I basically agree with Jonathan Chait's post on whether Barack Obama should be going all Truman on behalf of a stimulus bill that wouldn't pass Congress. But I think he's seriously off his usual game with a subsequent post that basically concludes that Republicans will believe in Keynesian stimulus the next time that they hold the presidency during a downturn.
It's hard to know what people sincerely believe, but I think Chait has this one wrong. Republicans have consistently called for tax cuts especially for rich folks, spending cuts on various domestic programs, and most spending on the Pentagon, regardless of economic conditions. The policies will be the same; only the rhetoric and the rationale will change -- as Chait himself has demonstrated many times in the past. And I think the record of 2008, with George W. Bush still in the White House, confirms it: there was no appetite in the White House or among Republicans in Congress for a large stimulus then, either.
See also a great catch by on of the Economist bloggers of a claim by a Tea Partier that military spending is important during a recession because of all the jobs.
I guess it depends on how loosely you are defining "Keynesian." I would expect if any Republican wins the Presidency and the economy still sucks (which it undoubtedly will) that he would try to pass something like Tim Pawlenty's absurd tax cut plan, deficits be damned. That is certainly not the kind of stimulus Barack Obama or me and you would want, but it's not the current Paul Ryan-ish fiscla contraction either.
ReplyDeleteThere was a stimulus in 2008, actually; it wasn't huge, but then again, this was pre-crisis. http://www.irs.gov/newsroom/article/0,,id=179095,00.html
ReplyDeleteHmm. I could see President Romney going all in for tax cuts for the rich, cutting domestic programs, increasing military spending, AND economic stimulus. Republicans are ideologues, but they want to win elections, and they don't care if what they said yesterday is 180 degrees from what they're saying today. And I agree with Chait that Democrats would go along, at least with the stimulus part, because they actually care about the country.
ReplyDeleteForgot to add - Republicans don't care about deficits, so that wouldn't be an obstacle
ReplyDeleteYes, but the Republicans were also the people who gave up Medicare Part D. As more and more baby boomers swell the ranks of Medicare, I have a hard time believing that any party is going to cut domestic spending. The Republicans might campaign on cutting future spending in 2035, but no one is going to cut spending soon.
ReplyDeleteMaybe I'm remembering the 2010 campaign incorrectly, but I thought the Tea Party campaigned on "Obama is making all of these other domestic programs so large, and government is getting so big, that he is going to have to cut Medicare." Which got out the senior vote.
Did any Tea Party candidates run on a platform of specifically cutting Medicare?
Romney, Dec. '08: http://goo.gl/DdWDA
ReplyDeleteThe downward spiral is deepening and accelerating: Congress and the president must act now....
The Fed should continue to expand the money supply. And, it should confirm that it will not tolerate deflation — the pain of inflation pales in comparison.
That being said, a stimulus plan is needed without further delay, and there are some things that Republicans should insist on.
The first is that tax cuts are part of the solution (my emphasis)...
On the spending front, infrastructure projects should be a high priority. But because infrastructure projects involve engineering, environmental studies, permitting and contracting, they can take a long time to actually boost the economy. Spending to refurbish and modernize our military equipment is urgently needed, and it has a more immediate impact on the economy....
We should also invest to free us from our dependence on foreign oil, not by playing venture capitalist, but by funding basic research in renewables, material science, combustion, nuclear reprocessing, and the like. During the 2008 campaign, virtually every candidate agreed on the need for an “Apollo-like mission” to achieve energy independence. Now is the time to start.
...the federal government should look to ease the burden of mandates on states, like Medicaid.
I have a post about this, and Romney's indictment of Obama's economic leadership, here
http://goo.gl/jNive
@Ron E
ReplyDeleteIt's true they'll try to pass enormous tax cuts on the grounds that they're trying to stimulate the economy. But when the economy is doing well, they'll try to pass huge tax cuts on the grounds that the people deserve their money back. In fact, that's just what they did in 2001. Chait has documented this before, particularly in his book The Big Con. It's supply-sidism, not Keynesianism, regardless of what argument they make at the time. A true Keynesian would say the government should tighten its belt during a time of economic growth, and that would mean a mix of spending cuts and tax increases.
And I think the record of 2008, with George W. Bush still in the White House, confirms it: there was no appetite in the White House or among Republicans in Congress for a large stimulus then, either.
