Gene Sperling, director of the White House’s National Economic Council, takes to the pages of the Wall Street Journal in an op-ed that devotes seven paragraphs to setting out the problem, four paragraphs to defending the president’s American Jobs Act, and six paragraphs to attacking the Republicans’ counter-proposal. If the bill were necessary and sufficient to get the economy chugging again, I’d be 100% behind it but as I understand things the case in favor of the bill isn’t nearly as clear cut as Mr. Sperling might want us to believe.
There’s a Yiddish proverb that a half truth is a whole lie. When Mr. Sperling writes:
First, it provides a strong and immediate boost to demand that could create up to 1.9 million jobs, increase growth by up to 2%, and lower unemployment, according to independent economists such as Moody’s Analytics.
that’s true. Moody’s did produce an analysis which said that the bill could increase GDP during 2011. Unfortunately, the same report also said that the bill would reduce GDP in 2012 and beyond. When Mr. Sperling writes:
Second, it is specifically designed to take on the problem of long-term unemployment. It includes a tax credit for hiring the long-term unemployed and veterans
that’s true. Unfortunately, he fails to mention that very few believe that the tax credit is likely to create more jobs for the long-term unemployed or veterans. It is far more likely to provide a subsidy for employers who will hire them anyway.
That’s not to say that I support the Republicans’ proposal. I think it is a) loopy and b) political posturing and setting down markers for the 2012 elections rather than a serious policy proposal. Unfortunately, so is the American Jobs Act.
Worst of all I do not believe that Mr. Sperling is a suitable advocate for job creation in the United States. For years he’s been a leading advocate for expansion of the H1-B visa program. As my former business partner once wisecracked I may agree with what you say but I will deny to the death your right to say it.
It would be like appointing Jeff Immelt, CEO of General Electric, a company which under Mr. Immelt’s tenure has off-shored as many jobs from the U. S. as any company in the country, as chairman of the president’s Council on Jobs and Competitiveness.
Can we just finally shoot Keynesian stimulus theory in the head and put it and us out of its’ misery?
d(^_^)b
http://libertyatstake.blogspot.com/
“Because the Only Good Progressive is a Failed Progressiveâ€
Dave Schuler: Moody’s did produce an analysis which said that the bill could increase GDP during 2011. Unfortunately, the same report also said that the bill would reduce GDP in 2012 and beyond.
Of course. That’s how a stimulus works, by transferring wealth from the future into the present (of if you use savings, from the past into the present). As the stimulus winds down, and efforts are made to repay the money, it slows the economy.
If the economy goes into a recession, it can feed on itself as people pull out of the markets resulting in a long-term dampening of growth. A stimulus can help prevent this from occurring while also sparking long-term growth potential. If the stimulus is sufficient, then slowing in the out-years will merely temper the growth, not arrest it. This is standard countercyclical policy.
@zachriel: Are we in recession now are are we in recovery?
*or are we in recovery?
<b.PD Shaw: @zachriel: Are we in recession now are are we in recovery?
The patient is stable, but not completely out of danger.
Nice to see that Zachriel has read the standard textbook. Too bad the standard textbook and reality do not intersect.
Zachriel,
We are already “stimulus” spending to the tune of about $1.4 trillion a year, or about 10% of GDP. How is that working out?
“Efforts are made to repay the money?” Under very rosy scenarios we’ll still run deficits of 4-6% GDP 10 years from now. When will these “efforts” materialize and where will the money come from?
@PD Shaw: Abysmally anemic recovery by official measures, one long recession by common sense, soon to be a double dip recession by official and political measures. Does that about cover it?
d(^_^)b
http://libertyatstake.blogspot.com/
“Because the Only Good Progressive is a Failed Progressiveâ€
Drew: Nice to see that Zachriel has read the standard textbook. Too bad the standard textbook and reality do not intersect.
Not an argument.
Andy: We are already “stimulus†spending to the tune of about $1.4 trillion a year, or about 10% of GDP. How is that working out?
It almost certainly avoided a much worse economic downturn.
•Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent,
•Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points,
•Increased the number of people employed by between 1.4 million and 3.3 million, and
•Increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 4.8 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)
http://cboblog.cbo.gov/?p=1326
Andy: Under very rosy scenarios we’ll still run deficits of 4-6% GDP 10 years from now.
Only if the U.S. doesn’t make any efforts at repayment. Keep in mind that the U.S. was running structural surpluses just a decade ago.
My query was oriented towards identifying where we are in the cycle for countercyclical stimulus. I don’t dispute the concept, but I think its important to identify what time it is. I think it’s 3:00 (the recession being at midnight).
