On “the” fiscal stimulus
Over at Kiwiblog there is discussion of the Democrat loss in Massachusetts. Reading through the piece David Farrar stated:
Priorities. Obama’s fiscal stimulus did little bar increase the deficit massively, and turn the country into deficit hawks. Unemployment went well beyond his worst forecasts
Now I found this statement unusal in that David’s writing is usually very balanced, and yet I do not find this statement balanced at all. Why?
- We have no idea if Obama’s fiscal stimulus did anything until the data is all finalised. In a couple of years researchers will be able to look over the data and discuss the design, implementation, and need of the scheme and reach an educated conclusion. At the moment people can only present an opinion on the basis of ideology.
- Personally (going onto my ideology 😉 ), I think the fact that unemployment rose even further than expected was the result of the shock being larger than expected (and areas of the US economy being more fragile). During the crisis the US government was able to borrow cheaply and use this borrowing to undertake investment when the cost of building this investment was cheap (thanks to the spare capacity in the economy) This sounds like a good thing to me …
- Unemployment as high as 10% indicates to me that there was a hole in demand – I do not believe that “structural” economic issues could be sufficient enough to warrant 1/10 people who want a job not being able to get a job. With the Fed unwilling to soften its monetary stance further the government is in a position to be “consumer of last resort”. Although I don’t really like the idea of this, in the face of sticky prices and a massive shock to the economy I have to concede that such a role exists in extreme circumstances.
As a result, if I had to guess I would say that the immediate crisis would have been worse if the stimulus hadn’t happened. This appears to be a moderate position among economists, between the “stimulus did nothing” and the “we needed more stimulus” extremes.
Now, we may find that the long run impact of this borrowing will be bad, and we may look back on the evidence and find that the scheme is flawed. However, the point that “Obama’s fiscal stimulus did little bar increase the deficit massively” is an extreme view (that could potentially turn out to be true) – not an objective fact.
As a result, if I had to guess I would say that the immediate crisis would have been worse if the stimulus hadn’t happened. This appears to be a moderate position among economists, between the “stimulus did nothing” and the “we needed more stimulus” extremes.
Would it be right to assume there is a bit more argument over the *nature* of the stimulus – Keynsian ‘pump priming’ (seems to be the dominant form from the US lately) vs tax cuts?
@StephenR
Before the stimulus there definitely was. More recently we have had:
1) “The stimulus did nothing – look the UR rose”
2) “The impact of the stimulus is indeterminate”
3) “We needed more stimulus – look at the UR rate!”
Instead of debating details.
The stimulus wasn’t the extreme Keynesianism of “throwing money in a hole”, is was merely moving forward projects and allowing automatic stabilisers to function – a lot like what we had here.
The difference in view of the respective stimuli stem from:
1) The fact the US was already running a deficit
2) The fact that the US public is more skeptic of stimulus programs then the NZ public.
Best policy would have involved more Fed action on the general economy, and less on stabilising housing. We didn’t have that. Instead we have a situation where the government did a stimulus program – one which we can’t evaluate until all the data is in. However, working off the assumption that the “stimulus did nothing positive” seems extreme – even without data.
I think if you read people like Greg Mankiw and John Taylor they would go along with David’s point. And Jeffrey Miron has written “In Defence of Doing Nothing.”
@Paul Walker
I have indeed “read people like that”. And the cynic in me would note that they are also all Republican supporters.
Also, Mankiw has never gone as far as saying it did nothing – he just keeps posting the unemployment rate. In fact Mankiw suggested temporary tax cuts, which is really a form of fiscal stimulus by another name.
Making a statement of fact with no evidence (which is what saying the stimulus did nothing is, given that we have a vicious paucity of data) would be intellectually bankrupt from an economist. Now saying that they don’t believe it had an impact (like Barro did) is fine, but he is willing to admit that the data isn’t around yet.
With what little data we do have, the fact that unemployment is above 10% and the fact that the Fed is unwilling to perform further monetary easing implies that the fiscal stimulus could have been beneficial – I do not like discretionary fiscal policy at all, but in these circumstances there is no way I could turn around and say it did nothing positive.
