Nate Silver: Double Dip or Not, Economy Is Falling Farther Behind
fivethirtyeight.blogs.nytimes.com
fivethirtyeight.blogs.nytimes.com
Up to now, Washington has thrown every Keynesian trick in the book at this recession, and it doesn't seem to have had a substantial impact. I think the original stimulus would have had a better impact if it had included a lot more infrastructure investments than "give a man a fish" type expenditures. I'm not a student of economics, and I won't try to pretend to be one on this forum, but haven't we run out of Keynesian options if we want to continue with the current economic policies?
Nate Silver's leading line above makes me think of Germany [1]. They were the only government to take a position of austerity, were widely criticized for it, but they're the only major Western economy that rebounded from the economic crisis. The U.S. government, on the other hand, lacks the unity and political will to lead a turnaround.
[1] http://www.nytimes.com/2010/08/14/world/europe/14germany.htm...
I don't think this accurately represents the arguments of the Keynesian economists. Krugman, to pick an example, calculated that high unemployment rates would cause us to miss out on at least $3 trillion of wealth creation, and he called for about $1.5 trillion in infrastructure investment. The government would capture perhaps 25% of the restored growth in taxes, so the federal government would come out at least $750 billion behind. But in theory, America as a whole would be wealthier. (All numbers from memory.)
The actual "stimulus" consisted of about $700 billion, of which maybe $350 billion was actually spent on things that Krugman thought would help the economy. He predicted that this was far too small to have any real impact, and that we would therefore spend years in a weak economy. (We later spent additional money on unemployment insurance; I don't know how this affects the models.)
So while you could very easily disagree with Krugman's theory, his models accurately predicted the results of the stimulus: A minor, temporary boost that would be insufficient to actually fix anything. So at least one high-profile Keynesian called it correctly, although you might argue that he just got lucky.
Personally, I don't know enough economics to have an informed opinion on my own. But we have at least 15 million Americans who should be creating wealth, and who are currently sitting around doing nothing. I'd love to see that get fixed, especially because the last 20 years of Japanese history suggests that if we alternate between rounds of weak stimulus and austerity measures, we might be stuck in this economy for decades.
It all goes to show what a bad job of negotiating the administration has done. In this case, as well as healthcare and the debt limit, the White House surrendered key parts of their plan in the name of compromise. In the end, the opposition still calls you a communist, god-hating country-wrecker either way so it would be better to get what you wanted. That being said, and given the language of the administration I'm not sure they buy into Keynesian economics anyway. They certainly are cozy with Wall Street and use the language and framing of austerity all the time.
Politics tends to distort the models so it is important to hold people to account. You might not like Krugman's politics but he does put himself out there and make predictions. Speaking of which, does anyone follow any economists who are proponents of austerity that makes falsifiable predictions? I still don't really feel like I have found a good writer on that topic to follow.
http://krugman.blogs.nytimes.com/2011/08/04/wrong-and-right/
Just $105B went to "infrastructure" and was highly politicized to the point projects became difficult to find (for example my governor, one of the least popular in the country, refused [billions of] stimulus money for rail because it was Obama's idea). Republicans were looking at any chance to make the stimulus look like a failure since it wasn't their idea while at the same time looking to take any money they could for their districts. Basically dump on the big obvious projects and then take credit for saving teacher jobs and doing minor infrastructure work all the while not mentioning where the funds came from. It's pathetic.
Even being a tiny chunk, the infrastructure portion has been noticeable where I live. There are two stimulus funded housing developments going up within walking distance, the Federal Court House down the block is getting a much needed retrofit, bridges are being repaired, etc etc.
In actuality, the correct answer is that there are a vast supply of projects going undone for lack of money - crumbling bridges, roads, water pipes, sewer pipes, high-speed rail, just to get started - and that if there had been the political will to spend money on those types of manpower-intensive projects, the economy would be in much better shape today. (You get new bridges, smooth roads, AND a working economy.) Instead a vast amount of money was spent, most of it going to benefit a few thousand of the richest people in the U.S., who have dutifully saved their profits in off-shore tax havens, creating no economic benefit.
When I think of economics, I think of the quote by statistician George Box, "All models are wrong. Some are useful." Economic models are more prone to error than mathematical models in science because they are so complex and can't really account for the human element. And ultimately, their usefulness is subject to their ability to be implemented.
Economics is not closely tied to politics. If you ever want to have a look at what real economics is, please go to http://ssrn.com/ and read some economic articles on subjects that interest you. One thing that you will rapidly notice is that politics has almost nothing to do with formal, academic Economics (and this consitutes the great bulk of the activity that goes on in the field of Economics).
It is worthwhile to distinguish between normative economics and positive economics. Positive economics, which constitutes the majority of the discipline, seeks to describe, explain, and record economic phenomena. Normative economics, which is the louder minority, seeks to prescribe solutions to problems by using economic theory.
The problem with modern Economics is that the loudest voices within the field are listened to because of their political viewpoints and not their economic expertise. Dr. Krugman in particular has the habit of mixing normative and positive economics without providing a careful distinction between the two. This is a huge problem, and it makes the entire field look bad. However, what can economists that are not popular do about this? The mass media has very little interest in impact studies of obscure policy changes done in third world countries, so we just keep churning away in the background.
