I read a really good quote last fall: "It took the government to put the 'Great' in 'Great Depression'".
We are being pounded by the steady drumbeat of the need "to do something". Last year I remember reading a quote from a congressman when the TARP bill was being passed that "we need to act fast - there's no time to figure out if we're doing the right thing, we just have to do something". Ugh.
Obviously the Obama administration is pushing the stimulus package heavily. Just today it passed the House easily. The media for the most part just repeats the tired old lines.
Here's what people should pay more attention to: Keynesian-style stimulus doesn't work. It didn't work in the 1930's, or the 1970's, or in Japan in the 1990's. And we want to do it now why?
I think a big reason is because on the surface it sounds right. There is a real problem here of intuition leading people astray. But intution often doesn't work well in analyzing complex systems. I've seen no actual explanation about why the proposed stimulus is going to work and why it won't be a long-term problem. In fact, the supposed argument for why it will work completely ignores the long term problem.
Why aren't people more disturbed that they do not point to a case where government spending expansion has worked in the past to get an economy out of recession?
I was happy to see a report of an ad taken out in Newspapers by several leading economists, Nobel Laureates among them, coming out against any kind of stimulus. See it here.
I know that such opinions are going to get lost in the noise. There is a tendency toward *wanting* the government to be big brother - to take care of us. Someone to just come and *do something*, *anything* to just make this go away. Arguments about reality be damned.
These are the types of opinions that were lost in the noise when *last year's* tax stimulus was passed. Or when the TARP bill was passed. Or when the "Big Three" car company bailout bill didn't pass - but Bush did it anyway (with Obama's urging right along with it).
Another big factor here is a sort of self-selection issue. That is, those who are most likely to pursue government positions are those that believes government is the answer to any problem. Plato recognized this dynamic thousands of years ago and said that the best rulers would be those that don't want to rule. Which is quite a paradox indeed.
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Shearic,
ReplyDeleteWhat I know about economics amounts to my choice of Market Basket over Stop ‘n’ Shop. However, lately, like many, I have been inundated by the media sharing various economic theories that suggest creative solutions to the ever increasing world recession.
The consensus of opinion, and statistics, seems to confirm that we are in a severe economic slump and it is only getting momentum. Evidence from my own experiences at work and a small business, and friend’s and neighbours’ newfound unemployment backs this up.
First thing is I don’t trust leading economists whatever their opinion. They all share some complicity in advice given to guide us haplessly along to the current mess we are in, and their general ‘all over the map’ responses how to resolve this problem shows there are other indicators besides the obvious driving this. The obvious statement is that there isn’t hardfast logic and principles of economics that can be applied without a political agenda, but that, as I say, is a ‘duh’ statement.
‘We need to do something’: Let’s take the alternative. What can we expect if we do nothing? There are claims that in this case we will not experience the real suffering of the 30’s, or in fact will we ever see that type of hopelessness, but what is the basis of those speculations? Is it because that, due to our experience with that misery, government will not let it happen again? Or is it really because not matter how deep this goes, soup lines are just not something we should worry about?
I don’t know the detail in your examples of Keynesian stimuli that have failed but it was my impression that, regardless of who is responsible for creating the Great Depression, it was inevitably the spending on the war effort that lead to recovery. The mighty economist Feldstein, another untrustworthy one too in my book, has a different shopping list (money on defense) but seems to agree that the way out of a recession is to borrow and spend, regardless of how much this conflicts with a political ideology. In fact, I hear somewhat of a consensus (disagreements sure) that there is a need to borrow and spend to reverse a recession but as I said earlier, opinions are all over the map.
After eight years of fear, I am worried that the momentum of the fear of the economic crisis might gain it’s own momentum. However, I believe that to avoid hardship and strife the likes of which we have never seen, the government needs to spend here. I agree with that. But spend wisely. What was the focus of the failed 30’s and 70’s and 90’s stimulus packages? The target of spending is the critical factor and something rushed and kneejerk should be critiqued and shaped into something valid. I think there should be a focus on incentives. Similar to Bush’s benefits for the Hummer owners, but for example to folks completing home projects or small business expansion. In any case, some kind of verification that the money is doing what it’s intended to do. Ergo it’s not Keynesian per se that is at fault but how the stimulus is directed. Granted the obvious complexity based on your facts might indicate a fundamental difficulty targeting said stimulus funds.
But where does my beef lie? I am disappointed that the stimulus passed by the house is filled with the entitlement programs stuffed in because it would be hard to pass in a bill of its own. It’s dubious if these things can achieve the spike in the timeframe needed to be effective. Although not necessarily targeted for political favours, it stinks of Pork, and that is contrary to what I expected from this government.
The dilemma is that nobody really understands the monetary system and most look to others, the subject matter experts, for guidance. And well, those experts, nobel laureates et al, are all at odds with each other’s solutions. I don’t hear many alternatives to the stimulus from the GOP naysayers besides increased tax cuts which don’t target money to the types of folks who will spend, those who live pay check to pay check, so I’m not sure how much the purveyors of No are contributing except by giving Mr. Obama a “be it on your head, Mr. President.”
