Wednesday, July 28, 2010

A bad argument against advocates of further stimulus...

...is "we tried that, it didn't work, and now they're just telling us we needed more in the first place - you can't win if the response is always 'well if we did more it would work'."

You hear this a lot - it's either ignorant or disingenuous - and either way it's a really, really bad case against stimulus advocates.

Paul Krugman explains in detail why here. As he says here, this is not some ex post rationalization. The stimulus argument was laid out in detail before Obama took office. I don't know of any economist (there are probably some, but I'm not aware of any) not working for the government that thought the $800K stimulus was a good figure. Independent economists either said it was too small or that it should have been $0. Even some administration economists, such as Christie Romer, apparently thought it was too small as well, but was silenced by poilticos. But I am not personally aware of an independent economist that thought it was right (maybe a few economic journalists, but since when do they run the numbers?).

If you're going to take issue with fiscal stimulus, make the argument on the merits - don't dredge up some ridiculous and easily debunked argument that advocates are just rationalizing after the fact, or that we didn't see this coming.

Krugman of course makes a mistake himself in this blog post - he only mentions the federal government. It looked like we needed about $2 trillion in stimulus, but that means $2 trillion in net stimulus. If the states are working against the feds, that shrinks the actual amount of fiscal stimulus even further.

It seems to me this recession offers a case study in do-nothing or at least do-very-little policy. If you're not happy with the policy response either, I can understand that. But at least be aware enough of your opponents views to recognize why this has been such a disappointment.

It would be a good reason to turn on Obama, in fact, if I thought anyone else out there would have done a better job - but unfortunately this is probably the best we could have hoped for. Don Boudreaux often chimes in on statements like that and says "well why do you want to give power to people that are so disappointing to you". I would think the answer to that question would have been obvious - because minimal fiscal stimulus is better than no fiscal stimulus. Disappointing action on the part of policy makers doesn't imply at all that no action on the part of policy makers is better.

UPDATE: Apparently Krugman tapped into a concern that a lot of people share. Brad DeLong just reposted this too. It's really hard to emphasize enough how dumb some people sound when they attack stimulus advocates from this angle.

27 comments:

  1. I once told a flatearther that the earth was round. He told me to not to use that argument with anyone else - because it sounded so stupid to him. BTW, I'm not saying you are a flat earther.

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  2. What are you saying exactly? Or are we just sharing unrelated anecdotes?

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  3. "It would be a good reason to turn on Obama, in fact, if I thought anyone else out there would have done a better job - but unfortunately this is probably the best we could have hoped for."

    That's sort of the problem of course - in a large, hierarchal polity such as ours where the state has aggregated the sort of powers it has you can only bet on one horse.

    "Disappointing action on the part of policy makers doesn't imply at all that no action on the part of policy makers is better."

    As a general rule it seems like a good position to have actually.

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  4. sandre,

    You actually met a flat earther? Wow!

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  5. Jonathan M. F. CatalánJuly 28, 2010 at 11:59 AM

    Daniel,

    Let's not go as far as to say, "[i]t seems to me this recession offers a case study in do-nothing or at least do-very-little policy." I think this argument would sound just as bad as the argument you're criticizing.

    The Federal Reserve inflated the money supply at a much greater scale than any other prior recessionary episode in history. The majority of big banks were bailed out. The Obama government is running deficits larger than that of Roosevelt. A $800 billion stimulus was passed under Obama, and a tax-rebate stimulus passed under Bush (not to mention TARP).

    This may have not been what Keynesians were looking for. But, let's not call this the same as "doing nothing", because that is just ridiculous.

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  6. Not to mention, a couple of auto companies and bunch of auto parts manufacturers were bailed out as well. Fannie & Freddie were both bailed out. AIG was bailed out.

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  7. 1. Once again, thanks for the correction. The monetary policy was fairly substantial. The fact that the money markets were still so contractionary is very telling. I have my head in fiscal policy - thanks again for making the second correction of this point in as many days.

    2. BUT, as for the stimulus I have to disagree with you. If you can find me an economic theory that suggests that a (1.) large growth in federal spending combined (2.) with a large reduction in state and local spending to make (3.) little net change in government spending is anything other than "do-very-little policy", then I'll relent, but we really, really haven't tried fiscal stimulus. I'm a states rights guy, but sometimes federalism can be a bitch.

    3. And again, you raise an interesting point about TARP. There are a lot of crisis-specific policies that we've had. I wouldn't label TARP "Keynesian". I wouldn't label efforts to prop up housing "Keynesian". These sector-specific policies aren't the sort of macroeconomic management policies that I was thinking of. But certainly, we have something to talk about here too, as with monetary policy.

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  8. Jonathan M. F. CatalánJuly 28, 2010 at 12:37 PM

    Daniel,

    I'm trying to write an article, but for some reason I'm having trouble formulating my position in words without feeling dissatisfied. This is spreading to my blog comments, as well! So, I will instead try to make one of my points with some algebra.

    Let's say that combining both Federal spending and State spending we arrive at a total spending of $0. For the sake of argument, let's say that Federal Spending is $700 billion and State spending, as such, as is -$700 billion (budget cuts).

    So, we have $700 billion + -$700 billion = $0.

    Without Federal spending it would look as follows,

    0$ + -$700 billion = -$700 billion.

    So, in fact, we can conclude that the Federal stimulus is nothing like "doing nothing", as doing nothing would (in this example) entail a net decrease in total spending (state + federal).

