Tomorrow's Much Too Long

by publius

This week's narrative is that the weak economy is dragging Obama down at bit.  The bad economic news has also re-energized Republican attacks against the stimulus.  And while those attacks are absurdly premature, I can't say I blame Republicans.  Pounding a weak economy is what opposition parties do.  In Wire-speak, that's part of the game.

A couple of thoughts though:

First, if the GOP is going all in hoping for a weak economy in 2010, Obama and the Dems need to punish them if things do turn around.  The GOP opposed the stimulus almost unanimously -- they preferred instead to do nothing or to give more money to wealthier people.  The united opposition was a risky move, but one that will pay dividends if the economy is still weak in 2010 and beyond.

If, however, the economy improves, the Dems need to make it perfectly clear where the Republicans stood.  The attacks they're enduring today must be answered in full.  Live by the stimulus attacks, die by the stimulus attacks.  That too is part of the game.

Second, these developments illustrate the foolishness of postponing reform efforts under the theory that the Dems will add seats in 2010.  If you have the numbers, you should push for reforms now.  Politics is unpredictable, and events can change on a dime. 

Frankly, the country would be better off if Dems were 100% certain that they would lose seats in 2010.  That would light a fire to get this stuff done -- and would convince the "centrists" to quit being so wankerous.

Comments

[joel hanes]

My fearless and probably worthless economic prediction: the economy will be a great deal worse in 2010 than it is right now. As the Bush 43 policy nightmare unwinds, I think we'll see continued employment shrinkage for most of the next year; foreclosures continue, another wave of business bankruptcies, house prices in many places down another 20%, Dow 6750.

The Dems better be getting ready to campaign in that environment, because all the stats are still saying down escalator.

Of course, my economic opinions are worth just slighly less than you pay for them

[TJ]

Frankly, the country would be better off if Dems were 100% certain that they would lose seats in 2010. That would light a fire to get this stuff done -- and would convince the "centrists" to quit being so wankerous.

Dude, you're kidding, right? Those Dems would just stall until 2010 when they'd be off the hook.

Moreover, Roubini now thinks no recovery until 2010 (GDP wise, that is). That means over 10% unemployment as far as the eye can see. I really wouldn't spend much time planning on how to stick it to the Repubs when the economy blossoms. I'm not too sure why Obama isn't pulling out all the stops right now to avert disaster.

[Brett Bellmore]

"I'm not too sure why Obama isn't pulling out all the stops right now to avert disaster."

Because if a crisis is an opportunity you can't waste, an all out disaster is that squared, with a cherry on top?

[antrumf]

"And while those attacks are absurdly premature, I can't say I blame Republicans. Pounding a weak economy is what opposition parties do. In Wire-speak, that's part of the game."

Does the fact that blameworthy actions ("absurdly premature") are predictable really make them any less blameworthy?

[Brett Bellmore]

Does the fact that it was predictable that Republicans would complain about the stimulus package not working in any way change the fact that it's not, in fact, working? We're currently at a higher unemployment rate than was predicted if the package didn't pass. Maybe we'd have been better off if it hadn't?

[Gary Farber]

"Because if a crisis is an opportunity you can't waste, an all out disaster is that squared, with a cherry on top?"

This is silly, Brett, at least in this context, because the opportunity is there if you're coming into office freshly, with credibility, and no responsibility for the crisis, which is what Obama did. If, however, at the end of four years, the crisis still exists, let alone is worse, than the Republicans will be highly likely able to sell the idea, true or untrue (and I don't expect it to be particularly true), that Obama is responsible at that point for the crisis, and thus he and the Democrats will lack credibility, and be unable to accomplish much, if anything.

This should be perfectly obvious, I would think.

[tomeck]

Bret

And maybe we'd be better off if the Republicans hadn't threatened a filibuster and the bill could have passed with a simple majority. Then it would have been a larger stimulus and it would probably be working better.

The Republican complaint is the same as saying your team is behind in the second inning so what was the point in playing the game.

The economy runs on money. If the money isn't coming from consumers and it isn't coming from the government then just where do you think it will come from?

[Anarch]

We're currently at a higher unemployment rate than was predicted if the package didn't pass.

Yeah, but pretty much everyone said those numbers were unrealistic to begin with. [Cf Krugman and Roubini saying the stimulus package was about a third the size it should have been.] For whatever reason, the Obama administration has resolutely failed to grasp the enormity of the crisis, with the resolute that they simultaneously look both spendthrift and cheap.

