A Stimulus for Tomorrow, part 2

by von

The largest part of the proposed stimulus is appropriations -- aka, government spending.  But, as noted below, this part of the stimulus isn't much of a stimulus.  It can't have nearly as much of a stimulus effect as the other two parts of package -- direct payments and tax cuts -- for a very simple reason: the requested government spending won't occur until after the recession is projected to end. 

This isn't Keynes v. Friedman.  Nor is it a Democrat v. Republican debate.  It ain't Krugman v. Norquist neither. (More on Krugman below.) It's a simple function of the time it takes to spend government dollars v. the immediate impact of direct payments and tax cuts.  Direct payments and tax cuts -- what the nonpartisan CBO calls "Division B" of the package -- are faster.  They are the primary components of the "stimulus package" when it matters most, 2009 and 2010.

Moreover, a relatively small amount of the proposed spending has to do with so-called "shovel-ready" projects that have been promised, much less green shovel ready projects that are going to launch us toward a bold tomorrow.  (Review pages 5 through 10 of the CBO report for yourself.)

Thus far, there have been two primary defenses of the government spending side of the stimulus package.  The first is obfuscation.  Hiding.  Eliding.  Kevin Drum, regrettably, takes this approach.  The CBO distinguises government spending ("Division A"), which "would take several years to complete" (CBO Report, p. 4) from direct payments and tax cuts ("Division B"), which have an immediate effect (id., p. 3).  

Drum selects about half of Division B and adds it to Division A, relabling the combined $600 billion beast "spending."  It's crude, but effective.  Government spending looks a lot more stimulative if you add stuff that ain't government spending. And Drum has a foolproof argument, so long as the fools don't read the CBO.

The more sophisticated response is from Paul Krugman.  Krugman acknowledges that the government spending side of the equation is going to take time, but asserts that it doesn't matter. Krugman argues:

It’s not a problem if some or even most of the stimulus arrives after the official recession, as determined by the NBER, is over. Why? Because in modern recessions, unemployment keeps rising long after the NBER has determined, based on things like industrial production, that the recession proper is over. You can see that the need for stimulus doesn’t end with the recession by the simple fact that in each of the last two recessions the Fed continued to cut interest rates long after the official cycle trough. if it’s good enough for the Fed, it’s good enough for fiscal policy.

That is not a wholly irrational response, although Krugman's reference to the Fed seems misplaced in the post-Greenspan era.  Haven't we all retroactively decided that Greenspan was a fool to keep cutting interest rates after the end of the last recession?  It supposedly caused the current housing market mess and all that?  Well, that used to be Krugman's opinion.  C'est la vie, I suppose. 

Anyhoo, crossed finger-pointing aside, the meat of Krugman's position is that "in modern recessions, unemployment keeps rising" after the recession's through.  The qualifier, "in modern recessions" is important to Krugman because Krugman's claim is not true for every recession prior to 1991.  (Yup, that's Krugman's own chart.)

In other words, Krugman's argument holds if the mild recession of 1991 and the even milder post-9/11 recession of 2001 define a new paradigm.  If they do, Krugman's on sound footing.  If they don't -- if, say, this recession is more like the deeper recessions of the late 1980s (and every one before) -- then Krugman's argument doesn't hold. 

Hello, brave new world. 

Comments

[liberal japonicus]

I think you are missing part of Krugman's point. He wrote

The reason we’re talking about fiscal policy is the fact that monetary policy is up against the zero lower bound. Stimulus will still be valuable as long as we’re still up against that bound — which is likely to be the case for a long time.

He said something similar on Sunday (This week in Washington iirc), that there are no clubs in the monetary policies bag, so we are left with fiscal policy. Normally, you'd want to fiscal policy intervention to taper off and have the monetary policy take over, but in this case, it's not an option. I think his point in relation to the Fed is that here is what we did earlier, but when you have an interest rate at zero, that option is not going to be available.

[now_what]

the requested government spending won't occur until after the recession is projected to end.

Since your argument here is pretty much a repeat of your previous one, rather than a "part 2", my response will be pretty much the same.

Projected to end by who? By the same people that "projected" that the recession would not, in fact, occur, at a time that the recession had already begun months earlier? They could not "project" the present, nor the past, but now we should gamble against the threat of a greater depression on their projections of the future? This seems sensible to you?

We were in a recession in December of 2007. At what time previous to that did you project the extent of the current recession? Of the surveys of economists in December of 2007, how many gave an opinion that the nation was already in a recession?

We are past the point where the current downturn is worse than the Bush recessions. We are at the point where it is as bad as the Reagan recessions. We are nearing the point where it is worse than any downturn in the postwar era. Given that, the risk of market failure in the employment markets lasting longer than current "projections" is far greater than the risk of our economy recovering sooner than expected. The latter would be a nice problem to have, comparatively. Unless, perhaps, you belong to the party of Bush/Hoover.

