10/24/10 1:50 PMHoisted from the Archives: The Obama Fiscal Boost: A Note (January 10, 2009) - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchJuly 18, 2010

Hoisted from the Archives: The Obama Fiscal Boost: A Note

(January 10, 2009)

You know, I really wish that I had not been just talking to myself...

From January 10, 2009: The Obama Fiscal Boost: A Note:

Paul Krugman writes:

Romer and Bernstein on stimulus - Paul Krugman Blog - NYTimes.com: ChristinaRomer and Jared Bernstein have put out the official (?) Obama estimates of...the... American Recovery and Reinvestment Plan would accomplish.... Kudos, bythe way, to the administration-in-waiting for providing this — it will be a joy toargue policy with an administration that provides comprehensible, honest reports,not case studies in how to lie with statistics....[I]t [is] hard to evaluate thereasonableness of the assumed multipliers. But... the estimates appear to be veryclose to what I’ve been getting.

[T]hey do estimates of effect in the fourth quarter of 2010, which is roughly whenthe plan is estimated to have its maximum effect. So they say the plan would lowerunemployment by about 2 percentage points, I said 1.7.... They have the planraising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so averageover 2 years, again not much difference. So this looks like an estimate from theObama team itself saying — as best as I can figure it out — that the plan wouldclose only around a third of the output gap over the next two years.

One more point: the estimate of what would happen to the economy in theabsence of a stimulus plan seems kind of optimistic. The chart above hasunemployment ex-stimulus peaking at 9 percent in the first quarter of 2010... theCBO estimates an average unemployment rate of 9 percent for 2010.... Bottom

Dashboard Blog Stats Edit Post

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line: even if I use the Romer-Bernstein estimates instead of my own — there reallyisn’t much difference — this plan looks too weak.

If I were in the Obama White-House-to-be right now, I would announce that we wouldbe using CBO numbers as our baseline for everything, and focus on providinganalytical input to CBO so that its numbers are as good as possible. Doug Elmendorf ishonest and reliable and will do his best. And if there is no daylight between theadministration and CBO, that is one fewer way that the David Brookses and the JohnBoehners and the other bad actors can confuse the gullible, lazy, and dishonest amongreporters and commentators who do so much to degrade the level of the policy debate.

I agree with Paul that this fiscal boost plan is too small, but I do want to admit thatdoing this well is harder than it looks. The tax-cut part does not look terribly effectiveas a stimulus--it is a step toward compensating for higher income inequality and apolitical play to make it more likely that Republicans will lose politically by trying toblock the package rather than a significant boost to employment. Thus I do not thinkyou would want to make the tax-cut part larger. And it is hard to find a lot ofadditional spending projects that can be ramped up quickly and do a lot of good--relatively soon in that endeavor the short-term fiscal multiplier falls below one. Theyare trying their best.

Nevertheless, I agree that there best is almost surely not enough. I also believe thatconventional monetary policy is tapped out, and unconventional monetary policy is ofdoubtful efficacy. So I am in favor of doing something else on the banking/finance side.My favorite idea right now is that of nationalizing Fannie Mae and Freddie Maccompletely and unleashing them to buy up every single mortgage in the country atmarket rates. Their ability to borrow at the Treasury rate means that they should beable to make money by doing this. When they own mortgages they can renegotiate andrefinance them all with the public interest in mind. And as they squeeze banks out ofthe mortgage business the fact that banks are looking for yield should push otherfinancial asset prices up--and make it possible for those businesses that should beexpanding to get financing right now on terms that make expansion profitable.

So at the moment my preliminary judgment of the Obama fiscal boost is that it is agood first bid, but that the administration ought to be doing a lot more.

It was clear--to me and to anybody else who had eyes to see that the fall of 2008 hadinflicted a more-than-Great-Depression-sized shock to the global financial system--that the ARRA was not going to be enough: it wasn't big enough to fill anything near tothe aggregate demand gap that anybody with eyes could see coming, and everybodywith eyes knew that the odds were that a financial crisis-generated recession followsthe pattern of not a "V" but an "L".

So why is John Harwood now writing about the "mystery" of the high jobless rate?This was baked in the cake--the most likely outcome if the government did not takesubstantial additional action beyond the ARRA--eighteen months ago.

Why oh why can't we have a better press corps?

John Harwood of the New York Times:

Mystery for White House: Where Did the Jobs Go?: [T]he biggest conundrumfacing President Obama.... Why is unemployment so high? The whodunit hasflummoxed economists in both parties for a year.... Part of the uncertaintyconcerns why. More consequential now, as the administration and Congressdetermine what to do, is whether the unemployment spike reflects a short-term or

10/24/10 1:50 PMHoisted from the Archives: The Obama Fiscal Boost: A Note (January 10, 2009) - Grasping Reality with Both Hands

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permanent shift in demand for workers. “The stakes are enormous,” said Alan S.Blinder, a Princeton economist who advised President Bill Clinton, because theanswers are “going to dictate the pace at which jobs come back.” And that, in turn,may dictate whether Democrats keep control of Congress or surrender at least onechamber to Republicans. So long as the job market remains weak, even substantialachievements like the passage of new financial regulations won’t alleviate voterdiscontent with the party in power. With eight million jobs lost since the recessionbegan, “We’re climbing out of a gigantic hole,” said David Axelrod, Mr. Obama’stop political adviser. “Until we fill the hole, we’ll get limited credit.”...

In January 2009, Mr. Obama’s economic advisers predicted that unemploymentwould peak around 8 percent if Congress passed their recommended stimulusprogram. As Republicans never tire of pointing out now, the rate hit 10.1 percentby October and has fallen less than one percentage point since.... [T]he rise inunemployment far exceeded what economists would have forecast.... Under Okun’sLaw... the jobless rate at the end of 2009 would have been around 8.3 percentinstead of 10 percent. “I don’t blame the administration for being off in theseforecasts,” said R. Glenn Hubbard, dean of the Columbia Business School andchairman of the Council of Economic Advisers under President George W. Bush.He called the rise in unemployment “a mystery”...

But in both of the previous financial shock-generated recessions--the dot-com bust ofearly 2000s and the S&L crisis bust of the early 1990s--Okun's Law broke down too:

It was not terribly prudent to forecast that it would hold in the late-2000s recession...

Brad DeLong on July 18, 2010 at 11:54 PM in Economics, Economics: Fiscal Policy,Economics: Macro, Information: Better Press Corps/Journamalism, ObamaAdministration, Utter Stupidity | Permalink

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Comments

Ebenezer Scrooge said...Oh, Brad:

"And if there is no daylight between the administration and CBO, that is one fewer waythat the David Brookses and the John Boehners and the other bad actors can confusethe gullible, lazy, and dishonest among reporters and commentators who do so muchto degrade the level of the policy debate."

True, but irrelevant. If you deprive, say, lawyers of enough points of spin, they mightbe hobbled. But The Brookses and Bohners (sic, but I won't reform my orthographyuntil the R's learn how to say "Democratic Party") have advanced so far beyond merespin that it doesn't make any difference. If they want to say that the CBO disagreeswith the Administration, they will say it, even if the Administration treats the CBOnumbers as Holy Writ. Our Free Press won't call them on it.

Reply July 19, 2010 at 12:55 PMComments on this post are closed.

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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

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