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October 14, 2009

Comments

I find people being wrong on the internets infuriating. I wonder what should be done about that?

Holy smokes! You need booze!

The only quibble I (may) have is whether or not the series expansion involved is actually a Taylor Series expansion. It's like one, at least. But is it one?

No. At least not in this example.

Well, as I recall the stimulus was around 900B over at least three years. So around 300B a year, out of 14 trillion. Again, the change in consumer savings is around 500b this year. Aggregate demand is meaningless because it wasn't provided as tax cuts or other means allowing choice, it focused on targeted spending. So it is a small percentage focused on a small subset of the overall economy.

That still doesn't make sense. Granted, I'd say the <900B we got wasn't entirely adequate - but it's not peanuts, either. (And, again, the technocrats in the administration certainly preferred something north of 1 trillion, the only reason it was cut--and cut, and cut--was in attempts to appease conservatives.)

And I don't understand what you mean by "aggregate demand is meaningless" without "choice". Government spending is also part of demand. As far as aggregate demand goes, government spending is interchangeable with private consumption and investment. That's the idea behind stimulus in the first place.

"And I don't understand what you mean by "aggregate demand is meaningless" without "choice"."

2% of GDP being invested primarily to support construction projects (and various other "specific initiatives") has good impact on the construction industry, not so much retail, etc. The numbers are big enough to create an impact even if you give them a 1.5 multiplier on a 14 trillion economy. The same math at 5 or 6% of 14 Trillion with some multiplier might have had an impact, but the difference in 900B and 1.2 in our best case 3 year scenarion is less than another 1%.

I will throw in that the money won't be spent in 3 years , only allocated so even these numbers are optimistic.

The difference in 300B in tax cuts is that everyone sees them right now, so the economic impact and the confidence impact is immediate. Still it wouldn't have a real, practical impact on the overall economy.

So, to Publius point (somewhere above in the comments) if the promise is the impact your counting on, tax cuts have a greater impact.

"Of course central bank objectives are not limited to price stability, but it's hardly far-fetched to say that, in a broad sense, the value of the dollar in terms of other goods is in fact set by a central authority - the Fed. "

But not in the way Nate is talking about at all. The government doesn't set the value of dollars as a medium of exchange. If it added a zero to every bill, the relative value of chickens to steel to milk wouldn't change. The only thing which would change would be a dollar's relative value to pay off government debt. Which could be economy destroying at some point, but not because the government 'controls' the value of 'money'. It would be economy destroying because it would mean that government priorities had by fiat gained ten times the priority for other needs--which is btw not a fantastic argument for government control the way Nate seems to be using it.

Governments don't control the value of their currency in any direct or positive sense. If they did, there wouldn't be so much handwringing about currency. Can government destroy the value of their currency? Sure. Governments can destroy a lot of things.

2% of GDP being invested primarily to support construction projects (and various other "specific initiatives") has good impact on the construction industry, not so much retail, etc. The numbers are big enough to create an impact even if you give them a 1.5 multiplier on a 14 trillion economy. The same math at 5 or 6% of 14 Trillion with some multiplier might have had an impact, but the difference in 900B and 1.2 in our best case 3 year scenarion is less than another 1%.

Again, where are you getting this? It looks like pure argument by assertion - your personal incredulity that 1%, say, could ever be big enough. An assertion that appears to be in stark contradiction to, you know, actual economists, who seemed to think that a only slightly larger than the one we got (at most double) would have been sufficient. Perhaps even appropriate.

And construction projects absolutely have an impact on retail, etc. Or do you think construction workers don't feed, clothe, entertain, etc. themselves and their families? That's kind of what the multiplier means, you know... (As someone right pointed out, while channeling most of the money through construction might seem unbalanced, it's in fact very appropriate, as much of the drop in demand came from the construction industry in the first place.)

Granted, there's a legitimate complaint to be made to the extent that planning and beginning construction projects resulted in less front loading than perhaps we would have liked, but tax cuts weren't the only solution to that either. Things like state aid and transit project funding were pared to the bone, even though there was (and is) evidence that many of these could have taken effect much faster.

