Econospeak and Krugman

Fiscal Stimulus Deniers: John Versus John by ProGrowthLiberal

A Transparency Paradox At The Fed by Barkley Rosser

CBO Mix-And-Match by Krugman

American Austerity, Charted Yet Again by Krugman

Why Is Our Policy Agenda So Biased Toward Fiscal Policy? (As Opposed to Jobs…) by Jared Bernstein
TARP didn't buy a recovery as Geithner promised and it discredited ARRA in the public's confused mind. We spend all of this money for such a tepid recovery.

Grading the Obama Economic Record by David Leonhardt

Excellent, thorough commentary by Eduardo Porter:

Stimulus Is Maligned, but Options Were Few

It has three main shortcomings, though. 1) No mention of the Federal Reserve 2) no mention of aid to state and local governments. In the December 2008 Larry Summers memo to Obama, they mention Bush's 2003 aid to the states program as being effective. 3) Porter quotes Kenneth Rogoff as saying Obama was given an "'only move,' a move forced by circumstance." In one sense this is right in that government activism was required because of massive private market failure. People who hate government probably felt "forced." On the other hand, Obama should have done more. He should have had a plan B.

Despite these shortcoming, the commentary is more informative than usual:

It was the winter of 2009 and the United States economy was shrinking. In the last three months of 2008 the economy had contracted at an annual rate of 8.9 percent, the sharpest decline in more than half a century. It shrank at a 6.9 percent rate the next quarter. By February 2009 the country had lost more than five million jobs.

We know what President Obama did. In February, he pushed Congress to pass the American Recovery and Reinvestment Act, an $831 billion fiscal stimulus package aimed at creating demand for goods and services to reignite growth and stop the downward spiral.

Only three Republican senators voted for the bill — Susan Collins, Olympia Snowe and Arlen Specter (who as a result of the vote had to change parties). Since then, Republicans have condemned the legislation as an unmitigated disaster. “These policies have made our economic woes worse,” the House speaker, John Boehner, wrote earlier this month on the third anniversary of the bill’s enactment. They “left millions of Americans out of work and made the future of job-crushing debt even more daunting for our children and grandchildren.”

The attack hardly fits an economy that appears finally to be gathering steam. By the end of last year the economy had recovered to its peak size in 2007, before the recession. Employment is growing at a steady, though modest, clip. The jobless rate is 8.3 percent, down from 10 percent at its peak in October 2009.

Perhaps more intriguingly, the Boehner attack suggests a question: Were there other plausible choices? And would they have fixed the economy sooner?”

Around the world, governments were trying to stimulate their economies at the time — on the right as well as on the left, totalitarian autocracies and parliamentary democracies. By early 2009, China had announced stimulus policies amounting to 4.8 percent of its gross domestic product. The austere Germans put in place measures worth about 3.4 percent of their G.D.P. to bolster flagging demand. A study published by the New York Fed found the average fiscal stimulus in a group of some 40 developed and developing countries was slightly less than 3 percent of national output.

There were alternatives. After an initial experiment with government stimulus in 2009, many European countries reversed course and slashed their budgets to try to restore fiscal balance, in the expectation that this would reassure businesses and investors that government finances were under control, and give them the confidence to invest and bolster the economy. But so far, these policies have proved to be an unmitigated disaster.

Britain — which has its own currency and enjoys low interest rates — offers perhaps the best parallel to the United States. In 2010 the coalition government of David Cameron came into office promising to undo the stimulus policies of its predecessor. It cut spending across the board, asking government departments to slash budgets by 25 to 40 percent. And it shot Britain’s incipient economic recovery in the foot.

By the end of last year the British economy was still 4 percent smaller than it was before the recession started four years earlier. And it is expected to contract a little more this year. Even after budget cuts, the government’s debt is bigger, compared with the size of the economy, than when Mr. Cameron took office.

By comparison, despite criticism of its size and composition by both the right and the left, the stimulus by the Obama administration did add to jobs and growth. The nonpartisan Congressional Budget Office estimates it will have contributed at least 1.6 million jobs and perhaps as many as 8.4 million by 2013.

This month, the Booth School of Business at the University of Chicago surveyed a panel of economic experts of different political persuasions about the impact of the president’s stimulus package: eight out of 10 said it had contributed to lower unemployment by the end of 2010. There was less consensus on whether its benefits would exceed its long-term costs, including higher taxes to pay for the spending. Still, when asked if the policy was worth it, four times as many economists agreed as disagreed.

