Thursday, August 11, 2011

Catch of the Day

This is cute: over at CAP, Michael Linden pours the newly revised (way down) economic numbers for 2008 and 2009 into the graphs that Douglas Holtz-Eakin has been using to prove that the Obama stimulus bill was a flop and finds, lo and behold, that based on the updated data but using the exact same method that the stimulus is now a brilliant success.

Of course, this begs the question: just what do DHE and other conservatives believe did happen in spring 2009 to suddenly improve things? I know, I know...the slump was all about anticipation of Obama tax hikes, and the turnaround was because of the Bush tax cuts poking through.

Nice catch!


  1. It occurs to me that by attacking the very notion of cause and effect, and replacing it with temporal sequence and imaginative association, David Hume can claim to have been the real founder of the GOP.

  2. I hope CSH sees this and clicks through to the Linden item, since it answers his question about "ROI" -- by a Republican economist's own estimates, the stimulus has already returned between 2 and 5 times the amount invested. Not too shabby.

  3. According to the CBO, average US annualized GDP, constant dollars, was about $13.2 T in 2008. In 2010, the average annualized GDP was $13.1 T, for a real dollar, two-year loss of around 1%. The 2009 stimulus was roughly $600 B; if 5X that amount is baked into the US GDP by 2010, that means 2010 GDP, ex-stimulus, would have been around $10 T ($13 T actual - $3 T stimulus). That $10 T would represent a 20%+ real loss over two years. Really?

    The red line in Holtz-Eakin's chart makes it seem like the US was going to continue on the horrid anti-growth 2008 trajectory through 2009 and beyond. There are any number of reasons to doubt such a projection, such as the stimulative decline in cost of commodities (e.g. oil) as the global economy contracts, the productive capacity of the US being increasingly large vs. the diminished output, etc.

    I'm not saying Holtz-Eakin is wrong, mind you, there's no way to know what the accurate dark red line should be in his chart. But when a country borrows ~5% of total GDP with virtually no real growth to speak of, it takes quite a bit of temerity to expect gratitude, from those that will foot the bill, on the basis that an imaginary alternative scenario would have been that much worse. Holtz-Eakin's basis for his conclusion, carrying forward the dreadful 2008 growth rate, is actually fairly insulting to those who will shoulder the bill for the stimulus.

  4. CSH, I refer you and anyone else here back to the Linden analysis linked to in the post. As of late 2008 we were losing GDP at an annualized rate of 9%, not 1%. The temerity would have been for policymakers to just sit around while that was happening and hope it stopped.

  5. Here's another vivid illustration of what was happening -- the chart accompanying this article (by a writer who's apparently a stimulus skeptic):

  6. But if the economy does not have natural, self-correcting mechanisms, such as noted in my previous post, then why have a free market economy at all? If only government intervention can make an economy function correctly, why not go all in with Soviet-style gosplan?

    In fairness, the fact that mega-banks had so f'ed up their balance sheets with toxic debt probably had an unusual impact on the lack of growth in 2008, as lending is arguably the mother's milk of our economy. But that's only one part of the stimulus. The rest, as the Forbes writer argued, was mostly crap.

    Someone made an interesting observation a few threads ago about how byzantine is the process to get a shovel-ready project approved. Pretty depressing in light of our discussion about "classic Keynes" (glut-busting borrowing) vs. "better-than-nothing Keynes" (throwing money down a dry black well).

    In the context of road work, glut-busting Keynes might be building a "Bridge to Somewhere", creating improved highway access to an area with pent-up economic demand. "Weak Keynes" would be fixing up a bridge that may be structurally obsolete (but decades away from functionally obsolete), and unattractive but not compromising economic activity. Which project is more likely to make it safely through the byzantine approval process?

    In sum, I'd agree about the utility of funds injected in the banking system to try to get it lending again. The rest of it is mostly crap - "Weak Keynes", per our discussion last week, and per the assessment of the Forbes writer.

  7. Actually, I apologize a little for not being clearer in the post just above: obviously, the broken banks were mainly aided by TARP, which was a) Bush legislation and b) ultimately fairly cheap, after the lending was mostly paid back. As a result, you could argue that the entire Obama stimulus was basically useless.