ReplyDeleteBut the crisis didn't hit until late 2008. As late as early October, the unemployment rate was still 6.1 percent -- up fractionally from a few months earlier, but not the kind of thing that would make stimulus seem urgent, especially with everyone's political attention focused at that moment on Sarah Palin, Bill Ayres and Joe the Plumber. The rate didn't officially exceed 7 percent until early January 2009, at which point Bush wasn't making major policy anymore.
I think Chait is probably right. He's not saying that Republicans will change their minds about anything; he's saying that any Republican who recognizes that voters are likely to hold him/her responsible for low growth or high unemployment will support policies to improve those conditions That necessarily means Keynesian policies, regardless of how they're framed rhetorically, for the same reason that anyone who wants to succeed at getting a spaceship to the moon will necessarily follow "Copernican / Newtonian" policies even if he's been insisting for years that the earth is flat.
Of course Republicans believe in Keynes. Republicans are for the most part businesspeople, and businesspeople channel Keynes every time they borrow money to make fixed capital investments.
ReplyDeleteA business will borrow money to make fixed capital investments to the extent that the payoff exceeds the cost of capital. This roughly captures the spirit of Keynesian stimulus. So if its 1950, with all manner of pent-up demand in America and poor infrastructure to serve it, it makes tremendous Keynesian sense to borrow a substantial sum of money to build the interstate system, an investment that obviously greatly exceeded its cost of capital.
Compare the interstate system, perhaps the iconic Keynesian stimulus, with sending Grandma the same sustenance check this month that she's been sent the last 20 years. Arguably taking Grandma's check away is anti-stimulative; pretty obviously sending the same check as the last 20 years is not stimulative in any Keynesian sense.
I think its become almost religion on the left to justify deficit spending on the basis that it is definitionally equivalent to Keynesian stimulus, and then to bash the right for not believing in Keynes. Nothing could be further from the truth!
Indeed, if you wish to determine whether a particular deficit proposal is truly stimulative (per Keynes, and not whichever left-wing pundit is trying to justify this year's deficit), ask yourself if a private company would undertake it on expectation of a positive ROI. I think you will find that the reason why Obama's 'stimulus' was so ineffective is that the vast majority of it failed this simple test.
You missed a key premise of Chait's argument: That Democrats take over the House and provide the policy push for stimulus. In Chait's telling, a Romney gets the stimulus that's good for the economy and his political fortune but also gets the political cover—the Democrats made me do it—for his apotasy.
ReplyDeleteI'd hate to try to predict what Romney would do in any particular circumstance, but I think he would have trouble trying to pass a stimulus package through a GOP Congress with a strong Tea Party element. Bush had a lot of trouble getting his party to vote for TARP at a time when the sky truly was falling. The Republicans sometimes sound Keynesian when they keep repeating that you can't raise taxes in a weak economy; but aside from the fact that they come up with different reasons for the same policy in a strong economy, they continue to press for deficit reduction through spending cuts in the weak economy without appearing to notice the inconsistency.
ReplyDeleteCSH, I don't know how you're calculating "ROI," but if the stimulus raised GDP by up to 3 points and lowered unemployment by millions -- as the CBO says it did -- for at least two years, putting the whole economy closer to its capacity going forward, that seems like a pretty good buy for just a few hundred billion in new spending (plus some tax cuts), especially at a time when the federal government can borrow at historically low rates.
ReplyDeleteBut leave that aside: It's interesting that you cite the example of the interstate highway system. How long did that project take to produce positive ROI? Most of the Obama stimulus was invested in 2010; this is 2011. How do we know yet what, say, the real ROI is on a bunch of jobs created last year in the renewable energy sector? Seeding new technologies and energy sources is something we have government do for the same reason we have it build highways: because it's the kind of essential investment whose "returns" emerge over decades, which is too long a time horizon for most private-sector ROI.
Bush clearly followed Keynesian policies. There’s been an anti-Keynes backlash among some movement conservatives lately, but I don’t think the average GOP lawmaker cares enough about macroeconomics to subscribe to any particular theory.
ReplyDeleteAnd at this point actual Keynesian economists can’t even agree on major issues, so identifying someone as a Keynesian doesn’t necessarily mean very much.
