The budget battles

[kenberg]

Staged is fine. Generally speaking, gradual is preferable to sudden. And really, I have no confidence at all that if this trigger cuts defense spending then it will be the unneeded people or programs that will get the axe.

[luke warm]

i see nothing wrong with attrition doing my downsizing in targeted areas

[Winstonm]

Phil,

 

I saw a lot of ideological positing in your post but no data to back up your claims. I understand the classical and neo-classical viewpoint you present; what I don't see is evidence that the viewpoint is accurate.

[phil_20686]

Phil,

 

I saw a lot of ideological positing in your post but no data to back up your claims. I understand the classical and neo-classical viewpoint you present; what I don't see is evidence that the viewpoint is accurate.

 

To much reliance on data is terribly misleading, mostly because economies are so complicated, and so many things affect so many other things, that it is really impossible to pull out instrumental variables. If you try, this happens. Secondly, data on the present is notoriously hard to come by. One usually only gets reliable figures even for easy things like gdp a year after it has happened. For more complex phenomena you may have to wait five years to put all the pieces together.

 

There is no part of the classical economics models that have not been tested. Those that have not worked have been discarded, and those that still exist do work. However, case studies where they have worked in the past are no guarantee that they will work again in the future, because economies are complicated enough that there are always effects that one has overlooked, and just occasionally these over rule the normal factors that went into your models.

 

Finally, its not clear what data you would like to see. I mean, studies of government spending multipliers have repeatedly shown that tax cuts have better multipliers than spending, which kind of supports point (8) on the output gap. Essentially as far as I can see the only way these could be different is if the government buys things that the economy doesn't really need. Supposedly the best study on government multipliers was done by V. Ramey, and gets about 1.4, the best study on tax cut multipliers by Romer and Romer, and gets about 3. Obviously, if you search hard enough, you will find people who disagree.

 

Even more finally, economics is not a pure science in the sense of being disconnected from the prejudices of its practitioners, partly because what is an acceptable solution is partly based on what seems just. For example, its pretty clear that a period of high inflation would help clear out the debt overhang. Say 7% inflation for 5 years. This would have lots of positive effects: It would lift people out of negative equity, it would shore up banks balance sheets by reducing their expose to bad loans. It would help people pay of debt. However, to many people it seems somewhat unjust, after all inflation is effectively just a wealth transfer from savers (like pensioners) to people with debt (like people with overly large mortgages). Thus whether you think it is a "good" economic policy is based at least partly on whether you think its fair to transfer money from people who saved prudently, to those who overspent, in order to get the economy going again. Thus, I do not think one can really do economics without some idealology.

[kenberg]

I'll climb into this a little here. A demonstration of the difficulty of prediction recently came from the stimulus package. Simply put, it did not behave as advertised. That does not necessarily mean that it was a mistake, quite possibly things would have been worse without it and better had it been larger. But there is no getting around the fact that claims were made for it that did not materialize.

 

To my way of thinking, the correct response is neither gloating nor denial, but rather an examination of causes. I have, for quite a while, been pushing the idea that one of the culprits is the large personal debt held by so many people. It may well apply to taxes as well. Giving people some money, say by suspending payroll taxes, is supposed to spur spending. But my guess is that all but the most brain dead have suddenly become aware of the fact that high debt is a serious personal threat. Almost everyone knows of a house in foreclosure or a family in a financial crisis. There but for the grace and all that, so people alter their habits. Give them money and they pay down their debt. The flat screen has already been bought, they don't need a second one, they need to pay for the first one. And so giving them money does not produce the expected result.

 

A mixture of ideology (we can hardly think without some such basis) and a careful respect for what is actually happening is what is needed.

[awm]

Here's wikipedia's article about fiscal multipliers, suggesting that increased government spending does more to help the economy than tax cuts. Here's an article from an online economics repository saying the same.

 

If you want some more authoritative sources, here's Nobel prize winning economist Paul Krugman arguing that the stimulus should include more spending and less tax cuts. And here are some numbers by Mark Zandi, economist for Moody's.

 

Of course, there may also be articles supporting Phil's view that tax cuts are better stimulus than government spending. But his suggestion that this is somehow a "settled matter" amongst economists is obviously untrue.

