What’s Wrong with the World

How would you explain the stimulus during the 1980s (see chart)?

http://www.slate.com/blogs/moneybox.html

al,

Not sure what chart you are referring to, but the annual increase in federal spending declined relative to Carter (after adjusting for inflation) during Reagan. Of course, if you consider letting individuals keep more of their own money "stimulus", then I guess we agree -- Reagan's tax cuts did indeed stimulate the economy during the 80s (and along with the Fed's efforts to fight inflation, the two policies were a perfect one-two punch to jump-start the economy).

Isn't it ironic that the whole liberal-secular 'weltanschauung' is “what you see is all there is”?

I have to say that I absolutely don't understand how Blinder can be so sure that it's impossible to spend that much money without creating jobs. That just seems like an incredibly shallow "argument," to which the obvious response is, "Why not?" What about make-work jobs that will vanish like snow when not being propped up by the government? I don't think they should count as being truly created. It's as though we're just supposed to accept without argument that the government is incapable of blowing that much money for no appreciable benefit. I, for one, don't grant that to be an obvious truth.

Lydia,

Related to your point is the fact that some of that stimulus money was "blown" on, let's just say, less than optimal infrastructure projects:

http://www.aei.org/article/economics/fiscal-policy/how-effective-was-the-2009-stimulus-program/

It's as though we're just supposed to accept without argument that the government is incapable of blowing that much money for no appreciable benefit. I, for one, don't grant that to be an obvious truth.

The Onion (language warning) must have read your mind:
http://www.youtube.com/watch?v=JnX-D4kkPOQ

Blinder is probably right though, in an idiotic way. Even if you took a trillion dollars and spent it on nothing but beer and hookers, you would probably have a positive effect on the number of providers of beer and hookers and associated services. That doesn't say anything about the quality or longevity of the jobs created, but those concerns deal with more fundamental questions of what an economy is for, questions that economists seem surprisingly ill-equipped to answer.

At that point, Matt, we have to ask about the definition of "creating a job." If I hire a person for two hours to go out into the desert, light a match, and burn a million dollars, did I create a job?

Matt,

Lydia's point is a good one, but in my OP I also ask you to consider Blinder's own advice -- think of what is unseen (the title of my post is a play on Bastiat's famous essay "That Which is Seen, and That Which is Not Seen" which is probably a play on the famous words of the Nicene Creed). The "trillion dollars" you refer to has to come from somewhere and the effect of taking that money (via borrowing and eventually taxation) will have a negative effect on the private sector and actively harm the economy. So as beer providers are hiring, businesses elsewhere are laying off people or deciding not to hire because they are worried about the future, etc.

Well the effects are unseen, but that is the rub isn't it? We don't know what would have happened, and the trillion dollars may have just been stuffed in a mattress. In these debates, each side usually assumes that the unseen effect would have been whatever would bolster their case.

It's entirely possible that a stimulus can create jobs, at least for some reasonable time frame. One example is building infrastructure that lowers the cost of entry into some productive enterprise, like say building a road or rail to a mineral-rich mountain range. The kicker is that it is, to say the least, extremely difficult for a central planner to know what would have this effect. The result tends to be that lots of projects happen, but only some of them pay out. It's sort of like the joke once made by a department store owner that half of his advertising budget was wasted, he just didn't know which half. The other factor is that the stimulus just lowered the barrier to entry...the government can't create something from nothing and eventually when costs or benefits changed one way or the other, a firm would have built the infrastructure necessary to harness the resource or declined to build as it is not a good investment.

Our stimulus orthodoxy is predicated on the idea that consumer spending drives the economy. This is why I brought up the question of what an economy is for...economists think it is for providing people with jobs that they do for money that they go spend on stuff that in turn creates incentives for more jobs, money, and stuff. The exact definitions of "job", "money", and "stuff" aren't important, all that matters is that the great circle of life is taking place. To be fair, they usually place a deal of faith in markets and homo economicus to make all those decisions about content, leaving economists to worry about how to maximize the proliferation of jobs->money->stuff. Some economists and especially journalists pretending to be economists (like the aforementioned Matthew Yglesias) take it all the way and argue that it is better to pay people to do nothing rather than have unemployment.

Most of us here would argue that the content of the jobs, stuff, and money is rather important, and an economy of pornography isn't good no matter how rich everyone is.