Zachriel,
I agree, but keep in mind the figures you quote are the product of an estimative model and not empirical data. But saying “it would have been worse” is a completely different argument than “stimulus” don’t you think? Let me as you this: How much more do we need to spend beyond the 10% of GDP to “stimulate” the economy into a sustainable recovery? Please show your work.
You can’t make repayments if you’re still borrowing money every year and we’ll still be borrowing in 10 years unless something drastic happens. If you’ve got a plan to generate surpluses in order to pay off principle, then let’ see it.
Additionally the surpluses from a decade ago were the product of an unsustainable economic boom and were therefore unsustainable. The conditions that existed then do not exist now and won’t exist in the future.
A good point, PD. If that’s the case, the AJA is procyclical stimulus not countercyclical.
IMO time-shifting with a short horizon during a period of slow or no growth is folly. If the claim were that intent was to shift growth from some point at which we were experiencing robust (defined as greater than the long term historical rate of 3% real GDP growth), it would be one thing. Increasing growth by 1% to a total of 2% while decreasing growth next year from 1.5% to .5%? That doesn’t sound like a good deal to me.
“Not an argument.”
Wrong. THE argument.
“Of course. That’s how a stimulus works, by transferring wealth from the future into the present (of if you use savings, from the past into the present). As the stimulus winds down, and efforts are made to repay the money, it slows the economy.”
This is incorrect. No wealth from the future is paid out today because the federal government does not borrow money in order to obtain funds for spending. When the government spends it simply credits accounts, it doesn’t go to the till first to make sure it has what it needs. Government is the monopoly issuer of currency in our country and is therefore not revenue constrained, so it does not in fact have trouble “paying anyone back”.
Your thinking about debt is exactly backwards. Those treasuries don’t exist unless demand for them exists, and demand exists because the private sector wants to save money. The appropriate response to the demand is for our federal government to issue the debt because the government’s job is to operate to the private sector’s benefit, not its expense.
“Can we just finally shoot Keynesian stimulus theory in the head and put it and us out of its’ misery?”
It did work for nearly the entire Reagan presidency. Of course, the past is no guarantee of the future.
Steve
@Andy
“We are already “stimulus†spending to the tune of about $1.4 trillion a year, or about 10% of GDP. How is that working out?”
Well, actually. The current deficit spendng is just enough to allow the private sector to net save without plunging into a deep depression.
“Under very rosy scenarios we’ll still run deficits of 4-6% GDP 10 years from now.”
Good. That means the government is tranferring net financial assets to the private sector, allowing it to save and accrue wealth.
“When will these “efforts†materialize and where will the money come from?”
The federal government is an autonomous currency issuer with a floating rate of exchange. It is not revenue constrained. Nor does “paying back” make any economic sense whatsoever. Surpluses generally harm economic growth because they drain financial assets from the private sector. In fact I’ll go so far as to say that the Clinton surpluses were to blame for a great deal of the current mess we’re in.
Dave, a nice tongue-and-cheek conclusion to the topic posted.
PD Shaw: My query was oriented towards identifying where we are in the cycle for countercyclical stimulus. I don’t dispute the concept, but I think its important to identify what time it is. I think it’s 3:00 (the recession being at midnight).
The economy has been stalled in neutral. With $10 trillion in lost equity and $4 trillion in lost deman, a $0.8 trillion stimulus can’t fill the hole. What is happening is that the excess real estate inventory is slowly being worked off, with the rest of the economy attempting to work around the problem. There are signs of economic activity that make a double-dip unlikely, but millions have still not reentered the productive economy.
Andy: I agree, but keep in mind the figures you quote are the product of an estimative model and not empirical data.
Models are based on empirical data. They are adjusted as more data becomes available.
Andy: How much more do we need to spend beyond the 10% of GDP to “stimulate†the economy into a sustainable recovery?
The economy will recover eventually, but a stimulus will shorten the recovery period, while reducing pain, and even long term debt. The $0.8 trillion stimulus was too small, much was misdirected, but it still helped stabilize the economy. Many economists thought it would have taken $1.5 to $2 trillion to spur enough demand to right the economy in a reasonable amount of time. Another half trillion may be just enough.
Keep in mind that it is difficult to predict with precision for several reasons, including because the actions of other countries can have a profound effect on the U.S. economy. The incremental approach the U.S. is implementing may be cheaper in the short run by not overshooting the mark and less waste, but runs of the risk of letting the economy sputter out.
