My views on the $85 billion meat cleaver of federal spending cuts, also known as the “sequester,” are entirely predictable to anyone who knows me or has been reading this blog. I think it’s a dumb thing to do when the economy is still weak and needs more deficit spending rather than less, it’s bad public policy to make indiscriminate cuts instead of selective cuts, and it’s not surprising that Congressional Republicans chose sequester over a balanced package of spending cuts and tax increases. I didn’t blog about it earlier because I didn’t want to be too predictable.
What’s interesting to me is that the sequester is nothing new in a sense. We had the opposite policy for two years, in the form of the 2009-2010 stimulus package, which pumped about $394 billion per year in new federal spending into the economy, and then the federal stimulus went down to about $0. The original yearly amount was about 2.5% of GDP, which should have boosted the economy quite a bit. Many leading estimates are that it did. The Commerce Department’s Bureau of Economic Analysis breaks down the contribution to GDP growth of the different components (household consumption, business investment, government purchases, net exports). Their estimates are that the federal government’s contribution to economic growth was just 0.74 percentage points in 2009 and a minuscule 0.14 points in 2010. (In both years, consumption and investment accounted for most of the change in GDP.) Possibly those numbers are underestimates and they probably do not account for any “multiplier” effects on consumption (people get money from the government and go out and spend it, etc.), but what I want to focus on is the next year, 2011, when the stimulus basically ran out.
In 2011, the combined federal, state, and local government contribution to real GDP growth was -0.67 points (which looks kind of small to me considering that stimulus spending fell by about $300 to $400 billion). It wasn’t much better — -0.34 points — in 2012. A problem with fiscal stimulus is that it’s temporary — if the patient doesn’t respond immediately, Dr. Congress decides that the medicine doesn’t work or is too expensive.
The sequestration amount for 2013 is $85 billion, or roughly 0.5% of GDP. Economists’ estimates of the size of the multiplier vary, from below 1 to about 1.4, so the likely reduction in GDP would be in the range of 0.3% to 0.7%. This would definitely hurt, but keep in mind that the government was tightening its fiscal policy in 2011 and 2012, too, with negative impacts of about the same size. To further play devil’s advocate, while the sequester is bad news and bad public policy, it’s unlikely to push the economy into recession, not if consumption and investment continue to grow as fast as they did over the past three years (with an average combined contribution to growth of about 2.5 percentage points). It’s still a lousy time to cut spending and raise taxes, but in the aggregate these cuts are mild enough that they’re merely misguided, not catastrophic.
I’ve written already that the best deal on the debt ceiling would simply be to raise it (or better still, abolish it), without attaching it to a bill that punishes the economy further by slashing spending and/or raising taxes. The last thing this ailing economy needs is a Grand Bargain to reduce the current deficit. It was disastrous policy during the Great Depression — first by Congress and President Hoover in 1932, then by Congress and President Roosevelt in 1937. I would have thought those historic blunders would not be repeated, but I guess it’s always a mistake to assume that politicians know economics or history. But I’ve said all that before.
What I want to point out here is that we’re due for some ill-timed spending cuts (and maybe tax increases), regardless of what Congress does in the next week. Remember that $787 billion stimulus package that Congress passed in early 2009? It was spread out over two years, so roughly $400 billion a year, about $250 billion of which was spending and $150 billion tax cuts, almost all in 2009-2011. So that stimulus is just about “spent.” The main tax cuts, like extending the patch for the alternative minimum tax, will probably be maintained because they’re politically popular, but the spending almost surely will not. So that’s an abrupt drop of about $250 billion in government spending, or about 2% of GDP, over the next year. This chart from James Fallows’ blog for The Atlantic shows the projected big drop in fiscal stimulus from “Relief measures.” That’s the trouble with stimulus — it’s finite. Congress passes these things reluctantly, and if the economy still needs stimulating when it’s over, people are more likely to conclude that it failed rather than that it was too small (which it was) or that it spared us even worse devastation (which it did).
Now it is possible, perhaps even probable, that Congress will fail to pass any deficit-reduction deal and will end up raising the debt ceiling anyway — after all, that’s what’s happened virtually every previous time that a debt-ceiling vote has come up. But even if Congress ends up not inflicting any new wounds on the economy, we’re looking at big-time deficit reduction that will do plenty of damage on its own.
