Summary: The US economy continues to slow, albeit the rate of decay has slowed. But the net damage is severe and a recovery soon is imperative — or more “black swans” will appear. This is the third in a series of posts about the effects of basic automatic stabilizers on the economy during this recession.
(1) Why has the worst recession since the 1930’s had such a mild effect on America?, 14 July 2009
(2) Economists discuss the impact of the stimulus on our recession, 6 October 2009
Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis. Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.
Of course these programs were mis-sold to the public, since our ruling elites (“both” parties) are compulsive liars. Government aid cannot end recessions. It serves only to mitigate the downturn and reduce the inevitable suffering. The heavy lifting among these tools results from unemployment aid, Medicaid, and food stamps — focused on those that have suffered loss of income. See the above 14 July post for details.
As the following graph shows, the impact of this downturn on US families would have been horrific without government assistance programs — esp as we went into this downturn with record low savings and record high debt. The dotted red line shows BLS’s newly revised job loss estimates (corrections to their inexplicably over-optimistic monthly numbers).
An even broader hard number showing the loss of worker’s income is aggregate hours worked (non-farm private non-superviosory workers). That’s down 8.5% since the recession started in December 2007, larger than the almost 6% loss of jobs. The job market might take many years to recover, as desribed in this report:
- “America’s New Post-Recession Employment Arithmetic“, James W. Hughes and Joseph J. Seneca, Advance & Rutgers Report, 1 September 2009 {update}
Job losses are only one metric describing recessions. Duration of the recession and decline in GDP are also important. By almost every metric this recession will be the worst sinc the 1930’s — worse even than the horrific ones in 1973-75 and 1980-82.
- To compare this with past recessions see Wikipedia’s entry on Recessions in the United States.
To compare this downturn with the 1930’s see:
- “A Tale of Two Depressions“, Barry Eichengreen and Kevin H. O’Rourke, VOX, 1 September 2009
- “The Labor Market during the Great Depression and the Current Recession“, Linda Levine, Congressional Research Service, 19 June 2009
Conclusion
Time and debt are the two major factors ignored by current Keynesian theory, and the econometric models built on it.
- They do not consider aggregate debt levels, a key factor causing both the recession and ecomomists’ collective failure to anticipate it.
- The severity of the second leg down (if it happens) will also surprise them, as they ignore the importance of time.
After two years of recession, many households and businesses have drawn down their cash reserves, max’d out their credit, and cut expenses to the bone. If it continues into a third year — perhaps due to holiday sales worse than last year’s — both business and household bankruptcies might rise even more in 2010. Also, look for still more “black swan” events as key parts of the economic machinery break.
We need a recovery soon. Unfortunately we cannot know what lies ahead. We have no close historical parallels to our situation, and have passed beyond the boundaries of conventional economic theory. In this key respect our leaders are in a situation similar to that of the Hoover Administration in 1930. Let’s pray they respond better.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the following:
Reference pages about other topics appear on the right side menu bar, including About the FM website page.
Posts about theft pretending to be solutions
- Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
- The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
- A reminder – the TARP program is just theft, 24 November 2008
- Stand by for action – more theft of our money being planned in Washington, 4 February 2009
- Update: yes, the Paulson Plan was just theft, 14 February 2009
- Now is the time for America to get angry, 24 March 2009
- America on its way from superpower to banana republic, 28 March 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
- “The Greatest Swindle Ever Sold”, by Andy Kroll in The Nation, 28 May 2009
- More about “Government Sachs” (they own America; we just live here), 31 July 2009
Some posts on the FM website about solutions to the financial crisis:
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- How should we respond to the crisis?, 24 September 2008
- A solution to our financial crisis, 25 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy – stat!, 7 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
- A look ahead to the end of this financial crisis, 30 October 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
Since you don’t even address the whole question of your overall demeanor in your reply, I’ll avoid getting into the tit-for-tat with you, and get back to the focus.
(1) “that being that the stimulous spending was merely a placeholder, a sop, and a poorly placed one by your own admission, that is only delaying while exacerbating the larger problem”
Bold words, if somewhat vague. Do you have any evidence that the stimulus is “exacerbating the larger problem”?
Hey, how about you first giving me some evidence to support your contention. You stated: “Without these programs (poorly structured as they are) the economy would in a far worse hole…” Nowhere do you prove this assertion. You claim, and I did not refute, that the stimulus helped mitigate some of immediate suffering that citizens endured. I would argue about to what extent it has helped even that, especially when you consider those families, as Americans, are on the hook for all this cash being spent, but for argument’s sake, I’ll concede the point for now.
However, mitigating immediate suffering on the part of Americans does not in anyway prove that the economy is not “in a far worse hole” overall, does it? After all, you can lessen the symptoms of a disease in a patient with various drugs and pain-killers, but not in fact address the thing actually killing him, no? He can be blissfully high on morphine right up until the point he codes. So, while your chart seems to support the idea that the *effects* of the bad economy have been blunted when it comes to what is experienced currently by US families, how does anything you cited *prove* the economy would be in a deeper hole had the stimulus not been passed?
Even your chart uses the rather nebulous term “Based on Preliminary Estimate of Annual Revision” to try and make its case. What proof do YOU have that the economy would have been worse off had the stimulus not passed? Excuse me for my lack of economic degree, but let me offer an analogy all the same. Maybe common sense might help. If I am running a company which is going under due to mismanagement, a cash infusion from any source will certainly help mitigate the effects of that mismanagment for a while, right? I can delay or curtail cuts to pay, beniefits and even jobs for a while, thus “mitigating the suffering”.
