An Economist article that I tweeted this morning looks at how much worse the recession was than previously believed, and examines the implications:
This clearer image of the recession may help settle some academic disputes. The downturn bolstered the conviction among some economists that GDP was the rougher of the measures of economic activity. Revisions to GDP, they argued, usually move it closer to an income-based economic gauge—Gross Domestic Income, or GDI—which should therefore be considered more accurate. An esoteric debate perhaps, but with real stakes: during the recession, GDI consistently showed a weaker economy than GDP did. Had policymakers focused on the income-based measure, their reaction might have been speedier and better informed. [In other words, a bigger stimulus. Krugman FTW? -ed.]
Other arguments will continue to fester. Concern has grown over a break in the rough historical relationship between output and employment known as Okun’s Law. Unemployment has seemed “too high”, leading some economists to fret that structural barriers to job growth have become a serious problem. [PANIC! -ed.]
The new revisions solve the puzzle, but only up to the end of the spring of last year. From the third quarter on, the numbers still look out of whack, if less so than before; and, given the current level of growth, the economy is still not producing enough jobs. The updated view may add to fears that long-term unemployment is a significant threat. The longer high levels of unemployment stretch on, the less they can be explained by weak demand.
And then there is the ongoing debate within the Federal Reserve between inflation hawks and those fearing deflation. The revisions, which reveal a larger gap between potential and actual GDP, shift the field in favour of the deflation worriers, who may argue for more accommodative policy at the Fed’s meeting on August 10th.
The new data might reasonably absolve the Democrats of at least some blame for the economy’s continued listlessness. A deeper-than-believed recession helps explain why the first unemployment forecasts by the White House proved too rosy, and why the stimulus plan has failed to bring down the jobless rate. The hole was simply deeper than it appeared. [At right, a helpful illustration of its depth. -ed.]
But voters may prove unsympathetic. [Gee, ya think? -ed.] What has not been altered is the scope of the employment crisis. If the Democratic leadership allowed over-optimistic GDP numbers to distract them from the obvious trouble in the labour markets, then they now have no one but themselves to blame for their party’s long electoral odds.
Translation: they didn’t #PANIC!!!! enough. Should’ve listened to me. 🙂
This article is interesting, but the data revisions are truly academic and do nothing to change the structure of the debate.
If you believe that this recession is simply an economic retrenchment following textbook business cycle fundamentals, and is therefore best managed by textbook Keynesian fiscal policy, then you can argue whether the stimulus was sufficient or should have been more dramatic given the revised data. As an example, I think we already know where Paul Krugman stands on the issue.
However, if you believe the economic collapse was fundamentally driven by improper monetary policy and unhealthy structural issues in the financial markets, then fiscal policy is clearly the wrong instrument for delivering a cure — it’d be like prescribing cough medicine for a stomach ache. So if you accept that the economic collapse was driven by extended monetary overstimulation (as a result of interest rates held too low for too long, with the result being major bubbles in assets and commodities) and policy malfeasance (in sum, Fannie Mae and Freddie Mac + looking the other way on brokers and underwriters issuing loans to folks who clearly were not qualified + near zero regulatory interest in setting up a healthy framework for MBS / CDS / CDO markets), then the solution is not artificial demand driven by government spending / tax cuts. Instead, the solution is to overhaul the policies that helped create the problem (i.e., rein in the two FMs, impose a smarter regulatory framework on the market for exotic mortgage-based financial instruments, and eliminate the perverse policy incentives that drove the bad behavior in the first place); do the best you can to expedite final resolution of bankruptcies, foreclosures, and other failed financial transactions (in other words, accelerate the resolution of what’s causing the economic volatility); and reduce future economic uncertainty by implementing structural reforms on taxes and entitlement programs.
To date, the Obama administration has not followed this latter course of action, and that is why we continue in a terrible malaise. For instance, instead of dealing with entitlement and tax reform, we’ve added Obamacare and are letting tax cuts expire; instead of driving resolution of failed transactions, we’re using Fannie and Freddie and the Fed to absorb a colossal shadow inventory of foreclosed homes and implementing counterproductive policies to stimulate refinancing and home sales; and instead of setting up a clear and workable market framework for financial instruments, we’re following the Sarbanes-Oxley approach of overlegislating and burdening the markets with unreasonable administrative and transaction costs (especially for smaller businesses). In other words, Obama has been pursuing an agenda almost 100% opposite of what is needed to get the economy out of the ditch. And it shows.
I don’t know if this is the first economic analysis of ARRA not associated with a partisan / ideological think tank that doesn’t simply substitute Keynesian multiplier formulas for real analysis to evaluate the stimulus’ “success”, but it certainly is a damning one:
So let’s do the math: Best-case scenario, the Obama stimulus created / saved a net of 659k jobs, at a cost of $787B, for a total cost of $1.2M per job created / saved; Most-likely scenario, we spent $787B to destroy or forestall 550k jobs.
As someone [in]famously asked, “How’s that hopey-changey stuff working out for ya?”
I just went on Twitter to try and find a liberal/Keynesian response to the study, and all I see is conservatives saying, “SEE?!? SEE?!?!” Sigh. Echo chamber effects suck.