Andy: You can’t make repayments if you’re still borrowing money every year and we’ll still be borrowing in 10 years unless something drastic happens.
They’re called taxes and spending cuts.
Andy: Additionally the surpluses from a decade ago were the product of an unsustainable economic boom and were therefore unsustainable.
The surpluses were sustainable, but the U.S. cut taxes, while expanding Medicare and starting two very costly wars. They suggested the tax cuts and wars would pay for themselves.
Dave Schuler: If that’s the case, the AJA is procyclical stimulus not countercyclical.
Why do you say that? Demand is still very low, as are interest rates.
Dave Schuler: Increasing growth by 1% to a total of 2% while decreasing growth next year from 1.5% to .5%? That doesn’t sound like a good deal to me.
Did you even read the Moody’s report you cited above? It recommends additional stimulus. That’s because the stimulus will generate enough additional growth so that the repayment will be with a larger and growing economy.
Ben Wolf: No wealth from the future is paid out today because the federal government does not borrow money in order to obtain funds for spending.
The U.S. government has issued lots of securities. IOU’s.
Ben Wolf: When the government spends it simply credits accounts, it doesn’t go to the till first to make sure it has what it needs. Government is the monopoly issuer of currency in our country and is therefore not revenue constrained, so it does not in fact have trouble “paying anyone backâ€.
The U.S. has promised to pay the money back in dollars. They can either raise taxes to do so, or they can inflate the money supply. Either choice has consequences. The former means less demand, less investment. The latter means higher inflation and higher interest rates going forward.
Ben Wolf: The appropriate response to the demand is for our federal government to issue the debt because the government’s job is to operate to the private sector’s benefit, not its expense.
Well, the government has to balance its books at some point. But because of the economic situation, it would be best if the U.S. continued to run deficits in the short run, but to have a plan in place to repay the debt when the economy recovers.
Ben Wolf: Surpluses generally harm economic growth because they drain financial assets from the private sector.
Well, surpluses tend to temper economic growth. Hence, countercyclical policy. Feed a cold, starve a fever.
@Zachriel
All the government does when it issues debt is borrow back money it spent into the economy. It is not revenue constrained and cannot, by definition, ever have difficulty in paying back any amount of debt. When you speak of government “balancing the books” you are referencing a monetary system which ceased to exist forty years ago when Nixon closed the gold window. It is literally not possible for our federal government to have any sort of public debt crisis; quite the contrary as deficit spending, when tuned to the private sectors needs and desires is necessary and good for economic growth.
The Clinton surpluses pulled financial assets out of the private sector at a time it wanted to spend. Starved for cash, it created credit to fund its expansion and resulted in the greatest credit bubble in history. The lesson is that balancing the books should never be a consideration for government, only ensuring the private sector has what it needs to generate wealth is important.
I was reacting to PD Shaw’s question and there was an “if” in the preceding sentence. I note that you haven’t answered his question.
“Counter-cyclical” is not necessarily synonymous with “demand at some level that’s lower than I like”. There’s an implied referent: the business cycle. The NBER pronounced the end of the last recession as June 2009. That means by definition that following June 2009 the economy expanded at some rate and any stimulus applied at that point would in fact be pro-cyclical.
Have we entered the contractionary period of the next cycle? Or is growth just very slow? I think the evidence right now is mixed. I’d like your opinion and your evidence.
I also suggest that you reconsider your views on U. S. debt. The U. S. government has never paid down the principal on its debt. We’re still paying interest on debt we incurred during the Spanish-American War.
What we have done is inflate the currency and expand the economy so that the debt incurred in the past wasn’t particularly significant. Both of those seem to be more difficult now than they used to be.
Assume for a moment that a) we will never pay down the debt we incur today, b) growth will remain below the historic average, and c) interest rates will rise, all of which seem pretty likely. Do you think that the policy you’re recommending remains the correct one?
Part of the reason I’m musing on the nature of the cycle is there are competing proposals for infrastructure spending. The Republican Congressman from Caterpillar wants a much larger highway bill, spread out over six years, paid for by the gas tax and increased oil leases. Obama’s highway spending is smaller and quicker, more in line of countercyclical stimulus. I don’t think you can fairly compare them without first deciding what “time” it is.
Ben Wolf: All the government does when it issues debt is borrow back money it spent into the economy.
When the government sells securities, it increase the number of dollars it has available to spend. This can occur when American investors buy securities with dollars, or, for instance, when foreign investors buy securities from their export earnings.