    According to the BEA, the only year since the Great Depression where real GDP dropped more than 2008 was 1946, which is fairly easily attributable to the post-war decline in production. 2008 was thus a very weird year, something very bad happened, and we can certainly argue what that thing was, but given the essential contribution of lending to economic growth, and the historic zombification of banks from sour CDOs and the like, you'll have a hard time convincing me that the bank death march wasn't primarily behind 2008's historically bad GDP results.

    So - yeah, much as I hate Bush, I'm gonna say TARP was mainly responsible for the 2009 GDP reversal, not Obama's stimulus.

  8. CSH, I don't understand the black-and-whiteness of the questions in your first paragraph. Lots of systems can be self-correcting within limits, or can manage "local" self-corrections, yet occasionally seize up or break down in some way that requires deliberate action to get them going again. A free market like ours, for instance, keeps the production of shoes from getting way out of whack with the actual demand for shoes. Soviet planning, famously, wasn't able to do that.

    But there has never been any free market that didn't require some attention from policymakers. We tried an extremely low-regulation market in the 19th century and wound up with regular depressions and panics, unreliable local banks and currencies, contaminated food and medicines, six-year-olds working in coal mines, the Thames River and Lake Erie turning into toxic sludgs, etc. The lesson of this, incorporated into policy over the period of roughly 1900-1975, was that there need to be some basic rules, a national currency issued from a central bank, international agreements that regulate currencies generally, government guarantees on bank despoits, and, per Keyenes, occasional government fiscal intervention to stop downward spirals brought on by the "paradox of thrift" and the like. Most of this is now uncontroversial, even though it makes the market less purely "free." I don't understand the current debate insofar as people seem fine with any number of interventions in the market (and would be horrified if these were removed and they saw the results), but then draw the line at that last one, Keyenesian stimulus, and call it "socialism." It's just another of the adjustments that are sometimes needed to keep the market from destroying itself.

  9. By "your first paragraph" I was referring to the comment @ 7:15. Just saw this latest.

    As to the relative contributions of TARP and the stimulus, that's been analyzed by the CBO and others more competent to do it than me. They say the stimulus helped. I guess it seems intuitively right to me that it would (and, conversely, seems intuitively wrong to anti-Keyenesians, for reasons I find baffling, as I just said). The "free market" economy depends on a virtuous cycle in which people have money to spend, therefore there's demand for things, therefore private enterprises arise and grow to supply that demand, therefore these enterprises hire and pay people, and therefore people have money to spend. When something interrupts that cycle, you have a crash. People stop spending, businesses can't hire, unemployment rises, so then there's even less spending, etc. The idea is to get the cycle going again. The central government is an agency with the ability to push money into the system, temporarily restoring people's ability to spend. Both monetary and fiscal policy can do this in various ways. In particular, the central government, unlike most households, can often borrow on very favorable terms (if one political party hasn't tried to destroy its credit) and use it sponsor projects -- "strong" if possible, "weak" if need be -- that will keep people working, and also one hopes add long-term value, in order to keep the virtuous cycle going (or at least arrest the vicious cycle) until the whole mechanism can become self-sustaining again.

    It just seems strange to me that people would argue to the contrary -- that with the central government able to borrow at literally zero percent interest or just above, it's better for it to sit still and let a large fraction of the workforce be unemployed, and an even larger fraction so worried or debt-ridden that it's unable to spend money and create demand. To me, in other words, what we're calling "Keneyesianism" is really just common sense. What's the flaw in the logic?

  10. Jeff, we may be arguing around each other a bit here. I'm a conservative and a Keynesian. I fully support government's role to intervene in an economy to relieve what Keynes would describe as gluts. Going back to my 7:15 AM post, I would very much support borrowing a lot of money to build the hypothetical "Bridge to Somewhere", assuming the price were right. The question is whether Obama's stimulus was mainly "bridges to somewhere" or money down the proverbial well, which, as you know, Keynes said was better than nothing, but by "nothing" he meant "economic armageddon".

    We can't answer the question conclusively, obviously. What we know is that real GDP decline in 2008 was historic in its size, exceeded only by the first year after the Great War in the post-depression era. Something unusually bad happened to our economy; it seems quite likely to me that thing was the complete breakdown of US/global banks driven by their balance sheets poisoned from toxic paper.