Regarding the children crushed by debt, no plausible economic strategy would have kept the budget deficit from mushrooming. President Obama’s fiscal stimulus package of February 2009 cost the equivalent of about 5 percent of the nation’s yearly output, most of which was spent over four years. Wrapping in other attempts by the Obama administration to ignite demand — from the payroll tax cut and extended unemployment assistance to the “cash for clunkers” program to encourage drivers to buy a fuel-efficient car — the cost rises to some $1.25 trillion, which amounts, on average, to about 2.1 percent of the nation’s annual output from 2009 through 2012.

While this is not cheap, it accounts for a small share of the budget deficit, which topped 10 percent of the country’s G.D.P. in 2009 and remained at 8.7 percent last year, swollen by plummeting tax revenue and mandatory expenditures as the country sank into recession and unemployment surged. (emphasis added)

International comparisons are explored. Empirical data considered. Republican politicians' claims debunked.

I first learned of the Booth School survey via DeLong. Maybe Porter got the info from the "Econosphere." If so, it would represent another triumph. 

The first instance of the econosphere's triumph is probably the fight against the privatization of Social Security during the Bush Presidency. Dean Baker recently discussed it here:

I recall an extreme version of this back in the debate over privatizing Social Security. I made what should have been a fairly simple point: it was impossible to get 7 percent real returns in a stock market with a price to earnings ratio well over 20 and a projected real growth rate of 2.0 percent. This was simple arithmetic, but all the big names in economics, including the non-partisan professionals at the Congressional Budget Office and the Social Security administration continued to write 7.0 percent real returns into their projections.

We were finally able to score some points on this issue with the “No Economist Left Behind” test, which asked economists to write out a set of dividend yields and capital gains that added to a 7 percent real return. (in other words, they had to write down two numbers that added to 7.) Using the Social Security trustees profit growth projections, 7 percent real returns would have required either paying more than 100 percent of profits out as dividends or having price to earnings ratios of 300-400.

 However, even our limited success in this case (no one in a position of authority acknowledged their error) was only accomplished after Paul Krugman wrote about the issue in his NYT column and the no economist left behind test caught fire in the blogosphere.

My point here is that anyone challenging the status quo is almost completely excluded from public debate. This was third grade arithmetic – the bad guys were just simply wrong – and we could not get people like the Washington Post editorial board and columnists to recognize this simple fact.

I don't remember the episode that well even though I was reading the econosphere back then. It seemed to be that Bush was lackluster in his efforts - which failed miserably - and that the econosphere put up a good fight but I don't recall how much of an effect it had.

Anyway there were three other recent econosphere victories which should be remembered.

One, NGDP level targeting. Christina Romer wrote an editorial in favor of it and Bernanke was asked about it by Binyamin Appelbaum at a press conference.

Two, St. Louis Fed President James Bullard responds to Tim Duy about the econosphere's discussion of the "output gap."

Three, worksharing. Dean Baker writes about the worksharing measures in the new payroll tax law here. Baker has blogged regularly about Germany's success with worksharing (I believe Thoma has linked to him.) I've read mentions of it in the NYTimes and Wall Street Journal in the German context.) The provision is based on a bill introduced in the Senate by Jack Reed and in the House by Rosa DeLuaro. It's possible they got the idea via the econosphere or by journalism inspired by the econosphere.

There has been much discussion about David Graeber's Debt, some of it focused on his unworkable anarchist policy prescriptions. Some of these criticism may be right, but I do think the econosphere demonstrates a successs of the anarchist principle even though many members may not see themselves as anarchists and are quite critical of Graeber.

Reversing Local Austerity by Krugman

In Ryan Lizza's article about Obama's mishandling of the economy - by listening to the advice of Orszag, Emanuel, Plouffe, Geithner/Bernanke, the VSPs - he linked to Summers famous 2008 memo. The memo says somewhere - but I can't find it - that the most effective part of the Bush 2003 stimulus package was aid to the states.

How Larry Summers' memo hobbled Obama's stimulus plan by Dean Baker

Jared Berstein on the Dec. 2008 memo an Ryan Lizza's piece

(via Krugman)

Spend, Spend, Spend. It’s the American Way. by Robert J. Shiller

And there was another problem. The truth is that stimulus packages never entirely lifted the economy out of the Great Depression. In the United States, unemployment didn’t drop below 12 percent until World War II changed the picture.