Jeff, Pinto has been discredited. Murphy seems to quote out of context and clearly misunderstands Krugman's Japan paper. PK is merely saying that expectations play a critical role in dealing with an economy at the zero bound. This requires the central bank convincing folks that higher inflation will be tolerated for the duration. Abe seems to be making this happen.

This, from your "analyst" isn't serious analysis, just political hackery.

"Nevertheless, the Obama administration chose a strong dose of Keynesian medicine, confidently predicting that unemployment would be lowered to 6 percent by the end of 2011. As we now know, this promise was not fulfilled, with unemployment currently at 9 percent. This has, fairly or not, once again soured American voters on Keynes, with three-quarters of the public concluding that the stimulus failed."

Recall that the best available public and private data showed a GDP drop around 3% which is what Romer used to calculate a need for a $1.4T stimulus which turned into a $700 odd B stimulus about half of which was tax cuts. The actual drop was around 9%. The unemployment projection was based on the data then available - projections are not promises. The rest of the article is as bad as my selection.

Obama, using some political calculus, I guess, kept insisting that the best he could get was just the right amount but that is another matter (he was also heavily criticized by we on the left for so doing).

I was referring to the chart Yglesias posted showing debt. What Reagan did to get us out of the deep recession at the beginning of his term was to engage in a standard Keynesian program - tax cuts and deficit spending followed by tax hikes later on.

Unlike today, the Fed had all sorts of room to maneuver we were well away from the zero bound and the deep recession didn't involve a financial crisis.

Re jobs: Much of the Reagan stimulus was totally non-productive and not much different than burying jars of money and paying folks to dig them up. That didn't matter. For example, the ship workers who were hired to install all sorts of bells and whistles on WWII battleships were paid good money (as were the suppliers of the bells and whistles) which they then spent on all sorts of things.

You mention Riccardian equivalence as a factor. Stimulus works in a slump because there is a lack of activity hence no crowding out occurs. That is why the standard Keynesian formula is deficits in the lean and surpluses in the fat.

The consensus on multipliers is in flux,

http://www.econbrowser.com/archives/2013/02/evolving_views.html

(No slight on battleships is intended. They are remarkable things - I saw the Iowa steaming in front of Catalina from the Palos Verdes back then - quite impressive.)

Thoma is a good aggregator on the mostly leftish side,

http://economistsview.typepad.com/economistsview/

I assume you read Tyler Cowen.

al,

I kind of suspected this post would bring you out of hiding and although I had made a previous promise to myself not to respond to your comments, since you are generally on point, I'll make an exception (again) and go through your latest comment point by point:

1) Pinto was discredited by whom? There are analysts who disagree with him, but that's not that same as saying he was "discredited".

2) The point of Murphy's article was to show that Krugman himself acknowledged that there are no historical examples of expansionary fiscal policy (i.e. Keynesian stimulus) working as advertised today to grow the economy but there are many examples of fiscal consolidations (i.e. government spending cuts or as I prefer, austerity) that have worked to spur economic growth.

3) Tino (who is a newly minted PHd and runs his own wonderful blog here for those who want to read some more on his work, although be warned, some of his stuff is in Swedish) responds directly to your criticism when he says in that article I linked:

Another argument, most notably made by Nobel Prize winner Paul Krugman, is that the high level of unemployment simply proves that the stimulus was too small. But by any objective measure, the fiscal stimulus was very large. Total government spending ballooned from approximately $4.5 trillion before the crisis to $5.5 trillion per year thereafter, adjusted for inflation.

Total government deficit spending during the three years since the crisis was $4 trillion. This $4 trillion—not just Obama’s $0.8 trillion “Recovery and Reinvestment Act”—is the total amount of Keynesian stimulus poured into the economy. Comparing deficit spending before and after the recession, post-recession spending has been larger by about 6 percent of GDP each year.

These are massive numbers, larger than the relative magnitude of the New Deal. If Keynesian fiscal policies have failed, it is unlikely to have been because of insufficient deficit spending.

It is worth noting that Paul Krugman has used the same explanation for the failure of Japanese stabilization policy, i.e. that the failure of aggressive Keynesianism to achieve growth proves that deficits were too small.