Ben Wolf: It is literally not possible for our federal government to have any sort of public debt crisis; quite the contrary as deficit spending, when tuned to the private sectors needs and desires is necessary and good for economic growth.
Of course it is. If the U.S. doesn’t have enough dollars to make its payments. If the U.S. decides to increase the money supply, such as by printing more dollars, then it reduces the value of each dollar. This will make the debt more manageable in the short run, but increase borrowing costs in the long run, as well as make imports more expensive in terms of dollars.
Ben Wolf: … quite the contrary as deficit spending, when tuned to the private sectors needs and desires is necessary and good for economic growth.
If there is deflation due to a large drop in demand, then some inflation of the money supply may be warranted. Otherwise, money will stay uninvested in the economy. If people have some expectation of inflation, then they will seek out higher returns in investments. On the other hand, dumping increasing amounts of currency into the economy will cause inflationary expectations and in the extreme, the currency will lose credibility.
Ben Wolf: The Clinton surpluses pulled financial assets out of the private sector at a time it wanted to spend.
The economy expanded at one of its fastest, continuous rates in history. The surpluses tended to temper the overheated economy. Consequently, the economic slowdown of 2001 was mild and short-lived.
Ben Wolf: The lesson is that balancing the books should never be a consideration for government, only ensuring the private sector has what it needs to generate wealth is important.
While fiscal balance is certainly only one factor to consider, it certainly is an important factor in managing the economy.
Dave Schuler: I was reacting to PD Shaw’s question and there was an “if†in the preceding sentence. I note that you haven’t answered his question.
We did answer PD Shaw’s question. The economy has been stalled in neutral.
Dave Schuler: “Counter-cyclical†is not necessarily synonymous with “demand at some level that’s lower than I likeâ€.
No.
Dave Schuler: That means by definition that following June 2009 the economy expanded at some rate and any stimulus applied at that point would in fact be pro-cyclical.
Um, no. If demand is still low, investment weak, then the cycle hasn’t yet turned. Try not to confuse the economy with a clock. It’s an analogy.
Dave Schuler: Have we entered the contractionary period of the next cycle?
The U.S. economy seems to be stalled in between. The engine has turned over, but is sputtering. A bit more gas and it may rev up. Or it might sputter out, especially if the load is increased suddenly due to problems, such as due to events in Europe.
If you prefer, we could use the heart attack analogy. The patient had a heart attack in 2008. The doctor’s immediately stabilized the situation through the use of bailouts. They then put the patient on a regimen of nutrients. The patient is able to get around a bit now, but is far from normal health. It may take another injection or two of stimulant, then the patient can return to normal diet and activities. At that point, they can return to work and pay off their hospital bills. Of course, this too is just an analogy.
Dave Schuler: I think the evidence right now is mixed. I’d like your opinion and your evidence.
Growth is slow, and some sectors lag. You might look at CBO for details.
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf
Dave Schuler: I also suggest that you reconsider your views on U. S. debt. The U. S. government has never paid down the principal on its debt.
The debt owed to the public decreased during the latter years of the Clinton Administration.
Dave Schuler: Assume for a moment that a) we will never pay down the debt we incur today, b) growth will remain below the historic average, and c) interest rates will rise, all of which seem pretty likely. Do you think that the policy you’re recommending remains the correct one?
As we recommend making payments on the debt when the economy recovers, your question is a non sequitur. However, to try an answer your question, if the U.S. enters a prolonged slump in economic growth, then it may have to struggle with its debt over a long period of time. This often happens with aging powers as they attempt to maintain their pretense of relevance. They run wars on deficits, for instance.
However, this result avoidable. You can’t recover water that’s already flowed over the dam. What you can do is assess a country’s strengths and weaknesses, and take appropriate actions. The U.S. has huge natural resources, and an educated and highly motivated labor force. There is no reason why they can’t compete in the coming century, but it will require investments in education and infrastructure. That may mean sacrifices over the short term, such as taxes to build that infrastructure. It’s really up to the Americans to decide their best course. But lately, they have not been able to have a mature discussion—something their creditors would love to hear.
PD Shaw: Part of the reason I’m musing on the nature of the cycle is there are competing proposals for infrastructure spending. The Republican Congressman from Caterpillar wants a much larger highway bill, spread out over six years, paid for by the gas tax and increased oil leases. Obama’s highway spending is smaller and quicker, more in line of countercyclical stimulus. I don’t think you can fairly compare them without first deciding what “time†it is.
The larger highway bill isn’t directly stimulatory, if it paid for by taxes. Short-term stimulus and long term investment are both required. They aren’t necessarily contradictory, and they can overlap.