However, at some time the piper will need to be paid, Peter will run out of money to pay Paul, and the company will go under completely, and the delayed suffering will come to full fruition; no pay, no benefits, and no jobs for all those families. Had money and effort been expended to fix the mismanagement, even at the cost of some jobs, benefits or even business model, the end result could have been an again thriving business. Instead, we got collapse.
Mitigating the suffering of the workers by merely throwing money at the bleeding only delayed the inevitable and worst outcome. So, again, where exactly is your proof that the ECONOMY, not families, is in better overall shape because of the stimulus?
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Fabius Maximus replies: Requesting evidence is always respected on this site! I’ve written a post about this: Economists discuss the impact of the stimulus on our recession. As for your other comments…
(2) “whole question of your overall demeanor in your reply”
You are not a customer. In effect, you are somebody who drops by for free drinks. That’s fine, but you have no standing to complain about the service. Opinions from folks whom I respect (e.g., operators of major websites, like Quick or Reynolds) get attention.
(3) “Even your chart uses the rather nebulous term ‘Based on Preliminary Estimate of Annual Revision'”
It’s a highly specific term, what Bur Labor Stats calls their latest revision by the data. It’s is more accurate than the solid red line, and shows greater job losses than initally reported.
(4) “merely throwing money at some time the piper will need to be paid, Peter will run out of money to pay Paul”
The stimulus spending on tax cuts and social services is aprox $100B/month, a trivial fraction of our $7.5 trillion public debt or $60 trillion total federal government liabilities. We might sink, but not because of that.
(5) “at the bleeding only delayed the inevitable and worst outcome”
Perhaps you’ve taken First Aid. Do you consider stopping the bleeding only delaying the inevitable and worst outcome? Of course not (for more on applying a first aid analogy to this crisis see A solution to our financial crisis, 25 September 2009). Nor are there any “inevitable worst” outcomes for the US. Our problems are manageable with a modest amount of wit and will (for a partial analysis of this see Update on our government’s deteriorating solvency, 1 October 2009).
I don’t see how anyone can observe the huge turnouts at the tea party demonstrations and fail to see how the reaction evidenced by them has not been mirrored by business people in their hiring decisions. We may have had debt buildups in the past, but we didn’t have tea parties. Clearly the tea parties demonstrate that a lot of people are really upset about govt economic policy. People who have never demonstrated before. Do you really want to try to assert that the heightened concern has had no impact?! I’m a small business owner and many of my friends and family members are, too. Concern about these policies has been widespread. They confirm that most of the people they talk with share the concern.
“Government aid cannot end recessions.” but then you proceed to point out how the stimulus has softened the economic downturn? I do agree with your sentiment that govt “aid” is the least successful means for ending a recession, yet govt “action” is the most effective means of controlling a recession. You can’t buy your way out of recession by spending money on “aid”, but you can, via govt policies, limit the duration/depths of a recession.
Let’s look at reagan… large deficits? yes, although not nearly as large as the current deficits. (worth pointing out that reagan’s first term saw a govt grow by 14.2%, where obama will grow the federal budget by over 16% in his first yearly budget.)
* massive tax cuts? unemployment goes from 10.8% in dec 82, to 7.2% in jun 84. the economy grew 6.3% in 84, 4.3% in 85, 4.0% in 86.
* did govt “aid” help? only insofar as returning money to a far more efficent job creation “machine”: the private sector.
* unemployment will be horrible, UNTIL the private sector is “stimulated”. There won’t be any 4% growth years, until unemployment is tamped down below 7.5%.
Had the stimulus actually focused on the private sector, with the understanding that tax cuts are stimulative, unemployment would not have gone so far, so fast, and remain projected to be high for the next several years.
“Why My Business Has Ceased Investing“, Coyote Blog, 5 october 2009
the stimulus was, in fact, just a “pain-killer”. we don’t notice the recession as much, largely becuase we got pumped full of morphine. It wasn’t a treatment for the cancer that is growing. Never fear, painkillers always wear off, and require increased dosages to achieve similar effects. btw-we are running out of “morphine”, but the only liberal treatment that is being offerred is “more morphine”.
funny thing about the tax cuts of 2003… federal tax receipts increased 35% from 03-06, or 650 billion. or wiki on 2003 tax cuts… “The Wall Street Journal editorial page states that taxes paid by millionaire households more than doubled from $136 billion in 2003 to $274 billion in 2006 because of the JGTRRA.” unemployment went from 6.1% in may 03, to below 5% by dec 05. The drop isn’t huge but unemployment was actually trending upwards, prior to the tax cuts. bottom line? we will NEVER have signiifcant, positive job growth, until there are broad based tax cuts.
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Fabius Maximus replies: You must be kidding. The recession ended in November 2001 (the mildest in the post-WWII era). Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 on 28 May 2003. What’s the comparison to the current situation, a stimulus passed in the middle of the most severe downturn since the 1930’s?
FM: “Conservative websites are abuzz with comments about the failure of the stimulus programs. Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.”
I’m very interested in this point of view. Can you provide links or data to substantiate it?
FM: “The heavy lifting among these tools results from unemployment aid, Medicaid, and food stamps — focused on those that have suffered loss of income.”
I have no doubt that these have been tremendously helpful. But are you saying that without the $780 billion stimulus package, “the economy would be in a far worse hole, with far greater suffering”? hanks in advance for your thoughts.
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Fabius Maximus replies: Both great questions. See the latest post for evidence of the first and second questions: Economists discuss the impact of the stimulus on our recession. For a broader discussion of your 2nd question see Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009.