CSH - Keynesian stimulus doesn’t require that the money be invested wisely, just that it gets spent. That’s one of the knocks against it -- that it only exacerbates systemic malinvestments because the money is not spent wisely.
looking at this with darkest non-tinfoil glasses, we see ruthless policy by republicans, using public institutions to punish or weaken political rivals.
ReplyDeleterather than expecting a republican majority to work for the general common good, we can extrapolate from wisconsin a national policy of using fake scarcity to excuse shifting main street resources away from perceived domestic enemies. starving the beastS.
Following on Jeff's response to CSH, I would add that in addition to taking a long time to pay off, government investments don't necessarily generate a return to the investor. The highway system, I presume, created new efficiencies and boosted economic development, but with the exception of toll roads, it never pays the investor back. That's another reason you need the government (and taxes) to do it; corporations don't provide public goods.
ReplyDeleteInteresting discussion. To those who took up my arguments, thanks much; these conversations are often quite thought-provoking. To Jeff and Scott - you guys are right that time horizon differences distinguish ROI from government stimulus. A company might spend capital that doesn't pay back for many years, while government stimulus tries to avoid that. Nevertheless, even though the interstate system didn't pay out the investment for many years, (in a strict ROI sense), surely the improvements in infrastructure led to a fairly immediate bump to GDP - which is what stimulus attempts to achieve.
ReplyDeleteTo Couves...I hesitate to interpret Keynes in this forum since there are surely several people reading this who know his writing much better than I. Nevertheless, Keynes didn't say that goverment spending per se generated stimulus, but rather spending dedicated to unlocking inefficiencies (gluts) in the marketplace. Borrowing $100 billion to paint all the nation's sewers bright pink would surely not qualify as Keynesian stimulus, for example.
(continued)
ReplyDeleteContinuing the thought from the previous post, its a fair question to ask whether the cost pools comprising our huge going deficits are really Keynesian. Does borrowing money to give an elderly citizen their going social security check unlock a glut in the marketplace? Surely taking it away would be a negative for GDP. But is borrowing money to provide the check a driver of sequential GDP growth? Probably not.
Indeed, this discussion has led to a pretty big insight for me, for the first time I'm somewhat sympathetic to rich people not wanting to pay higher taxes. As most in this audience know, the CBO projects total deficits for the next 10 years to be north of $10 T - that's after this week's lukewarm debt "deal". A big part of that debt is due to exploding health care and other costs related to the bulge in the elderly population. This in spite of no one really believing that the Medicare/SS of the future will provide anywhere close to the level of resources that the elderly of the future will want to consume.
Thus alarming deficits in the next decade are largely driven by demographic effects that will continue to deteriorate as time passes, and for which no one has much of an answer. We would like rich people to pay significantly more taxes to help ameliorate this problem, not because we think we have any hope of solving it, but because we like to kick cans down the road.
I think if I were a rich guy, I might say that I honestly had sympathy for Grandpa's expensive treatment that the government can no longer afford, but rather than subsidize such things indefinitely, I might prefer that the government had a talk with Grandpa first.
CSH, as I understand Keynesianism, it boils down to the observation that economies can underperform because of insufficient spending (aka "demand"), and that when businesses and consumers aren't spending, then the government needs to. And as Couves says above, it's not essential that the spending be directed to anything useful. Hence this famous quote from Keynes's General Theory:
ReplyDelete"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again ... there need be no more unemployment..."
The point is that once people are getting paid to do even useless work, that money is back in the economy, because those otherwise impoverished people are going to be spending it, which helps all the businesses they spend it at, which allows those businesses to hire people, who then are also paid, etc. etc. in a self-reinforcing virtuous cycle (the reverse of the vicious cycle that causes depressions).
Hence, stimulus "works" if it just keeps people employed. However, Keynes went on to say:
It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above [i.e. pointlessly burying banknotes in the ground] would be better than nothing."
So, the Obama stimulus was spent partly on public-works projects (road improvements, etc.), partly on aid to states to avoid mass layoffs of teachers and so forth, and partly on long-term investments like research into alternative energies. As Scott said, the government invests in public goods, and that's what it did here. The CBO, which both parties rely on, says the money "bought" higher GDP and lower unemployment. And it probably had further benefits that will take a while to show up, as the returns from the interstate highways did (returns that I can't believe were visible already in GDP in the first year -- you know how long it takes to buid a highway? -- except insofar as the workers that project employed were spending the money they were paid for working on it; that's a Keynesian effect).