Wasn't World War II government spending a stimulus?

Winter Work Done on the Farm by Robert J. Shiller (October 15, 2011)

Winter Work Done on the Farm by Mark Thoma (December 8, 2010)

Pehaps it's a common analogy used in Economics?

"Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah's Flood."

Overcoming America's Debt Overhang: The Case for Inflation by Christopher Hayes (Sept. 9, 2009 two years ago)

(via Rortybomb)

Also from Rortybomb:

First, also from Ezra’s article, Joe Stiglitz gets the core of it:

Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.  One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”

Next Ben Bernanke, transcript:

CHAIRMAN BERNANKE: …I thought [This Time It's Different] was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.

What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries…

That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.

Here is Joe Gagnon:

Some have argued that economies take longer than normal to return to full employment after financial crises (Reinhart and Rogoff 2009). However, there is a wide range of growth outcomes after financial crises, and the worst outcomes tended to be associated with the poorest policy responses.

The goal of policymakers should be to learn from the past and achieve a better outcome than simply the average of past outcomes. In the current crisis, the zero bound on interest rates has been a major factor preventing monetary policymakers from doing as much as they otherwise would to speed recoveries. But, as discussed below, the zero bound is not a limit on what monetary policy can do. There is plenty of scope for further monetary stimulus.

FT Alphaville discusses Morgan Stanley's Spyros Andreopoulos on the probability of a double-dip recesion:

He sifts through all the slowdowns — defined as two successive quarters of growth not exceeding 1 per cent — recorded since 1950. There are 13 in total – and, as the charts above show, not all of them presaged a double-dip recession. Partly because, of the 13, only four occurred in a “young” expansionary period. That is, within eight quarters of a recession ending.

And of those four, only two resulted in a double-dip recession. One was 1959, in which a recession commenced three quarters after the the slowdown, and 1981, when a recession immediately followed a slowdown.

Andreopoulos writes:

But what were the catalysts?

…both because of monetary tightening: It turns out that both these recessions were precipitated by monetary policy. The 1981 recession was – deliberately – induced by the Fed in order to squeeze inflation out of the system (the recession essentially marked the beginning of the ‘Volcker disinflation’). And even the 1960/61 recession is thought by economic historians to have been caused by “the drastic tightening of money that occurred in 1959/60".

Conclusion: double-dips have only occurred upon Fed tightening: Whenever in post-war US history expansions have died young, the catalyst has been monetary policy tightening. Put differently: double-dips have occurred only when induced by the Fed.

A commenter writes:

RTRS GREEK GOVERNMENT TO BAN THE EXPORT OF TARAMASALATA AND TZATZIKI
RTRS LAST DITCH ATTEMPT TO STAVE OFF DOUBLE DIP RECESSION

On fiscal policy, Andreopoulos writes:

The outcome here is binary, with adoption of the president’s proposals bringing about 0.8% of GDP of net new stimulus; a rejection by Congress would mean expiration of these measures and bring about an automatic fiscal tightening of 1.2% of GDP. And of course the eurozone debt crisis – a fiscal problem – could yet prove a catalyst for a potentially vulnerable US economy.

Yes, We Can Do Stimulus Without Adding Debt. Here’s How. by Robert Shiller

Five Trillion Dollars by Krugman

A couple of notes on the most recent Congressional Budget Office Projections:

1. They offer a portrait of an economic catastrophe. Here’s the CBO estimates of potential real GDP — the amount the economy could produce without causing inflationary pressure — and actual GDP, in trillions of 2005 dollars per year:

 

No, I don’t know where that recovery in 2015 is supposed to come from; my guess is that it’s basically the CBO unwilling to project a depressed economy more or less forever. But even with that bounceback assumed, the projection says that we’ll have a cumulative output gap of $5.1 trillion, with $2.8 trillion of that having already happened.

Surely it would have been worth making an extraordinary effort to avoid this outcome[....]

What Should We Have Known About Fiscal Stimulus? by Krugman

I’ve noticed a number of people arguing that the original Obama stimulus was underpowered because at the time nobody realized how deep a hole the economy was in. And it’s true that revised GDP numbers have shown that the 2007-2009 recession was even deeper than we thought. But the basic line of thought here is wrong: there was plenty of information in January 2009 indicating that the economy needed a lot more help than it was about to get.