Heh… not disputing or asserting here; just wanted to point out something I thought was interesting from the job-losses chart: the last three recessions before this one have taken the longest (progressively increasing) to recover back to “full employment.” the 1981 recession took 26 months; the 1990 took 30 months; the 2001 took 46 months. Now, based on the trajectory, it looks like the current recession will take far longer than 46 months to recover full employment. I wonder what changes to our economic system since 1980 have made US employment so sluggish to respond to a ‘recovered’ economy. There are several viable explanations, but I suspect it is a combination of a gradual decline in the U.S. manufacturing base, new labor-saving technology used in the service industries, plus an increasing mountain of debt that companies feel the need to work off before they can hire more workers. Anyone have other ideas?
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Fabius Maximus replies: This has been noted for years. US recession ended as the Fed “injected” credit into the US economy. In each cycle US aggreagate debt increased. As US aggregate debt grew, the marginal effectiveness of an additonal dollar of debt decreased. Hence more debt (as %/GDP) to achieve the same stimulus. In the 1990’s Bank Credit Analyst wrote about this as the Debt Supercycle.
When an economist at Drexel in the mid-1980’s, Maria Fiorini Ramirez (now a top economist) speculated that additional debt would no long stimulate when the US economy reached its maximus sustainable debt load. At that ont the post-WWII era would have ended and a new cycle begain — probably with a period of deleveraging. The response to the 2001 suggested that we were near that point. We might be at that point now. To see posts on this topic, click here.
“Conservative websites are abuzz with comments about the failure of the stimulus programs. It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis. Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering”.
Hmmm. You state this as if it were an indisputable fact. Surely it is possible that when combined with the forward deficits created, expected–or feared–tax increases to cover them, the “vig” or “slippage” created or taken by federal and state government employees, “adverse selection” in federal dollars distributed, the worse than zero-sum nature of these kinds of programs (inter-temporal expenditure differences excluded; i.e., “certain” spending now versus delayed spending)—-that it is more than plausible strong disagreement with these programs is not mere “dingbat” analysis. Quite the opposite in fact.
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Fabius Maximus replies: Take a look at the new post — Economists discuss the impact of the stimulus on our recession. A wide range of economists disagree with you, including Candidate McCain’s chief economic advisors. Can you site any evidence supporting your theory?
The reason you’re getting so many comments raising broader issues than the original post covers is because the original post doesn’t prove anything. I see a chart showing a rapid decline in jobs – much more rapid than any other recession since the 1930’s. So as I understand it, your claim is as follows: The effect of the recession so far is mild, despite it being the most severe since the great depression. Therefore, the stimulus package (or at least the tax cut and social assistance portion of it) is helping to mitigate the most severe effects. Is that about it? If that’s the case, consider the following:
1. What if the rapid job loss is the result of the stimulus? As an analogy, if you dramatically increase welfare payments, you will wind up with more people opting to stay on welfare. If you drew a graph and saw a rapid increase of the number of people on welfare, would you conclude that your higher welfare payments are working, because otherwise all those people would be suffering?
I’m sure that the vast majority of people out of work are in that situation because they simply can’t find work. However, on the margins there WILL be people who are still out of work because they aren’t looking, because they are getting enough in social payments to demotivate them. How many that might be is a good question, but there should be some.
2. The huge amount of borrowing could be crowding out private investment – an effect which is diffuse and hard to measure. How many businesses did not hire because they found it too hard to attain credit, who otherwise would have been able to? I imagine someone is doing this analysis, but I haven’t seen any numbers.
3. Under the Permanent Income hypothesis, if the large amount of borrowing going on now has convinced people that their taxes will be going up in the future (or their retirement savings are going down), then we would expect people to save more money, negating the effects of stimulative spending to some degree. And in fact, savings rates have skyrocketed. How much of that is due to the PI hypothesis? This happened with Bush’s first stimulus – a temporary tax rebate which vanished into the bank accounts of the public and did not stimulate much at all. Given how much of current stimulus falls under the category of temporary payments, I would assume tha the same applies, other than for those people who simply have to spend it because they have no choice. In any event, I would expect the multiplier to be lower than forecast.
4. The stimulus and its ‘Buy American’ clauses are causing trade restrictions. I have already seen this first-hand in my own industry, where ongoing projects were scrapped because of the mixed-country nature of the project teams, in an attempt to move to projects that can be eligible for stimulus money. This is not only inefficient, but could very well lead to layoffs even of Americans in some cases.
5. How much investment is sitting on the sidelines waiting for stimulus money? How many companies are hurt because they can’t win bids today, because they don’t meet the requirements of the stimulus plan or because the requirements for projects haven’t been finalized because no one is sure when they will receive stimulus money?
6. What other unintended consequences are buried in a massive rush to shower the economy with almost a trillion dollars in a chaotic manner driven by political interests? How many distortions of local markets are there? How big a factor is the uncertainty of how the stimulus money will be spent, and what regulations will go along with it?
The other proposals of Obama’s are off-topic, but they do contribute in the aggregate to uncertainty, and the last thing an economy needs after taking the kinds of economic shocks this one has is uncertainty. Businesses need to be able to plan ahead. They need to be able to forecast what their costs will be and what potential customers they might have. When a federal government continues to tinker with every aspect of the economy and constantly proposes new, sweeping changes that could radically affect profitability, it’s got to cause damage. Adding the uncertainty of the stimulus to that makes it worse.
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Fabius Maximus replies: Can you cite any evidence supporting your theories?