And, once again, since you mentioned a "just wage" for the military in the previous photocopy of your post, I want to know how you think a just wage for employees is determined in the general case. What is a just wage for a worker?

[von]

LJ, that's a different point. A further fiscal stimulus can be valuable when we're up against a zero lower bound and the country is still in recession. Krugman, who's forgotten more economics than I've ever known, is right about that. It's Krugman case for fiscal stimulus in the form of government spending in Division A that I'm disputing.

Keep in mind that all of the stimulus package is a part of fiscal policy. I'm not disputing Division B is helpful. If, God forbid, the recession is game on in 2012, we'll see more Division B. I'm disputing, however, that Division -- however praiseworthy (or not) -- is an effective stimulus.

[J. Michael Neal]

von, a part of your problem is that you are making a silly argument that some government spending isn't government spending. You would help yourself a lot if you would stop pretending that that's so. If you want to argue against infrastructure spending, fine, but don't try to split non-existent hairs.

[publius]

I won't pretend to know all answers here, but a few points:

1 - Your argument basically, as I (and NW) read it, depends on the recession ending in 2011. In other words, it's the LATENESS that you seem to be focusing on.

that would be great, but all signs are for a nasty long and brutish downturn (and if gdp is +0.1 for two quarters -- do we pop the champagne?).

frankly, this is looking nasty enough that large of chunks of stimulus in 2010-11 don't sound bad at all to me (particularly when you factor in benefits of infrastructure, multiplier effects, etc.)

In short, if it's a long downturn, we need a long stimulus.

2 - I guess I'm not following your Krugman criticism.

If the recession goes only longer than historical ones, then that STRENGTHENS the case for stimulus.

Krugman, as I read him, is just saying "even if recession ends early, it's still good too spend." You then say "yeah, but what if *doesn't* end early?" To which I say, "that makes the case for stimulus much stronger, so who cares."

Sorry if I'm missing something obvious -- like I said, i'm not following completely (had a bball game tonight, and am tired)

[Gary Farber]

"Haven't we all retroactively decided that Greenspan was a fool to keep cutting interest rates after the end of the last recession? It supposedly caused the current housing market mess and all that? Well, that used to be Krugman's opinion. C'est la vie, I suppose."

Could you please quote which sentences in Krugman's four-year-old article say anything about interest rates? I'm having trouble finding them there. I'm having trouble even finding the words "interest rates."

Thanks!

[Kevin Drum]

Von, what are you talking about? I didn't relabel anything. I copied a line directly off the CBO chart. They labeled it "outlays" and I called it "spending," but it's the same thing. They're the ones who scored it at $600 billion, not me.

As for when the spending takes place, the CBO table (which is reprinted in my post) also provides that. And that's the number I used in my post.

So again: what on earth are you talking about? I didn't elide anything. In fact, I was doing little more than stenography in that post.

[sujal]

What J.Michael Neal said.

you're being obtuse in order to avoid compromising on a point that doesn't, i don't think, take away from your concern that the spending is unnecessary because it comes too late.

I think the real issue is that you want tax cuts and spending on your pet issues while this bill is focused on creating jobs directly. Not buying thrones or chairs or whatever, but in keeping people from running out of cash. Giving more money to already employed soldiers doesn't help as much as keeping a laid off construction working employed or, at least, on unemployment until the recovery happens.

I think there are other affirmative reasons to have multiple years of spending in the bill.

1) they help people hired to provide the services plan over several years, improving consumer confidence. (others have made this point, but you've ignored it).

2) it helps planning other spending - the nice thing about this bill is that it's comprehensive and seems to account for future costs related to the changes, including which ones sunset. This is good. It minimizes the games of the sort played by Republicans with the 2001 tax cut.

3) Much of the initial outlays are on short term mitigation. Extending unemployment benefits ($22 of the $60+ billion in Div B spending in 2009) goes right to the people most directly affected by the recession. And even though it's in Div B, it's spending because, you see, the government is spending, not turning away revenue.

It also strikes me, but I have no specific examples to offer, that part of the better returns of spending vs. tax cuts is that useful projects will spur related private sector spending in many cases which, again, anticipate the completion of said project (e.g. improvements to transit spurring new shops/construction along those lines). These don't have to wait until the project is complete to begin, especially if there is high confidence that projects finish.

Sujal

[tgirsch]

Von:

Dean Baker seems to read the report differently than you do. He claims that nearly 62% of the spending portion of the stimulus bill gets out the door by the end of 2010.

[hilzoy]

von: "It can't have nearly as much of a stimulus effect as the other two parts of package -- direct payments and tax cuts -- for a very simple reason: the requested government spending won't occur until after the recession is projected to end. "

Huh? In your last post, you accurately said that the CBO projects that less of the appropriated spending than the tax refunds will be spent by the end of FY 2010. How did that "less" become "none"?