[Brett Bellmore]

"Then it would have been a larger stimulus and it would probably be working better."

Yeah, right. We'd be better off if we'd totally used up our nation's last remaining capacity to borrow on not particularly stimulating pork, instead of just mostly using it up. Look, if you're doing the wrong thing, doing it harder isn't an improvement.

The economy is worse than they'd predicted if they HADN'T gotten their stimulus bill. Either their understanding of the economy is worth crap, or their chosen cure is making things worse. Which one of those options fills you with such confidence that you want an even bigger serving of "didn't work worth crap"?

[(The Original) Francis]

Brett:

You are in a boat that is sinking. The rate of inflow is unknown but at least 5 gallons per minute. The captain seeks a bucket that can empty water at 3 gallons per minute, expecting that the ship will start righting itself with that amount of assistance before it takes on too much water.

Following Republican opposition, Congress gives the President a bucket that can empty water at 2 gallons per minute, starting in the fall.

Meantime, it turns out that water is coming in at 8 gpm.

And you're complaining the bucket's too small!!??

So you know where the ARRA funds have gone, in detail, and can advise us as to why those expenditures have been useless?

Please enlighten us.

[Marty]

"You are in a boat that is sinking. The rate of inflow is unknown but at least 5 gallons per minute. The captain seeks a bucket that can empty water at 3 gallons per minute, expecting that the ship will start righting itself with that amount of assistance before it takes on too much water."

If the captain then starts bailing at 1 gallon per minute and decides the resy of the bailing capacity should be used over the next few days to try to make sure the boat doesn't sink later.......

[Brett Bellmore]

Sounds to me like the rationalization you once saw when they tried to bleed people to cure anemia. The 'cure' can't possibly be counter-productive, it's GOT to be that you didn't do enough of it.

Well, government actions CAN make things worse. Unlike bailing a sinking boat. Suppose the stimulus DID make things worse: How would things look different from the way they do now?

[Phil]

We're currently at a higher unemployment rate than was predicted if the package didn't pass

Unless you have the ability to travel back and forth between alternate universes or timestreams, you don't actually know whether those predictions were accurate, do you?

[Scott P.]

Sounds to me like the rationalization you once saw when they tried to bleed people to cure anemia. The 'cure' can't possibly be counter-productive, it's GOT to be that you didn't do enough of it.

Substituting post hoc ergo propter hoc reasoning isn't an improvement.

[Brett Bellmore]

I'm simply pointing out that the belief that the stimulus is helping, rather than hurting, has to be falsifiable. At what point is it falsified, as we apply more and more stimulus, and the economy gets worse and worse?

And is that point THIS side of the point of no return?

[Brett Bellmore]

I mean, let's face it: The economy ending up worse than the "do nothing" prediction, after doing something, can mean one of at least two different things: It could mean the initial prediction was bad. But it could also mean the "something" that was done backfired.

On the face of it, it's evidence in the direction of falsification, even if not conclusive. Confidence that the stimulus is the correct approach should be declining, not rising.

[Anarch]

Confidence that the stimulus is the correct approach should be declining, not rising.

Had myriad economists at the time not argued that the stimulus was going to be too small, I'd agree with you. Given that they did, however, I don't.

IIRC, the value given by Roubini and Krugman was on the order of 3-4 trillion dollars. If we get to that value quickly enough -- as in, quickly enough that their original estimates can be fairly said to obtain -- and the economy is still collapsing, then I'd agree the stimulus had failed. [Which, incidentally, is different than the proposition I think you're driving at, namely that the idea of the stimulus was inherently flawed.] So that, to me, says that the theory's falsifiable, although unlikely to be falsified in the way that you'd like given the political realities of the situation.

[kenB]

That's the beauty of economic predictions -- Krugman and his supporters can claim the stimulus was too small, lib/cons can claim it was mis-targeted, and those who supported the stimulus as it was can say that things would've been even worse if it hadn't been passed, and there's no way to prove any of them wrong.

Cf. this Jim Manzi post from back in February, anticipating this.

[Brett Bellmore]

"Had myriad economists at the time not argued that the stimulus was going to be too small, I'd agree with you."