First, even in January 2009 the CBO was forecasting an “output gap” — a shortfall of the economy’s actual production over what it could and should be producing — of more than $2 trillion over 2009-2010. That told you right there that an $800 billion stimulus, much of it consisting of tax cuts of dubious effectiveness, was likely to fall short.

There were also good reasons to believe that the slump would be prolonged, that the economy would need help over a protracted period.

After all, the two previous recessions had been followed by long periods of jobless recovery, and there was every reason to expect a repeat. Moreover, we had international evidence showing that the aftermath of financial crises is a long period of high unemployment.

The point is that even in January 2009 it should have been obvious that the economy probably needed a really major push. Maybe that wasn’t possible politically; but it’s clear that there was a complacency in the White House that remains very hard to understand.

"We need a tow, not a jump-start."

Obama referenced Mark Zandi in defending the stimulus component of the tax cut deal.

Krugman responds that we're in a process of deleveraging at his blog here and here.

I disagree with Krugman's criticisms of Obama, but Krugman could be right if the engine of the private sector doesn't get going. My view is that he's wrong to personalize the issues when it comes to Obama by saying stuff like Obama isn't a fighter. He isn't tough enough? The first black President? The man has no fear. Obama, Axelrod, and Plouffe took on the Clinton machine in the Democratic primary and dealt with their hard ball  tactics with "dirt off the shoulder."



It gets me down when he links to Digby or DeLong links to Jane Hamsher or Atrios.

Krugman on the real-time test of Keynesian versus classical economics.

Arsenal of Democracy

Dean Baker points us to an editorial at the Washington Post.

Nor is Mr. Obama or his economic policy to blame for the economy's inability so far to resume robust, job-generating growth. The economy faces a painful, protracted process of deleveraging. Households and companies must work off a huge overhang of debt built up during the boom, and they can't resume spending and investing in the meantime. That deleveraging will hamper growth for -- well, for as long as it takes. Government efforts may ease deleveraging, but to the extent they succeed, it is generally by postponing the day of reckoning and making it more expensive when it inevitably arrives. 

Baker also notes that those calling for sacrifice failed to foresee the $8 trillion housing bubble which caused the overleveraging of debt. As Krugman argues, we can work off the debt cleanly or ugly. In the meantime the government could boost aggregate demand to utilize excess capacity until the private sector recovers. 

Here Krugman blogs about a new paper which shows that fiscal stimulus worked during the prewar buildup to World War II.

What Gordon and Krenn point out is that we actually have more information than a simple comparison between the depressed peacetime economy and the war economy after Pearl Harbor: there was a period of more than two years when the United States was gearing up for war but not yet engaged in combat -- the Arsenal of Democracy era. Rationing was not yet in effect, and for at least part of this period the economy still had excess capacity despite a very large rise in government spending.

...in the prewar buildup you had a clear-cut expansion of federal spending on the order of 14 percent of GDP. That’s a real experiment with the economy. And the results were clearly Keynesian.

The editors at the Post seems to the think the stimulus bill worked to help prevent another Great Depression - actually it was negated by the "50 little Hoovers" at the state level - but they don't advocate more to get us to full employment and full capacity usage.

It seems to the editors at the Post were a little too complacent about the housing bubble and are currently too complacent about high unemployment, slow growth and disinflation.

Interesting bit from a commenter at Baker's blog:

From Keynes's The General Theory of Employment, Interest, and Money: Chapter 21 - Trade Cycle - Section III:

"Furthermore, even if we were to suppose that contemporary booms are apt to be associated with a momentary condition of full investment or over-investment in the strict sense, it would still be absurd to regard a higher rate of interest as the appropriate remedy. For in this event the case of those who attribute the disease to under-consumption would be wholly established. The remedy would lie in various measures designed to increase the propensity to consume by the redistribution of incomes or otherwise; so that a given level of employment would require a smaller volume of current investment to support it."

If the businessmen drink my blood
Like the kids in art school said they would
Then I guess I'll just begin again
You say, "can we still be friends?"