    I'm not arguing that we have tried fiscal stimulus, or that the stimulus so far has been sufficient. You already know my position on this topic, and so there's no reason for me to express it. I am arguing as if I agreed with you, but making the clarification that we have so far done a lot, because had we done nothing the numbers would look entirely different.

    Regarding Bush's tax stimulus, it seems to me that this is a good method by which to compare Mankiw with Krugman. Mankiw is a much more tax-oriented economist, while Krugman focuses more on fiscal stimulus. It's hard to quantify the effects of either stimulus package, but it there was a way it would be interesting. By the way, I was referring to the "Economic Stimulus Act of 2008", not TARP (the former was tax-oriented).

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  9. I'm not saying you can't figure out a way to get a multiplier estimate out of it if you can find a way to identify a counter-factual. Theoretically you could, although I'm not sure how that counter-factual would be estimated.

    From an empirical perspective, we might be able to get some estimates out of this - I don't know. I would be very wary of how people treat non-federal government spending (and I'm increasinly curious about how it has been treated in the past now).

    I'm thinking more from a policy perspective. People talk as if we've conducted fiscal stimulus. We haven't. If the DOD drastically reduced its budget and HHS drastically increased by the same amount, nobody would consider that fiscal stimulus. Nobody would try to conclude from that whether Keynesianism worked or not.

    If you can think of an empirical strategy for getting at the impact your thinking of, I would be very interested - and I'd personally expect to see positive impacts. But from the perspective of a citizen, it's all very depressing and it's depressing that so many people don't recognize why.

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  10. "What are you saying exactly?"

    Don't make start your argument by calling your opponents argument stupid.

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  11. Ok, again, I thought the whole idea of fiscal stimulus was to fill the gaps re: spending by the private sector. I'm not quite sure why this doesn't work for other levels of government in our federalist system. So is stimulus more than merely filling the gap?

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  12. Xenophon -
    If you're saying "the federal government filling the state hole is better than the federal government doing nothing" I fully agree.

    If you're saying that this constitutes fiscal stimulus I disagree.

    This is no more fiscal stimulus than it would be fiscal stimulus if the DOD decreased its budget by X billion dollars and HHS increased its budget by the same amount. Who cares?

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  13. Can you define the term "fiscal stimulus?"

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  14. I thought I did this yesterday!

    As a rough cut, I think we can think of "fiscal stimulus" as additional public spending to boost aggregate demand during a period when aggregate demand is depressed (presumably by an increase in liquidity preference).

    One might also talk about the importance of running deficits if we think for some reason the loanable funds market isn't clearing (say, a zero lower bound when the equilibrating interest rate is negative). But that's a special case - it's not necessary. Deficits aren't strictly necessary when we talk about fiscal stimulus, although they are useful and important.

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  15. So stimulus has to be more than filling the gap?

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  16. Maybe this exercise would be easier if you spell out in more detail exactly where you're going with.

    I don't think it's unreasonable to call stimulus "filling the gap". It's a very simple way of thinking about it, but I think its fine.

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  17. So, if the federal government is merely filling in the spending that has been decreased by other levels of government or by private entities, that is not stimulus?

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  18. I think you're confusing things, Xenophon.

    Sure, the federal government did some stimulus. But who cares? There was almost no net fiscal stimulus in this recession.

    Like I said - would you even bother remarking on it if DOD decreased its budget and HHS increased its budget.

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  19. "But who cares? There was almost no net fiscal stimulus in this recession."

    So one could argue from this POV that there are two types of stimulus: (a) a net fiscal stimulus and (b) a fill the gap stimulus? Is the former better than the other? Is that based on the context?

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  20. What are you talking about? Those two are the same thing aren't they?

    Or are you including government spending in "the gap"? That doesn't seem to make sense.

    There is only one kind of fiscal stimulus. Presumably you could talk about government institutions that are more stimulative than others (the Supreme Court, for example, has really lagged behind Congress and the administration in contributing to aggregate demand!). You could do that I suppose. But that doesn't seem to make much sense. What could possibly be the point of that?

    And you certainly shouldn't include government reductions in spending in "the gap".

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  21. What I am getting at is this...

    It seems to me that if you are filling the gap you are stimulating things even if that is all you are spending - call it a "steady state stimulus" if you will. Anyway, maybe I'm just confused.

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  22. "And you certainly shouldn't include government reductions in spending in "the gap"."

    Why not?

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  23. Well right, and "steady state stimulus" is fine.

    But what we've got now is a net decrease in private output.

    The federal government appropriated money that would have filled roughly a third of that gap. That's paltry, but better than nothing. That is "fiscal stimulus" by the federal government.

    The states reduced their demand by roughly as much as the federal government incresaed their demand. That means:

    1. The private gap was not filled at all, and

    2. All we really had was a ratio in the contribution to government spending: the feds paid more/the states paid less.

    How this can be called "fiscal stimulus as a response to the recession" is beyond me.

    Could I imagine worse scenarios? Sure. The feds might have done nothing. Or the feds might have reduced their spending. That would have been worse. But their was no "filling the gap" to speak of.

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  24. Ok, but does the government have to match the decrease dollar for dollar?

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  25. I'll give this question more thought when they come anywhere near matching it dollar for dollar :)

    I would suspect, though, that no they shouldn't match it dollar for dollar. Crowding out problems don't just materialize right at full employment. They phase in in different sectors and markets over time. The more you "fill in", the greater the risk of crowding out.

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  26. Thanks for putting up with my interrogatories. :)

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