Also, without further information, I assume that when you say "the recession is projected to end", the people who do the projecting are the journalists you referred to in your last post. Leaving aside for now the question whether econ journalists are the people whose projections we should be listening to now, note that these are their projections (from the Sullivan post):

"Asked when the recession would end, 31% said early 2010, 26% said mid-2010, 22% said January 2011, and 21% said even later."

Jan. 2011 is well into FY 2011. So I think you can only count 31+26=57% as thinking the recession will be over before 2011, when the spending you seem to object to kicks in. That leaves 43% who do not think it will be over by then. When you add in the fact that unemployment lags, I really don't see what the problem is.

And we haven't even started to talk about multipliers yet.

Really, though, I don't get at all why you write the bit I quoted at the beginning of this comment. It's not accurate at all.

[hilzoy]

I think the point about whether 'spending' means 'appropriations plus direct grants' (as Baker seems to mean), or 'appropriations but not direct grants', as von seems to mean, is immaterial. (It wouldn't be if von were trying to argue, as Congressional Republicans were last week, that very little of the whole bill would get out in time, but he isn't.)

[liberal japonicus]

Well, we are deep in the weeds, and I'm over my head. I understood Krugman to be saying something like 'hey, we've had interest rate hangovers before, but we can't go below zero, so what will keep going is fiscal policy'. It seemed to echo the point Krugman made on the show, but I can't seem to find the clip online (it was in a blog, and I hate trying to navigate the network sites for links, so apologies in advance)

[logopetria]

Not that I know anything about economics, but there's another non-obviously-correct assumption in von's reasoning (which I think a commenter to the previous post pointed to) -- namely that future spending, being in the future, can't have a substantial effect on present problems.

von says: "government spending [...] can't have nearly as much of a stimulus effect [because it] won't occur until after the recession is projected to end." But since various companies and manufacturers are making their spending and hiring plans now based on expected demand in the future, it seems that a big dose of future government purchasing could indeed have an impact on present plans and outcomes.

To work with von's example, a company that makes chairs might have better access to credit if lenders know that a big government chair purchase is coming. The company might survive 2009 thanks to the promise of spending planned for next year.

[Phil]

That is not a wholly irrational response, although Krugman's reference to the Fed seems misplaced in the post-Greenspan era. Haven't we all retroactively decided that Greenspan was a fool to keep cutting interest rates after the end of the last recession? It supposedly caused the current housing market mess and all that? Well, that used to be Krugman's opinion. C'est la vie, I suppose.

The fact that Krugman recognizes that the Fed continued in efforts to combat recession past the time when a recession officially "ended" according to some indicators is not a defense by Krugman of any particular effort, or of Greenspan's rate-cutting specifically.

In other words, Krugman's argument holds if the mild recession of 1991 and the even milder post-9/11 recession of 2001 define a new paradigm. If they do, Krugman's on sound footing. If they don't -- if, say, this recession is more like the deeper recessions of the late 1980s (and every one before) -- then Krugman's argument doesn't hold.

Well, hey, don't bother offering an argument that this recession is more like older ones than it is like more recent ones. Just post an if-then statment and pretend you've proved something!

[Phil]

I mean, what do you suppose a paradigm change consists of in the first place?

[Tom Maguire]

Two points regarding the lag in interest rate hikes following the 1990-91 recession - the initial period was derided as the "jobless recovery", and Clinton raised taxes in his 1993 budget. One might argue that the fiscal de-stimulus in 1993 and following allowed for a longer period of monetary stimulus. In fact, many did - the whole point of the famous bargain between Clinton and Greenspan was a trade between lower interest rates and a deficit-fighting Administration. Odd that Krugman forgot that.

[von]

von, a part of your problem is that you are making a silly argument that some government spending isn't government spending.

Silly or not, I'm applying the CBO's own standards, which distinguish between government spending (appropriations, Division A) and everything else (direct payments and tax cuts, Division B). It seems that if you're going to disagree with the CBO, you have to explain why.

Von, what are you talking about? I didn't relabel anything. I copied a line directly off the CBO chart. They labeled it "outlays" and I called it "spending," but it's the same thing. They're the ones who scored it at $600 billion, not me.

Kevin, quit playing games: "Outlays" includes both Division A and part of Division B (specifically, the direct payment portion of the Division B). The CBO does that in that section of its report because its measuring relative impact on the deficit.

But relative impact on the deficit is not the issue here: The issue here is what portions of the bill have maximum stimulus effect and when. That's why the CBO is very careful to distinguish -- and even divided for you -- Division A from Division B. Your post ignores this distinction, favoring a meaningless one instead.

[von]

1 - Your argument basically, as I (and NW) read it, depends on the recession ending in 2011. In other words, it's the LATENESS that you seem to be focusing on.

that would be great, but all signs are for a nasty long and brutish downturn (and if gdp is +0.1 for two quarters -- do we pop the champagne?).

No, I don't assume that. My point is that our stimulus package should reflect the best information that we have at the moment. The best information that we have at the moment is that the recession will end before the spending part of the bill gets paid out. If, it turns out, the recession lingers longer than projected, we have an opportunity to use the dollars not spent today in a better way tomorrow.

