Can the market alone fix the economy?

[mheslep]

Whoa, not so fast Government Motors! Here we go, a few hours ago today from the supreme Ginsburg, a very, very rare action:

Supreme Court of the United States
No. 08A1096
INDIANA STATE POLICE PENSION TRUST, ET AL.,
Applicants,
v.
CHRYSLER LLC, ET AL.

IT IS ORDERED that the orders of the Bankruptcy Court for the
Southern District of New York, case No. 09-50002, dated May 31 and June 1,
2009, are stayed pending further order of the undersigned or of the Court.

I never had understood all the statements in the press about how the federal government could just do whatever it wanted with TARP money, authorized by congress, or manhandle and mandate all of these bond holders to do whatever they wanted. There's a contract, there's the TARP law, and if you break it you get sued whether you are Joe Smith or Uncle Sam (aka Chysler/GM here). Apparently so.
http://online.wsj.com/public/resources/documents/08A1096INPolicePensionvChryslerOrder.pdf
http://online.wsj.com/article/SB124447718295294527.html#mod=testMod

I forecast some heavy government pejorative comments against the investors, though the one - Indiana State Teaches fund may escape.

 

[Astronuc]

An interesting article on the deficit(s)/debt.

How Trillion-Dollar Deficits Were Created
http://www.nytimes.com/interactive/2009/06/09/business/economy/20090610-leonhardt-graphic.html

and related article
America’s Sea of Red Ink Was Years in the Making
http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html

. . . .
The New York Times analyzed Congressional Budget Office reports going back almost a decade, with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II. This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it.
. . . .

That is one of my concerns. The other is that there does not seem to be a viable plan to reduce the deficit spending, and there are looming obligations, e.g., social security and Medicare, that are not being addressed.

 

[mheslep]

An interesting article on the deficit(s)/debt.

How Trillion-Dollar Deficits Were Created
http://www.nytimes.com/interactive/2009/06/09/business/economy/20090610-leonhardt-graphic.html

and related article
America’s Sea of Red Ink Was Years in the Making
http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html..

Ug. This NYT piece is sycophantic BS. It has all been 'years in the making'? Let's not look at the current deficit explosion because its been years in the making? Debt accumulation during the Bush years is attributed to "Bush Policies", but debt accumulation now is attributed to the "Current Recession".

"All the news that's fit to print." Please. This stuff on top of the bogus front page McCain affair article during the campaign, Pulitzer awards for bogus stories, etc. Maybe the NYT should be added to the PF banned sources list.

 

[Astronuc]

Energy is a critical factor in the future of the US and global economies.

A friend sent this to me.

The GOP's Energy Alternative
We need more nuclear power
http://online.wsj.com/article_email/SB124467604217304035-lMyQjAxMDI5NDE0MTYxNzE2Wj.html

I still have to work through the details. I am concered about the Henry Waxman and Edward Markey plan to establish a cap-and-trade system that will sharply limit carbon-dioxide emissions and increase energy prices. It may not work as they intend.

Plus the trading system just seems to be a way fo middlemen to make money for doing nothing but getting in the way. I'd just as soon see good technology used to reduce fuel consumption and CO₂ emissions.

 

[turbo]

Plus the trading system just seems to be a way fo middlemen to make money for doing nothing but getting in the way. I'd just as soon see good technology used to reduce fuel consumption and CO₂ emissions.

It would be nice to see the coal-fired plants in the midwest that give Maine mercury, acid-rain, and constant ozone alerts in the summer months be monitored AT THE STACK and be required to adhere to standards that allow down-wind citizens to have cleaner air to breath. Currently, the generators put the air-monitoring instrumentation close to the plants and build stacks that shoot the effluent so far into the atmosphere that the local sensors are totally by-passed. They pretend to behave properly, while passing the pollution down-wind.

 

[Astronuc]

Amid Recession, One Automaker Is Prospering
by Dan Bobkoff

http://www.npr.org/templates/story/story.php?storyId=105227106

More Cozy Coupes are sold each year in the U.S. than Toyota Camrys or Honda Accords.