In the decade following the 1991 crash, Japanese deficit spending was on average 5 percent of GDP per year, and 7 percent of GDP in the decade that followed. Japan’s debt increased from normal levels to a staggering 233 percent of GDP today, far higher than in every other advanced country, including Greece. None of this managed to stimulate growth.

In this vulgar form, Keynesianism is turned into a non-falsifiable theory. If borrowing and spending 150 percent of GDP fails to achieve growth, why, that merely proves Japan should have borrowed and spent 300 percent of GDP!

4) I thought that debt chart was the one you wanted me to focus on. Yes, Reagan spent too much money for those of us who wanted him to cut the size and scope of government more (although he was dealing with a Democratic Congress when he was first elected). However, as I mentioned in the OP, Reagan did cut some government spending (mostly discretionary spending), but if you think it was Reagan's defense build-up that launched the economic boom of the 80s, well I have a couple of bridges in downtown Chicago to sell you...

P.S. I notice you ignore the John Taylor link -- harder to criticize one of today's greatest living economists writing for a popular audience, isn't it?

Our stimulus orthodoxy is predicated on the idea that consumer spending drives the economy. This is why I brought up the question of what an economy is for...economists think it is for providing people with jobs that they do for money that they go spend on stuff that in turn creates incentives for more jobs, money, and stuff. The exact definitions of "job", "money", and "stuff" aren't important, all that matters is that the great circle of life is taking place. To be fair, they usually place a deal of faith in markets and homo economicus to make all those decisions about content, leaving economists to worry about how to maximize the proliferation of jobs->money->stuff. Some economists and especially journalists pretending to be economists (like the aforementioned Matthew Yglesias) take it all the way and argue that it is better to pay people to do nothing rather than have unemployment.

Matt, isn't pretty much all of that straight-up Keynesianism? To me it sounds like walking right into the punch of the broken window fallacy. Which has hardly been ignored by _all_ economists, though it certainly is ignored by the Keynesian ones. But economic theory doesn't simply _equal_ Keynesian economic theory. There are other schools of thought, like Austrian economics, for example, which would never in a million years lead one to say that it's better to pay people to do nothing than to have unemployment, or that consumer spending drives the economy. If Austrian economics is supply-side, then what is Keynesianism? I sometimes call it "demand-side." And I don't particularly mean that as a compliment, either.

Nor is the theoretical issue chiefly one about the deep Meaning of the jobs created. It can also be a purely pragmatic meaning that it's practically speaking, sheerly in terms of people's _material_ well-being, going to Mess Things Up in the long or even medium run to pay people to do nothing, to distort the economy with make-work jobs, to blow money on things that aren't ready for prime-time and that therefore the market can't sustain (coughcough Solyndra), etc.

What was that about projections, Al?

Between 2014 and 2023, according to CBO estimates, annual tax receipts will soar by 65 percent. During that time period, revenue collected by the federal government will average 18.9 percent of the economy. That's 1 point higher than the 17.9 percent average from the end of World War II to the year 2000 (just before George W. Bush's first round of tax cuts was passed.)

At the same time, due to negotiated budget caps and automatic cuts known as the sequester, defense spending is projected to grow relatively modestly -- by about 20 percent over the next decade. By 2023, defense spending will account for only 12 percent of the overall federal budget. Not only is this well below the historical average, it's the lowest level since at least 1940, when the White House Office of Management and Budget data begin. (It's almost certainly the lowest level in history, given that the modern welfare state didn't begin until 1935 with the passage of Social Security). Previously, the lowest level recorded was in 1999, toward the end of the post-Cold War military drawdown, and even then defense represented 16.1 percent of the budget.

Despite the fact that new tax revenue will be drastically outpacing growth in the defense budget, the nation is still projected to accumulate an additional $7 trillion in deficits over the next 10-year period, bringing the public debt to $20 trillion. The cause of that debt, therefore, cannot be taxes that are too low or defense spending that's too high. In fact, by 2020, Congress could vote to eliminate all military spending and it wouldn't even be enough to cover interest payments on the national debt.

http://washingtonexaminer.com/cbo-report-settles-budget-debate-in-conservatives-favor/article/2520775

Now, obviously, if I have adduced another "discredited" source, Al will quite easily be able to illustrate where the writer has mischaracterized CBO projections.