UPDATE, 1 Aug. 2011: Actually, it looks like it’s already happened. In the dismal GDP figures released last week, the government’s contribution to real GDP growth was negative 1.2 percentage points in the first quarter of 2011, with about two-thirds of the decline coming from the federal government. Government purchases account for about 20% of GDP, so cuts in government purchases reduce GDP. “Fiscal drag,” the economists call it. Federal government purchases fell 9.4% in the first quarter (the unwinding of the stimulus surely had much to do with this), and state and local government purchases fell 3.4%. (In the second quarter federal purchases rose 2.2% and state and local purchases again fell 3.4%.)
P.S. The title’s musical inspiration is forty years off and I’ve used it before, but hey, it’s a good song.
The BLS unemployment report for November is out, and it ain’t pretty. Less than a third as much job creation (+39,000) as expected, not nearly enough to absorb new entrants into the labor force, so the official unemployment rate edged up to 9.8%. (The comprehensive U-6 unemployment rate was unchanged at 17.0%.)
The private sector added 50,000 more jobs, and the government shed 11,000 jobs. It is a bit hard to disentangle private sector jobs from the government, in view of the fact that the $787 billion stimulus went mostly to the private sector as opposed to new government jobs, but it is rather remarkable how little the government is doing in terms of direct job creation. At the federal level this comes down to politics — in this conservative age, creating 3.5 million temporary government jobs, as the New Deal did each year, is considered a bad thing. Indirectly creating or saving 3.5 million jobs, as the Obama Administration credits the stimulus with having done, is politically viable (or was in early 2009) but hard to prove, which is probably why the stimulus is unpopular with most of the public. At the state and local level, of course, it comes down to balanced-budget requirements — with tax revenues down for the count, everyone’s cutting government payrolls to try to close the budget gap. (Without emergency federal aid to make up the difference, the recession gets magnified at the state and local government level.) If I eyeballed the numbers correctly, employment is down for the year at all three levels of government.
The only good news I noticed in the report was that the number of temp workers, a leading economic indicator of employment, increased for the fourth straight month. (And even then, the increase is smaller than in several months earlier this year.) Another leading indicator, weekly hours worked, did not improve, instead holding steady at 34.3 hours.
Now, the unemployment rate is a lagging indicator, and there are positivesigns of recovery elsewhere, but that’s cold comfort to the nation’s 15 million unemployed. Seems like we’re back to where Merle Haggard was in 1973, especially with Republicans in Congress so far refusing to extend unemployment benefits for the long-term jobless:
Michael Grunwald of Time has an interesting new article about the specifics of the stimulus spending, which began with “shovel ready” projects that could employ people right away but is now about to move onto “shovel worthy” projects that required more advance planning and are more in line with the Obama Administration’s long-term policy goals on energy, education, etc. The article differs from others I’ve read on the stimulus in that the focus is not on its impact on jobs or GDP but on how these programs may yield a greener energy policy, expanded scientific research and broadband access, and school reform. There’s an analogy to be made with the New Deal, whose early jobs programs were sometimes derided as “leaf raking” or “ditch digging” but which came to include enduring projects like highways, bridges, buildings, and parks.
The $787 million stimulus bill that passed in early 2009 is by now unpopular with the public. A recent poll I saw in The Washington Post this summer (I’ll try to find the link later) found that the public, by a 56-41% margin, actually thought the stimulus had made the economy worse. This is perhaps understandable considering that the unemployment rate has not come down much, but still mind-boggling in the face of empirical estimates by nonpartisan economists that the stimulus saved three million jobs.
The only part of Grunwald’s piece I didn’t like was his claim that “liberals” think the stimulus was not large enough. While that much is basically true, it’s not just political liberals who believe that. Keynesian economists, not all of whom are liberal Democrats, would tend to argue that another big round of stimulus is necessary to push the economy back toward “full employment,” i.e., an unemployment rate of about 5%, maybe 6% (it’s now 9.5%). Three million jobs saved is better than none, but the glass is less than half full considering that there still are eight million more unemployed Americans now than in 2007, before the recession began.
Matt Yglesias presents another poll that tends to suggest that the stimulus’s unpopularity reflects not the content of the stimulus bill but basically just the sad state of the economy and the usual tendency of the public to blame it on the president — i.e., if the stimulus bill was his bill, then it must have been a bad bill, because the economy stinks. Yglesias cites a poll that asks people whether they would like certain measures to be taken. Asked if they would favor “additional government spending to create jobs and stimulate the economy,” 60% said yes. Politicians, take note.