Now, if only they came is adult sizes.

 

[mgb_phys]

More Cozy Coupes are sold each year in the U.S. than Toyota Camrys or Honda Accords.

Now, if only they came is adult sizes.

They do (or did), and made by BMW

 

[OmCheeto]

Did everyone miss the press release on the 2011 Corvette?

http://www.goodyblog.com/playing_house/images/2007/11/05/flinstonemobliejpg.jpg

 

[Astronuc]

They do (or did), and made by BMW

I was actually thinking of a larger plastic Cozy Coupe model with pedals and a windshield.

I've seen a few SmartCars around town, but I'd like something that uses pedal power as opposed to gasoline, and with a cover. That might get a bit warm in the middle of summer though.

http://www.smartusa.com/smart-fortwo-pure.aspx

 

[Ivan Seeking]

http://img196.imageshack.us/img196/1233/fortuneteller1.jpg

http://img196.imageshack.us/img196/8583/fortuneteller2.jpg

 

[Phrak]

Oddly enough, an 'economy' is destroyed by engaging money in activities that add lesser value or even produce none. Just as oddly, an 'economy' improves by engaging money in activities that add better value.

Is there anything else that need be said about how economies are damaged, and how economies recover from damage?

The magic bullet is labor in productive tasks. Why is this not obvious? Sitting at a computer and offering why is not one of them.

 

[mheslep]

http://img196.imageshack.us/img196/1233/fortuneteller1.jpg

http://img196.imageshack.us/img196/8583/fortuneteller2.jpg

 

[Astronuc]

Why more engineers are losing jobs

http://marketplace.publicradio.org/display/web/2009/06/17/pm_endangered_engineers/

Even in a recession, a lot of people think tech jobs are a safe bet. But American engineers are losing their jobs faster than any other professional sector. Janet Babin reports.

Kai Ryssdal: Engineers weren't always thought of as the coolest people in the room, the whole pocket-protector stereotype and all. They did usually have jobs, though, when it was tough for others to find work. The rise of the high-tech economy has finally given engineers a measure of respect. I mean, who doesn't love somebody who can figure out your computer networking problems on the fly?

But now engineers are losing their jobs faster than people in a lot of other professions are. Even graduates of the best schools are getting laid off as companies downsize and outsource operations to other countries. And the answer is not all about finding cheaper labor, either. Janet Babin has more from the Marketplace Innovation Desk at North Carolina Public Radio.
. . . .
Oechslin graduated from Stanford University last June with a master's in mechanical engineering. He specialized in electronic gadgets. He quickly landed a job as a systems engineer in the semi-conductor industry.

You're probably thinking boring. Actually, Oechslin designed robots. But it didn't last long. His job was soon outsourced to another country.
. . . .
According to industry trade group IEEE, engineers of all stripes are losing their jobs at a faster rate than other professions. When the economy sours and money's tight, research and development becomes expendable. So do the engineers that staff R&D.

Hewlett-Packard, Microsoft and IBM have shed thousands of jobs this year, many in technology. According to industry trade group IEEE, engineers of all stripes are losing their jobs at a faster rate than other professions. When the economy sours and money's tight, research and development becomes expendable, and so are the engineers that staff R&D.
. . . .

IBM engineer, Rick Clark thought his job was secure, but then he got laid off (like a lot of other IBMers I know).

That wasn't the only surprise. Clark's manager handed him a brochure about an IBM program called Project Match. It offers laid-off employees new positions with the company. But there're in emerging markets like India and China. Engineers there typically earn less than half the salary of their U.S. counterparts. IBM transplants like Clark would earn the going rate.

An engineer needs to be diversified with numerous skills. Even then one cannot count on job security.