[WellSpyder]

Of course, there may also be articles supporting Phil's view that tax cuts are better stimulus than government spending. But his suggestion that this is somehow a "settled matter" amongst economists is obviously untrue.

Thanks for posting that, Adam. I'm an economist (Masters degree with distinction and 28 years so far as a professional economist in both the public and private sectors) and Phil's post left me fearing I had missed something here. I think there is a case that can be made that tax cuts may have a better medium term effect on the economy in some circumstances than spending, but to imply that this is true of the activity multipliers they produce is a very different matter.

[y66]

From awm's January 2009 Krugman link:

 

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

 

Let’s hope I’ve got this wrong.

As Obama was putting his plan together, the Congressional Budget Office was reporting that U.S. economic output would average 6.8 percent below it's potential for the next 2 years, or $2.1 trillion in lost production (per Krugman).

 

A hemorrhaging patient loses 2.1 trillion units of blood. You restore 775 billion units.

 

The patient is still looking a little peaked.

 

You conclude what exactly?

[y66]

Recording - "Hello, Welcome to the Psychiatric Hot-line."

 

If you are obsessive-compulsive, please press 1 repeatedly.

 

If you are co-dependent, please ask someone to press 2.

 

If you have multiple personalities, please press 3, 4, 5 and 6.

 

If you are paranoid-delusional, we know who you are and what you want. Just stay on the line until we can trace the call.

 

If you are schizophrenic, listen carefully and a little voice will tell you which number to press.

 

If you are manic-depressive, it doesn't matter which number you press. No one will answer.

[PassedOut]

I think that a big factor in the current perception of the stimulus was the mishandling of the politics of it by the White House. What happened is something that Bill Clinton would never have permitted.

 

Many of Obama's opponents have said that he (or his administration) promised that the stimulus would hold unemployment to 8.5%. Of course that never happened. Much as John Kerry falsely assumed that the swift-boating charges against him would go away simply because they were untrue, the Obama administration let the 8.5% promise claims go unchallenged for so long that even folks who should know better give the charges some credence. Clinton would have punched back immediately to prevent that from happening.

 

The basis for the 8.5% claim was a report developed by Christina Romer and Jared Bernstein in the weeks before Obama took office and released early in January 2009. At that time the CBO was projecting that unemployment would reach 8.5% in 2009 and 9% in 2010. The Romer/Bernstein report projected that the stimulus would improve on the CBO projection by about 1%. However, that same report made clear that the CBO projections were fraught with uncertainty and that without the stimulus the unemployment rate might reach 11%.

 

It's always a political mistake to let an opponent's lies go unchallenged. And, for the life of me, I can't figure out why they still do that.

[kenberg]

Are you saying that Obama himself never endorsed that number? Of course not challenging it is apt to be seen as an endorsement, but it would be interesting to know if he is as non-complicit in this claim as you suggest. Presumably he did, in one manner or another, make suggestions of what the impact would be.

 

This seems to me to be more than just a lack of savvy. More like letting the number hang out there as a point of advocacy and then, when it doesn't work out, saying "Well golly gee,I wasn't the one who said that."

 

At any rate, neither for the first nor last time, Obama ends up looking not so good. Attributing this to Republicans being mean just isn't enough.

[blackshoe]

It's always a political mistake to let an opponent's lies go unchallenged. And, for the life of me, I can't figure out why they still do that.

 

Perhaps because there are so many of them (on both sides of the aisle) that it's hard to keep up.

[onoway]

nothing to offer about the topic except this email someone sent me yesterday (the image of "Maxine" didn't come through :( )

 

 

 

 

BAIL'EM OUT!!! ???? Hell, back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed. Now, we are trusting the economy of our country, our banking system, our auto industry, our home utilities, and possibly our health plans to the same nit-wits who couldn't make money running a whore house and selling whiskey?!"

 

"What the Hell are we thinking?"

[PassedOut]

Are you saying that Obama himself never endorsed that number?

That's right.

 

As president-elect, Obama (and everyone else) knew that he faced a serious economic crisis that he'd have to deal with as soon as he was inaugurated. His economic advisors worked long hours to prepare for inauguration day, and the Romer/Bernstein report was a product of that preparation. The advisors did not have the full resources of the government, but did have the current CBO projections to work with. The report was released a couple of weeks before Obama's inauguration.