If I was scared... I would
And if I was bored... you know I would
And if I was yours... but I'm not

All the kids have always known
That the emperor wears no clothes
But they bow to down to him anyway
It's better than being alone

I'm Ready to Start. 
(or we wish Bernanke was running the place)

No helicopter drop, but the Fed has signaled it's on alert and ready to do more. Krugman blogs:

What the FOMC announced was a slight change in policy: rather than allowing its balance sheet to shrink as the mortgage-backed securities it owns mature, it will maintain the balance sheet’s size by reinvesting the proceeds in long-term government bonds. Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee.

...In effect, reinvesting the funds from expiring securities became a focal point, an essentially arbitrary location in the space of policy responses that nonetheless had come to have "salience", because it was what everyone was watching.

...

So why am I even slightly encouraged? Because the critics did, at least, succeed in moving the focal point. Not long ago gradual Fed tightening was the default strategy; but as I said, at this point the Fed realized that continuing on that path would have unleashed both a firestorm of criticism and a severe negative reaction in the markets.

What we need to do now is keep up the pressure, so that at the next FOMC meeting the members are once again confronted by the reality that not changing course would be seen as dereliction of duty. And so on, from meeting to meeting, until the Fed actually does what it should.

And via DeLong, Obama/Pelosi/Reid pass $26 billion aid to the states legislation. Not much but at least they're doing something.

What happened was that liberals were expecting unemployment to top off at 8 percent and then drift down again. Instead it hit 10 percent and might remain at 9 percent for a while. Liberals are depressed about this and what it might mean for November.

Krugman criticized Romer-Bernstein's chart and Atrios made fun of it.

At the time I thought they were being unfair. Yes they got it wrong, but economic forecasting is extremely hard and nobody foresaw the Greek debt crisis. The Fed and Congress are reacting to the change in circumstances but not enough.

Krugman pointed out that Romer had recommended a larger stimulus package but that Summers didn't include it in the presentation to Obama. I also liked how she would assert there is no "new normal" of lowered expectations so it is good to read speculation that she might be nominated to run the Federal Reserve Bank of San Francisco.

In Study, 2 Economists Say Intervention Helped Avert a 2nd Depression by Sewell Chan

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year. 

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

...

Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.

 By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 -- or about 6 percent of G.D.P. at the time.

...

If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.

The combined effects of both sets of policies cannot be directly compared with the sum of each in isolation, they found, "because the policies tend to reinforce each other"

David Leondhardt's reaction.

DeLong's reaction.

Krugman on why the stimulus was too small and how we knew that at the time.

What Happened?

Atrios and Krugman linked this Romer-Bernstein chart on the Stimulus's effect on the economy. Obviously things have turned out worse, with the IMF forcasting 9% unemployment for 2010-11. Krugman blogs about what he believes Obama's economics advisors were thinking at the time. (Atrios just uses the chart to mock the Obama administration.)*

Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer -- and I don’t ask for -- any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers -- which reads rather differently now that we know how things are really working out, or more accurately not working out -- it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above. So all policy needed to do was meliorate the worst, while we waited for the economy to recover spontaneously. From the Lizza article:

Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was "an insurance package against catastrophic failure."

I don’t know why Summers etc. believed this.

Krugman is right and the stimulus should have been larger, but there were political considerations - did they have the votes? - and the European sovereign debt crisis didn't help the situation. Greece has become a convenient club for the heartless bastards in the Pain Caucus. Also, uninformed independent voters don't like government debt and the administration probably wouldn't have done a stimulus (porkulus to the rightwing) prior to their yearlong campaign to reform health care, had interest rates not already been at zero.

As Krugman would probably argue, the administration should have hit the slumping economy with overwhelming force precisely because interest rates were at zero and the Federal Reserve Bank had used up all of its conventional tools.

--------------------------
*Which is why I don't like Atrios and rarely read Eschaton. That and the fact he was calling Treasury Secretary Tim Geithner "Timmeh." Look, yes Bernanke, Obama and Geithner et al. saved the financial system in ways that were more lenient on the bankers and more costly to the public than they needed to be. However, we were driving without a map and you can't really blame them for erring on the side of caution. The main thing is that the economy was in a tailspin and the governments of the rich nations coordinated successfully and stabilized the situation. However, as John Cassidy pointed out, the rescue of the financial system in the wake of the bursting of the housing bubble put the economy's inequities and unjust character in the spotlight:

The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry. "People just don’t get how these institutions got bailed out and their people are still making big bonuses," Mark Zandi noted. "It just does not compute. No matter what you say, you can’t persuade them it’s right."