P.S. Today’s title is from J.J. Cale’s “After Midnight,” but the song I felt like posting was this one by The Flamin’ Groovies:
It’s been noted that President Obama used the word “jobs” more times (29) than other word in last night’s State of the Union address. Much of that was in connection with a jobs bill that he plans to introduce, and about which he mentioned a few reasonable-sounding specifics. But indications are that he and his party will try to do this one on the cheap, rather than open themselves to the “big spenders” charge or the predictable cries of deficit scolds who think there’s nothing wrong with the economy that a good bloodletting won’t cure.
And, according to polls, last winter’s American Recovery and Reinvestment Act (a.k.a. the stimulus bill) is unpopular. It was too small to make much of a dent in the massive unemployment crisis, and the continued high and rising unemployment has led many to conclude, by that famous fallacy post hoc ergo propter hoc and with the encouragement of countless politicians and talking heads, that the stimulus actually caused the rise in unemployment. Brad DeLong has an excellent column on “America’s Employment Dilemma” right here.
Some on the right have likened the Obama stimulus bill and the still-high unemployment to the New Deal jobs programs and the Great Depression: the argument is, if they didn’t end it, then they must have caused it. (Which is kind of like blaming Doctors Without Borders for an earthquake.) Others make the less extreme but still ridiculous argument that because unemployment is still high, the fiscal stimulus must not have created a single job. (Which is hogwash — Prof. Menzie Chinn of Econbrowser shows that private studies by IHS/Global Insight, Macroeconomic Advisers, and Moody’s Economy.com estimate that the stimulus has created 1.1 to 1.6 million jobs to date, and Chinn himself estimates that the number may be more like 2.9 million. It’s wonkish stuff, but worth a look.)
Anyway, here’s an unpublished letter I wrote a few weeks ago to USA Today in response to a letter that made that bogus argument about how those New Deal programs that employed millions somehow didn’t employ anybody:
“Though unemployment will remain stubbornly high, and the economic recovery sluggish in 2010, the government doesn’t need to provide another round of stimulus spending to keep the economy afloat, they say.”
That’s a mighty big “though” there! Just how stubbornly high do they expect unemployment to remain?
“The forecasters are not upbeat about the outlook for the job market next year. Though the latest employment data point to the end of a nasty cycle of job cuts, next year’s recovery is not expected to make much of a dent in the unemployment rate, which is hovering around 10 percent. The consensus is that the jobless rate drops by just two-tenths of a percent, to 9.8 percent, by the end of next year.”
That forecast is in line with other general predictions I’ve seen. And each point in the unemployment rate represents about 1.5 million jobless persons. So why not have a jobs program to relieve this stubborn problem? (First, to be fair, let’s note that two of the eleven members of the panel do support another round of stimulus. They are Jan Hatzius, chief economist of Goldman Sachs, and Ethan Harris, head of North American economics for Bank of America Merrill Lynch. When Goldman Sachs and Bank of America are the good guys, maybe there’s something wrong with my profession?)
Edward Leamer of UCLA, whom I have heretofore associated with common-sense empiricism and clear writing, channels his inner Scrooge and mixes his metaphors in offering this beatings-will-continue-until-morale-improves prescription:
‘“The time to short-circuit the negative feedback from job losses is behind us,” said Ed Leamer[,] director of the UCLA Anderson Forecast. “Let the private sector heal the economy.”’
To paraphrase Homer Simpson and Proverbs 21:13: “It’s not that we’re not listening to the cries of the unemployed, honey, it’s just that we don’t care.”
The federal government’s “cash for clunkers” program has been the hot economic news item the past two weeks. The program is novel, visible, finding lots of takers, and by far the most popular item in the stimulus package. It is not without its critics, however, on both the economic and environmental fronts. Let’s review the debate.
The first national “cash for clunkers” proposal, as far as I know, came from the eminent macro/policy economist Alan Blinder in a NYT column about a year ago. Blinder noted that smaller-scale programs had already been implemented in several states and Canadian provinces. He touted it as a “public policy trifecta”: (1) It would help the economy at low cost: he estimated the cost of a good national program at about $20 billion, cheap in comparison with the then-stimulus of $168 billion (not to mention this year’s $787 billion stimulus). (2) It would do a lot to reduce exhaust pollution, an estimated 75% of which comes from cars over 12 years old. As for the apparent waste of retiring old cars that still have some life in them, he said they could be refitted with new emissions controls and resold, or their scrap metal could be recycled. (3) It would be progressive in its impact, since it’s mostly poor people that drive those old clunkers.
My former graduate macro professor Willem Buiter had a typically hilarious and typically negative response, sarcastically titled “Please torch my car.”