[von]

Leaving aside for now the question whether econ journalists are the people whose projections we should be listening to now, note that these are their projections (from the Sullivan post):

"Asked when the recession would end, 31% said early 2010, 26% said mid-2010, 22% said January 2011, and 21% said even later."

Well, that can't be right, Hilzoy. Because Sullivan's post does more than poll journalists: you also have bona fide economic experts and the Fed, all forecasting an end to the recession prior to 2011.

If you don't believe me, just follow the link. All you need to do to is read beyond the first line to see your mistake.

(By the way, it's still "less" (not none). I didn't mean to imply otherwise, though I see the basis for the confusion.)

[von]

I think the point about whether 'spending' means 'appropriations plus direct grants' (as Baker seems to mean), or 'appropriations but not direct grants', as von seems to mean, is immaterial.

But see, it's not "as von seems to mean." It's as the CBO states. You either accept the CBO's distinction between Division A (spending/appropriations) and Division B (direct payments/tax cuts) for the purposes of measuring the stimulus, or you don't.

I accept the CBO's distinction for the purposes of measuring the stimulus. Dean Baker and Kevin Drum, apparently, do not.

[hairshirthedonist]

I'm no economist, but if I take people at their word when they say the recession will end too soon for spending stimulus to have an effect on the recession, I immediately think "Then why throw money at a short recession when infrastructure spending will do more good in the long run?" If we're talking about a short recession, the risk profile, telling me where BEST to put the money, points more toward long-term economic development and less toward short-term disaster avoidance.

[von]

Two final wrap ups: Logopetria makes a good point that might hold on the margins in theory, but I am utterly unqualified to assess whether it has any impact in practice (much less what that impact might be).

Phil, I'm not qualified to try to "prove" anything vis-a-vis Krugman. The man is a bona fide Nobel Prize winner. I can, however, read Krugman's chart in light of Krugman's argument. Krugman's chart supports Krugman's argument only if you assume that the two most recent, mild recessions are predictive of the present recession and assume that every prior recession is not predictive of the present recession.

[Ugh]

Meh. All of this is moot. The stimulus is not big enough to avoid a severe down turn, and even if it were, running trillion dollar (or more) deficits for 4-5 years might finally break the U.S. treasury.

[now_what]

you also have bona fide economic experts and the Fed, all forecasting an end to the recession prior to 2011

You keep bringing up these experts, you also keep running away from the question of why we should heed their predictions.

In December 2007 what were the forecasts of these experts as a group? Was it that we were in a recession and that it would be the longest recession in the postwar era as has turned out to be the case? No. Was it that we were in a recession at all? No. Was it that we were not yet in a recession but one was imminent? No. It was that we were not in a recession at the time and there was not going to be one in the near future. Now you think we should risk our economic future on the forecasts of these experts. Why the hell would we do that?

Tell me the last time the consensus forecast of these experts was that we were in a recession and would still be in a recession in 12 months. Has that ever happened?

If, it turns out, the recession lingers longer than projected, we have an opportunity to use the dollars not spent today in a better way tomorrow.

This makes no sense whatsoever when combined with your other arguments here. You say we can't do fiscal stimulus quickly enough, but if things are worse in the future, we can get started then. A dangerously lousy argument.

Finally, since we are on the subject of questions you apparently can't answer, on the last thread you asked a question about whether we should spend more on paying a just wage to those in the military. How do you determine the just wage for an employee in general, von? The world wants to know.

[Phil]

Krugman's chart supports Krugman's argument only if you assume that the two most recent, mild recessions are predictive of the present recession and assume that every prior recession is not predictive of the present recession.

I suppose I need to explicitly point out, then, that Krugman's argument looks less ridiculous or convenient or weak -- or whatever you're trying to do here -- when one notices that "every prior recession" was obviously not predictive of the last two recessions.

Which is to say, if you had used "every prior recession" to make predictions regarding the 1991 and 2001 recessions, you'd have been wrong. Right?

Could you outline for me your reasons why "every prior recession" is predictive of this particular one but not the two in between?

[von]

You say we can't do fiscal stimulus quickly enough, but if things are worse in the future, we can get started then. A dangerously lousy argument.

Where do you read that? There are fiscal stimuli that can be done quickly -- very quickly -- as I repeatedly acknowledge. They're called direct payments and tax cuts.

Have you been reading any of my posts?

[von]

Could you outline for me your reasons why "every prior recession" is predictive of this particular one but not the two in between?

Phil, again, this challenge would be relevant if I were drawing a conclusion from past recessions. I am not. I am pointing out that Krugman's argument requires two past recessions to have predictive value and every other recession to have no predictive value.

I realize that this is well-nigh unheard of in the blogosphere, but I don't have a positive case here. I'm not proving anything. I am pointing out what appears to be a substantial (and unexplained) problem with Krugman's proof, however.