 

[Astronuc]

Slow recovery rate for many U.S. cities

http://marketplace.publicradio.org/display/web/2009/06/17/pm_cities_recovery/

A report from the Brookings Institution says that only about 10 of the top 100 cities in the U.S. show signs of economic health. The institution's Alan Berube talks with Kai Ryssdal about how the nation's cities are recovering.
. . .
Kai Ryssdal: For all the talk of an economic recovery that you're hearing it helps to remember this: Most of the recovering that's going on out there is at the national level. Things like the entire economy losing fewer jobs. But you break it down a bit to states or even farther to cities, the recovery gets less clear. Some big metropolitan areas are doing all right. Others really aren't. In a report out today the Brookings Institution surveyed the country's top 100 cities. Only 10 of them are showing any signs of bouncing back at all. So for starters, I asked Alan Berube from Brookings' Metropolitan Policy Program why one of them, Austin, Tex., is doing so much better than others.

Alan Berube: Like a lot of the other better performing metropolitan areas, it's first about what they do. And Austin, of course, is a state capital so concentration in government has been a good thing. That's an industry that really hasn't shed many jobs over the course of the recession. And it's a university center as well. Home to a big one, if not the biggest public university in the nation, and that's a sector that's actually added jobs over the course of the recession. So what people do in Austin accounts for some of their performance.
. . . .
BERUBE: Yeah, that's right. I mean, there's of course been this relentless attention to the national figures coming out of Washington, the jobs, the GDP, the unemployment rate. And we think that tends to miss what is a tremendously diverse U.S. economy on the ground. And we look at that economy through the lens of metropolitan economies, our labor markets, our housing markets. When you look at it through that lens you find that, yeah, all metropolitan areas have been hurt to some degree but that pain is shared very, very unequally. So on the way down this is an uneven recession, which indicates that when we finally turn the corner it's going to be potentially a very uneven recovery.
. . . .

I've certainly seen it in the northeast and other parts of the country.

MetroMonitor: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas
http://www.brookings.edu/reports/2009/06_metro_monitor.aspx

June 2009 —
Beneath the constant drumbeat of headline numbers emanating from Washington on U.S. jobs, national unemployment, GDP, and home prices lies a complex, diverse set of 366 metropolitan economies. While no metro area has been immune from the current economic downturn, the pain is unevenly distributed. Some have felt only modest effects, and a few show early signs of recovery, while others are undergoing a wrenching restructuring that may fundamentally alter their economic trajectory.
. . . .

http://www.brookings.edu/~/media/Files/rc/reports/2009/06_metro_monitor/06_metromonitor.pdf

http://www.brookings.edu/metro/MetroMonitor.aspx

 

[mheslep]

http://marketplace.publicradio.org/display/web/2009/06/17/pm_cities_recovery/

I've certainly seen it in the northeast and other parts of the country.

MetroMonitor: Tracking Economic Recession and Recovery in America’s 100 Largest Metropolitan Areas
http://www.brookings.edu/reports/2009/06_metro_monitor.aspx

http://www.brookings.edu/~/media/Files/rc/reports/2009/06_metro_monitor/06_metromonitor.pdf

http://www.brookings.edu/metro/MetroMonitor.aspx

I heard that report - re the large variations in recession conditions among metropolitan areas. Detroit seems to be an utter disaster, experiencing 1930's depression unemployment. Retailers, large ones, just leaving town. It is akin to the 19th century ghost town examples. At the other end is Austin, Tx, doing quite well.

 

[bleedblue1234]

We will NOT see a recovery within the near future (extrapolating 10-20 years out) and in terms of real value the Dow/stock market will not reach its true lows (it could find a low at 25,000 but if inflation is running to push stocks up, it wouldn't matter one bit).

The new regulation continues this idea that the government is somehow 'fixing' the problem when they are the ones who continue to start the fire and call in the fire brigade so they can be credited with 'fixing' the problem.

We are still seeing 350,000 jobs lost PER MONTH (mind you these are practically made up statistics, with true unemployment rates running around 16% and substantial more losses each month than reported). We are interfering majorly in the market that will distort and meld the market into some non-existent bureaucratic behemoth.

We could see substantial public resistance as the government continues to try desperately to hold on to the populous 'mind-control' esque reliance on the government and belief in it. We could potentially see severe public displacement ala 90's era Soviet Unit post collapse scenario if we continue this terrible economic policy.

Cliffs:
GET OUT OF DOLLARS
Get into hard assetts

This is all available out on the internet and reading...