“Have we entered the contractionary period of the next cycle?”
The problem is that we aren’t in a typical business cycle recession. We’re in dire economic straits because of a private debt crisis the magnitude of which we haven’t seen since the Great Depression, what heterodox economists refer to as a balance sheet recession. Demand is low because consumers are net saving in order to deleverage, the exact same process Japan has been going through for over twenty years now. The business cycle can’t resume until sufficient debts are cleared to allow resumption of consumer spending.
This is, incidentally, why monetary policy has been ineffective in stimulating economic growth: all the Fed can do is swap assets, either increasing or decreasing liquidity. The private sector wants to save, meaning that to accelerate the recovery we need fiscal operations to increase flows of money to it from the government.
Zachriel,
Models use some empirical data but also assumptions. The model itself assumes certain things about the economy which is why models fed identical empirical data come to different conclusions. The point is that the CBO is estimating the effects of the stimulus based on a model and measured empirical results. If you look around the site here, Dave posted a couple of studies that do an empirical analysis.
So, $0.8 trillion was too small, but $0.5 trillion “may be just enough”? What is your evidence?
Also, keep in mind that over the last three years we’ve deficit spent almost $4.5 trillion which is quite a stimulus by itself. Next year’s deficit is projected to be around $1.1 trillion. Why should we think another $500 billion will do the trick?
Please read what I wrote again. Even under very optimistic assumptions, we will still be running deficits of 5-6% GDP in 10 years. Some of those assumptions include major spending cuts (cutting medicare payments to doctors by more than $25%, just to give one example), the repeal of all the Bush and Obama tax cuts to include repeal of the AMT fix.
I’m not very interested in what “they” said, whoever they are. The fact remains that tax revenues were boosted in large part by the tech boom and there were also excess revenues from FICA which were included in the surplus at the time. The FICA surpluses are gone and even if we could go back to the Clinton-era tax code we wouldn’t come close to a surplus. So no, they were not sustainable – changing demographics and the tech bubble ensured that….
The US deficit-spent (ie. borrowed money) for every major war including the war of Independence. Indeed, I’ve never really understood how this meme that borrowing to fund a war is somehow bad or unusual. It’s the norm going all the way back to the Romans. Wars are terribly expensive and the ability to fund them without borrowing is very, very rare historically. This fact has nothing at all to do with “aging powers.”
Ben Wolf,
The US can choose to pay off it’s debts, it can choose to print money and inflate the debt away, or it can choose to renege on the debts completely. I’m sorry, but there aren’t any free ponies in any of those choices.
Ben Wolf: The problem is that we aren’t in a typical business cycle recession. We’re in dire economic straits because of a private debt crisis the magnitude of which we haven’t seen since the Great Depression, what heterodox economists refer to as a balance sheet recession.
Most individuals have the same motivation, to simultaneously deleverage. Hence stimulus spending.
Ben Wolf: Models use some empirical data but also assumptions.
All models in empirical sciences are based on assumptions, which are then tested against observations.
Andy: The point is that the CBO is estimating the effects of the stimulus based on a model and measured empirical results.
Typically, they compare several models. There is enough uncertainty in economics that no single model has been able to capture all the detail necessary for completely accurate prediction. However, it is possible to make reasonable predictions in most circumstances.
Andy: So, $0.8 trillion was too small, but $0.5 trillion “may be just enough� What is your evidence?
You do understand the word “may”? In any case, the economy has stabilized and is slowly growing. That indicates the general size of the stimulus needed, not to mention the fact that putting people to work will provide help to a lot of families. Economists who have studied the situation indicate that the new jobs plan should add significantly to GDP over the next year or so, and unless there are additional shocks, may be sufficient to push the economy back into gear. It’s impossible to provide precise numbers, but that isn’t required. It’s like steering. You course correct as you go. You can either try one thing then another, or throw everything at it at once. The latter will work in the least time, but the former will probably cost less and have less waste.
Andy: Also, keep in mind that over the last three years we’ve deficit spent almost $4.5 trillion which is quite a stimulus by itself.
Much of that was absorbed by the process of deleveraging, however, it was sufficient to stabilize the economy.
Andy: Even under very optimistic assumptions, we will still be running deficits of 5-6% GDP in 10 years. Some of those assumptions include major spending cuts (cutting medicare payments to doctors by more than $25%, just to give one example), the repeal of all the Bush and Obama tax cuts to include repeal of the AMT fix.