 

By the time Obama was inaugurated, the CBO unemployment projections had continued to rise, so the projections on the Romer/Bernstein report were already known to be too low. At that time no one knew how bad the situation actually was, so neither Obama nor his advisors ever gave a specific number. If they had, we can be sure that Obama's opponents would be using that number rather than pointing to the Romer/Bernstein report.

 

Why the Obama people never challenged the false claims by Eric Cantor, George Will, and many others simply befuddles me. It's like failing Politics 101. All of the politicians in Washington and all of the news media people who cover Washington know that the Obama administration never promised to hold unemployment to 8.5%.

 

Maybe Obama's people expected the news people to do the challenging. Maybe they didn't fight back because they didn't have an accurate number to give. Maybe they thought that a very pessimistic number would contribute to depressing the economy. Maybe they thought the importance of the numbers would fade in the light of other events. Whatever the reason, it was a serious error and -- you are certainly right -- does not burnish Obama's credentials as a politician.

[phil_20686]

Thanks for posting that, Adam. I'm an economist (Masters degree with distinction and 28 years so far as a professional economist in both the public and private sectors) and Phil's post left me fearing I had missed something here. I think there is a case that can be made that tax cuts may have a better medium term effect on the economy in some circumstances than spending, but to imply that this is true of the activity multipliers they produce is a very different matter.

 

 

SO the relevant papers are based on the idea that an economy has some foresight about what the government will do, so this was started by Romer & Romer who used narratives to seperate tax changes into groups based on motivations, and looks at them separately. This showed that the spending multipliers for tax changes are different depending on the motivation. You can find it here. You can skip to the graphs at the end to get a general idea of her conclusions. Her analysis has been replicated by others, although whether you agree on the motivation to her paper is more interesting. Valarie Ramay essentially repeated the Romer analysis for spending, and compared it to standard analysis, and suggests that the conventional multipliers are too high. You can find it here.

[mike777]

BTW

 

Romer said, “The basic idea that if you increase government spending or you cut people’s taxes that stimulates the economy and lowers the unemployment rate, is a very widely accepted idea. It’s in every economics textbook, that’s what we teach our undergraduates, and I certainly try to teach them the truth.

 

“It is a very known and accepted idea and fact and the empirical evidence is definitely there, and people just want to say the sky is green.”

[phil_20686]

Here's wikipedia's article about fiscal multipliers, suggesting that increased government spending does more to help the economy than tax cuts. Here's an article from an online economics repository saying the same.

 

If you want some more authoritative sources, here's Nobel prize winning economist Paul Krugman arguing that the stimulus should include more spending and less tax cuts. And here are some numbers by Mark Zandi, economist for Moody's.

 

Of course, there may also be articles supporting Phil's view that tax cuts are better stimulus than government spending. But his suggestion that this is somehow a "settled matter" amongst economists is obviously untrue.

 

So i could criticise all thse links. Firstly the Wikipedia article provides a list of different multipliers as calculated by diferent people, including, say, barro, who thinks they are negative. You have just quoted the Zandi numbers that are also the numbers in Zandi's paper and the same numbers in the Econbrowser link. These numbers are all "one year multipliers", if you look at romer and romer, they are the 3 year multipliers. If you read off the graphs you would find that she agrees with those numbers roughly. However, tax rises are more "sticky" and the largest benefit comes roughly two years after they are instituted, whereas spending comes all at once, and its effect vanishes after it stops. Tax changes continue to give benefit even after the tax is changed back as people to not quickly adjust consumption based on marginal changes in cost. I.e. A one year tax cut doesnt really do anything, as the market barely adjusts before it is back in place. It is however, a policy question on whether you think the USA's troubles are short term, medium term, or longterm. If short term, as in a manufacturing led recession, then clearly spending is better. If you think the USA is going to need 5 years to get back on track (I am in this camp) due to debt, then tax decreases are likely better. Having said that, I think the long term effects of debt are going to be bad whenever you choose to face them. Any efforts to stimulate demand via debt will only make facing the problem harder when you do change tax. Especially considering the demographics of the US.