Did they predict that a 'small' (By which we mean something like, "largest in history".) stimulus would be worse than no stimulus AT ALL? I don't think so. We're into "we turned on the fire hoses and the fire got hotter" territory here, and that's not an argument that we needed more water. At least, it's not an argument we should be sure we need more water.

And where the hell were we going to get 3-4 trillion dollars, when the 'too small' stimulus has got our international creditors talking about moving away from the dollar as a reserve currency, and is making Treasury bonds hard to sell? Is there really an infinite pool of borrowing available to us? Or are we close to exhausting our potential to borrow our way out of anything?

The proposition I'm driving at is that what's being called a 'stimulus' is partly stimulus, partly Democratic wish list that would have been gone after even if the economy were roaring, and partially measures like the auto company takeovers and bonus clawbacks which have seriously anti-stimulatory potential.

And it's being applied to an economy which has been subject to unrelenting 'stimulus' for years, by which I mean deficit spending. (Which is really all 'stimulus' seems to mean in this context.) Maybe the positive effect of stimulus is already saturated? And we're just pushing it into the declining or even negative returns regime?

But, mainly, I'm making a point about falsifiability. At some point, if we keep stimulating, and the economy keeps tanking, we're going to have to reconsider the whole concept.

[Nate]

Brett: So, um, what exactly IS your bold economic thinking, besides "the stimulus isn't working"? How exactly do you think we should be working to undo this gigantic financial crisis, created by 20ish years of Wall Street fraud, stagnant wages, and bubblicious house prices, coupled with 8 years of the Worst Administration Ever's completely backwards tax cut and start war policy?

What exactly do you think would work to fix the economy? Or is the economy like the tides, and we shouldn't try and avoid the problems, we shouldn't try and fix things?

[ral]

Brett, if by "falsifiable" you mean, as the Wikipedia says,

Falsifiability (or refutability) is the logical possibility that an assertion can be shown false by an observation or a physical experiment. That something is "falsifiable" does not mean it is false; rather, that if it is false, then this can be shown by observation or experiment

I'm afraid you will never be satisfied with any economic theory or assertion. There just isn't a way to conduct controlled macroeconomic experiments.

But, I have to suggest that you apply your same evaluation criteria, whatever they are, to the Bush administration's economic policies. If we're just judging by results, tax cuts did not produce a robust, healthy economy.

[Tony P.]

In the 1930s, the US was mired in recession. Money was scarce, jobs were scarce, and not even the New Deal was a big enough stimulus, not even 7-8 years in, to emphatically "turn the economy around".

Then came MASSIVE stimulus. HUGE government spending. GIGANTIC levels of government debt. And whaddaya know, it worked!

It's a complete mystery where all the money "came from", around 1940 onwards, given that the country was in such dire straits a couple of years earlier. At least it must be a mystery to Brett, in light of his comments here.

Government "spending" means buying things and hiring people -- things that were going unbought and people that were going unhired by the free market. Government borrowing to finance lots of buying and hiring did not kill the economy, but rescued it. Economically speaking, it was not the boys who climbed Point du Hoc or the guys who raised the flag on Iwo Jima who saved American free-market capitalism. It was massive government deficits that did it.

--TP

[Davis X. Machina]

The economy runs on money. If the money isn't coming from consumers and it isn't coming from the government then just where do you think it will come from?

Tax cuts, of course.

[Gary Farber]

I thought Tomorrow Never Dies, incidentally.

[ral]

Tomorrow never knows.

[Hartmut]

My analogy would be a large rocket with the size of the stimulus being the amount of fuel.
1. Should we launch that rocket in the first place?
2. How much fuel should be filled into the 3 stages?
Not enough fuel in total (or too much) and the rocket will not get off the gound in the first place. If the fuel is put mainly in the second or third stage it will have no effect. The worst case scenario is to put just enough into the first to get it into the air but not enough to get it high enough for the other stages to carry it into orbit. In that case it will come down on you and the fuel in the upper stages will create an inferno.
What, I presume, Brett proposes is to try to do without the rocket (which might or might not be a wise choice) while most of the others see the launch as the only chance.
What it looks like is that there's a compromise to launch the rocket but to keep the price tag down by saving money on fuel (and hoping that the likely disaster will happen only after having the chance to get away from the launch pad far enough).

[Anarch]

Did they predict that a 'small' (By which we mean something like, "largest in history".) stimulus would be worse than no stimulus AT ALL? I don't think so.