 

[Astronuc]

The economy is uneven and perhaps will become more so.

The Changing Fortunes of the U.S. Workforce: What's Driving Income Inequality
http://www.brookings.edu/events/2009/0623_income_inequality.aspx

Event Summary

In the years leading up to the current recession, jobs in the U.S. economy shifted away from manufacturing towards services and became more integrated into global markets. Both developments have helped fuel economic growth but were accompanied by rising income inequality.

On June 23, the Center on Children and Families at Brookings will host an event that examines a new report by McKinsey Global Institute on changing employment and income that informs the debate on what has driven the dispersion in incomes across industries and occupations. The report offers new insights on income and employment levels over a 15-year period, maps the link between labor market changes and the differential growth in labor income, and assesses drivers of differential income growth, including technology, trade, immigration, unionization and education.

. . . .

Related -

Getting Ahead or Losing Ground: Economic Mobility in America
http://www.brookings.edu/reports/2008/02_economic_mobility_sawhill.aspx

 

[mheslep]

...

Cliffs:
GET OUT OF DOLLARS
Get into hard assetts

This is all available out on the internet and reading...

Then there is no need to repeat it again on a scientific forum.
https://www.physicsforums.com/showthread.php?t=5374

 

[OmCheeto]

hmmm... Apparently no one listened to https://www.physicsforums.com/showpost.php?p=2007705&postcount=1059"... grrrrr...

http://economictimes.indiatimes.com/news/international-business/Americans-save-more-as-recovery-slows/articleshow/6253989.cms"
4 Aug 2010

In June Americans saved 6.4 per cent of their income on average, the highest savings levels in a year.

"The savings rate rose for the forth month in a row and reached 6.4 per cent, which is relatively high for the 'old-style' American consumer," said Natixis economist Thomas Julien.

By my calculations, this is over $700 billion dollars, at an annualized rate.

$45,381.00 = per capita income 2009
307,000,000 = capita 2009
$13,931,967,000,000 = pretax income
$715,000,000,000 = state tax 2009
$2,105,000,000,000 = fed tax 2009
$11,111,967,000,000 = post tax income 2009
6.4% = 2010 June savings post taxes
$711,165,888,000 = annualized rate

15,671,005 = annualized savings rate/per capita income = # of jobs lost
14,600,000 = unemployed July 2010

Ha ha!

Reminds me of driving on ice. No matter how many times you've done it, no matter how may times you've been told not to do it, we always step on the brakes, and crash.

Silly humans.

 

[talk2glenn]

15,671,005 = annualized savings rate/per capita income = # of jobs lost

That's a rather simplified model, but it does do a fine job of capturing the general problem with higher savings rates, particularly during periods of economic minima (economists would prefer people save during boom times, but they tend to do the opposite, of course). Do remember, though, that savings, to the extent that it is not money stuffed under a mattress, can still provide working capital to the economy, and that not all jobs lost to reduced consumption will be domestic (US imports constitute a little less than 20% of net consumption, and US exports account for a little more than 15% of net production). There are problems with the domestic economy that go well beyond the household savings rate (which is a symptom of the larger problem, not the core cause).

As an aside, this is the rationale behind temporary government stimulus. If the private sector will not invest fixed capital, the government ought to, through the savings markets (ie, by issuing bonds). Of course, the theory calls for the government to buy those bonds back once private sector spending recovers, but we all know how often that happens...

 

[OmCheeto]

That's a rather simplified model

I'm not very smart.

, but it does do a fine job of capturing the general problem with higher savings rates

Yay!

, particularly during periods of economic minima (economists would prefer people save during boom times, but they tend to do the opposite, of course).

You are talking about me again...

Do remember, though, that savings, to the extent that it is not money stuffed under a mattress,

Where did all the money go from the Washington[/PLAIN] Mutual run on the bank? Incredible that just $16.7 billion was withdrawn to cause the collapse, and was touted as the largest bank collapse in history. Now we're spending trillions.

can still provide working capital to the economy, and that not all jobs lost to reduced consumption will be domestic (US imports constitute a little less than 20% of net consumption, and US exports account for a little more than 15% of net production). There are problems with the domestic economy that go well beyond the household savings rate (which is a symptom of the larger problem, not the core cause).