CBO’s baseline projections are for deficits of 3-4% of GDP in 10 years with debt stabilizing at about 80% of GDP. The alternative scenario, where tax cuts are extended, AMT indexed, and Medicare cuts not made, will result in deficits of about 6% of GDP, pushing the debt to 100% of GDP and more.
Andy: The fact remains that tax revenues were boosted in large part by the tech boom and there were also excess revenues from FICA which were included in the surplus at the time.
Payroll taxes have been included in the unified budget since the 1960’s.
Andy: The FICA surpluses are gone and even if we could go back to the Clinton-era tax code we wouldn’t come close to a surplus.
The surpluses would have pushed debt down substantially, even if demographic changes would have eventually led to additional pressures on the budget. What it would have meant is that the U.S. would have had low debt when the financial crisis struck, plus the bubble would have been tempered; a much better situation than what the U.S. found itself in. But yes, the U.S. would have had to make changes to entitlements at some point.
Andy: The US deficit-spent (ie. borrowed money) for every major war including the war of Independence.
Yes, but they also raised taxes. Cutting taxes during a time of national emergency is not advisable. People are usually willing to chip in when their children are risking their lives in combat.
Andy: This fact has nothing at all to do with “aging powers.â€
If you say so.
Andy: I’m sorry, but there aren’t any free ponies in any of those choices.
Agreed.
“The US can choose to pay off it’s debts, it can choose to print money and inflate the debt away, or it can choose to renege on the debts completely. I’m sorry, but there aren’t any free ponies in any of those choices.”
1) inflation is not a given, nor is it simply a function of the size of the monetary base.
2) There is no such thing as monetization of debt, as it is already monetarized.
3) Public debt denominated in the currency controlled by a sovereign nation is not economically relevant. The federal government doesn’t “owe” a set stock of dollars to anyone. It simply credits accounts as it has done for forty years.
4) The U.S. dollar has no intrinsic value. None. Explain to me how a government which can create as many worthless paper slips as it likes can have difficulty “paying back” slips with no value?
Zachriel,
Yes, and the CBO isn’t testing their model against empirical observation, which was my point. They haven’t directly measured the effects of the stimulus – they estimated the effects using their models. When considering historical actions one is likely to get more accuracy from directly measuring the effects rather than estimating the effects through a model.
I understand the word perfectly well. Do you understand the difference between evidence and proof? I am asking for the former, not the latter. We are right around 100% debt-to-gdp right now and we can’t afford to take blind shots in the dark and throw good money after bad and it seems to me the onus is on the advocates for this stimulus to make their case that it will actually do what is promised – unlike the last stimulus.
Never said they weren’t. The point is, the general fund isn’t getting a couple of hundred billion in FICA revenues anymore and pretty soon the revenue stream will reverse. That’s pretty relevant, don’t you think?
No, it wouldn’t have pushed the debt down substantially (but at least you now seem to agree the surpluses were not sustainable!)
First of all, gross debt continued to increase despite the Clinton surpluses thanks to inter-government transfers. So the national debt didn’t decrease at all under President Clinton – only the public debt did. Even that portion of the national debt was only reduced by 0.2% due to the Clinton surpluses. Extend that another 8 years and it’s hard to call that substantial. Any savings there would be (and were) eaten up by increased inter-government transfers. Without the Bush tax cuts we would be in a much better place debt-wise, but the notion that continuation of Clinton’s surpluses would have pushed down the debt substantially is not supported by the evidence.
Often taxes are raised, but not always. Even when there is a war tax it typically only accounts for a small portion of the war’s cost – the rest is borrowed. For example, for WWI and WWII tax increases accounted for about 1/5 of the war’s cost – the rest was borrowed, primarily from private savings. Hence the notion that nations have to borrow money to fight wars is completely normal. However, I agree that cutting taxes and telling people to “go to the mall” was a very bad move for a variety of reasons.
If you don’t believe me you can look up the history yourself.
Ben,
You don’t seem to understand what we’re saying. Yes, we could print as many “worthless paper slips” as we’d like to and “pay back” our debts – as long as we’re willing to deal with the consequences and the consequences would likely be severe.
Let’s have a little thought experiment – suppose we “printed” money to cover our current deficit each year – currently about 10% of GDP. What would happen?
“Let’s have a little thought experiment – suppose we “printed†money to cover our current deficit each year – currently about 10% of GDP. What would happen?”
Nothing would happen. Monetary inflation occurs when enough currency is spent into existence to push aggregate demand beyond the economy’s productive capacity. We currently have a hole in consumer spending of approximately 10% GDP, therefore demand would not be overstimulated. As I stated in my previous post, monetary inflation is not a result of the size of the monetary base.