 

Finally, krugmans democratic partisanship is so well known that it has its own wikipedia entry. He is a well credentialled economist certainly, but so is Gregory Mankiw, and they seem to disagree on almost everything. (Well, thats not really true, but they often accuse each other of deliberately saying things they know to be untrue in order to score political points, e.g., the exchange on "the man who can't be taxed"). Infact, Mankiw has long been the camp of thinking tax multipliers are undervalued, and has studied it a lot under the guise of the question "how much of a tax drop will the government recoup".

 

I do read Krugman's blog, is stuff about liquidity traps is pretty compelling, but he is a keynesian who seems to think that long run issues do not matter that much. His oft repeated argument that borrowing (even more) now to prop up spending will not cost because interest rates are low now is pretty naieve. For one thing, interest rates are mostly low now because people are worried about the economy/stocks, not because they beleive that the US is in a healthy spot. When the money goes back to equities the bonds market will reflect expectations better. Secondly, debt overhang is a well known problem in economics, krugman favours spending now, and having more inflation later (in fact, he thigns the US should be aiming for 4-6% inflation right now). This would probably work, and would be part of my preferred solution, but will crush pensioners and savers. Its not clear that that is a politically acceptable outcome. Taking the first part of the medicine when there is no prospect of ever taking the second part seems worse than useless.

[phil_20686]

From awm's January 2009 Krugman link:

 

 

As Obama was putting his plan together, the Congressional Budget Office was reporting that U.S. economic output would average 6.8 percent below it's potential for the next 2 years, or $2.1 trillion in lost production (per Krugman).

 

A hemorrhaging patient loses 2.1 trillion units of blood. You restore 775 billion units.

 

The patient is still looking a little peaked.

 

You conclude what exactly?

 

I have never appreciated this argument. I mean, its based on keynes, but keynes also wrote about recessions as creative destruction, and if you believe that then propping up the economy by buying whatever they are making robs the economy of the chance to change direction. For example, a lot of the lost production is found in the housing market, where the us currently has a glut. The only way to improve the production gap in the housing market is for the government to get the construction companies to make houses, but if no-one needs houses that is only making the glut worse, the real reason for the production gap is that we built too many houses already. * The same might apply to designer clothes etc.

 

Secondly, if you think that deficit spending can prop up demand, then that must be what has already happened in the racking up of household debt. If you beleive that then you must think (like I do) that demand prior to the recession was un-sustainably high, driven by easy credit, and a painful adjustment is needed when demand falls and debt is paid off. If the government continues sustaining demand at that unsustainable level that is only putting off a painful contraction in demand until another day. When there is pain to be had best to get it over with quickly.

 

 

*Yes, I know most construction companies can make other things than houses. I was looking for an example and this seemed to make my point. Obviously, they could build roads and stuff and that would be a good think in the US. In the uk most of our transport infrastructure is in pretty good nick, so that would not be possible here.

[hrothgar]

 

Finally, krugmans democratic partisanship is so well known that it has its own wikipedia entry.

 

I couldn't care less if Krugman is a partisan.

What I care about is the reliability of his nostrums.

 

On this front, I'll let that well known flaming liberal David Frim make my case for me

http://www.frumforum.com/were-our-enemies-right

[kenberg]

Why the Obama people never challenged the false claims by Eric Cantor, George Will, and many others simply befuddles me. It's like failing Politics 101. All of the politicians in Washington and all of the news media people who cover Washington know that the Obama administration never promised to hold unemployment to 8.5%.

 

And Bush never said "Mission Accomplished". He just flew in with media coverage to a ship with banners saying "Mission Accomplished". Somehow people still held him responsible for the claim.

 

I am not befuddled at all. The number was getting play, and he liked that fact until the numbers did not turn out that way.

 

 

Obama did not fail Politics 101. The explanation has to lie elsewhere.

[WellSpyder]

In the uk most of our transport infrastructure is in pretty good nick, so that would not be possible here.

One of the problems of the internet is that it can be hard to detect sarcasm, so I can't tell whether you really mean this or not. But in any case, I beg to differ! Although one can argue about whether it is possible to fund improvements at the moment, I think there is significant evidence of shortcomings in the UK's transport infrastructure, ranging from heavy congestion at times on roads and rail and at airports to a huge increase in potholes in the roads.