As an aside, this is the rationale behind temporary government stimulus. If the private sector will not invest fixed capital, the government ought to, through the savings markets (ie, by issuing bonds). Of course, the theory calls for the government to buy those bonds back once private sector spending recovers, but we all know how often that happens...

Actually, I don't know much about government bonds, nor how they are repaid. I consider myself a scientist primarily, and a lay economic bystander. I mean really, this is a science forum.

ps. Do not go to www.economicsforums.com for an answer.
They have apparently gone bankrupt, and sold out to URL advertisers.

 

[talk2glenn]

As an economist, I consider myself KIND of a scientist!... I did take physics once anyway.

But yeah, the idea with government bonds is you absorb some/most/all of that savings (when people "save", they tend to buy either US Treasuries or cash equivalents, like a money market fund at a savings bank) at the national level. The government can then turn around and spend that money, stimulating the economy. This is pure Keynesian stimulus; the government tends to absorb savings anyway (if not directly through bonds, then indirectly through currency appreciation), so it might as well use that position as a "consumer of last resort".

However, when the recession ends and savings rates drop (that is, demand for government bonds drop, and demand for consumer goods or private bonds picks up), the theory calls for the government to stop propping up the private capital markets and start propping up the government bond and cash markets, by reducing spending and using the "savings" to buy back its debt (the bonds it sold during the recession).

Governments are very good at the former (at least the spending money part; they're still pretty bad at picking what to spend that money on), and very bad at the latter, generally speaking. Indeed, as a descriptor of fiscal policy generally, governments and central banks have gotten pretty good at supporting economies during recessionary periods, but are still pretty bad at resisting economies during inflationary periods.

Sorry; I didn't mean to belittle you by calling your model "simple". For a layman to deduce that on his own is pretty impressive - I learned it in college.

 

[mheslep]

The government can then turn around and spend that money, stimulating the economy. This is pure Keynesian stimulus;

talk2glenn: There's an increasing group of economists joining the opinion that the fiscal multiplier under these conditions is less than one, i.e. that fiscal spending is on net ineffective for various reasons: crowding out of private investment, expectation of increased future taxes, etc., in addition to the traditional problem cited even by Keynes - the government takes too long to move the money into the economy. I'll cite some of them if you like. What is your current take on fiscal stimulus?

 

[Gokul43201]

talk2glenn: There's an increasing group of economists joining the opinion that the fiscal multiplier under these conditions is less than one...

Are you saying this opinion (effective multiplier less than 1) is independent of the distribution of spending (i.e., multipliers are less than 1 for all types of spending), or that it is based on some model stimulus package, or that it is based on the one that was passed last year (or something else)?

I'm thinking about a CBO estimate from about a year ago, showing a table of multipliers for different types of spending - some of them had mean values of multiplier greater than 1 (infrastructure projects), others less than 1 (short term tax cuts). I'll see if I can find it.

EDIT: Found it: http://www.cbo.gov/ftpdocs/100xx/doc10008/03-02-Macro_Effects_of_ARRA.pdf

 

[mheslep]

Are you saying this opinion (effective multiplier less than 1) is independent of the distribution of spending (i.e., multipliers are less than 1 for all types of spending), or that it is based on some model stimulus package, or that it is based on the one that was passed last year (or something else)?

There is literature based both on some kind of standard macro model and analysis or the ARRA plan.

I'm thinking about a CBO estimate from about a year ago, showing a table of multipliers for different types of spending - some of them had mean values of multiplier greater than 1 (infrastructure projects), others less than 1 (short term tax cuts). I'll see if I can find it.