Dan H — Great response. I almost think FM is pulling our leg.
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Fabius Maximus replies: I thought this post was so obvious (to anyone who reads the news) as to need to supporting evidence. It is, however, easy to provide (see today’s post). Nobody here has cited anything to support their theories.
FM: Perhaps I should accuse you of not reading my comment, but that would be gratuitously rude, would it not?
Correct me if I am wrong, but your position appears to be that federal stimulus spending can help the economy shrink less than it would have. You provide no evidence for this, and the fact that job losses have been worse than expected, and worse than Obama predicted when he was selling his stimulus plan, is to you just evidence of how essential the stimulus plan was. That conservatives disagree with you — that they think the “stimulus” was actually harmful — proves that they are dingbats engaged in partisan politics. You agree that the backers of the stimulus plan were compulsive liars, but since all politicians are compulsive liars, a conservative web poster pointing out that the plan failed to achieve the objectives with which it was sold is likewise a dingbat engaged in partisan politics.
Ironically it seems that you are actually damning the backers of the stimulus plan — presumably head salesman Obama especially — more harshly than many of the conservative websites, because you impugn his honesty, while most of them assume that Obama actually believes the economic nonsense which he proposes.
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Fabius Maximus replies: I am not sure why this is supposed to make sense. Perhaps you can comment on the new post.
“should accuse you of not reading my comment”
Perhaps you can provide evidence that I did not read your post, as I did above.
“What’s the comparison to the current situation, a stimulus passed in the middle of the most severe downturn since the 1930’s?”
some disagreement on the severity/symptoms. you won’t get any argument about unemployment being ‘almost as bad’ as the early 80’s. The severity of the 80’s was horrendously compounded by inflation, and the subsequent interest rate hikes, which stifled job creation.
a glance at gdp numbers…
80 -1.3%
81 +1.3%
82 -1.4%
together this three year run was an agregate of -1.4%.
a glance at current/recent gdp numbers…
08 +.4%
09 -2.6%
10 imf projects 1.6% growth. BEFORE the stimulus passed, the recession was predicted to end 3q/4q, and growth was projected to exceed 1.0% for 2010.
The aggregate loss over the three year period is less than .7%. It is not characterized by high inflation, like the 70’s and 80’s. Financial crisis tend not to fit within a fiscal year, and the gestalt view of a -2.6%, without considering the ‘bookends’ is providing a limited examination. I survived carter, and the first two years of reagan, complete with a spate of WORSE economic numbers, and characterized by a media that was far less ‘sensitive’ about avoiding doom and gloom scenarios.
hands down, the 78-82 period was an actual crisis that exceeds the one we currently face.
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Fabius Maximus replies: The point of this post (follow-up to an earlier one) is to explain why this decline has a smaller decline in aggregate demand (e.g., GDP) than other recessions — despite being worse or far worse in most other metrics (e.g., personal bankruptcies, loss of employment, loss of household income — note the 2 links in this post comparing these with the 1930’s). The stimulus is the most likely answer. It was applied far sooner and larger than usual. The first round being the massive tax rebates in Q2 of 2008. Compare with the 2003 tax hike you mentioned in comment #45, applied 17 months after the recession was over. BTW, GDP is not the best — and certainly not the only — measure of a recession’s impact.
A few more details. Why do you look at the 1978-1982 period? It’s not a full business cycle, and appears arbitrary. Also, the current downturn is characterized by deflation — which is more destructive than inflation, esp for a high-debt economy like ours. It’s rare, but history suggests it is more difficult to treat than inflation.
Look to the fundamental imbalances. The trade deficit. The energy deficit which is a big part of it. The world beyond the U.S. was just asked to take in too many dollars. BO is just making everything worse. The “stimulus” is a joke.
FM: “What’s the comparison to the current situation, a stimulus passed in the middle of the most severe downturn since the 1930’s?”
the wiki entry seems to make mention of a recession in 1945, characterized by a 12.7% loss in gdp. since it isn’t in the 1930’s, is our financial situation worse than 1945?
they do have the current recession posted as -3.9%, despite +growth in 2008, and + projected for 2010, sandwiching in a -2.6% for 09. any chance you can explain the 3.9% reported downturn? I guess you’d need that number to be higher than the 2.7% decline reported for the 80’s, to strengthen you argument.
still-“most severe downturn since the 1930’s” is surely not an attempt at at obscuring the reality of the actual numbers, via political ‘sloganeering’. If you want to tell me what makes the economy worse now, as opposed to the 80’s, I’d listen. Please don’t offer the looming spectre of insolvency, as a 787 billion borrowing spree would have played a contributing role to the ghost.
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Fabius Maximus replies: The 1945 event resulted from the wartime demobilization, whose effects were muted as the economy was still largely controlled by the government. Look at the 2 posts comparing the current event to the 1930’s to provide better perspective. Also, GDP is not the best — and certainly not the only — metric to evaluate economic cycles.
Misery Index. an anecdotal measure…but still…the misery index of the 80’s was more than “twice” its current numbers. fear not, even if we recover a tad, unemployment will remain above 10% for at least a couple of years, and inflation is inevitable. At that point, one may very well argue that we face the greatest finanical crisis since the 30’s.
you are just jumping the gun by a few years. While I would not include the recession on obama’s resume, it would be quite a feat to followup the worst crisis since the 30’s with another which actually does fit the bill. We are well on our way.
