Speaking of bad assumptions, Kevin Hassett and Glenn Hubbard, in an op-ed in the Washington Post, make what looks to me a pretty good case that there’s an intrinsic contradiction in the economic case the President Obama is making:
A Keynesian stimulus like the one the Obama administration advanced in 2009 would be appropriate if a recession were expected to be short and deep, followed by a quick and robust recovery. Such a stimulus has three stages: the initial short increase in GDP from the spending, a subsequent phase of approximately equal reductions in GDP after the stimulus runs out, and then an additional reduction in GDP when higher borrowing or taxes are needed to pay for the stimulus. If you expect a recession to be long and drawn out, a Keynesian stimulus is likely to be ineffective, because the hangover from the second two stages could easily push the economy back into recession. In such a world, policies that stimulate long-run growth such as fiscal consolidation and tax reform are clearly preferable to a Keynesian stimulus.
Thus the administration’s economics suggest mistakes of diagnosis or cure, or both. If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.
If the president wants to continue claiming that the stimulus was the appropriate economic policy and that we can afford the damage from higher taxes because growth is going to be high in the near future, then he should concede that Reinhart and Rogoff’s results do not explain the slow recovery of the U.S. economy — and that the more likely explanation is the failure of his own policies.
I think the mechanics of the Obama Administration’s fiscal policies went something like this in its early days. Very early on the White House, determined not to let a good crisis go to waste, had arrived at a number that they had concluded was the largest stimulus package they could get through the Congress. Its economic advisor, unethically, groomed their reports to conform to that number, providing intellectual cachet for what was, in fact, a political judgment.
Once the details had gone through the Congress it was much what one might expect. It scratched itches that had been festering for years, rewarded friends, punished enemies, and, generally, maximized the political benefit of fiscal stimulus rather than its economic benefit. Whatever you think of fiscal stimulus in theory I think that we should all agree that in practice what actually happened was inadequate to the need.
I would like to know why anyone treats the coauthor of Dow 36,000 as a competent economist. What best selling economic book has been proven to be more wrong? Anyone who followed its advice would have lost a lot of money. The fact that he has a prominent position in a big “think tank” I find incredible.
1) Find a country which has experienced growth from fiscal consolidation. Greece and Spain have consolidated themselves into a depression and Britain’s recession continues to worsen. This is exactly why Hubbard is nothing more than a propagandist. He specifically stated in 2010 the countries which made cuts to spending would restore market confidence and unleash growth through private sector spending. Are markets in Europe more confident today, or less? The financial industry is increasingly hedging against the end of the euro, the exact opposite of what Hubbard promised us would happen. Is it too much to expect him to rethink his opinions when every indicator has gone the opposite direction his model forecast?
3) Is there a more debunked study than Reinhart and Rogoff? Most of their data was derived from the gold-standard era when nations operated in a currency they did not control. They repeatedly assert causality by disregarding timelines (Japan has high public debt, is growing slowly, therefore debt is slowing growth).
I couldnt bring myself to take this piece seriously. I am surprised you did. First, the study they cite looks only at American recessions. Ours is an international banking crisis. AS R and R showed, these have long recoveries. The paper cited is irrelevant. But, if you still want to find relevance, then there is some, maybe.
“We find three exceptions to this pattern: the recovery from the Great Contraction in the 1930s; the recovery after the recession of the early 1990s and the present recovery. The present recovery is strikingly more tepid than the 1990s. One factor we consider that may explain some of the slowness of this recovery is the moribund nature of residential investment, a variable that is usually a key predictor of recessions and recoveries.”
If Kevin (Dow 36,000) wants to believe that a recession linked to copper speculation and banking problems is the same as when we set record levels of private debt, have hundreds of banks go under and have the mortgage market collapse, as a partisan writer he can think so. I dont think the rest of us should find that analogy helpful.