    Solving that breakdown has to be fairly laid at the feet of TARP, which Geithner has estimated will end up costing the taxpayer about $25 billion once everything has been paid back. So: $25 Billion for TARP, $700 Billion for Obama's stimulus...its probably the understatement of the century to say TARP was better bang for the buck.

    And you know, if my underlying thesis is correct, that the broken banks drove the historic 2008 real GDP decline, this comparison is a bit unfair to Obama, as Bush got his shot at TARP before Obama could. As a general point, I'd be happier if things like Obama's stimulus were held to the standard of traditional, glut-busting Keynesian economics, and not the lesser, weak tea, better-than-nothing version.

    Its just so damn expensive.

  11. OK, CSH, I'll have to learn more about the "glut-busting" aspects of Keynesianism, because I'm not familiar with that part of the theory. As to the stimulus (aka "ARRA," not to be confused with the Chicago-based cover band of that name), there is as you probably know a web site that tracks what specifically the money was spent on: You can search this by zip code, with an explanation of the individual projects funded. In my neighborhood, the recipients included a trust fund that helps restore land damaged by leaking underground chemical tanks, a project to modernize a control tower at a regional airport, and a program to develop curricula for training vehicle fleet managers and mechanics in the proper maintenance of hybrid cars. We can of course debate the usefulness of such projects; to me, they seem to vary in terms of immediate payback or "ROI," but I wouldn't put the return on any of them at zero unless we're dealing with corruption of some kind and the money isn't being spent as advertised.

  12. Jeff, the website is helpful, perhaps I can use it to illustrate my concern with ARRA. For Keynes, deficit spending is useful to the extent it unlocks a "glut", that is, to the extent it makes use of productive capacity on which the free market fails to capitalize. Generally speaking, which MSA embodies this Keynesian principle best? Which MSA has the infrastructure, both physical and intellectual capital, to support much greater economic activity, but lacks the spark that can be provided by Keynesian deficit spending, and is frankly seeing its capital decay? Many somewhat fit the bill, but probably none so much as the formerly great, rapidly fading, Detroit.

    If ARRA were guided by traditional Keynesian principles of unlocking dormant capacity, it would stand to reason that significant investment would be attempted in Detroit. Look at investments by zip code in Michigan. Looks like 5 of the top 10 are in the Detroit MSA, which isn't bad, though 40% of the state population is in the Detroit metro. Those 5 zip codes pulled in a little over $1 B - also not bad. However, none of the 5 were the #1 zip code, which pulled in - on its own - $1.5 Billion!!! Where was that #1 zip code? Lansing - the state capital! (But ARRA was not a state bailout...)

    (Indeed, I went through a handful of states, and the state capital zip code was the winner for all but Missouri, which had a zip in the much larger KC barely edge out the Jeff City capital. But. ARRA. was. not. a. state. bailout!)

    Surely some of that huge flow of money that was pumped into the Michigan state capital in Lansing might have benefitted Detroit, if only indirectly. However, if you, me and Keynes were sitting down to tea, and talking about the Upper Midwest, and where we would wave our Keynesian wand, we would no doubt put a big focus on sure looks like, from the data on the site, that ARRA saw Michigan quite a bit differently than Keynes would.

  13. CSH, there's a quirk in the tracking system -- I recall now having heard about it a while ago and apologize for not having warned you about it. Part of the ARRA was a revenue-sharing-type effort to make up drastic shortfalls in spending at the state level. (Overall, state cutbacks + federal spending mostly canceled out, which means there hasn't been much net stimulus funding at all; Keyenes hasn't really been tried in this crisis. But I digress.) Also, some of the funded projects, by their nature, had to be administered or overseen by state governments. The site lists all these projects as "happening" in the state capital, because that's where the money initially went, regardless of where it was really destined.

    Thus, for instance, Lansing, the state capital of Michigan, is shown as the recipient of several grants for expanding and upgrading the Wayne County Passenger Ship Terminal and adjacent wharves, which are in Detroit. Presumably the point of that project is to make it easier to get people (and therefore money) into Detroit, thus encouraging greater private investment in that city. Also, presumably, the workers hired to do the job were living in or around Detroit. But because it was a project of the Michigan Department of Transportation, it shows up in Lansing.