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Fabius Maximus replies: The misery index works as a measure of economic stress during inflationary periods. It does not work during deflationary periods. A few years of -3% deflation would destroy this economy, but the negative inflation would lower the misery index. It’s like a docter than considers only termperatures above 98.6 problematic. Congrats, your temp is 80 — so you must be in fine health!
the above issues aside… you questioning of those who believe the stimulus has had little effect… I turn the chessboard, you get to play white, instead: did the massive supply side tax cuts of reagan lead to unemployment going from 10.8% to 7.2% in 16 months? did they have anything to do with the 84-86 gdp growth?
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Fabius Maximus replies: It is an interesting question, as many things changed at that time. The massive purge of infllationary expectations, initiating the long disinflation of the next two decades — and falling interest rates. Deregulation, began by Carter and expanded by Reagan. Two years of falling oil prices. And, as you note, Reagan’s massive expansion of deficits and reduced marginal tax rates. I’ll leave analysis of such things to economists who specialize in such things.
Many comments requested expert evidence supporting this post.
Please see Economists discuss the impact of the stimulus on our recession.
FM: “Putting such weight on forecasts is absurd. There is no history of economic forecasts being accurate in the past, and hence they provide no useful yardstick to evaluate economic policy.”
So economic forecasts that support your position are valid (i.e., your latest post), yet those that contradict your position “provide no useful yardstick”. Heads I win, Tails you lose. Unemployment is worse with the stimulus than was forecast without it. You can (perhaps) reject this data point by saying forecasts are always inaccurate, but you certainly can’t then point to current forecasts (“The firm also forecasts that the package will, in total, result in about 2 million more jobs than otherwise would have existed at the end of 2010.”) as any sort of proof of the positive utility of the stimulus. Not with any sense of intellectual honesty, at least.
And I still say that the burden of proof is on you to show that the $800B of borrowed money was well-spent, not on anyone else to show that it wasn’t. But since it appears that your position is completely and proudly unfalsifiable (i.e., the initial case for the stimulus has been falsified – concrete predictions were made and found to be grossly incorrect – yet you reject this as being evidence of falsity), I don’t suppose we have the same sense of what carrying the burden of proof actually entails.
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Fabius Maximus replies: I was making statements about the past, which are not forecasts. To use an example, predicting who would win the Civil War was difficult. Analysis showing why the Union won is relatively easy. As for your second point, you mistate what I said. The actual impact is what counts. Reality — not vs. economists forecasts about what would happen (based on a combination of forecasts about the course of the recession and the impact of the stimulus).
“I still say that the burden of proof is on you to show that the $800B of borrowed money was well-spent,”
For more about this see Economists discuss the impact of the stimulus on our recession.
FM: “Reagan’s massive expansion of deficits and reduced marginal tax rates. I’ll leave analysis of such things to economists who specialize in such things.”
as a % of gdp, obama’s deficits are larger than reagan’s. i don’t now how to express the value of twice the reagan’s “massive expansion”, but obama’s own budget projects even larger. One man’s “massive expansion of deficits” is apparently another man’s “stimulus”. so you hold no position on the effects of tax cuts, but feel comfortable defending the stimulus? awkward. at best it(stimulus) is palliative care, but can’t really be considered a treatment for the disease of the economic downturn.
interesting table, with some relevance… debt by presidential terms. one point about the problems reagan faced… he had to raise interest rates, cutting against job creation and gdp growth. At present, we are all but giving cash away.
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Fabius Maximus replies: This has gone too long for something off-topic on this post. However, I will refer you to some articles on the subject which explain the complexity of these issues.
* “Americans save their tax cuts => Federal spending gives more bang-for-buck stimulus.“, Jeff Frankels (Professor of Government, Harvard), 3 August 2009
* “Fighting Downturns with Fiscal Policy“, Federal Reserve Bank of San Francisco, 19 June 2009
The 2nd is the best single thing I’ve read about our situation, a rare moment of intellectual honesty.
Why no worse: black and grey markets. A LOT of economic activity is off the books. Sure roofing shingles get bought at the lumber yard. But the labor disappears. This is what happens when tax rates get high. Want to bring that grey market labor back on the books? Lower taxes. Permanently.
And then there is the biggest black market of all – illegal drugs. About $50 bn is spent on enforcement. Another $50 to $100 bn goes to sales. A lot of that cash gets exported. On the plus side there is all the police overtime and prison building.
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FM,
Americans save their tax cuts in a DOWNTURN. Americans always save more when the economy is tanking. It has nothing to do with tax cuts per se. When their books are rebalanced Americans start spending again. Government debt – which goes on the taxpayer’s books is just putting off temporarily the day of reckoning. Some feel it will lead to a double dip – see what happened re: auto sales and the clunker of a program. In my neck of the woods car sales were running 5,000 – 5,500 a month before clunkers. Then they spiked to around 15,000. Now? 2,500 a month. For how long? Until the forward sales are digested. The same holds nationally. So instead of steady production to meet demand we have a production spike followed by much lower sales levels. Not very efficient. Production wise.
“The trouble with socialism is that you eventually run out of other people’s money.” Margaret Thatcher
Then what? What happens when government can no longer borrow and spend? The answer: nothing good.
So why are tax cuts good? They allow the consumers to rebalance their books sooner. Of course they have no immediate effect. They just allow you to come out of the recession hole sooner.
Think of this: government spending has a .8 multiplier. If consumer spending has a higher multiplier then the money is better of in consumer hands even if the money at first has little or no effect.
And riddle this: is crony capitalism a more efficient way of allocating resources than spreading the money to consumers? We shall see won’t we.