Now it’s his. We’ll see.
-Paul.
Ahva -
ReplyDeleteI'm glad to have your thoughtful responses, and I hope you keep up the energy to do it!
I want to try and keep these comments brief, because I'll touch on some things that I'd rather dedicate a fuller post to.
"Consensus of economists" I think is very deceptive. I believe there is a consensus of media and their claim on what economists "say". I've read quotes of the TV media tsk tsk'ing the Republicans for not going along with the stimulus because "Obama has tried to be bipartisan, what more can he do?" There is such a built in bias there. They can't conceive that it is a valid principled position to be against it.
The US finally came out of depression after WWII, but there are some pretty special things about wartime economy.
* Technology/manufacturing improvements - the war effort focusing production and leads to innovation in both technology and manufacturing. I don't believe the types of gains made during the 20th century can be repeated in the 21st century. But those things can help drive economic prosperity once war is over.
* Austerity and rationing - People consumed less specifically because of the war. Their appetites were whetted to consume once it was over.
* Population thinning - 418,000 US dead in WWII. Economically speaking, that will improve your unemployment figures.
* War bonds -I'm not sure percentages, but we at least "owed ourselves" to some degree at the end of the war. Which means when these were paid back it stayed within the post-war economy.
I haven't studied WWII economics specifically, but these are the things that come to mind.
The fact that we conjure up thoughts of soup kitchens and the 1930's is because the media, Obama, etc., have been incessantly calling this "the worst economic crisis since the Great Depression". This is a lie. Could it become that? Yes - if the government does too much (IMHO).
It is probably the worst *financial* crisis since the 1930's, but that is different. That has to do with addressing the banking and finacial industries specifically. Which is where the bulk of the energy should lie.
Just today the Q4'08 GDP numbers were put out and they were reported as the "worst since Q1 1982". That means 1982 was worse. Even the way they report that is in order to maximize shock: 3.8% drop on annual basis. All they do is take the actual drop for the quarter (.9%) and multiply by 4 to get an annual number. This is very deceptive, because GDP numbers are very volatile. The 1982 number they compare against of 6.4% annualized drop in Q1'82 is itself instructive because the overall drop between the peak and trough quarters of that recession was 2.3%. So, it's the equivalent of saying "this is really bad if we multiply by 4!".
Also, it should be said that the consensus view was for a drop of 5.4%, and it came in at 3.8%. So are things not as bad as we think they are? The media surely won't play that aspect of it up.
I believe there is no way to have the government "do nothing", but as you point out - Obama is a politician like all those that came before him. The "stimulus" is a vehicle for an agenda, not job creation. And it's justification is definitely driven by fear.
I even heard someone interviewed on NPR today who was extremely Keynesian (to the degree he said Gov't should pay people to dig ditches and fill them back in) say that investing in "Green" jobs won't create jobs long term because increase in "Green energy" jobs necessarily comes with loss of "Brown energy" jobs - coal, etc.. So even that isn't about jobs.
I definitely have sympathy from those feeling the pain from the economic downturn. Part of the lesson has to be that these things happen, and have to be planned for. Anyone younger than about 40 hasn't had this happen in their adult lives. It was oft-repeated financial advice that people should have a 6-12 month cushion or more built up in case they lose a job. But how many did this? New cars, houses, and TV's beckoned.
Instead of trying to explain this lesson, the gov't would rather try and prop up the economy to an unsustainable level because that gets votes. This is where austerity could come into the picture. Instead the gov't wants to inflate the bubble again.
Where I think the gov't should act is in the much more limited capacity of addressing those that are affected. Increasing unemployment insurance for example. Maybe something along the lines of funding for job training for new jobs.
I just thought of an analogy. Let's say I steadily gain 100 pounds over the course of a few years, which would put me at 310. Then, suddenly, a change in diet has me lose 50 lbs in 3 months.
Does the Dr. say: "Good God man, losing 50lbs is terrible! We've got to get you eating lots of fat and carbs to get you back up to 310!"
Or does the Dr. say: "Whoah - you may be losing weight too quick there fella! But your weight should really be about 210, so let's try and be gently about losing those aother 50 lbs."
The point here is that the healthy level isn't necessarily where we just were. It may be where we're headed, but the journey to get there is the painful part. But still necessary. Putting it off means more pain later.
The WWII war bonds I mention above could be interesting here, because one of the big problems with the stimulus (besides the fact that it is more pork than stimulus), is that it is externally funded. We will be putting ourselves into more debt to the Chinese to fund it (this is the "mortgaging our childrens' futures part). This just means more pain down the road.
Eventually countries like China will be in a position to wield our debt against us - devalue the dollar further, and drive an inflationary spike through our economy. When this happens we'll forget that it was things like this stimulus that put that weapon in their hands.