    Personally, I'm not sure it's better, in terms of unlocking gluts, to send money to state or local governments as opposed to having the feds pick all the projects. I mean, who am I going to trust to do a better job, Joe Biden (point man on ARRA) or Rod Blagoevich? But that's just me. From the standpoint of "federalist" conservatives who oppose central economic planning, the fact that states administered a lot of the money is presumably a plus. Recall that Republican governors, senators and congressmen were quick to put in their bids back when the cash was flowing. Realistically, in this country, there probably wasn't any other way it was going to get done.

  14. Jeff, thanks for the clarification about the state capitals. I suppose my bias that ARRA was not really Keynesian is long since established, but I certainly agree that expansion/improvement to a transportation choke point like a ship terminal very much passes the Keynesian sniff test, regardless of where it is recorded.

    Maybe I'm wrong about ARRA. In any event, its a fair bit more interesting to me now, so thanks for that.

  15. Actually, CSH, I had what I think is an even better (and more free-market-oriented) idea for ARRA at the time it was being passed. I mentioned this at the time on discussion boards like this one, but somehow the White House failed to pick up on it. My idea was that the federal gov't should send every household in America one of those gift/debit cards like people give you at Christmas. You know, one that looks like a VISA or Amex card, but has only a certain amount of value on it. You could give each household, say, $1,000 on such a card. This card couldn't be used for cash advances or paying normal bills, only for the purchase of new goods and services -- and it would expire a year or 18 months later.

    The point of this plan would be:

    > The government pumps a trillion dollars into the economy;

    > Consumers themselves decide what to spend the money on, with no government planning or direction; and

    > You avoid the problem that occurs with tax cuts and rebates, which is that people just save them instead of spending them. (With the card, it's "use it or lose it.")

    Of course, this wouldn't get bridges or ship terminals built, because ordinary consumers and households don't buy those things. But it would ensure that the stimulus money was flowing into the real economy rapidly and not just being saved, and without the government interfering any further in the market. As I say, no takers this time, but I think something like this is the Keyenesian wave of the future.

  16. You know what I learned from this discussion? That it is awfully difficult to execute something like ARRA in a way that effectively satisfies the Keynesian criteria of breaking up gluts.

    You can imagine the WH in the early stages of planning, and they might have noted, as in this thread, that a disproportionate amount of glut is located in a place like Detroit, so it makes the most economic sense to focus disproportionate funds there. And then the reps from my MSA spoke up and said, "Excuse me? You're gonna spend disproportionate funds in...Detroit? Not voting for that!!!"

    Eisenhower's interstate initiative mostly didn't face this problem, and as a glut-buster, neither did TARP (the only protest being milquetoast comments about free money for rich people). The $1,000 debit card seems better than ARRA, but it still struggles with unlocking dormant capacity, as the spending mostly wouldn't go to dormant places without a push from outside.

    In conclusion, I used to think the problem with ARRA was shortsightedness from Obama or those enacting the policy.

    Actually, the problem with ARRA is shortsighted selfishness from me. And you. All of us, really.

  17. Yes, it's an imperfect world, and a (very, I think) imperfect political system, rife with logrolling and pork-barrel politics whenever there's money to be spent. I suppose ideas like this National Infrastructure Bank that's been talked about are meant to address such problems, and maybe new mechanisms of that kind will eventually evolve. I do think that Keynesiasm as a practical program is a work in progress, and that in general -- despite some of the alarmingly Hooveresque ideas abroad in the land these days, both here and in Europe -- lessons are learned over time, the dynamics of big modern economies come to be better understood, previous mistakes are avoided and policymakers gradually become better equipped to respond to future problems more effectively. If that's so, we won't need to worry about future ARRAs because they won't be needed, and if they are, the people implementing them will have taken lessons from the current experience. I hope that's not hopelessly optimistic.

  18. Who the hell are you people? I thought blog comments were supposed to be filled with inflammatory, homophobic, misspelled contrarian bluster? Going back to Yahoo news where I can post "OBAMA SOCALIST FAG LUVR" under a comment wherein Bush is accused of orchestrating 9/11.

  19. (What Jeff emoticoned)


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