[Phil]

Again, von, it's only a "substantial problem" if you fail to realize that "every other recession" didn't have predictive power in 1991. Or 2001. So if Krugman thinks they also don't have predictive power now -- just like they didn't the last two times! -- he may just have good reasons for thinking so.

[ThatLeftTurnInABQ]

von,

Two points:

1 - If you think this downturn is going to be short, I have a bridge to sell you. The economists you cite (A) don't have a stellar track record of forecasting, and (B) are under some obligation as public figures not to say in public what they may think in private, for fear of causing widespread panic (including a run on bank deposits).

We will be very lucky indeed is this is only as bad as Japan's lost decade. It could be much worse, because this is not a normal recession - it is a recession and a banking crisis coming on the heels of three decades of rapidly growing public and private debt (measured both in absolute terms and per capita and per GDP).

We are in uncharted waters here, because the US has had a relatively small number of major banking crises (roughly half a dozen or so) in our brief history, and none of them occurred while the US dollar was the global reserve currency.

To the extent that there is some sort of historical record suggesting what we might expect, it is not encouraging. The IMF recently released an important statistical analysis of past banking crises indicating how they tend to differ from more conventional cyclic recessionary downturns.

The bad news is that (A) banking crises tend to be both deeper and longer lasting than "normal" recessions, and (B) we are currently pursuing policies (regulatory forbearance and capital injections into zombie banks) which in past banking crises have made the problem worse rather than better.

There is no good news.

My second point is made in greater detail in the next thread over (Publius' call for more-bettah stimulus), the short version here is that we can't front load the stimulus because we are highly dependent on the sale of short dated Treasuries to pay for it, so we have no choice but to stretch it out over several years.

[mikkel]

"Where do you read that? There are fiscal stimuli that can be done quickly -- very quickly -- as I repeatedly acknowledge. They're called direct payments and tax cuts."

Actually it's different in a debt crisis...nearly all of the money is saved and there is very little stimulus.

I second Ugh and LeftTurn. The focus shouldn't be on getting GDP up, it should be on refocusing of priorities. To me this means making sure the states don't go bankrupt, we put in a lot for long term infrastructure and we keep credit available for very good purposes (i.e. not simple consumer consumption). I'd make huge cuts to food subsidies, the drug war/prison complex and our global military presence...as well as having better oversight in other programs. But that's just me.

I do have to say I admire von so vigorously addressing the comments considering it's so one sided.

[von]

That Left Turn, I don't know whether the recession will be long or longer. (We're past the stage that it can be short.) I don't see evidence of a Japan-style slowdown, in part because we don't have the same structural issues and in part because we're probably starting to (finally) see the bottoming-out of the housing market and the effects of Fed Policy. Inventories are steadily contracting. We're also probably out of the woods with respect to a short-term liquidity crisis. Bernanke has bags of cash left in his helicopter, yet mortgage rates are already dropping.

The recession itself is almost certain to continue for a significant period of time, regardless of the above. And I could be misreading the current trendlines. But there are two dangers in every crisis: Overreaction, and underreaction. "Just throw money at it" is an overreaction. You need to know exactly why you're throwing money at and what you can achieve. Because, as you aptly point out in the other thread, there are real costs to the current spending spree that we'll have to address in the not-to-distant future.

Actually it's different in a debt crisis...nearly all of the money is saved and there is very little stimulus.

I'm a little confused for the following reasons:

First, "debt crisis" usually refers to a situation in which a country's debt far exceeds its GDP/GNP. We're not in a debt crisis at the moment, although, if we continue to deficit spend, we might get into a debt crisis.

Second, if you're talking about a liquidity crisis, there's not a heckuva lot to be done on the fiscal side. The best responses are via monetary policy.

Third, if you're talking about something else, I'm lost. Some help, please?

[hairshirthedonist]

The focus shouldn't be on getting GDP up, it should be on refocusing of priorities.

Right. We need to get real value for our money and prevent real human suffering. I'm not sure what the best way to do that is, but economic contraction is only a serious problem in so far as it contributes to real human suffering, an not in and of itself. One thing I do know is that we don't need to be buying more cheap, plastic future trash from who-knows-where. And we don't need to make sure really really rich people as safe from becoming just really rich.

[hairshirthedonist]

Oh, and let me second commending von for continuing the discussion in the face of fierce opposition. Kudos.

[Sebastian]

1 - Your argument basically, as I (and NW) read it, depends on the recession ending in 2011. In other words, it's the LATENESS that you seem to be focusing on.

that would be great, but all signs are for a nasty long and brutish downturn (and if gdp is +0.1 for two quarters -- do we pop the champagne?).

frankly, this is looking nasty enough that large of chunks of stimulus in 2010-11 don't sound bad at all to me (particularly when you factor in benefits of infrastructure, multiplier effects, etc.)

In short, if it's a long downturn, we need a long stimulus.