Now, I'm sure none this cuts any ice with certain rich people who are convinced that "they" personally "earned" every dollar of wealth that living in a wealthy country with public education and publicly provided infrastructure allowed them to acquire. (Other rich people, including Bill Gates and Warren Buffett, know better.) But guess what? The rest of us outnumber those ingrates. Ain't democracy grand? And one thing that the experience of every advanced country makes clear is that non-rich people want their governments to provide basic income support, retirement security and access to medical care. And so that's what advanced countries are going to continue to do. The Paul Ryans among us have already lost that argument.
Well, sure, inserting borrowed money into the economy is always temporarily better than not doing so, but that wasn't really Keynes' glut argument; indeed by your very quote Keynes endorses it only in comparison to "nothing at all".
ReplyDeleteTo put that into perspective - Milton Friedman is most famous for the quote: "Inflation is always and everywhere a monetary phenomenon". Elsewhere Friedman noted that, in the face of deflation, he would advocate dumping newly-printed money out of helicopters. Interpreting the anecdote about the banknote bottles as "classic Keynesian stimulus" is a little like saying that Friedman generally believed in throwing money out of helicopters.
I'm interested though in a comment at the end of your post, because I think it gets to the heart of the problems haunting the US and Europe. First, its interesting that global equity markets collapsed on the heels of the disappointing debt deal in the US and Trichet admitting he had little control over the PIGS in Europe. A lot of differences between the two cases, but at the heart of each is a scary similarity: its awfully hard, in a democracy, to contain a Great Society when it starts to impinge on the carrying capacity of the general society.
You argued at the end of your post that exponential costs of Medicare should be borne by the wealthy because there are more of us than those damn ingrates. But therein lies the rub: we are the ingrates. Oh sure, most of us are not rich now, but we all have a plan, a glidepath to where someday we might be. Even if our salaries are not high, there's always investment opportunities, money for that book we're writing, who knows. And when we get there, damn if we want the govt passing off on us its weak inability to deal with these issues.
Unless, of course, we don't get there. In which case, screw the rich, let em pay for my mid- six-figures cancer treatment when I'm retired, and here's some of that ingrate meme-ology to boot.
That, I think, is why this moment is so terrifying, why we shouldn't take comfort in some $1-$2 T math error from S&P in thinking the downgrade is no big deal. Which side of this fence is any of us on? Sure, for ideology we'll pick a side, if we're leftists we'll say screw the rich and if we're rightists we'll say the gov't sucks at these things. I'm asking, which side are we on really? Like, deep down? I suspect that for most of us, the honest answer is: it depends.
Which makes an already tricky challenge, potentially impossible.
CSH, I wasn't suggesting that Keynes' reductio was a description of his ideal. The point is, you seemed to be saying that stimulus should have an ROI based on what the money directly buys. But the intended return on stimulus is stimulation, i.e. a heightened level of economic activity, and that purpose can succeed even if there's no investment value in the traditional business sense -- although what Obama, like FDR and every other sane policymaker, actually tried to do was kill two (or three) birds with one stone, i.e. increase economic activity while also buying public goods of both short- and long-term value.
ReplyDeleteAlso, I don't know anyone, certainly in mainstream political discussion, who's saying "screw the rich." The most anyone is seriously proposing is raising marginal tax rates back to the level of the 1990s, and maybe reducing the preferential treatment of capital gains. That's hardly screwing anyone or preventing people from being rich. There were rich people in America when top marginal rates were much, much higher, and there are rich people in other countries today where taxes are higher. My points were just these: (a) we all rightly have a say in how wealth is distributed, since we all have a role in creating it; and (b) as a political matter, and even given the kid-glove treatment that Americans have often given the wealthy, it's just very hard to imagine that ultimately the mass public will sacrifice basic guarantees like retirement security just in order to keep tax rates at their already historically low levels. And that really is the trade-off, because if we did nothing more than sunset the Bush tax cuts and maybe lift the cap on income subject to Social Security taxes, we'd have little problem paying for Social Security and Medicare for a very long time.
As you know, the Bush tax cuts cost the economy somewhere between $1 and $2 T over the first ten years of their existence. If we assume that the number will be around $2 T over the next ten, that's in the ballpark of the proposed savings from this week's "deal", a level that the S&P specifically called out as hopelessly inadequate to deal with the US' debt balloon. Thus the last sentence above is not correct; if we simply returned to Clinton-era rates we'd still be nowhere close to paying for the Great Society, at least per the ratings agencies.
