Krugman on Stimulus--Again

Krugman's op-ed piece in the Times today argues that the claim that the Obama administration tried a massive stimulus plan and it didn't work is wrong. In fact, the stimulus plan was not large enough and much of the plan was not federal government spending. Instead, it was tax cuts and grants to states to make up for the lost revenues states faced. Much of what he says is true. In posts I did at the time of the stimulus, I argued that much in the stimulus bill was not stimulus. Instead, it was spending on programs that Democrats wanted but didn't put in the regular budget.

Krugman also argues that when people think of Obama as pushing big government, they don't have any massive new programs to point to. Here, it is clear that no matter how smart Krugman is, he doesn't get some basic ideas that people have. Krugman notes that the health care bill hasn't really kicked in yet so there is no new bureaucracy in place yet. True, but people anticipate there will be. People see that the focus of the administration had not been jobs but programs long held dear by Democrats in Congress, especially health care. The stimulus bill, as already pointed out, also included many things that may or may not be good, but could not be considered stimulus spending. People see that, for all the rhetoric from the administration, the focus of the administration was on programs long sought after by Democrats and not economic recovery. Krugman misses the point because he shared the same desire for the programs pursued by the president.

Can the Obese Eat Their Way to Good Health?

David Wessel's column in today's WSJ discusses the need for more action on the economy. He discusses how there are three views--more stimulus is needed now, stimulus didn't work so have to rely on Fed, and the worry over debt so the need for austerity. He opts for more short-term stimulus combined with credible longer-term deficit reduction. He concludes with noting that financial crises tend to recover slowly, "But is this really the best we can do?"

I don't know if it is the best we can do or not. But, is his solution of short-term stimulus and credible long-term austerity does not seem realistic to me. In theory, one can make a case for it. But what would constitute credible long-term deficit reduction? Congress is expert at promising things long term that either never happen or are changed later due to some new crisis.

Given that many have used medical analogies, I will try one also. For example, I have read where people say that a doctor would be remiss not to do all that is possible for a cancer patient. Agreed. But what if our sick economy is more like health issues related to obesity? It would be wrong to keep feeding the patient to alleviate a symptom since the basic problem is obesity. Similarly, if the problem was too much leverage and debt, then more debt may not be the prudent action to take.

Some Good Articles in the Wall Street Journal

The Wall Street Journal has had a couple of interesting op-ed pieces recently. Two are somewhat related. An op-ed piece by Robert Barro discusses "Obamanomics" from an incentive point of view, and finds Obamanomics lacking. In today's journal, Alberto Alessina provides a piece that talks about research he has done on tax cuts versus stimulus. The evidence points to tax cuts being more effective than stimulus spending. (Naturally, Krugman disagrees.) Finally, and on a different note altogether, Danish statistician, writes a piece about the polarization of the debate concerning global warning. He persistently has said he believe global warming is a problem and is human made, but that solutions other than massive cut backs in carbon emissions are available. Finally some in the media have seen his recent comments but take it as a change of heart. His piece points to the problems in todays' polarized ideological environment, and I suspect they can be extrapolated to many issues today.

$50 Billion for Infrastructure

President Obama is calling for a $50 billion transporation bill to increase spending on infrastructure. According to the Wall Street Journal article, the President said, "All of this will not only create jobs now, but will make our economy run better over the long haul."

In previous posts, I noted that much that was in the stimulus package was not really stimulus, but that infrastructure spending makes sense because it does increase the productivity of the economy over time. The original stimulus bill called for almost $50 billion for the Department of Transportation. According to the government's web page for tracking the recovery, the Department of Transportation has spent $18.5 billion so far. This is since passage of the Act in early 2009. The government has not been very quick on spending money that may actually be stimulative and a true investment.

The Recession and Keynesianism Once Again

Christina Romer's farewell to the National Press Club as she leaves her post as chair of the Council of Economic Advisors caught my eye because I think it might have supported some statements I made in yesterday's post. The title is, "Not My Father's Recession" and refers to the recession in the early 80s that I referred to yesterday. She correctly noted that the sources of the two recessions differed and that led to differences in the depth of the recessions and caused economists to misinterpret events in late '08 and early '09. However, I am disappointed in that she didn't take the next step. She still argues for a Keynesian diagnosis and solution. She offers some reasons why the stimulus seems to have been less effective than desired, but doesn't consider other options than increased government spending. Romer writes in Keynesian terms, "The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts."