 

(Please don't think I disagree with all your arguments, though. I agree that there is no point in supporting jobs producing things that nobody wants. And I don't think increasing public spending is the answer to current economic woes. But I'm pretty sceptical of the case for tax cuts, too!)

[PassedOut]

The number was getting play, and he liked that fact until the numbers did not turn out that way.

Not likely, since the only way the number was used -- even in the first half of 2009 -- was to bash Obama. But no doubt folks can honestly differ on whether publishing a working report with heavily qualified numerical projections is like giving a speech standing before a huge banner that says "Mission Accomplished."

[phil_20686]

I couldn't care less if Krugman is a partisan.

What I care about is the reliability of his nostrums.

 

On this front, I'll let that well known flaming liberal David Frim make my case for me

http://www.frumforum.com/were-our-enemies-right

 

I read that already, and on teh one hand I do not disagree. I suspected a fall in demand. The difference is whether you thought demand was "on trend" prior to the crisis. Time to pull out a favourite chart:

http://dshort.com/charts/guest/2011/GDP-excluding-debt.gif

you can see that in the the 7-8 years from 2000 to 2008 the US ran a budget deficit of about 3% GDP, all of which is in essence borrowed prosperity from the future. This means that compounding it, the GDP as measured, and the GDP excluding "borrowed prosperity" included, must have differed by about 10% come the crisis. Ideally One would like to repeat this analysis with consumer debt figures. Whenever you choose to balance the budget, that is the level of "demand correction" that one is probably expecting.

 

Data on consumer debt is found here

 

the key data for me is

Total U.S. consumer debt (which includes credit card debt and noncredit-card debt but not mortgage debt) reached $2.45 trillion at the end of 2009, down sharply from $2.56 trillion at the end of 2008. (Source: Federal Reserve's G.19 report, March 2010)

 

Even more than government debt, consumer debt is borrowing against future proseperity. People have started to try to control this, and the loss in consumer demand is a lot. That number represents some 15% of US GDP, and while I have no data on what it was, I suspect it was mostly racked up recently (i.e in the last decade). All this is demand that is lost and most importantly it is not coming back. Krugman is suggesting propping up demand at a level that I do not beleive it will ever be returned to. The output gap here has become structural, rather than cyclical, and thus Government spending can at most soften the blow, and at worst saves up a worse problem for a rainy day. Moreover, since trend GDP will be structurally lower, so will trend government revenue, and that makes the deficit projections even worse.

[phil_20686]

One of the problems of the internet is that it can be hard to detect sarcasm, so I can't tell whether you really mean this or not. But in any case, I beg to differ! Although one can argue about whether it is possible to fund improvements at the moment, I think there is significant evidence of shortcomings in the UK's transport infrastructure, ranging from heavy congestion at times on roads and rail and at airports to a huge increase in potholes in the roads.

 

(Please don't think I disagree with all your arguments, though. I agree that there is no point in supporting jobs producing things that nobody wants. And I don't think increasing public spending is the answer to current economic woes. But I'm pretty sceptical of the case for tax cuts, too!)

 

COngestion is not necessarily a problem of infrastructure. The railways are terrible, but the roads are in a much better state than a decade ago prior to labour going on a drive about road maintenence. Particularly in Scotland. Even the railways are in a better state than they were at the end of British Rail. Even though their privatisation was an abject fail.

 

(I don't think tax cuts are teh answer either, I just think they would be better than deficit spending. I fundamentally think there is no answer to a change in structural levels of demand, other than getting on with life at a slightly lower standard of living)

 

EDIT: incidentally, I think that the number one indicator of a poor transport infrastructure is inequality of house prices. The better the transport infrastructure, the easier it is to live "close" to your work, and the smaller the premium on living close to the city centers. A thought experiment involving a star trek type transporter should convince you that transport is the prime driver of the location bonus. Thus, IMO, good government policy would be to build the first high speed rail link from london to, say, Newcastle, with the aim of trying to bring poorer/cheaper areas into the london orbit, and hence persuading industry and people to move to the north.

[Winstonm]

accidental post deleted.