“How dead is Keynes?” asked economist James Tobin in 1977, when Keynesian economics was starting to lose ground in economics departments to more theoretically elegant alternatives like new classical economics, and when the stagflation of the mid-1970s sapped many people’s confidence in Keynesian policy prescriptions. Tobin said Keynesian economics was still the best macroeconomic theory out there, and that standard Keynesian pump-priming remedies for recessions like deficit spending and monetary expansion still worked. True as those words might have been, however, Keynesian economics was not faring well in the court of public opinion, neither among academic economists nor among policymakers. Paul Volcker’s Federal Reserve invoked monetarism, not Keynesianism, in its draconian anti-inflationary policies of the early ’80s, and President Reagan, of course, sold his tax cuts as “supply side” economic policies designed to restore incentives to work and save.
It’s fair to say that nothing really did come along to supplant Keynesian economics on the policy front. Even Reagan’s “supply side” tax cuts had most of their impact through traditional Keynesian channels — putting more money in people’s pockets for them to spend — than by influencing people to supply more labor or save more. The estimated impact on labor supply was meager. The personal saving rate actually fell (graph from Calculated Risk). And President Bush 43’s early 2001 tax rebates worked much the same way — though they weren’t enough to prevent the recession of that year, they did mitigate it. But it’s hard to imagine any Republican politician of the last 30 years announcing, as President Nixon once did, “I am now a Keynesian.” Even Democratic politicians seem less than eager to embrace Keynes.
Fast forward to President Obama’s and Congress’s $787 billion, two-year stimulus package. Republicans have been calling it a failure practically ever since the time the ink on the bill was dry, and the American public seems to be getting increasingly impatient with, if not skeptical of, the stimulus. Unemployment keeps creeping up, after all, most recently to 9.5%. Warnings about the country’s long-term debt problems, to which the stimulus makes some contribution (however overblown in some quarters), have become ever more dire. Andrew Leonard of Salon has a nice little update on the politics and economics of the stimulus, titled “Is the Obama economic rescue plan a failure?”
Leonard, citing Barry Ritholtz of The Big Picture, says the real problem, contrary to Republican critics who say the stimulus is just worthless “spending” as if government purchases weren’t part of GDP (and as if tax cuts weren’t part of the stimulus, too), is not that the food is so bad but that the portions are too small:
To paraphrase Benjamin Franklin, a nation that chooses deficit reduction over its economic health will soon have neither.
A story that I’d missed a couple days ago was the results of new polls from the NYT and the WSJ, allegedly finding Americans to be apoplectic about the federal budget deficit and down, down, down on the $787 spending stimulus. The poll results are described by Catherine Rampell of Economix, Paul Krugman on his blog, and Andrew Leonard on Salon. Considering the disastrous effects of budget cutting during the Great Depression (first in 1932 under Hoover, then in 1937 under FDR), the results does not seem to bode well for future recovery efforts. “A nation of Herbert Hoovers” was Salon‘s headline.
It’s easy to read these poll results and conclude that Americans want the economy placed on a starvation diet. But is that the correct conclusion? Rampell takes a closer look at the NYT poll and isn’t so sure. She points out another question, which asks what America’s biggest problem is, and notes that only 2% say the budget deficit. That puts it well behind the economy (38%), jobs (19%), and “health care” (7%). An accompanying chart of Gallup poll results since the 1930s show that not since the mid-1990s has the budget deficit been seen as the nation’s top problem by more than 5% of the public.
Thomas Friedman has a thought-provoking column in Sunday’s New York Times, titled “Time for (Self) Shock Therapy.” Unfortunately, one of the thoughts provoked is “A lot of this is oversimplified,” but there are still some good ideas and some good exposition in it. On the eve of the inauguration, Friedman suggests that President Obama’s first White House meeting should be with the presidents of the 300 biggest banks, and he should tell them there’s a new sheriff in town. The first paragraph of Obama’s imaginary indictment of the bankers is nicely put, especially the heart metaphor:
“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. The banking system is the heart of our economy. It pumps blood to our industrial muscles, and right now it’s not pumping. We all know that in the past six months you’ve gone from one extreme to another. You’ve gone from lending money to anyone who could fog up a knife to now treating all potential borrowers, no matter how healthy, as bankrupt until proven innocent. And, therefore, you’re either not lending to them or lending under such onerous terms that the economy can’t get any liftoff. No amount of stimulus will work without a healthy banking system.”
Friedman then has Obama announcing a thinning of the herd, kind of like FDR’s bank holiday of 1933, whereby the healthy banks would be recapitalized and the sick banks liquidated: (more…)
Blogging Through the Wreckage 