Oh well, I guess I didn't keep this comment too short... ;-)
I very rarely listen to media outlets that seem to overly sensationalize events or tsk tsk the actions of politicians. I have not heard this, and I listen to NPR and BBC. (No doubt laughs here, but although there are claims by conservatives that NPR has a left wing bias, I don’t see quantitative evidence that this is true). On which NPR show did you hear the digging ditches reference, and was there any cross questioning of the Keynsian guy? Contrary to tsk tsk’ing those that disagree with Obama’s stimulus, many of the discussions I heard were giving valid analysis as to why simply having house or senate minority folks over for bipartisan drinks was not enough. In fact there was criticism for not involving the house minority at all when constructing the bill.
ReplyDeleteDoesn't your conclusion on a “consensus of economists” owe as much to subjectivity as does the "media" consensus you argue against?
There are some pretty special things about now as compared to wartime: the country’s infrastructure has been going to hell in a hand basket for years and is in a state of disrepair. The society of engineers has done a comprehensive analysis and estimate on what would be needed to bring things to code and the stimulus amount, although not all targeted to this type of effort, is only a fraction of that estimate. The point I mentioned about war was to indicate that spending does help a recession. Obviously we don’t want to start a war to aid the recession, but there has to be some benefit in analyzing the effects on an economy. If the economy can be manipulated in war, it can be manipulated in peace.
The statistics show that the GDP in 1982 was worse, yes, and although it’s the worst situation a lot have seen, I agree that ‘the worst economic situation since the Great Depression’ is not accurate. But let’s look closer. The annualized GDP rate is a factor of four as you mention. But rather than focus an argument that this is elevated, it’s important to note that it is exactly the same factor that is used for comparison in previous years. Looking at the quarterly annualized rates for the last 60 years, it has only been worse on three occasions.
The GDP result indicates that there is a backup of products in stockrooms. What it also indicates is that there needs to be a change in production to correct it, which means a loss in jobs. Maximizing shock by saying it’s the worst since 1982 is one way of looking at it, putting it in perspective is another. This is a concern. Not only does it indicate a loss in jobs but those job losses are likely to have a ripple effect on crime and poverty. I say that not for shock value but as a suitable argument on the effects of reining in public spending. With decreased production and subsequent job losses the GDP will return to a positive number. NPR’s Market Place reported the GDP numbers by saying, and I paraphrase, “The good news is it is much less than expected. The bad is we have to go back to 1982 to see something worse.”
It is interesting you mention War Bonds. In Bush’s world we weren’t actually told to keep our 6-12 month cushion, we were told to go shopping. Back in late September, 2008, I was discussing the looming financial crisis with a colleague at work. The upshot was we wrote to Senator Kerry suggesting now was the time to reinvigorate the War Bonds program.
Ahva -
ReplyDeleteThe show on NPR with the hyper-Keynesian was around 12:15pm yesterday (1/30). Which it means it would have been "Here and Now". They don't have the show up in their archives as of right now (http://www.here-now.org/shows/).
I think NPR has a bias, but it is low-level enough that I don't think it is that hard to filter (for me). I think it is subtle though. It is usually not what they say, but what they *don't* say, or *don't* ask, where the bias lies. I've liked the BBC, but haven't heard it since I stopped commuting months ago.
You're right about consensus being subjective. But I'm not the one in a position of public policy direction that is using it to try and convince a population down a particular policy path, stating it like some objective fact.
"Consensus of Economists" itself isn't useful in this context, as neither is "Consensus of scientists" useful in other contexts (such as climate change). What is relevant is what economists with relevant backgrounds and expertise hold the opinions. I'd like to know, if it could be known, what the consensus is of economists who specialize in macroeconomics, and particularly with a strong knowledge of the history of macroeconomic policies and their effects.
There are many economists and Nobel Laureates who believe stimulus should be done. But in the link I provided there were also a great number of economists, including Nobel Laureates, that oppose it.
I'm not so sure that WWII reflects a case of government spending fixing an economy. The spending on the war helped us win the war, but it also produced a record debt level (as reflected in GDP/debt ratio) at the end. Our strength as an export economy in *post-war* is what I understand to be the major reason for the economic recovery. The rest of the developed world had bombed-out infrastructure and we had the manufacturing capacity to capitalize on that.
We're obviously not an export economy now. So this path is not available to us.
On the 1982 thing, I wasn't trying to say that it wasn't fair to compare to 1982. That is completely appropriate. What I think is ironic is that we hear this is the worst "since Great Depression", but then the numbers come out and its worst "since 1982". It can't be both. In my mind, this puts truth to the lie about comparing the current economic state to the 1930's. And then its worth pointing out that since this is "worst since 1982" that it wasn't government spending stimulus that got us out of 1982.
You mentioned Bush and his exhortation to "go shopping" back in 2001. In the context of the time, it was an understandable statement (if not adequately worded). I have no doubt in the same circumstance that Obama would have the same message - just delivered 1,000 better I'm sure. The fear was that people out of fear would freeze retail and the economy would contract, blah, blah, blah. Kind of where we are now - except at the time it was an option to keep shopping! Ugh.