@Andy
You might help your understanding a bit if you studied sectoral balances. Here are the basics:
http://pragcap.com/sectoral-balances-and-the-united-states
Ben Wolf: 1) inflation is not a given, nor is it simply a function of the size of the monetary base.
Money supply is a primary factor, other than externalities.
Ben Wolf: 2) There is no such thing as monetization of debt, as it is already monetarized.
It refers to increasing the base money supply as a way to deal with debt.
Ben Wolf: 3) Public debt denominated in the currency controlled by a sovereign nation is not economically relevant.
Of course it’s relevant.
Ben Wolf: 4) The U.S. dollar has no intrinsic value. None.
The value is largely determined by the quantity of money in circulation and the productive capability of the country.
Andy: Yes, and the CBO isn’t testing their model against empirical observation, which was my point.
They use existing models (CBOLT) that have already been tested, then adjust the models as new data becomes available.
Andy: They haven’t directly measured the effects of the stimulus – they estimated the effects using their models.
Ah, so that’s your point. Yes, they use history to project the future. They postdict to predict. Then they adjust their models as the future itself becomes history.
Andy: No, it wouldn’t have pushed the debt down substantially (but at least you now seem to agree the surpluses were not sustainable!)
Of course it would have pushed debt down.
Andy: First of all, gross debt continued to increase despite the Clinton surpluses thanks to inter-government transfers.
We’re talking about debt held by the public. That’s what is meant by a budget surplus, the government taking in more money than it’s spending.
Andy: Even that portion of the national debt was only reduced by 0.2% due to the Clinton surpluses.
Debt reduction was $236 billion in 2000 with a debt held by public of $3410 billion. That’s 7%.
http://www.cbo.gov/budget/data/historical.pdf
Projections were of paying the entire debt held by the public in about 12 years. Of course, external factors can intrude. Nevertheless, substantial reductions would have been made. This would have left the U.S. in a much strong position. It would have tempered the overheated economy in the run-up to the financial crisis. They could lead rather than react.
Again, not atypical behavior of an aging power. Saying others have to follow, while being forced to react time and again to events seemingly outside their control. The young are nimble, not clumsy, and not so stuck in their ways.
Andy: Hence the notion that nations have to borrow money to fight wars is completely normal.
Yes, but so is raising taxes.
Andy: If you don’t believe me you can look up the history yourself.
Heh. We see the lines in America’s face, but we are actually quite sanguine about her future. She has quite a bit of life left in her, but she does have to start making some good decisions— and quit acting the prima donna.
Zachriel,
No, the stimulus has run it’s course, so it was a historical analysis. They measured the inputs (the stimulus) and then adjusted their models to the known historical end-state (the actual unemployment rate, economic growth, etc.). The models then estimated how many jobs the stimulus created, etc. What should have been done was to actually measure the jobs created by the stimulus.
Another great example of economic modeling! Assume the boom is the long-term trend line and profit! We could do that with housing prices too and I can dream that my (now sold) modest Florida home would be worth millions today.
Never said it wasn’t. My point was that borrowing during wartime is completely normal.
Who is this “we” you’re talking about? I’m not sanguine at all – quite the opposite. I’m simply pointing out that borrowing money to fight wars is not a sign of national decline since all countries borrow money to fight wars and the US did so when it was a rising power. What is a sign of decline is borrowing money to pay government operating expenses and then expecting we can throw money at the problem to get back to the unsustainable status quo.
What aggravated me was that the CBO explicitly rejected the idea of measurement to determine the effectiveness of the stimulus.
Andy: No, the stimulus has run it’s course, so it was a historical analysis.
Yes, the original stimulus is now history.
Andy: What should have been done was to actually measure the jobs created by the stimulus.
Nice in theory, but not practical in reality.
Andy: Another great example of economic modeling! Assume the boom is the long-term trend line and profit!
They paid down the debt by 7% just in 2000. Any reasonable projections for the ought years would have resulted in similar payments on the debt. Over the longer term, demographic changes would have required restructuring, but that is much easier to do when running surpluses and having low overall debt.
Andy: I’m not sanguine at all – quite the opposite.
America’s problem is political. A country is not #1 by insisting so, but by taking the actions that lead to success. Because it is political, it can be solved.
Andy: What is a sign of decline is borrowing money to pay government operating expenses and then expecting we can throw money at the problem to get back to the unsustainable status quo.
Yes. Borrowing money for day-to-day living expenses will eventually lead to problems.