What von is ignoring is the amount of other non stimulus bill "front loaded" economic stimulus that was being provided from other sources like the Fed and TARP. This would all have been factored in on treasury models and along with the propping up of consumer demand by tax cuts, transfer payments to the states etc has produced the almost certain shift to economic growth we've already seen. The beauty of the stimulus bill is it's back loading because it keeps pumping money into the economy in the most effective job expanding mode possible during the next year or so. And the sums are going to provide a massive stimulus believe me. Most economists are now predicting somenthing 2.5% growth for the last half of this year and 3% for next year.....I wouldn't be surprised to see 4-5% for next year and unemployment down to 7.5% by the third quarter precisely because of how the stimulus has been designed.

Sebastian: I never said the government sets the value of money, I said society does. Government is a part of society, a part that we use to decide on and enforce the basic rules of society, at least in a democracy. What the government does with money is to print it, and back its value with the "full faith and credit of the United States".

The main point I am making though, is that when people say "It's my money, I earned it!" as an attack on taxes, they're ignoring the many many many ways both government and society enabled them to earn that money. And since they used the resources of both government and society to earn the money, they should pay for what they used, and to ensure the system that allowed them to get where they were keeps working, both to keep them where they are, and to allow others to get there too.

Now, if we're going to get into the details of how much the various services of government and society are worth, and if people are paying too much or too little, that's an entirely different discussion, but the blanket "It's my money! Keep the government off of it!" claim is based on a bunch of false assumptions.

"Again, where are you getting this? It looks like pure argument by assertion - your personal incredulity that 1%, say, could ever be big enough. An assertion that appears to be in stark contradiction to, you know, actual economists, who seemed to think that a only slightly larger than the one we got (at most double) would have been sufficient. Perhaps even appropriate"

Double would have been in the 5 to 6% range that I referred to earlier. So I disagree with slightly larger, and agree with at least (rather than at most) double.

But back to my original point, no stimulus would have had very little less effect than the stimulus we did.

Let's try to be a little serious here and consider the stimulus in terms of real world application rather than classroom wonkery.

Moving 100's of $billions takes time, especially if you want to try to limit fraud. There are applications to file, applications to review, more of the above at the state level, project money doesn't get allocated in 1-shot upfront but as the work is being done.

Additionally, who says the recovery has begun? I'm happy for Goldman & JPM that their profits are up, but unemployment hasn't peaked yet, and when it turns around, 6 million jobs are going to magically reapppear overnight.

Get a grip.

But back to my original point, no stimulus would have had very little less effect than the stimulus we did.

And this is based on...?

Posted by: Will | October 15, 2009 at 12:22 PM

"Additionally, who says the recovery has begun?"

......Just about every reputable economist......GDP growth(the main metric of recovery) is going to be around 2.5% in the second half...it's a cliche but employment REALLY is a lagging indicator.....otherwise I agree with your comments about the practicalities involved in spending 800 billion.

The only quibble I (may) have is whether or not the series expansion involved is actually a Taylor Series expansion. It's like one, at least. But is it one?

No. At least not in this example.


Posted by: Anarch | October 15, 2009 at 10:25 AM

Thanks, Anarch. (Are you the one who finished a Phd in math a number of months ago?) And certainly not in the form it was presented (80% of $1M plus 80% of $800k plus 80% of...), which is just a geometric series. I wasn't sure if there was a Taylor Series upstream that reduced to that geometric series and it was just a case of not showing one's work. It's not a problem or example I ever came across, not having studied economics in depth or having applied the calculus I did study in that way. I guess it's tangential (not mathematically), in any case.

And that's one of the perils of using GDP as the sole measure of recession/recovery. If the recession's "over" because companies are making profits either through fraud (Wall St) or by laying off employees faster than they're losing sales, are we really recovering?