The original estimates from Romer, http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf" in the Appendix:
The Job Impact of the American Recovery and Reinvestment Plan, Romer and Bernstein, Jan 9, 2009 (Romer's the US administration's chief economist)
They estimated spending ~1.5x, tax cuts ~0.9x


Edit: Some of the contrarians:

http://online.wsj.com/article/SB10001424052970204731804574385233867030644.html
By JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND

Is the American Recovery and Reinvestment Act of 2009 working? At the time of the act's passage last February, this question was hotly debated. Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs. Our own research showed that more modern macroeconomic models predicted only one-sixth of that GDP impact. Estimates by economist Robert Barro of Harvard predicted the impact would not be significantly different from zero.

Mr. Cogan, a senior fellow at the Hoover Institution, was deputy director of the Office of Management and Budget under President Ronald Reagan.
Mr. Taylor, an economics professor at Stanford and a Hoover senior fellow [...]
Mr. Wieland is a professor of monetary theory at Goethe University in Frankfurt, Germany.

Paper:
New Keynesian versus Old Keynesian Government Spending Multipliers
John F. Cogan, Tobias Cwik, John B. Taylor, Volker Wieland*
February 2009
http://www.volkerwieland.com/docs/CCTW%20Mar%202.pdf

Informal http://www.voxeu.org/index.php?q=node/3949" by one of the authors:

Does the multiplier work? The recent debate in the US indicates quite some disagreement even among Keynesian economists. President Obama’s advisers Christina Romer and Jared Bernstein estimate that 1% of government spending would generate a 1.6% increase in GDP. They give much weight to the type of traditional macro models used by some forecasting firms. As a result, they believe the ARRA stimulus is good for 3% to 4% additional growth by end of 2010. A robustness analysis with New-Keynesian models conducted by Cogan, Cwik, Taylor, and Wieland (2009) indicates only about one-sixth of this effect. Our analysis suggests government spending quickly crowds out private consumption and investment, because forward-looking households and firms will consider eventual increases in future taxes, government debt, and interest rates.

New evidence on the multiplier

In a recent paper, Tobias Cwik and I assess the magnitude of Eurozone stimulus and construct a range of impact estimates (Cwik and Wieland 2009). We use a database of macroeconomic models that includes several models developed and used at important policy institutions such as the ECB, the EU Commission, and the IMF.

Our findings confirm the earlier analysis with models of the US economy. Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier. The expectation of future tax increases, or rising government debt and future interest rate increases leads to a reduction in private consumption and investment spending. This holds in particular for the three New Keynesian models developed by economists at the ECB, the IMF and the EU Commission (see Smets and Wouters 2003, Laxton and Pesenti 2003, and Ratto, Roeger and in’t Veld 2009). These models include extensive Keynesian features such as price and wage rigidities, but also employ up-to-date microeconomic foundations. The model of EU Commission researchers is especially interesting because it is recently estimated and one-third of its households do not care about the future and follow a traditional Keynesian consumption function.

Broadly similar results are obtained in the multi-country model of Taylor (1993), a slightly older vintage of New Keynesian economics with price and wage rigidities and forward-looking households and firms. Only the ECB’s area-wide model delivers the desired multiplier effect. However, all its firms and households look backwards. Its developers therefore caution that it is adequate for short-term forecasts but not the evaluation of major policy changes (Fagan et al. 2005).

Likely implementation lags make things worse. If anticipated, the initial effect of fiscal stimulus may even be negative. Monetary accommodation, of course, helps. For example, if the ECB puts off the usual interest rate increases for a year, the fiscal stimulus gets more play, but not enough to generate a substantial multiplier.

 

[talk2glenn]

talk2glenn: There's an increasing group of economists joining the opinion that the fiscal multiplier under these conditions is less than one, i.e. that fiscal spending is on net ineffective for various reasons: crowding out of private investment, expectation of increased future taxes, etc., in addition to the traditional problem cited even by Keynes - the government takes too long to move the money into the economy. I'll cite some of them if you like. What is your current take on fiscal stimulus?

Oh sure, I won't argue that. There's a whole camp of post-Keynesian economists (the monetarists) who think government spending is so inefficient that it can never be more helpful than private consumption, even if the private sector is acting extremely conservatively. I would dispute that assumption that the multiplier could ever be less than 1, however; this is impossible by definition. The multiplier-effect of money is always an integer equal to or greater than 1.