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Fabius Maximus replies: I don’t know what you are attempting to say, or how it relates to this post about the role of automatic stabilizers during a downturn. Nor have I seen any evidence that black markets are larger than during the high-tax 1970’s.
Also, your recommendation of tax cuts makes no sense to me. Given that we’ve run massive deficits for decades (computed using real — accrual — accounting), shouldn’t you be focused on spending cuts? Esp now that both Medicare and Social Security, which have financed the general budget for generations, have negative cash flow. Perhaps you believe we should ask China and the Saudi Princes to finance the entire US government budget — why settle for less? We could post our carrier strike forces as collateral.
some numbers reagan deficit v. obama…
as % of gdp.
82 -4%
83 -6%
84 -4.8%
85 -5.1%
09 -11.2%, {not necessarily blaming obama, the shortfall is not his, yet his budget increase for 2010 accounts for, roughly half, of the deficits. 08 to 09 outlays go from 2,983bil to 3,688bil, a 23% increase in the size of govt. or 700bil/14trillion=5%.}
10 -9.6%
11 -6.1%
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Fabius Maximus replies: Please, enough of this. It means nothing, and is grossly off-topic. You might as well contast these with FDR’s WWII deficits. It’s like neolithic tribes holding their chief responsible for the rains. The recession was 16 months old when Obama took office. The measure he takes will have full force in 2010.
FM: this post about the role of automatic stabilizers during a downturn.”
Is that what this post is about? I thought it was about the role of this stimulus package during this downturn. I don’t have numbers; how much of this stimulus package was in the form of automatic stabilizers (unemployment benefits, Medicaid, etc), and how much was in the form of payouts to favored constituencies? How about the time component – how much of the spending was planed for the immediate downturn, and how much of it was intended to juice the economy around mid-term elections? I have my impression (about 20/80 against the stabilizers), but I don’t have actual numbers. Are my impressions grossly misinformed?
Stipulated: automatic stabilizers have value during a downturn.
Conjecture1: This stimulus package was more about politically motivated spending than providing automatic stabilizers.
Conjecture2: Both individuals and the nation as a whole have been consuming beyond their means via debt, and the debt burden has become unsustainable. Even with the most favorable view of the stimulus package, it ultimately represents ever larger amounts of borrowed money. The stimulus perpetuates and exacerbates the underlying problem of an unsustainable debt load.
Conjecture3: If as is being reported, the dollar loses its reserve currency status and oil sales no longer get priced in dollars, the cost to the US economy and US citizens will be greater whatever palliative benefits the stimulus provided.
Of course, this stimulus package would not be wholly to blame for such an outcome, but it does provide pretty clear evidence to the rest of the world that the US is not yet prepared to bring our consumption inline with our production and that our currency should not be relied upon. It seems rational for other nations to look to minimize their exposure to dollars.
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Fabius Maximus replies: All the answer to these questions are in Economists discuss the impact of the stimulus on our recession. As for your conjectures:
(1) False. See the link.
(2) True, as described in many posts on this site. For evidence see the links on the reference page End of the post-WWII geopolitical regime. Esp this and this.
(3) It’s not being “reported“; there is speculation about this happening sometime in the future. It will be a good but painful event. See here and here.
(2) “whole question of your overall demeanor in your reply”
You are not a customer. In effect, you are somebody who drops by for free drinks. That’s fine, but you have no standing to complain about the service. Opinions from folks whom I respect (e.g., operators of major websites, like Quick or Reynolds) get attention.”
This confirms everything I have written about your attitude. People can read that and judge for themselves. I am guessing its pathological at this point, but let me set you straight on something since you are so comfortable with getting personal. I am indeed *not* a customer, as I don’t find myself buying much of what you are selling. I find the product shoddy and delivered by a salesmen lacking the smallest hint of charm.
But, I also don’t think you see me as someone “dropping by for free drinks”, but rather as someone who crashes the party you’re perpetually throwing celebrating your supposedly superior intellect.
I don’t know, maybe it has to do with the fact that the first time I dropped by here, I exposed you for not knowing the basic facts about recent history, which undercut the entire thesis of one of your posts. I think that gets you kind of cranky, having to backtrack, don’t it? I think you know the post I am talking about. While you eventually conceded the facts I presented to you, you STILL stubbornly refused to rethink the larger thesis, now undermined by those newly conceded facts.
See, Fabius, I KNOW you don’t like being challenged, logic and evidence presented or not. You’ve proven it to me. So, you can make all the disparaging and dimissive comments you want, but I have the real score on your intellectual honesty, not a “Preliminary Estimate”.
You are not a thinker, Fabius, you are a linker. When you assert something, there are a multitude of links to supposedly support your position. Great. Links are good. But when called upon to argue the logic of YOUR assertion, or when presented with alternative facts or opinions refuting them, you stonewall, divert, and insult. You give ground resentfully, if you even do at all, despite the merits,
Hey, I don’t mind THAT, as it is your blog. I just dislike this pose you strike as some sort of great seeker of deeper truths. What you are seeking is to always have yourself proven as right. At least be honest about that!
I’m off to find somewhere the drinks aren’t watered down, and the glasses are not chipped, worn and dirty worn, even if I have to pay for them. Hey, its a bad analogy, but you started it.
Cheers, WG
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Fabius Maximus replies: Since you provide no specifics, to reply is difficult. Let’s try, anyway.
(1) “since you are so comfortable with getting personal.”
Any quotes to support this? I explained how I operate this site, regarding you not as a customer but as somebody dropping by for free drinks. Hardly a personal comment.