His argument doesn’t require a long or short recession. Stimulus that happens say 62% by the end of 2010 isn’t stimulus really at all. The end of 2010 is almost two full years away. This is still early 2009. The whole point of Keynesian stimulus is to push consumption to un-stick the business cycle. It doesn’t make sense to have stimulus where more than a third of it fails to show up after two years.
The basic problem, as always in economics and in most of real life in general, is one of tradeoffs. There are available stimulus tools 80-90% of which can go out the door as of April 15, 2009 in middle class tax rebates. There is extended unemployment benefits for the middle class and poor which can go out now and through the end of 2009. There are planned infrastructure improvements that could go out a little ahead of schedule which would be well in process by the middle of 2009. If your interest in doing these things is to un-stick the business cycle (which is to say stimulus) it would be better to do the NOW things rather than the 2 year from now things. And if you think this recession is particularly bad (which you seem to be arguing) than you should want even more now things.
I’m not saying that these longer term projects are unimportant. You really have to look at them one at a time and analyze them on a cost/benefit axis. But they definitely aren’t stimulus, one of their potential benefits is not stimulus, and they really don’t have any place in a stimulus package bill.
(Also I wonder if you aren’t letting the liberal reflection of the Republican mistake get in the way. Republicans, permanent tax cuts aren’t stimulus. Democrats, permanent government spending isn’t stimulus. It is the same error, and if you are arguing for Keynesian stimulus you can’t be arguing for these permanent programs. I’m not sure you are making this error, but in case you are I want to bring it to the surface)

[ThatLeftTurnInABQ]

von,

First, I'd like to echo mikkel in expressing appreciation for your willingness not only to put in the effort of writing these top levels posts, but also wading into the comments.

Now about this...

I don't see evidence of a Japan-style slowdown,

Aside from the popping of a gigantic real estate speculation based asset value bubble, monetary policy response of ZIRP followed by qualitative easing, and propping up zombie banks, I don't see much resemblence either :-)

in part because we don't have the same structural issues

I'll grant you this - amongst other things we don't have an export driven economy and our savings rate is far worse. That is why I said we'd be lucky to get what they got. 1990's Japan is really my best guess estimate of what a controlled landing looks like in this situation, if Bernanke and Co. are able to do with our economy what Cptn. Sully did with his aircraft after the geese took out both engines. I don't see any outcomes better than that with non-trivial probabilities.

and in part because we're probably starting to (finally) see the bottoming-out of the housing market

Case-Shiller says otherwise. As usual, CalculatedRisk graphs it so these figures are easier to grasp at a glance. That doesn't look to me like a bottom - it looks like being about halfway thru down falling down a flight of stairs - and that is assuming that we merely revert to the mean and don't overshoot. Remember that the main wave of Alt-A failures hasn't hit yet.

I believe there is a hallowed phrase in the stock market about catching falling knives. In this case perhaps a better metaphor would be catching a falling house - ask the Wicked Witch of the West how well that worked out.

[ThatLeftTurnInABQ]

Urk! Those whom the typo gods would destroy, first they make proud:

qualitative quantitative easing.

Come to think of it, both sound like something we could use right now.

[Gary Farber]

We could have more long-term investment, rather than less.

[mikkel]

von,

We don't have a debt crisis if you only look at public debt, if you look at both public and private we have a huge debt crisis. That debt:GDP figure is actually almost up to 400%. We have by far the most amount of debt based on GDP of any industrialized country in the last 150 years....except for Europe right now which is even in worse shape.

It's not just a liquidity crisis because there are too many private parties that are going to be defaulting and even if we went back to historical lending standards we'd have a huge hit. Look at these leverage amounts!

//US banks levered cash to loans at 25:1 and liabilities at 33:1 at the credit bubble peak. The long term historic average ratios are about 5-7:1, and 7-10:1 respectively.

Moreover, historically, the ratio of real estate loans to cash averaged 1.25 to 2 (!!!) on a sustained basis, whereas the ratio at the unprecedented hyper-leveraged point in 2007-2008 reached 12-13:1, with real estate loans as a share of all bank loans reaching almost 60%. Real estate loans/GDP topped out at 26-27% (!!!).//

Our system is hyper leveraged and that is why the vast majority of tax cuts and giveouts will be saved...unless it's to the poorest people and even then a lot will be. Also look at our savings rate, which is only about 3-4% but needs to go back up to about 10% in order for people to start servicing the debt they already have.

While I agree that housing isn't close to bottoming (amongst other reasons because the main thrust of foreclosures haven't occurred) it's also because housing is *still* overpriced by about 30% compared to where it should be. Also cram downs -- while they are good for individuals -- will make the rate of decline pick up even more speed.

[John Cole]

Von- Are you going to address Kevin's comment?

It seems calling someone a liar at least would require responding to their defense.

[John Cole]

Never mind Von- you addresses it as part of a different comment. Still kind of struck that you chose to call Kevin a liar rather than just wrong, but whatever.

[ThatLeftTurnInABQ]

if you look at both public and private we have a huge debt crisis.