ReplyDeleteOne of the important things missing from this conversation is the spirit of Keynes' anti-glut argument. That is, if the economy is not functioning correctly in period 1, the government can borrow money to improve on said inefficiency and get a higher/better functioning economy in period 2, which can then easily pay out the debt accrued during period 1.
That's the essential idea of Keynesian stimulus as an antidote to economic glut. It should be easy to contrast that with borrowing a bunch of money to sustain, in period 2, a social program that was unsustainable in period 1. If the government borrows a bunch of money in period 2 to sustain what is unsustainable from period 1, that may be better - for today - than not doing so, but I tried to explain that to my toddler, Jeff, and she kicked me in the shin.
Well, I don't want to irritate any toddlers, and I also would not argue for borrowing to maintain an unsustainable course. Let me see if I can find the data I've seen that explains the point I was making. Watch this space.
ReplyDeleteOK, here ya go. Here's CBO's "extended baseline scenario," i.e. what happens if the Bush tax cuts expire:
ReplyDeletehttp://tpmdc.talkingpointsmemo.com/2011/06/chart-of-the-day-if-congress-does-nothing-the-deficit-will-disappear.php
And here's Ezra Klein on the cost-control measures already made law in the Affordable Care Act:
http://www.washingtonpost.com/blogs/ezra-klein/post/the_democrats_have_a_plan_for_controlling_health_care_costs_paul_ryan_doesnt/2011/04/08/AFeF9f1C_blog.html
Needless to say, Klein favors the ACA, but he strikes me as fairly cautious and restrained here in describing its cost controls. As he points out, what they're designed to do -- and they are the only plan anyone has seriously put forward for doing this (unless you count invoking the words "free market" like some magical formula) -- is create mechanisms that would actually lower total American health-care spending, not just dump it back on citizens and thus reintroduce the same problems that led to the creation of Mediare and Medicaid in the first place.
Now, the CBO didn't credit most of these mechanisms with saving money because we haven't seen them work yet. But we will over the next few years, i.e. well within the time frame of the extended baseline scenario. So, you sunset the Bush tax cuts (or partly sunset them along with some revenue-raising "tax reform"), you watch what happens with the ACA, and of course you look for an end to the current quasi-depression -- which as Chait said in the item that prompted this post, even Republicans will be working to bring about if they regain power. Oh, and you end the stupid wars.
Then, at that point, you can argue over the best way forward. If more budget controls are still needed, there will be various possibilities available: a VAT, a health-care public option, etc. At any rate, it makes no sense to try to decide all this now, for the same reason it wouldn't have made sense in 1935 to try to make budget policy for 1955. We have to see what develops, and the idea that the situation is so dire that Medicare needs to be phased out, etc., is just GOP propaganda designed to protect ultra-low tax rates for the wealthy.
P.S. late update: Just read that the revenue gained over 10 years from ending the Bush tax cuts is estimated at $4.6 trillion. As the old saying goes, a trillion here, a trillion there, and pretty soon you're talking about real money.
ReplyDeleteJeff, wanted to say quickly how much I enjoy these discussions, and to note that your penultimate post above seems reasonably agreeable to me. There's something to be said for finding our way to better footing before making wholesale changes in our government/economy.
ReplyDeleteFor me personally, you'd still have some work to do to sell that argument, as I likely perceive the US to be further out on the ledge than others might. In general, the "first things first" argument might work under these circumstances; its certainly better than alternatives such as "$1 Trillion going deficits are no big deal".
OK, good, CSH, see you on the next thread.
ReplyDeleteWhile Republicans, by and large, adhere to Supply-Side, Monetarist, or other classical, economic theories; they do subscribe to Keynesian theory with regards to 3 basic issues.
ReplyDelete1) They generally tend to support outlays for infrastructure maintenance/creation, ie. roads, bridges, etc., though the Tea Party members in Congress may not follow this norm.
2) They support maintaining or increasing the Pentagon's budget as well as the budgets of other, "security" related groups (such a the TSA).
3) While many Republicans railed against QE2, Republican presidents and members of Congress have usually supported quantitative easing initiatives undertaken by the Fed, ie. Volker's actions towards the end of the 1981 recession, Greenspan's actions in 2001/2002, etc.