While I would not say that George Box is wrong outright, I would say that this quote from him is not entirely accurate as it could be when applied to Economic modelling. You see, by definition an Economic model is merely a simplification of a real world phenomena. Of course, all simplifications are "wrong" because they are not intended to be "right" they are merely intended to be approximations.
Economic models are more prone to error than Mathematical models and models in the Natural sciences because they are, in essence, brutally simple models of Human behaviour. Their usefulness is not subject to their ability to be implemented, but is is subject to the context of the problem at hand and what the expectations are for the model.
For example, one thing that I did recently was to analyze some time series data to analyze a market for seasonality. The predictions of my model for the next two quarters were not even close to being exact, but the seasonality estimates were spot on. A model's usefulness must be determined within the context of its overall purpose.
The former are less tied to politics, but much more closely to it than, say, physics.
Actually, they're all of a kind. One of my core problems with Keynesianism is that you must treat "government investment opportunities" like any other resource; you've got low hanging fruit, where you put in a dollar and get $4 in wealth back, you've got a series of barely-above-break-even, then a sea of places you can put a dollar and get back $0.75. You can't just assume that because you've spent a dollar under duress you're getting more than a dollar back in value; economics is built on that but the logic only holds when one is freely choosing to spend the dollar because you expect to get more than a dollar back.
Keynesianism isn't about just spending wildly, it's all about spending where you get over-unity results, and even if I believed in the power of a massive centralized authority to correct determine where those opportunities are (which I don't), there's a huge problem with that, which is that we already spent a large number of those dollars on those over-unity projects. We don't hang around in the boom times and let our roads go to pot on purpose so that when the recession comes we have good investment opportunities for stimulus. It is unlikely that that is even a good idea. So the goverment is trying to stimulate into a market where the low-hanging fruit is mostly gone anyways.
Maybe this works in 1930. Maybe this works in the Third World. In a developed country there's [feasible] no way to PRODUCTIVELY spend three trillion dollars. Now... UNproductive spending we can do, but even under the dictates of Keynesianism that's a bad idea! Sucking a dollar out of the economy (as debt or taxes) to get back $0.75 in value is simply a straight-up net loss.
I find the theory that government spending is producing a lot of net loss of wealth dovetails rather nicely with the real economic results we are experiencing, as opposed to the predictions of those who are implementing this policy.
21st century Keynesianism has some enormous leaps of logic in it that I have not been able to follow wherein it is simply assumed that the government can find things to spend that are stimulative. I'm not even sure where this stuff is supposed to come from, even in theory. You can't even just wave around the word "crumbling infrastructure" because you can't just wave a wand and make everybody a construction worker, so you're bounded there.
Every trick was tried, and that only got us a hundred billion or so, so our politicians just kept spending more anyhow. Guess what? It's disastrous, not stimulative, and as far as I can tell, even Keynes would have said so in advance.
I'd be really curious to see how a Keynesian model predicted a GDP/production recovery with stagnating employment. I was under the impression that most Keynesian models assumed that employment was slaved to production.
Germany did not have a property bubble and hence it did not have an outsized building sector crashing, taking huge numbers of jobs with it.
German households have been saving like crazy forever. They are not indebted at all. Germany does not have to fight a deleveraging spiral.
Germany did not have a huge current account deficit. It has a huge current account surplus meaning Chinese growth does the Keynsian stuff for Germany.
Germany has a permanent stimulus resulting from sharing a currency with the likes of Greece, Ireland, Portugal, Spain and Italy.
German companies fire as few people as possible in a recession. That's a huge Keynsian effect as well and one I don't see many US conservatives pointing to when they celebrate German austerity.
And by the way, German "austerity" comes in the form of a deficit north of 3 percent, exceeding the level allowed under the Maastricht treaty. In comparison to other countries that's still low, but it's not austere by any definition and it comes at a time when the German economy is booming.
Austerity is what the Brits do and look at their growth. It's around zero, worse than in the US.
If you look at the job reports over the last year, more often than not the private sector was adding jobs while the government has been shedding jobs (first firing census workers - obviously that doesn't count, but then states and local governments contracting)
And you can make a fairly simple correlation between the winding down of the federal stimulus and the current feeling that we are going into a double dip.
I know you can look at this data and come to either conclusion (that we did a stimulus and we're not having a roaring economy now, or that we didn't do enough stimluus and we're not having a roaring economy now), and also that proving causation in economics is very hard, but I personally think that the economics show that the stimulus was too small while the politics show that the stimulus was too big.
False. Total government spending (in $B):
2006 $4698
2007 $4926
2008 $5335
2009 $5896
(State and local numbers for 2010 are not yet available.)
The recession started in late 2007 and became apparent in late 2008. Efforts to address the recession (the Stimulus package) weren't implemented until 2009 (http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...) so that's the baseline. To show his comment is false we need the spending numbers for 2010 and YTD 2011. The site doesn't have solid numbers yet, but the "guesstimate" for 2010 ($5,799) indicates that krschultz is right.