These are the supply-siders - they don't argue with the proposition that government should borrow money during recessions, they just think government should use those funds to bail out consumers, rather than spending the money directly. Politically, it is the difference between Republicans and Democrats. But there is no consensus in the field regarding who is right. The trouble with economics is that it is very difficult to test experimentally.

Both camps agree with the proposition that government should spend during recessions, and save during expansions, however.

EDIT: Ok, the CBO is citing something they're calling a "policy multiplier", which is a proprietrary, CBO metric for cumulative short term GDP effect of particular stimulus options; this is different from the money multiplier. Unfortunately, I am not familiar with the exact models used by the CBO in calculating policy multipliers, but government analysis is usually based on past aggregate historical outcomes from like policies - I'm going to guess that's what they're doing here.

 

[talk2glenn]

Our analysis suggests government spending quickly crowds out private consumption and investment, because forward-looking households and firms will consider eventual increases in future taxes, government debt, and interest rates.

This is correct, assuming that government spending is financed by money removed from privately investable supplies. However, as Gokul pointed out, savings rates tend to rise during economic contractions. To the extent that government borrowing is financed by saved money, there is no short-term crowding out effect. In the long run, however, if government fails to return debt levels to normal levels during economic expansion, then there won't be sufficient capital to fuel the recovery. This is likely a large part of the current problem - the economy is no longer recessionary, but it is capital-starved.

Likely implementation lags make things worse.

This is also correct; the stimulus, by definiton, must be revenue spent. Unfortunately, bureacratic delays often mean that several quarters pass between the passage of legislation and cash outlays (purchases by designated recipients). This can mean that by the time the government spends all of the allocated stimulus, the economy is no longer recessionary.

Once you allow for a significant role of forward-looking behaviour by households and firms, there is no multiplier.

This is debatable. There are models that show some individual savings rates for recipients of stimulus under the most recent programs approached 80%. Even then, however, there is a multiple greater than 1 (specifically, 1.25). But, it is likely in these cases that the stimulus was less effective than practical alternatives.

You should note that these individuals were banks receiving government bailout funds under the rescue packages, which would seem to undermine the argument that Keynesian stimulus is less preferable than direct private-sector subsidy (that is, it would have been preferable, from a stimulus perspective and ignoring for a moment the consequences of further bank failures, for the government to spend that money directly, rather than loaning it to private corporations).

 

[mheslep]

This is correct, assuming that government spending is financed by money removed from privately investable supplies. However, as Gokul pointed out, savings rates tend to rise during economic contractions. To the extent that government borrowing is financed by saved money, there is no short-term crowding out effect. In the long run, however, if government fails to return debt levels to normal levels during economic expansion, then there won't be sufficient capital to fuel the recovery. This is likely a large part of the current problem - the economy is no longer recessionary, but it is capital-starved.
This is also correct; the stimulus, by definiton, must be revenue spent. Unfortunately, bureacratic delays often mean that several quarters pass between the passage of legislation and cash outlays (purchases by designated recipients). This can mean that by the time the government spends all of the allocated stimulus, the economy is no longer recessionary.
This is debatable. There are models that show some individual savings rates for recipients of stimulus under the most recent programs approached 80%. Even then, however, there is a multiple greater than 1 (specifically, 1.25). But, it is likely in these cases that the stimulus was less effective than practical alternatives.

You should note that these individuals were banks receiving government bailout funds under the rescue packages, which would seem to undermine the argument that Keynesian stimulus is less preferable than direct private-sector subsidy (that is, it would have been preferable, from a stimulus perspective and ignoring for a moment the consequences of further bank failures, for the government to spend that money directly, rather than loaning it to private corporations).

Note that those quotes are not mine, but Volker Wieland's on the VOXEU site. Also the topic of the moment is the ~$800B stimulus from the http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009" act that went temporarily to the banks, a different subject.

 

[mheslep]

Another fiscal multiplier paper is out:

How Big (Small?) are Fiscal Multipliers?
Ethan Ilzetzki, Enrique G. Mendoza, Carlos A. Végh
NBER Working Paper No. 16479
Issued in October 2010

We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.

