example, might elect not to provide such supplemental coverage to executives owed money by AIG.

At a minimum, the government should conduct “stress tests,” estimating potential losses in alternative scenarios, and formulate a policy on the magnitude and fraction of derivative losses it would be willing to cover. A policy that doesn’t fully back AIG’s obligations should be seriously considered.

Read the whole thing.

Some Links

Josh Wright —  10 March 2009