Paul Krugman's most recent op-ed piece in the New York Times calls on President Obama to push for a very large stimulus package. He argued in early '09 that the stimulus plan was too small and should have been much larger. He claims that the evidence is that the stimulus worked but was too small and another round is needed.

It seems to me that the stimulus plans are similar to another program used last year--the "Cash for Clunkers" program. The program stimulated auto sales while it lasted, but then there was a big drop in car sales after the program ended. The program merely shifted the timing of auto purchases and didn't impact overall demand for cars. Similarly, increased government spending increases GDP by definition, but may not jump start the rest of the economy if there are structural problems that need to be corrected, such as too much debt on the balance sheets of households. As Krugman notes in his piece, as the stimulus plan has wound down, the impact on GDP has fallen. He says this shows we need another round of stimulus. I ask, "When will the need cease?" I think the answer is when households have repaired their balance sheets. To me, this suggests the emphasis should be on reducing the tax burden on households rather than increase government spending. The increased cash flow may not generate increased spending immediately as people pay down debt, but will get us to a point when people can feel more comfortable spending again.

Obama in My Hometown Dissing my Representative

President Obama appeared briefly in Holland, Michigan today for the groundbreaking ceremony for a new factory built by LG Chen, a Korean manufacturer. The factory will build batteries for GM's Volt. The $351 million plant is receiving $150 million from the stimulus bill passed last year. While giving his talk, President Obama diverted from his prepared text to say, "Some made the political calculation that it's better to obstruct than lend a hand. They said no to the tax cuts, they said no to small business loans, they said no to clean energy projects. It doesn't stop them from coming to ribbon cuttings -- but that's OK. " Obama had earlier acknowledged the presence of Pete Hoekstra, representative to Congress from the district that includes Holland.

Hoekstra's response was, "It demeans the office of the president. It's disappointing. It is unpresidential....This is my home district. These people are paying the taxes that he's handing out today. I'm here to respect the office of the president, and I don't think he reciprocated."

I agree that it was unpresidential. In a news report from a local tv station, Hoekstra referred to another small business owner who was expanding and hiring more people without government funding. Why isn't that owner getting any coverage.

In previous posts, I have commented on the fact that much of the stimulus was not actually stimulus spending. The Holland plant is an example. Yes, it will create jobs in an area that has unusually high unemployment. But, the batteries used in Volts are instead of other devices used in cars that are not battery operatred or hybrid. The reduced demand for those devices mean that some people are not working that would have been working but for the government grant to LG Chen.

In the past, I have often disagreed with President Obam but tended to respect him and wish hime well. The pettiness he showed today may make me reconsider.

Tax Cuts versus Government Spending

Greg Mankiw's column in today's business section of the New York Times compares economic research on the stimulative impact of tax cuts relative to government spending. He cites research papers that find a larger impact for tax cuts, including work done by the President's advisor, Christina Romer. I know space is limited in a column, but I wish Mankiw had emphasized more the difference between temporary changes and permanent changes. As anyone who has had any microeconomics knows (or at least learned at one time) all elasticities are greater the longer the time period.

The stimulus offered while George W. Bush was still president was a tax cut, but a temporary tax cut. The effect was that most people used the tax cut to pay down debt or increase savings. I think these are good things, but they do not stimulate the economy. Similarly, increased spending that is know to be temporary in nature will not have as much effect as an increase in spending that should last a long time. If a firm wants to take advantage of a temporary increase in spending, it will not make long-term investments as part of the process. If the firm believed the spending might be available for many years, it would respond in a different manner. One of the reasons tax cuts provide more stimulus when the cuts are expected to be permanent, or as permanent as anything can be that involves the government, then there is both a spending effect and an incentive effect. The latter is not in place for temporary tax cuts or rebates. Probably the worst think Keynes ever said was, "In the long run, we are all dead." But time passes and constant focus on the short run leads to ad hoc measures that lead to more measures later on.