Full paper is restricted to subscribers.

 

[Gokul43201]

Interesting. Will see if I can get it this weekend.

Meanwhile, I came across this oldish article in the Economist that I'm sure is going to be met with vigorous disagreement here: http://www.economist.com/node/16846494/comments%20Health%20care%20holding%20down%20costs:%20http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf (weird url)

Government Motors no more
-An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not

AMERICANS expect much from their president, but they do not think he should run car companies. Fortunately, Barack Obama agrees. This week the American government moved closer to getting rid of its stake in General Motors (GM) when the recently ex-bankrupt firm filed to offer its shares once more to the public.

Once a symbol of American prosperity, GM collapsed into the government’s arms last summer. Years of poor management and grabby unions had left it in wretched shape. Efforts to reform came too late. When the recession hit, demand for cars plummeted. GM was on the verge of running out of cash when Uncle Sam intervened, throwing the firm a lifeline of $50 billion in exchange for 61% of its shares.

Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool ...

Yet the doomsayers were wrong. ... But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends. On the contrary, his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold.
...
That does not mean, however, that bail-outs are always or often justified. Straightforward bankruptcy is usually the most efficient way to allow floundering firms to restructure or fail. The state should step in only when a firm’s collapse poses a systemic risk. Propping up the financial system in 2008 clearly qualified. Saving GM was a harder call, but, with the benefit of hindsight, the right one. The lesson for governments is that for a bail-out to work, it must be brutal and temporary. The lesson for American voters is that their president, for all his flaws, has no desire to own the commanding heights of industry. A gambler, yes. An interventionist, yes. A socialist, no.

 

[WhoWee]

Interesting. Will see if I can get it this weekend.

Meanwhile, I came across this oldish article in the Economist that I'm sure is going to be met with vigorous disagreement here: http://www.economist.com/node/16846494/comments%20Health%20care%20holding%20down%20costs:%20http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf (weird url)

It's too bad they couldn't do it on a level playing field.
http://www.reuters.com/article/idUSTRE6A161020101103

"The Wall Street Journal earlier reported that GM would not have to pay federal taxes on up to $50 billion in profits. A later version of this story revised this figure to about $45 billion."

Even better, they're getting their wings back as well.
http://www.npr.org/templates/story/story.php?storyId=131060206

"After the government bailed out the car company, it forced GM to sell its fleet of private jets. Executives were required to fly commercial. Now GM is profitable and preparing to sell shares again to the public, and The New York Times reports that the company has once again started to use private planes.

But for now the charter jets are only for executives on the road show that's promoting the company's stock to potential investors. "

The jets will only be used to promote the IPO? To demonstrate how profitable they have become?

Sounds to me like the books might be cooked.LOL

 

[mheslep]

Interesting. Will see if I can get it this weekend.

Meanwhile, I came across this oldish article in the Economist that I'm sure is going to be met with vigorous disagreement here:

You are correct,

Mr Obama has been tough from the start.
[...]
But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends.
[...]
Taxpayers might even turn a profit when GM is sold.

Fawning piece with lazy fact gathering.

General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

http://online.wsj.com/article/SB10001424052748704462704575590642149103202.html
http://www.dailyfinance.com/story/taxes/gm-to-get-45-billion-tax-break-thanks-to-bailout/19700767/
http://mystateline.com/fulltext-news?nxd_id=207857

http://www.mlive.com/auto/index.ssf/2010/09/warren_mayor_jim_fouts_critici.html"

 

[turbo]

No mention of the Fed buying $600 Billion in bonds, juicing the stock market, driving up oil, and devaluing the dollar on foreign markets? Hmm.

 

[mheslep]

I'm don't think I like the $600B fed buy (close to $1T when combined with other actions). I agree the Fed action does exactly the things you indicate, but I don't object to it for those reasons, except for the oil price increase. An oil price surge is not great, but then this favors increased production of US oil over imports, and that part is great.

 

[readaynrand]

How to fix the economy

Only the market can heal the economy. Politicians should do as little as possible.