Next, it is very well known that everyone, not just Obama’s advisors greatly underestimated the severity of the drop in GDP in 2008. What was thought to be a bad 4% drop in GDP was really a post-war record drop of 9%. I have gone back and looked and have not found anyone suggesting our drop was that severe (several folks were asking for a larger stimulus since they thought it was worse and unemployment would peak much higher than predicted, but no one I know of put it at 9%).
While the ideas put forth in this piece are unfounded, I think you are correct that they opted fro the largest politically feasible stimulus. Based on the data they had at the time, I think that was the largest they could get. If you think that the CEA influenced GDP reports to get smaller numbers to confirm to the size of the stimulus, I think you should have some support for that belief.
Steve
As I see it that’s the crux of the point they’re making. How do you reconcile taking the position that the economic downturn we’re in is the consequence of an international banking crisis with the position that it can be remediated by spending that only takes into account the situation in one country?
It would at least be consistent to take the position that, due to the international character of the financial crisis, stimulus must be significantly larger to have adequate effect on employment. Alternatively, it would be reasonable, after a fashion, to take the position that Keynesian stimulus can’t be effective in dealing with the problem due to the present globalized economy.
I do not believe it is reasonable to take the position that doing something inadequate or even counterproductive is justified because it’s better than doing nothing. The underlying problems with the economy have not been addressed. The present level of employment is far, far lower than was predicted. What was done exacerbated preexisting conditions that resulted in worsening income inequality. The well has been poisoned.
If you take the position that the U. S. federal government really needed to ameliorate a global problem, there’s really only one practical (and I’m stretching the definition of “practical” to the breaking point with this observation) way it might have been accomplished with fiscal policy: suspend federal taxes. The amounts needed are just too great to realize any other way. Finance the government through issuing bonds that the Fed buys (which is, essentially, the way we’re financing the federal government now).
What was thought to be a bad 4% drop in GDP was really a post-war record drop of 9%.
I remember everyone stating that it was the worst economic crisis we had had since the end of WWII. A 4% drop in GDP would have only made that the third worst recession in the previous thirty years, and only moderately worse than the one that sunk the first Bush presidency. So, were they lying when they were claiming things were going to get that bad just so they could bilk the government? Either they believed it was going to be much worse, in which case the 4% comments were lies, or they really thought it was only going to be a 4% contraction, in which case they were lying when they were telling us it was The End of the World as We Know It. (Although they would have been unwittingly closer to the truth in the second instance.)
“How do you reconcile taking the position that the economic downturn we’re in is the consequence of an international banking crisis with the position that it can be remediated by spending that only takes into account the situation in one country?”
Depends on your goals. For myself, I think it is plausible that while it may have contributed to a recovery from the Great Depression, given that we started with a much higher level of public debt this time (thank you GOP), I didnt expect us to be able to sustain deficit spending long enough to fix private balance sheets. I think it was needed to help stop the disaster that we had in the last quarter of 2008. We avoided 20% unemployment or wherever we were going if all of our major banks collapsed at once.
As to the international issue, I think this is applicable to any solution advocated by either party. If you support supply side solutions, tax cuts for the wealthy, how much of that gets spent in the US? Are they going to build their factories in the US or Indonesia? I dont see how you stop leakage. At best you minimize it.
So, take a libertarian approach and do nothing. Find out what happens when every large bank in the US fails. A supply side approach and watch more money go overseas or into “innovative financial products.” Or go with a demand side stimulus which will have some of that money misallocated and some will leak overseas, but some will stay local. For cutting off the acute crisis, I favored the demand side approach. For the long term, I think we need private debt reduced, a functioning housing market, regulatory reform and solving our cost problems in health care and education.
Steve
Which is why I’ve criticized the solutions offered by both parties. I opposed the Bush tax cuts in 2002, opposed their extension in 2010 by the Democratic Congress, and am skeptical that merely cutting taxes without addressing any of the structural issues will have a beneficial effect.