Without knowing more about what formulas or assumptions THIS paper’s “models” are using, it’s hard to know how to assess this, but I appreciate the link. Broadly, I will say this: after listening to some very interesting podcasts by the smart anti-Keynesian economist Russ Roberts (of Keynes / Hayek rap video fame) in recent days, I’m ever more frustrated that the field of economics seems to be an endless circular discussion of fundamental questions that are never actually answered to anyone’s satisfaction except for those consumed by confirmation bias.
Economics is a (hopelessly?) complex field and I don’t really want to get dragged into a debate on it. I’m pretty sure we face a lot of rather interconnected problems, and that, on balance, nobody is actually right.
The key thing I’m willing to take away from the article AML mentions is that US manufacturing is in serious trouble. But we’ve known that for a while. It doesn’t make the problem less serious or the consciences to our overall economy less serious but I wouldn’t call it news… per se…
I think one of the other rather serious problems we face is Government efforts to make policy with the tax code (buy a house, have a family, give to charity, buy this kind of water heater, etc.) It’s just not the right place for that kind of thing, makes the tax code needlessly complex, and leads to people not having the foggiest idea how much they pay in federal taxes, or if it is, in even the vaguest sense of the term, fair. And instead think that the check they get or send to the government in April is indicative of if taxes are too high or just fine. It’s stupid. We need comprehensive tax reform. But there are too many vested interests for us to get it.
…after listening to some very interesting podcasts by the smart anti-Keynesian economist Russ Roberts (of Keynes / Hayek rap video fame)…
I assume you’ve seen the sequel as well. These videos are brilliant, IMO (even if you are a Keynes disciple, you gotta appreciate their ability to make a nerdy/wonkish topic like economics engaging in a Weird Al-sorta way).
I’m ever more frustrated that the field of economics seems to be an endless circular discussion of fundamental questions that are never actually answered to anyone’s satisfaction except for those consumed by confirmation bias.
Where have you been for the past twenty years of your intellectually inquisitive life?!?
Actually, let me make another point as well: You could make the statement that “the field of [insert topic having some bearing on politics here] seems to be an endless circular discussion of fundamental questions that are never actually answered to anyone’s satisfaction except for those consumed by confirmation bias” and it’d be just as true. Examples: “climate science / global warming”, “bioethics”, “jurisprudence”, “political philosophy”, and so on. Translation: Assumptions and weltanschauung are everything. This is why I am always bashing you over the head to study political philosophy in more depth; it’s important to understand the ins and outs of different systems of thought (including the basics of religion and philosophy, examining areas of thought like epistemology and metaphysics) so you can better appreciate your own thought patterns and on what unstated assumptions they depend for coherence. As an example, I can draw a somewhat clear line from my preexisting beliefs and assumptions about the existence of God, the nature of evil, the nature of Truth, and questions about morality / justice, to how my weltanschauung is framed to interpret data and political questions. If I simply use logic and reason as my guide (assuming it’s possible to fully separate that from emotion and ethos, which i don’t believe is possible) and proceed into political debate, empirical studies of data, and/or interpretations of history and anecdotes without first examining these foundational concepts and beliefs, I can’t possibly correct for my lenses being rose-colored vs. some other tinting. IOW, everyone suffers from confirmation bias, and this holds true for most any academic subject or topic, so you won’t get very far in disentangling from that confirmation bias if you’re not able to understand how your belief system is constructed — its inputs, framework, and outputs.
I think one of the other rather serious problems we face is Government efforts to make policy with the tax code (buy a house, have a family, give to charity, buy this kind of water heater, etc.)
I completely agree, but that’s a fairly self-inflicting position to embrace as a liberal. Liberals in general view government as an appropriate vehicle for shaping culture and effecting positive citizen choices for the good of society, and the tax code (i.e. financial incentives) is one of the most powerful ways of doing that — perhaps even more powerful than the legal system. If you accept that money and taxation are a good way to mold societal behavior, the question then becomes, what behaviors do you wish to incentivize, and how do you build in sufficient flexibility to tailor for effectiveness and efficiency? Laws, codes, and regulations in and of themselves are simply another form of taxation, as they have a financial impact on people and institutions which ought to be estimated and considered prior to implementation.
We need comprehensive tax reform. But there are too many vested interests for us to get it.
If Obama throws his weight behind fundamental tax reform, I believe it will happen regardless of which party controls Congress. Reagan pulled it off in 1986, and they said all of the same things about tax reform back then.
I think the frustration expressed here is really with macroeconomics, not micro. Economists do a decent job of modeling individual decisions, corporate decisions, and the behavior of markets for single products.
The science gets much more abstracted and more dependent on assumptions when economists try to model economies on an aggregate level. We suck at that.
There is a nascent movement these days to construct macroeconomic models that are built off of microeconomic foundations. This is hard to do simply, but at least it’s happening.
Finally, the data for analyzing stimulus spending are sparse and heterogeneous, so we can’t just do a happy little test of employment = controls + stimulus + error term and let the data speak for itself. That’s why we are subjected to so much weird analysis.
Wait… Actually, the paper AML links to does exactly what I say above cannot be done. It essentially says, “Look! The government spent more in the recession, therefore government spending CAUSED the recession!” That paper would get destroyed at a Rochester seminar, even though our faculty support its basic argument. The authors will have fun taking that paper on the road.