And do you have any support for that? I don't think so. What you have is a graph that many people -- including many that you're decrying in this thread -- said was wrong to begin with. But if we're going to get serious about falsifiability, please provide your proof that the "'small' stimulus" was in fact worse than no stimulus at all.

But, mainly, I'm making a point about falsifiability.

No, you're not. You've already been told how various people (including myself) would consider their beliefs falsified; there isn't much more to say in that regard. [Unless you want to take on all forms of economic prediction, including your own blithe shmibertarianism, in which case: that, I can get behind.] You're trying to argue that something is false, which is a completely different kettle of fish.

[Gary Farber]

"Tomorrow never knows."

I've heard of those guys: whatever happened to them?

[Hartmut]

I might add that fires can be made hotter by injection of water under certain circumstances (and that some fires are easier extinguished with boiling water than cold), so that analogy is not that absurd.
It's fair to debate whether a stimulus works or not, what size is ideal and what is actually possible.
What I see (admittedly I am an economic know-nothing) is a lot of money used to shore up the very institutions that created the crisis and by far not enough used for projects that could provide longterm stability. If it had been up to the GOP all money would have gone to the former and less than zero to the latter (because the former has to be conterfinanced to be "responsible"). The 'compromise' between the GOPsters and the Demperates (Inc.) may indeed turn out to be worse than nothing but imo still better than the 'something' that would have come from the Right (with their 'destroy* to save**' mindset).

*you
**me and mine

[ThatLeftTurnInABQ]

Seems to me this thread has gotten lost in a dark wood of not very illuminating analogies. Anyway, I wanted to highlight this:

"And where the hell were we going to get 3-4 trillion dollars, when the 'too small' stimulus has got our international creditors talking about moving away from the dollar as a reserve currency, and is making Treasury bonds hard to sell? Is there really an infinite pool of borrowing available to us? Or are we close to exhausting our potential to borrow our way out of anything?"

While I strongly disagree with Brett on the validity of Keynesian macroeconomic theory and its applicability to our present situation, he has a very valid point here. No matter how effective a larger stimulus might be, or how much we might wish to have one, there was at the time of the original stimulus debate in the spring of this year and, and even more so today, evidence that the borrowing capacity of the US Treasury is not only finite, but even worse is not greatly in excess of what we are already borrowing. The signals coming from both the bond market and the PBOC have been pretty clear in that regard.

So if we are going to go back for more stimulus (roughly the size of the one enacted this year), it had better be effective, because IMHO we've only got one more chance to do this right, before the supply of credit runs dry. Any borrowing beyond that will trigger a dollar devaluation crisis. This is why getting our energy policy on the right track is so important. If the US is going to pay dearly for imports, we'd better be in a position to cut our imports of oil (and anything else for which demand is relatively inelastic).

[Anarch]

FWIW, TLTIA, I completely agree. Ignoring the digression about falsifiability, my take has been that a) the stimulus was far too small, but b) the Obama administration lacked the political capital to get something much larger and c) the Treasury may well have lacked the ability to borrow much more anyway. Which means that, IMO, the stimulus will act as something of a brake on the descent, but the ultimate landing will be almost as hard and almost as deep as it would without it.

Will a second, similarly-sized stimulus help? A little -- enough to warrant doing it, I think, as I felt about the original stimulus -- but ultimately, no. We lack the political will (and maybe the legal system) to fix the damage. Bluntly, I think we're f*cked.

[Brett Bellmore]

"While I strongly disagree with Brett on the validity of Keynesian macroeconomic theory and its applicability to our present situation,"

I'm not sure we entirely disagree about Keynesian macroeconomic theory. My opinion is that the primary problem with it, is that in practice it doesn't get applied. Do you see much sign of us running surpluses in good times to cancel out the deficits in bad times? I don't: What I see is politicians running as big of deficits as they think they can get away with, pretty much at every point in the economic cycle, and pretending they're engaging in counter-cyclical spending. If the deficits are bigger in bad times, it's because bad times provide an excuse to run bigger deficits.

My specific objection to the 'stimulus', is that it's nothing but using a crisis as an excuse to use up the last remnants of our borrowing power on a longstanding wish list of things we could possibly afford in good times, but these ain't good times.