I was actually talking about this: 'Government employment is now 1.9 percent lower than it was at the start of the recovery, a drop of 430,000 jobs. In contrast, government employment rose by 1.1 percent (or 232,000 jobs) during the equivalent part of the last recovery.'
Pretty much anytime government employment is going DOWN, it is hard to argue that the response has been in any way keynesian.
http://www.washingtonpost.com/blogs/ezra-klein/post/what-mak...
There are several problems with the hypothesis that Germany's austerity experience is broadly applicable.
1. Germany is an export-oriented economy operating within a currency union with countries that are less export oriented. This means that Germany has the benefit of an exchange rate that is lower than it would be if Germany was not a member of the Euro currency.
2. Germany did not actually take an austerity only approach:
http://www.guardian.co.uk/world/2009/jan/27/germany-europe
http://www.thelocal.de/money/20090724-20807.html
As far as Washington goes, our first stimulus package was shameful. Our nation's infrastructure is underdeveloped:
http://www.economist.com/node/18620944
Our electric grid is woefully inadequate:
http://ideas.economist.com/blog/us-electric-grid-gets-less-r...
http://www.infrastructurereportcard.org/fact-sheet/energy
Yet, about half of our $700 Billion USD stimulus went to tax cuts. Given the lack of evidence that economic output improved, it seems sensible to conclude that most of these tax savings went to either debt servicing or savings accounts, and I have no idea where the rest of that $700 billion went. It doesn't seem to have gone into any major infrastructure projects that I am aware of.
When your entire problem is a lack of economic activity, investments should be made that produce positive net benefits.
As a side note, to call Washington Keynesian is to fundamentally misunderstand Keynes. Truly Keynesian economic policy would not continuously run a budget deficit. A central tenet of Keynesian economics is that a Government saves when times are good and spends when times are bad. Washington spends when times are good and spends when times are bad.
Edit: Also, one thing that is very important to keep in mind is that the States have received only marginal amounts of assistance with their budgetary woes. With the States needing to balance their budgets on an annual or bi-annual basis, the net effect of the federal stimulus package may have been nothing:
http://www.thefiscaltimes.com/Blogs/Bartletts-Notations/2010...
When you include the states in the picture, maybe the U.S. is not as far from austerity as we would like to believe.
Right - tax cuts are not Keynesian stimulus spending by any sensible definition. Trying to stimulate a recessionary economy with tax cuts is like pushing on a piece of string.
Two problems:
1. As others have noted, Germany's approach can hardly be categorized solely as a position of austerity.
2. Germany wasn't the only major economy to implement austerity measures. The UK implemented measures more dramatic than Germany, and was widely lauded as the model for the rest of the world by American conservatives -- that is, until their economy dramatically contracted, and the conservatives suddenly forgot about them...
Answer: About 20 years. The exact answer is ((log 2)/(log 1.035)).
One way to see why it's a good approximation is to do a Maclaurin series:
(log 2)/(log(1+r/100)) = c/(log(1+x)) where c=(log 2) and x=(r/100)
= c/(x - [x^2]/2 + [x^3]/3 - ...) ~ c/x = 0.693/x = 0.693/(r/100) = 69.3/r ~ 70/r
Basically, civilization is a heat engine, where prosperity, power, industry is directly tied to how much energy we can burn. Increasing prosperity demands increasing energy.
In the case of the US, oil production peaked in 70's, and the US has struggled to increase oil supplies since then. The show-downs with OPEC in the 70's that led to bad recessions are an example of the struggles.
As of 2005, World oil production has been basically flat. There's plenty of oil left, the problem is that despite trillions of dollars of CAPEX, it just can't be pumped fast enough to support 6 billion humans at increasing living standards.
Hence, World prosperity is probably staying level, but redistributing itself Eastward towards Asia.
edit: Per NBC, there are 45 million Americans claiming foodstamps in order to feed themselves. That's a very scary contrast with how the US normally thinks of itself.
That number is set to increase with severe cuts to entitlements and the unlikelihood of another extension of unemployment benefits.
Americans have really drunk the Kool-Aid on the notion of American exceptionalism. The idea that America is somehow special, possessed of some manifest destiny and unable to lose has been so deeply engrained in the American psyche, and for so long, that even now the notion of failure seems too fanciful to enter the common narrative. America is not special. It's been favoured by politics and luck, but there's nothing keeping it on top besides continued prosperity. Look at Japan for an example of what could easily happen: a high-tech economy with a massive banking and manufacturing sector, that collapsed then...never really restarted. There are, in fact, many parallels between the Japanese and American recessions. While Japan is still a massive innovator, the benefits have not trickled down to the average Japanese citizen. China long ago took over as the biggest economy in Asia, and could easily supplant the US globally if current trends continue.
To face these challenges, the US has...Congress. The leadership vacuum in Washington is downright depressing. Amidst bitter political bickering, the disaffected masses turn to the demagoguery of the Tea Party, further perpetuating the political morass. Can anyone see a viable, achievable solution? Cutting the deficit is critically important, yet any proposed method of doing so seems likely to hurt the economy at a time when it simply can't take it. Everything seems poised to get much worse before it gets better.