(2) “the party you’re perpetually throwing celebrating your supposedly superior intellect..”
Have you read the comments on this thread? Harsh debate, clashing opinions. Hardly a party “celebrating me”. That’s how this site runs.
(3) “I think you know the post I am talking about”
There are 13,000 comments on this site, from Dec 2007. Why is one of your’s special? I have no idea what you’re talking about.
(4) “you stonewall, divert, and insult”
Can you provide any examples? Here’s a counter-example from your comment #41:
* You: “Hey, how about you first giving me some evidence to support your contention.”
* FM: “Requesting evidence is always respected on this site!”
So I posted a few thousand words of evidence: Economists discuss the impact of the stimulus on our recession.. To which you make no reply.
To all readers: any comments?
WG’s comments are #20, #30, #41, and this one. I don’t much there even relevant to this comment. I made no personal insults; he gave no rebuttals. He asked for evidence, which I provided. I asked for evidence (and a few questions), which he ignored.
What are your thoughts on this? Perhaps we’ll hear from him in reply, as I emailed this to him.
FM: “I was making statements about the past, which are not forecasts.”
I call foul on this. I quoted the forecasts (results in 2010) that you posted as somehow evidence of the utility of this stimulus package. You simply can’t reject out of hand falsified forecasts for results in 2009 yet quote approvingly forecasts for 2010. Either the forecasts are inherently unreliable and have no predictive value in which case forecasts of 2010 don’t mean anything, or they do have value and the falsified prediction on events this year meant this stimulus has made things worse.
And if you go with the former, then I’d say that given that the utility of an economic intervention can’t be meaningfully predicted, the opportunity costs of $800B of borrowed money alone says the stimulus shouldn’t have been done.
It’s my opinion that economic forecasts have some value, especially in the near-term, but it’s not great. And if events show that not just the magnitude, but even the sign is wrong on your prediction, that fairly conclusively says that something is fundamentally wrong with the model you’re using. Since that was the model used to justify the stimulus, and the stimulus implicitly carries some negative consequences, the stimulus is on strike two. You need to bring something better than ‘but we forecast 2010 will be good’ or ‘politics says we’ll get half a baby’. Both statements might be true, but as an argument they’re clearly unfalsifiable. If an outcome you don’t like comes to pass, you’ll just discount it with ‘forecasts are always unreliable and politics doomed it to failure’.
And BTW, if politics doom it to failure, isn’t that all by itself a pretty compelling argument for not borrowing $800B? Also, given that there’s effectively single-party rule and politics still doom it to failure, doesn’t that say the Democratic Party is not fit to govern?
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Fabius Maximus replies: This is complex, so let’s follow the logic.
“I quoted the forecasts (results in 2010) that you posted as somehow evidence of the utility of this stimulus package.”
I assume you mean this from comment #58:
Folks on this site asked for evidence that economists believe the stimulus is working. So I posted Economists discuss the impact of the stimulus on our recession. The WaPo article from which you quote showed that even some Republican economists believe the stimulus is working. If you disagree with Swagel’s analysis, take it up with him.
“Please, enough of this. It means nothing, and is grossly off-topic.”
you were the one who brought up “Reagan’s massive expansion of deficits”. post 56. Sorry to put them in context and provide scale. I won’t trouble you again. bona fortuna.
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Fabius Maximus replies: Posting the numbers with no discussion of the vastly differing circumstances is not putting them in context. It’s chart junk. By the way, I said mentioned the deficits in response to your mention of Reagan’s tax cuts. That’s providing context.
one last point, though…. this repeated phrase: “the worst recession since the 1930’s” pretend that one were judging economic crisis on a scale of 1 to 100. We’ll give the great depression a score of 85.
This current crisis is about a 20. Put the other crisis in the system, and we’ll give the 80’s a low score of 10.
Your intellectual “brinksmanship” demands that you point out that our current crisis is the closest we have ever been to the great depression, without ANY OTHER scale. You repeatedly use the phrase, without any acknowledgement that on the spectrum, our position is FAR CLOSER to our modest recessions, than the great depression.
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Fabius Maximus replies: As I have said repeatedly, the curent downturn is the worst since the 1930’s by almost every metric. Duration of the downturn. And decreases in
* mfg capacity utilization at 69% (a post-1930’s low
* personal income – down almost 4% annualized, first negative since 1960
* personal expenditures -down over 2% annualized, first negative since 1960
* industrial production at -13% YoY, a post-WWII low
* business earings – S&P 500 eps down-91% vs. down 74% 1929-32
* trade (Krugman: “has fallen through the floor in a way that it literally never has before, including in the Great Depression”),
* and employment (see this post).
Compare this downturn in GDP to the other severe “gdp recessions” since WWII:
Start…….End….Duration…Drop in GDP
2005Q2…????…….6……..-3.5%
1957Q2…1957Q3…2……..-2.7%
1972Q3…1974Q1…7……..-2.3%
1953Q4…1954Q2…3……..-2.1%
1980Q2…1981Q1…4……..-1.7%
(source: Bureau of Economic Analysis)
Due to the large and rapid federal stimulus programs (poorly designed as they were), the resulting drop in aggregate demand was muted — hence the decline in GDP. I have no idea on what basis you give this downturn such a low score, but it differs with the assessment of every mainstream economist I’ve seen. Perhaps you can justify it.
“If you disagree with Swagel’s analysis, take it up with him.”
I’m not disagreeing (or agreeing) with Swagel’s analysis, I’m disagreeing with your use of it. You can’t on the one hand say the forecasts are meaningless when they disprove your position and with the other hand point to a different forecast and claim it backs your position.