And at the micro level you can see this clearly - the stimulus checks sent out to taxpayers last year in many cases went to paying down private debt (credit cards, auto loans, helping with the mortgage), not consumer spending. That is why the multiplier effect was such a dud.

The other debt factor is that Mortgage Equity Withdrawl or MEW (aka the Home ATM) has gone into reverse. The amount of additional debt taken on by consumers via this is simply staggering (more than 2 trillion $ from 2004-2007, see CalcRisk for details and especially take a look at the charts).

Not only has that source of private spending been turned off, but in order to get back to the status-quo ante consumers are now going to have to pay it back. That is an anti-stimulus at least as large as the proposed US Govt fiscal stimulus package.

There are a lot of words to describe what is going on right now, but "debt crisis" has to be at the head of the class. Or if you prefer, another catchy phrase I seen recently is that we have hit "Peak Credit".

[von]

It seems calling someone a liar at least would require responding to their defense.

John, I don't think that I called Drum a liar: I said he was obfuscating (hiding, eliding) an important point that didn't happen to fit his thesis. Maybe I swim in rougher waters than you, but that seems without bounds of civilized discourse -- particularly when it's almost impossible for this to be an accident on Drum's part. Unless I've missed it somewhere in the CBO report, the very official-looking post that Drum has on his blog is not in the CBO report. Rather, a different chart that, unlike Drum, clearly distinguishes between Division A (government spending) and Division B (direct payments) outlays is in the CBO report.

It's clear that Drum thinks that all outlays should be treated the same, but, if so, he should at least mention the fact that the CBO disagrees.

[John Cole]

Thus far, there have been two primary defenses of the government spending side of the stimulus package. The first is obfuscation. Hiding. Eliding. Kevin Drum, regrettably, takes this approach.

That is your quote. That to me suggests a pretty strong assertion that he is intentionally lying- dummying up the charts, if you will, with the intent to deceive. When you accuse people of obfuscation, you are not accusing them of making a mistake, you are accusing them of something much different. Or, as we say it here in the "calmer" waters, "lying."

It just seemed strongly worded and accusatory, and maybe I misinterpreted. I actually thought to myself "Is there another Kevin Drum he is talking about, because it can't be the guy who started at Calpundit, moved to the WaMo, then to Mother Jones. The guy who never swears, always gives people the benefit of the doubt, always politely responds to every email, and who on his wild days talks about civil war genealogy, post pictures of his cats, or discusses his wife's quilting. Surely he can't be calling that Kevin Drum a liar."

I could understand the language if it were directed at me, because i am kind of a jackass.

At any rate, I have wasted enough of our time.

[Gary Farber]

"I don't think that I called Drum a liar: I said he was obfuscating (hiding, eliding) an important point that didn't happen to fit his thesis. Maybe I swim in rougher waters than you, but that seems without bounds of civilized discourse"

You accused him of deliberately not telling him the truth.

You didn't allow in any way that it might be a case of different interpretation, or anything else. You just said he wasn't being honest.

[...] The first is obfuscation. Hiding. Eliding. Kevin Drum, regrettably, takes this approach.

It's regrettable you took this approach, as I pointed out in the first place.

[Gary Farber]

"...particularly when it's almost impossible for this to be an accident on Drum's part."

See, there it is again.

[liberal japonicus]

This reader mail over at TPM gets at a point I think is important

Economic crises are ultimately about loss of confidence, i.e., a lack of faith in the economy's future. For this reason knowing that government money will be spent not only this year, but for years hence, is actually more stimulative than a quick launch of make-work projects whose effects, while immediate, would be quickly discounted as short-term.

Knowing Uncle Sam is willing to stimulate aggregate demand for years, not just for a few quarters, is just the kind of long-term reassurance companies need to plan ahead and entrepreneurs need to restore flagging animal spirits.

[hilzoy]

von: I honestly don't see why you think that Kevin was obfuscating or hiding anything, as opposed to just talking about a different question than you were.

All weekend, conservative congresspeople, pundits, etc., were saying: oh no! the (nonexistent) CBO report says that very little of the money in the stimulus package will be spent in the near future!! Kevin reads the actual CBO report and says: well, that's not true. To do this, he breaks it down into tax cuts and spending, not because he's trying to hide anything -- he's not making any point at all about the efficacy of appropriations spending.

It's like saying that you are "hiding" or "obfuscating" because you don't distinguish money spent on transit from other money. The answer to anyone who said that would be: that has no relevance to the point von's trying to make, so there's no earthly reason why he should bring it up. That being the case, it's just wrong to say he's "hiding" anything here, any more than he's "hiding" his middle name or his favorite flavor of ice cream by not mentioning either in this post. (This would be true even though the longer version of the CBO report does break out transit spending.)

Why isn't this the way to think about Kevin's post?

[Blar]

Von, did you miss this part of the CBO blog post?