Dave Schuler: What aggravated me was that the CBO explicitly rejected the idea of measurement to determine the effectiveness of the stimulus.
Not sure how you would measure it directly, for instance, due to multipliers.
Zachriel,
Yes it is a lot easier just to run a model. Unfortunately, economic models generally suck.
You’ve picked the best year when the tech bubble was at it’s peak (and, not coincidentally, the surplus was at its peak), made that your baseline and then assume the same $200 billion plus surplus would continue for another decade? Even through the 2002-2003 recession? Even through the war in Afghanistan? That’s a nice fantasy.
As the saying goes, “The United States will always do the right thing—when all other possibilities have been exhausted.â€
Zachriel reminds me of me when I got done with my first intermediate macro level course in graduate school, I was sure I had all the answers.
My offhand guess is that Zachriel is a German, working in the U. S.
Andy: Unfortunately, economic models generally suck.
That’s the technical term. Models are not completely accurate, but they still provide important information for planning. They are better than just an educated guess.
Andy: You’ve picked the best year …
CBO made the projections.
Andy: You’ve picked the best year when the tech bubble was at it’s peak (and, not coincidentally, the surplus was at its peak), made that your baseline and then assume the same $200 billion plus surplus would continue for another decade?
CBO projected a ~2.3% real GDP growth from 2000-2008, not unrealistic, and less than the actual value.
Andy: Even through the 2002-2003 recession?
Real annual growth in GDP never dropped below zero.
2000 4.10
2001 5.00
2002 0.30
2003 2.40
2004 3.10
2005 4.40
2006 3.20
2007 3.20
2008 2.00
Andy: As the saying goes, “The United States will always do the right thing—when all other possibilities have been exhausted.â€
Yes. Fortunately for the Americans, most of their competitors are just as hapless.
Zachriel, I’m beginning to wonder if you don’t understand what the CBO is or does. The CBO is not an unbiased source. It is a creature of the Congress that operates at the will and direction of Congress. It’s not enough to cite CBO findings; you’ve got to know what question the folks at CBO were attempting to answer and what assumptions Congress had directed them to make. You cannot assume that CBO’s assumptions are reasonable or even likely.
Dave Schuster: The CBO is not an unbiased source.
CBO provides objective, non-partisan analysis. While Congress may request an analysis for partisan purposes, the baseline and alternative scenario projections are based on best economic practice.
@Zachriel
“Money supply is a primary factor, other than externalities.”
This is not correct because you are confusing stocks with flows. The amount of money in circulation will only trigger monetary-inflation if the flow is large enough to push aggregate demand beyond what the nation can produce. Demand and produxtive capacity are the determinants, not monetary base. The trillions of dollars in equities, bonds, savings, etc. do not play a role in the process because they are stocks of money and in any event are endogenous to the financial system.
The United States could spend $100 trillion into the economy tomorrow: if we had the productive capacity to meet the demand created there would, in fact, be no net inflation.
You’ve just validated my observation. You don’t understand the CBO. I’m not impugning the CBO, just pointing out the conundrum in which it finds itself. It can be objective, non-partisan, and follow economic best practice and still provide nonsense answers because of the questions Congress put to it and the assumptions that Congress requires it to use.
That’s not to say that it’s not better than openly ideological sources like Heritage or the Center for American Progress. But there are better sources. The NBER and the regional Federal Reserve Banks, just to name a few.
Ben Wolf: The amount of money in circulation will only trigger monetary-inflation if the flow is large enough to push aggregate demand beyond what the nation can produce.
We were referring to the situation where total production was relatively flat with the country monetizing its excess debt, but your statement is correct. Indeed, an increase in the money supply is warranted over time as an economy expands.
Ben Wolf: Demand and produxtive capacity are the determinants, not monetary base.
Of course the monetary base is a determinant. The classic equation is MV = PT.
Ben Wolf: The United States could spend $100 trillion into the economy tomorrow: if we had the productive capacity to meet the demand created there would, in fact, be no net inflation.
Yes, if the U.S. could produce an additional $100 trillion tomorrow, then there would be no net inflation. But as it is not possible, if the U.S. injected $100 trillion into the economy tomorrow, it would cause a complete collapse of the dollar.
Dave Schuster: It can be objective, non-partisan, and follow economic best practice and still provide nonsense answers because of the questions Congress put to it and the assumptions that Congress requires it to use.
Yes, as we noted above, Congress often asks loaded questions, and the CBO is required to answer them, though it always makes sure that it adds appropriate caveats. That has little to do with providing baseline projections, which are what they are.