If you summarily dismiss any disconfirming forecasts because forecasts are meaningless while simultaneously citing confirming ones, your position is not one of logic but rather one of faith. That’s fine as far as it goes (we all have beliefs that are not reached solely due to reason), but don’t go trying to fool others (or yourself) into thinking that your position is logically sound.
Note: that doesn’t even mean your position is incorrect – only that you’re not proving it logically.
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Fabius Maximus replies: My reply was perfectly clear, which you just ignore. And Swagel’s comment was in a different post, which discussed a different point. At no point did I say that I agreed with Swagel’s analysis, merely that he (and almost every other economist) agrees with the verry narrow proposition about the role of automatic stabilizers.
Speaking of beliefs that are not reached solely due to reason, it is my opinion that the unsustainable debt burden is primarily due to Baby Boomers apparently congenital ability to willing deprive themselves of anything. I have no proof, just observations of debt vs time. There’s a lot of borrowing from the future to consume in the present, and that consumption seems to favor the Baby Boomers.
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My reply was perfectly clear, which you just ignore. And Swagel’s comment was in a different post, which discussed a different point. At no point did I say that I agreed with Swagel’s analysis, merely that he (and almost every other economist) agrees with the verry narrow proposition about the role of automatic stabilizers.
I didn’t not understand your reply as being responsive, simply reiterative. To be fair, so was my comment. But also to be fair, you originally warned that your logic was “complex”, so I don’t think even you thought it was “perfectly clear”.
And yes, Swagel’s comment was in a different post – in a post that you linked to here as a response to the argument that the stimulus was having a negative effect. I don’t see why it’s unfair to dismiss your referenced response with the same argument you use to dismiss evidence disproving your thesis.
Finally, I too have explicitly agreed with the very narrow statement about stabilizers (“Stipulated: automatic stabilizers have value during a downturn.” – SG). We’re not in disagreement over that point, only over whether this stimulus package has been a net positive to the economy or not.
Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering.
I take this as your thesis – that “these programs” (i.e., this particular stimulus in toto, not some alternate theoretical stimulus package and not limited to the stabilizer portions of this stimulus package) has been a net positive (i.e., prevented “a far worse hole”).
To the extent that the underlying economic problem is caused by excessive debt (a notion which you have said you agree with) this stimulus has absolutely worsened that problem; it has made the debt hole “far worse” if you will. That much seems inarguable.
So we’re left with the second half of your thesis – whether or not this stimulus has reduced suffering. Given that unemployment is still rising, we can rule out the notion that the stimulus halted the suffering; we’re reduced to whether it has lessened the degree. Since unemployment has exceeded the projections without the stimulus, we also know that it has failed to reduce suffering at least on the merits of the argument used to promote and pass the stimulus. The only arguments that seem to remain (or at least that you’ve been willing to offer) are unfalsifiable counter-factuals and more economic forecasts, which you have demonstrated will be rejected as meaningless if they ever become falsified.
Clearly nothing can be “proven” in either direction – economics isn’t called the dismal science for nothing – but the preponderance of the evidence seems to be on the side of this stimulus packaging having been on net negative. Which doesn’t mean there aren’t pockets of benefit and certainly doesn’t mean it has had no effect (the strawman that most of your counter-quotes attack), but only that on the whole it has hurt more than it has helped.
And the main reason why I persist in challenging you on this is because I anticipate the economy continuing to worsen to generate calls for more counter-productive “stimulus packages” and I would like that nipped in the bud. Extension of unemployment benefits, Medicaid and the like to ameliorate suffering, sure lets debate those, but no more massive stimulus packages intended to borrow our way back to prosperity.
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Fabius Maximus replies: I agree with your last paragraph. The reason I post about the importance of automatic stabilizers is that their vital role has been challenged by the politically motivated faux economics which — as seen on this thread — has spread so widely.
As for conflating these two seperate posts, the point was to show broad agreement among economists about the value of automatic stabilizers. I don’t take responsibility or agree with everything they say, nor with how they arrive at their conclusions. Which is why they are seperate posts.
Willem H. Buiter has been mentioned (along with other economists) in comments #5 and #10, with the implication that he would not agree with my posts about the value of automatic stabilizers. I challenged this, asking for proof.
A quick search of his writings reveals proof — but not what they implied. During his career he has written about the value of stabilizers. Here are two examples, at opposite ends of his career.
Buiter is Prof Economics at the London School of Economics, see his publications here.
(1) “Stabilisation policy in New Zealand: Counting your blessings, one by one“, October 2006 — Here he proposes 2 methods to further strengthen automatic stabilizers:
* Tax real capital gains at the same rate as earned income (a large increase).
* Broaden the tax base by eliminating deductions.
(2) “The Theory of Optimum Deficits and Debt”, National Bureau of Economic Research, November 1983 — Purchase or subscription only. Pages 19-21 describe the benefit of countercyclical fiscal policies (including automatic stabilizers), even if they result in large government deficits.
These are the same sort of people who we see in this comment thread. Then and now, mocking the unemployed.
“GOP debate crowd cheers idea that jobless are to blame for their plight“, by Greg Sargent, Washington Post, 19 October 2011:
http://www.youtube.com/watch?v=8aXRYC0wxC8&w=420&h=315
Here we see the same contempt for the unemployed displayed by many of the people commenting on this thread:
“A Convenient Excuse“, Mark Thoma (Prof Economics, U OR), 19 October 2011