"Let's try to be a little serious here and consider the stimulus in terms of real world application rather than classroom wonkery.

Moving 100's of $billions takes time, especially if you want to try to limit fraud. There are applications to file, applications to review, more of the above at the state level, project money doesn't get allocated in 1-shot upfront but as the work is being done."

I agree with all of this. I have not spent a lot of time on how I think the stimulus should have been enhanced, but, due to these very issues I believe that we should have done a payroll tax cut in the 800B range over two years and then allocated another 800B-1.5 trillion to programs.

This would have positively impacted the spike of the original recovery followed by enhancing the longer term recovery.

I would have even objected less to the targeted nature of the program spending if we had shown we serious about hastening the recovery.

What we ended up with was an agenda to rebuild the economy in specific areas, better or worse, and a recovery that is happening at its own pace, with the uptick in 2011-2012. I don't think it was an accident that we ended up there.

(...)and a recovery that is happening at its own pace(...)

How do you know this, Marty? Do you have an alternate universe we don't know about?

"Do you have an alternate universe we don't know about?"

Many think so, I will let you know after the hypnotist brings back my repressed memories from the blackouts.

I specifically account for my view several places above. I do not think based on the numbers and pace of spend that the stimulus rationally has any impact on the recovery.

In specific micro instances it has helped individuals, local fire departments etc. which is great. But at a macro level there simply hasn't been enough spent to impact the overall economy.

marty: "But at a macro level there simply hasn't been enough spent to impact the overall economy."

right. and also seconded by Ariana Huffington, who said of the Stimulus Package: "If You Jump Halfway Across a Chasm You Fall Into the Abyss"

There is a reason for the estate/gift tax no one seems to have (directly) mentioned.

One of the things we Americans are supposedly to be trying to avoid is the creation of an Aristocracy. Allowing great wealth to accumulate unchecked within families is a recipe for creating an aristocracy (just w/o the fancy titles).

Personally, I think the estate tax pretty damned weak.

Rob: I thought I mentioned that, but I think it was probably in my post that got eated.

But yes, preventing an inherited aristocracy of wealth is (or at least should be) one of the goals of the estate tax. Also making sure the heirs of giant fortunes at least have to contribute something to society if they want to be as wealthy as daddy or mommy. And contributing keeping astronomical rates of hording preventing anybody else from joining the ranks of the wealthy through luck and work, i.e. keeping the ultra-rich from pulling the ladder up after them. Meritocracy is another of those well-loved American myths.

marty: "But at a macro level there simply hasn't been enough spent to impact the overall economy."

right. and also seconded by Ariana Huffington, who said of the Stimulus Package: "If You Jump Halfway Across a Chasm You Fall Into the Abyss"

Well, I'm no great fan of Larry Summers et al, but I think I trust even his evaluations more than Ariana Huffington's pithy analogies.

I too would have liked to see a Congress and a political situation that would have allowed a more ambitious, evidence-based package the first time around.

But that's very far from saying what did get through is literally doing nothing and/or making it worse. Even one dollar of stimulus still stimulates, even if it doesn't stimulate as much as $500 billion or $1.8 trillion. There's no evidence for some magic threshold theory. The first stimulus IS out there, just working much more slowly and less aggressively than might have been ideal. (In fact, I believe it took a few months to even start trickling, so it's no surprise we don't have good data on just what effect it's had yet.)

Don't say I never did anything nice for you...

RECOVERY.COM

that should be

www.recovery.gov

(Are you the one who finished a Phd in math a number of months ago?)

Yup :)

I wasn't sure if there was a Taylor Series upstream that reduced to that geometric series and it was just a case of not showing one's work.

Not so far as I know; the entire point of calling it a multiplier is (again, so far as I know) that it, well, multiplies at each iteration. Even if you picked a more general function to iterate -- or, god forbid, a sequence of functions to apply -- you're not going to get a Taylor series out of that in any useful capacity.

[And yes, it's a tangent, but at least it's a tangent on which I contribute!]

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