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

So in places even the CBO did what Drum did, dividing the stimulus into spending and revenue. Which is a pretty natural thing to do, since that's how budgets usually get split up. You're free to argue that it's more informative to focus on Appropriations as their own category, but there's no reason to accuse others of dishonesty for not describing it that way.

[Kevin Donoghue]

This comment by the CBO Director seems relevant:

As the possibility of another round of fiscal stimulus is debated, it is not a surprise that employment effects of stimulus have emerged as a key measuring stick. According to CBO’s estimates, with enactment of H.R. 1, the number of jobs would be between 0.8 million and 2.1 million higher at the end of this year, 1.2 million to 3.6 million higher at the end of next year, and 0.7 million to 2.1 million higher at the end of 2011 than under current law.

That looks like a timely sort of stimulus to me.

[john miller]

My 2 cents worth.

The first penny states that tax cuts/rebates have little chance to provide much in the way of stimulus or recovery or job creation. They are nice, and some people may actually spend some of the money they get, but my somewhat educated guess is that most of it will go to paying down personal debt. I am employed, as is my wife, and I will probably get a decent, though not spectacular bonus and tax return this year. However, I doubt if more than 10% is going to actually be spent on goods, which might trickle down into jobs, and the rest will go to paying down debt accrued when I was unemployed and then underemployed for a long period of time. I have a sense that this is not an uncommon situation.

Penny 2. Infrastructure projects, since the money would primarily be going to "shovel ready" projects and other projects which need to bring people into employment just to get started, create jobs, most of them good paying jobs, right from the start. Even more important perhaps is that they are not short term projects, but to some degree provide the newly employed some sense of security, which means they can make longer term plans and actually spend money based upon that.

Of the two situations, I believe that the second is much more likely to have a major impact on the economy, plus, since those jobs also create revenue income for the government rather than revunue outgo (through unemployment benfits, food stamps, etc) they are better for the deficit.

[bedtimeforbonzo]

To pick up on what john miller said, when I received my Bush rebate check last spring, I used it to pay bills -- actually, I set it aside to pay a mortgage payment.

I don't know of a friend or co-worker who spent theirs to buy a TV or computer or weekend trip. I did not have a single customer who said, "I just got this $1,000 rebate check and am going to use it as a down payment for that Altima."

And things are only scarier now.

This stimulus money has to go to job creation. No one is going to feel safe buying big ticket items or going out for a fancy Valentine's Day dinner when the news screams of 50,000 jobs lost in one day.

[Fraud Guy]

John Miller, BFB,

Last year's check went to keep us from going two months behind on our mortgage, while I was waiting for my first paycheck to come in from my new job.

Any stimulus check is going to pay our back RE taxes.

But on the good side, my wife just got offered a position change which will up her net pay about 20%, which will allow us to save towards this year's taxes.

Yeah!

[john miller]

Fraud Guy, it is great to hear good news amongst the bad.

Congrats to your wife.

[hilzoy]

Hey, congrats, fraud guy!

[liberal japonicus]

I'm wondering if the shift to digital TV is going to act as a stimulus. It did here in Japan (well, that and the World Cup)

[john miller]

lj, I think that is pretty much over here, and most of the TV's for the Super Bowl have already been sold. All except one of my TV's (And no I don't own 20) are on cable connect. The kitchen one uses an antenna and having gotten the converter box, I no longer can get one channel and I really have to fiddle with the antenna to get a couple others. When it works, its great, but I have used some new words of late.

[GoodOleBoy]

"namely that future spending, being in the future, can't have a substantial effect on present problems".

This is incorrect. A significant consideration in the creation of jobs(in the present), especially by small businesses, is whether or not the prospects for the jobs to be enduring(in the future) are high.

[Bernard Yomtov]

In other words, Krugman's argument holds if the mild recession of 1991 and the even milder post-9/11 recession of 2001 define a new paradigm. If they do, Krugman's on sound footing. If they don't -- if, say, this recession is more like the deeper recessions of the late 1980s (and every one before) -- then Krugman's argument doesn't hold.

von,

Yes, looking at the chart one sees that in earlier recessions unemployment started to drop at the end of the recession. But I think you need to be more cautious in interpreting this.

First, as Krugman points out, the Fed kept cutting rates, continuing monetary recession-fighting. Surely this helped bring unemployment down more quickly than otherwise. If so, then if monetary policy is still ineffective at the official end of the current recession, it makes sense to continue fiscal measures.

Second, even in the cases where the employment picture did improve right after the official end of the recession, it did not drop quickly to pre-recession levels. In fact, in some cases it never got back before another recession hit. In the late 70's unemployment was around 6%. It rose from there and took about 8 years to get back down to that level. Unemployment started to drop, from 10.8%, in Jan of 1983, but was still 7.3%, not a good number, two years later.

So even in case where unemployment drops there are still plenty of people struggling, and plenty of scope for policies to address that fact. Despite the fact that we date recessions, economic conditions are not just a binomial variable - good or bad. It's not as if we can look at some numbers, say "recession over," and stop thinking about it.