More on "Jobs Saved"

Former colleague Victor Claar sent me a link to a news story about errors in the counting of saved jobs, including the treatment of raises as equivalent to saved jobs.

There is another dimension I had not considered as yet. There has been a disruptive construction project on an intersection in Holland through which I often drive. Signs indicated that funds came, at least in part, from the stimulus package. The firms that worked on the job then must estimate how many jobs the project saved or created. The project lasted three months. Will the companies report these jobs saved or created as if they were year-long jobs or will the length of the project be considered? In earlier blogs I wrote about how the methodology used by the government to estimate jobs created or saved focused on job-years. I believe the average citizen reading about jobs saved or created believes that the number of unemployed falls or at least doesn't increase by the number of jobs saved. But, that clearly is wrong, and there is really no way to tell by how much.

Jobs Again

There is an op-ed piece by Ed Lazear in today's Wall Street Journal. Lazear was chair of the Council of Economic Advisors under Bush. He writes that his final economic forecast while a part of the council predicted the economy would begin to recover in the third quarter, and this was without considering a stimulus plan. Of course, his forecast could have been overly optimistic, but it could also mean that the GDP growth in the third quarter was not due to the stimulus plan we have.

He also talks about the estimates of jobs created and the jobs retained as due to the stimulus. Recipients have to fill out a report providing the data. Lazear notes two problems with the reports. The first is reporting bias. A construction firm wanting additional funds may believe that it needs to err on the high side of estimates of jobs created or retained. Second, these programs are likely to count people who switch jobs as new hires.

I have written before on the methodology used by the government to estimate the jobs created and saved by the stimulus. It is a direct link to the spending, assuming so much money equates one job. It also measures job-years and not individuals. That is, a person who is hired as part of a two-year project would count as two jobs--one for each year. The Administration has been criticized for the way they are trying to estimate jobs created or saved, but they keep doing it. The process gives the illusion of precision that is only an illusion. The concept of a job saved is ok--grants sent to states that use the money as a stop-gap in cuts in schools will save some jobs of teachers. But to think we can measure these in a meaningful way is not legitimate.

Perhaps the members of the administration think that if you repeat something often enough, people will believe it must be true.

More On Jobs Saved and Created

In an earlier post, I outlined how the government is counting the number of jobs created or saved by the American Recovery and Reinvestment Act, or the stimulus package passed by Congress in February. Since the government used a formula that related so much spending to a job, it ignored the fact that some of the spending would be replacing other spending. For example, spending on green technologies means less spending on "dirty" techonologies. A job created in one area offsets the loss of a job in another rather than creates a new job.
The Wall Street Journal now has an article on estimates the states are reporting to the federal government about the number of jobs created or saved. The figures are much less than the estimates of the federal government.

Where's the construction?

This will be brief since I am on vacation. We drove roughly 1000 miles, mostly on interstates to get to our vacation destination. Road construction delays were virtually nonexistent. Where is the stimulus?

Keeping Track of the Stimulus Spending

The government has set up a website (www.recovery.gov) where the public can go and see how much has been spent and how it has been spent. A firm also has a site (www.recovery.org). The firm has a number of search engines that are used to find government Request for Proposals and other notices of bid taking for new projects. As of the date of this writing, the private web site has more information than the government web site. According to the private web site, the most expensive project authorized so far is in the state of Washington and involves demolishing nuclear facilities and remediating the waste sites. The price tag is $1,635,000,000. It is unclear when the money will start being spent since the usual government process involves a request for proposals, the collection of proposals and bids, and the awarding of bids. Once the bid is let, it takes time for the firm to begin work. However, this particular project is interesting in that part of the task is to, “Accelerate cleanup of facilities, waste sites, and groundwater along the Columbia River to support shrinking the active area of cleanup at the 586-square-mile Hanford Site to 75 square miles or less by 2015". That is, money for this project will still be paid out as late as 2015. Some critics of the American Recovery and Reinvestment Act point out that a lot of spending may be done after the recession is over and is no longer needed.