And in so doing, making sure the good times won't return for an ungodly long time. That dollar devaluation crisis? It's coming, and every increment of 'stimulus' just brings it closer. Our economy, so long driven by external investment due to our status as a safe haven for capital, is like a speed junkie who's finally hit the wall: A bigger dose of stimulant is just going to make the crash that much worse.

We'd be better off getting clean while we've still got a little borrowing power left for a REAL emergency. But we're not going to, we're going to go the way of every nation that gets too far into debt: Hyper-inflation and debt repudiation. That's our future.

[ThatLeftTurnInABQ]

"Do you see much sign of us running surpluses in good times to cancel out the deficits in bad times? I don't"

I keep having this strange dream about running budget surpluses in the 1990s under Bill Clinton. Probably a sign I should swear off the tequila for a while.

Agree about the coming inflation (although I think it will stop short of the hyper- part) and debt repudiation part, tho. Sigh.

[Phil]

Do you see much sign of us running surpluses in good times to cancel out the deficits in bad times?

Uh, we were in 2001, until George W. Bush got his grubby little mitts all over it.

[Tony P.]

Hyper-inflation and debt repudiation. That's our future.

Or higher taxes. We might try those, some day.

--TP

[Brett Bellmore]

"I keep having this strange dream about running budget surpluses in the 1990s under Bill Clinton."

Yeah, that's precisely what that was: A dream. Don't confuse a momentary appearance of black ink, during a period of divided government, with the legislature and executive at each other's throats, AND a stock market bubble, with the painful half of Keynesian counter-cyclical policy. Even under those unlikely to be replicated circumstances, the surplus that occured was tiny compared to the deficits that preceded and followed it.

Keynesian theory calls for the surpluses during good times to be of about the same magnitude as the deficits during bad times. That's something we've never done, it's close to politically impossible.

Do you think that, some time around 2014, we're going to be running 1-2 trillion dollar surpluses? No? Then don't pretend this is Keynesian counter-cyclical policy. It's not, we're just mortgaging our future for a fling today.

[Hartmut]

The question remains, what are the (viable)choices? To reuse my rocket analogy, there are claims that no optimized amount and distribution of fuel will get it into space but at the same time it looks like there is no real alternative (that's the reason someone built the thing).
I fully agree that the stimulus as it is now has a high probability of failure and just postpones the catastrophe absent a fundamental change (like politicians and haves stopping to act in ways that deliberately harms the have-nots, everyone living according to rational means etc.). But the three alternatives usually proposed look even more unproductive.
Car on collision course with wall (brakes defective). Usually proposed choices:
1. Do nothing
2. Do GOP = accelerate
3. Design a better bumper before crash occurs

Usually not even considered:
0. Change course, even if there is no guarantee that it'll work.

I forgot the other GOP proposal (on top of 2.): Fire RPGs at the wall to make a path for your car

[Brett Bellmore]

Of course, you do realize that economies eventually recover without stimulus? Just a bit slower. So we're talking about using a rocket to get somewhere we can walk to. Fine if you've got money to burn for rocket fuel...

[Tony P.]

Brett, "eventually" sounds suspiciously like "the long run". Neither you nor I will care about either GDP or inflation in 2109. So what's your notion of "eventually"?

You're right that government has to run surpluses in good times to offset deficits in bad times. I know you're not a Republican, exactly, but let's not forget that the last time our government actually did run surpluses the Republican mantra was that taxes must be cut since the surplus was proof that government is taking more of "your money" than it needs. How loudly did you oppose the Bush tax cuts?

--TP

[Brett Bellmore]

I was too busy opposing the Bush spending increases, since I believed both taxes AND spending were too high.

[Tony P.]

Brett, to reduce the debt you have to cut spending WITHOUT cutting taxes. If you want to cut BOTH spending AND taxes, that's fine. But in that case you're not really serious about reducing the debt.

--TP

[Brett Bellmore]

Any more than Democrats who want to increase both spending and taxes? I'd like to see both cut, with spending cut more.

[Tony P.]

That's fine, Brett. So, let's cut the Pentagon budget in half. Use half the savings to retire debt, and the other half to increase the personal exemption on the income tax. That's my suggestion for cutting taxes and cutting spending more.

Alternatively, I say once again that we could privatize the national debt and watch people's voting patterns change in a hurry. I don't know whether the change would be in favor of less spending or lower taxes, but I would trust the voters to do the right thing about the debt.

--TP