I’ll be surprised if a decent evaluation a decade hence finds that the stimulus package was on net desirable. That’s of course a different standard than whether it did anything.
It certainly induced folks to wreck perfectly good cars by pouring sand into their engines and running them ’till they seized, bringing forward purchases of durable goods by a few quarters (I still get a bit weepy thinking about those poor engines).
Oh – Miron’s no Republican. Libertarian, sure. Republican? No way.
@Eric Crampton
“I’ll be surprised if a decent evaluation a decade hence finds that the stimulus package was on net desirable.”
I can definitely fathom that – especially for long-run consequences.
The argument will be that the design of the stimulus was wrong methinks.
However, hopefully more of the critique will be on the basis of what caused the crisis (social and private returns from some activities not meeting) and what is the appropriate scope of the Fed (have they gone too far, or not done enough).
Something happened this time around (10% UR attests to that) and trying to understand that will be of value then trying to estimate multipliers around a fiscal stimulus that shouldn’t have been necessary in the first place.
“Oh – Miron’s no Republican. Libertarian, sure. Republican? No way.”
I see, very good.
Martin Feldstein: “Unfortunately, despite the talented team of economists in the administration, most of the president’s economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved”
Would have been helpful if they’d cut rather than increased the minimum wage for starters. Hoping I lose money on my NZ trading here…but only on the shorting of “no increase” rather than my shorting “big increase”….
@Paul Walker
So what exactly?
I was arguing against an absolutist claim that the fiscal stimulus did nothing positive.
I am inherently very against discretionary fiscal policy, but given the ridiculous circumstances I can see how it could have had positive impacts (even with its imperfect decline). It IS NOT a first best solution, but none of the better solutions seemed to involve any political (or otherwise) will.
Again I repeat, “Making a statement of fact with no evidence (which is what saying the stimulus did nothing is, given that we have a vicious paucity of data) would be intellectually bankrupt from an economist.”. If David is just repeating a fact put forward by some dishonest/exaggerating economists then I do not blame him – but it does not make it appropriate.
Would I have preferred a more textbook monetary stimulus – yes.
Would I have preferred better public policy so that these social and private returns from risk didn’t diverge and the crisis didn’t happen – yes.
Would I have preferred a stimulus scheme that was set up like a textbook scheme, instead of filled with rubbish for interest groups – yes.
Would I have preferred the changing of policies to allow for greater price flexibility in order to avoid the need for any discretionary central action – yes.
Even with all this, do I believe that the stimulus could have had some positive impacts, especially given the obvious market failure in the labour market (which 10% UR indicates) – yes 🙂
@Eric Crampton
Indeed. It is amazing how supply and demand goes out of the window when looking at the labour market 😛
It sounds like the govt will increase the minimum wage, they have a no-change call on one hand and a $15 call on the other hand – and they want to sound centrist so they’ll go in the middle.
The problem is the negative impact will be cloaked by a recovering economy – people will start saying “higher MW, higher employment” 🙁
I can definitely fathom that – especially for long-run consequences.
The argument will be that the design of the stimulus was wrong methinks.
However, hopefully more of the critique will be on the basis of what caused the crisis (social and private returns from some activities not meeting) and what is the appropriate scope of the Fed (have they gone too far, or not done enough).
Something happened this time around (10% UR attests to that) and trying to understand that will be of value then trying to estimate multipliers around a fiscal stimulus that shouldn’t have been necessary in the first place.
“Oh – Miron’s no Republican. Libertarian, sure. Republican? No way.”
I see, very good.
fiscal stimlus is good in another country but bad in my country
The problem is the negative impact will be cloaked by a recovering economy – people will start saying “higher MW, higher employment” 🙁
I do hear every now and then that there’s ‘no proof’ that increasing the MW negatively impacts on employment e.g. ‘look, unemployment didn’t go up!’, in response one could presumably say that ‘MAYBE it would have been lower without a MW increase!’. The theory of MW being harmful has some credence to it in my very humble opinion, but what data would PROVE it?
“I think the fact that unemployment rose even further than expected was the result of the shock being larger than expected”
Agree completely on this. So many (read ‘all’) corporates reacted as if there is no tomorrow…