A Brief History…

The Democrats seem to have gotten all their own people on board, and there was doubt about Diane Feinstein and Ben Nelson, and now they have two Republicans. Specter was always the most likely to flip. He was never a real Republican, having been a defense attorney for one of the most notorious murderers in Philadelphia history. Ira Einhorn was an aging hippie who murdered his girlfriend and, when his lawyer Arlen Specter got him out on bail, he skipped for 16 years. Republicans prosecute murderers, not get them off.

Susan Collins is one of the squishy Maine Senators we have come to expect little of. She couldn’t even bring along her colleague Olympia Snowe. That’s how bad this bill is. An analysis of the bill by economist Robert Barro makes a few points:The multiplier effect of government spending is never more than one and usually less than one. Paul Krugman, who is not an expert on macroeconomics, no matter what he writes in the NY Times, thinks World War II ended the Depression.

Barro ?

Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.

Not so good. What does he think of the “stimulus bill” ?

He doesn’t like it.

you are fairly skeptical in general that fiscal policy will boost aggregate demand.

Right. There’s a big difference between tax rate changes and things that look just like throwing money at people. Tax rate changes have actual incentive effects. And we have some experience with those actually working.

What would you say is the best empirical evidence there?

Well, you know, it worked to expand GDP for example in ’63 and ’64 with the Kennedy/Johnson cuts. And then Reagan twice in ’81 and ’83 and then in ’86. And then the Bush 2003 tax-cutting program. Those all worked in the sense of promoting economic growth in a short time frame.

I’m the middle of a study where I am trying to estimate this overall, going back to 1913 — sort of constructing some measure of the overall effect of the tax rate at the margin, at the moment. I’m just looking at that now, actually…

You’re talking about the multiplier on a dollar of…

Well both things, but here I’m talking about the tax rate stuff. Get some measure of the effect of marginal tax rate that comes from the government — federal, state, local. And then you can see what it looks like going down or going up and how the economy responds. And then, in addition to that, the government might be spending more or less money on either military stuff or not on military stuff. And we can estimate that at the same time. With the government spending stuff, the clearest evidence is in wartime. It’s not that it’s the most pertinent, but it’s the clearest in terms of evidence because it’s the dominating evidence at those times, especially during the world wars.

What does his study conclude ?

One thing is what do you think about the ratio of spending to tax relief in the bill. And the second is, if you judge it by Larry Summers standard — that stimulus be temporary, timely and targeted — does it clear the bar?

This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.

He doesn’t sound very enthusiastic. What about the Obama economists ?

They’ve brought in some reasonable people in terms of economic advisors. I don’t know what impact they’re having, and I suppose they have different views on Keynesian macroeconomics than I have. But I’m giving you my opinion about it.

I think Geithner is a good appointment. I think he’s going to focus on what really matters, which is the financial system and the housing market. That’s where they should be putting their efforts. That’s where the problems came from.

Fixing the credit market, you mean?

That was the main problem in the Great Depression, too. Though then it was concentrated on commercial banks which were the main credit vehicle. That was the main problem in the depression and fixing that was the main thing that ended the depression.

Well since you brought it up… I have no idea what your views are on financial economics, but it seems like there’s going to be another round of TARP-like bailouts. Do you have an opinion on how that should be structured?

That’s a hard problem. I mean, they’re basically floundering around — the crew of the previous administration more than the current one. But I admit they’re having a good effect by putting more resources into assistance. The exact way to do it is pretty tricky. It’s not clear what the best thing to do is. Larry Summers did bring in Jeremy Stein, who is probably one of the best people in the area. I think he’s going to have a lot of impact on that design. I hope so. That’s another person they hired recently.

So, what do we do ?

Tax cuts are bound to be better. I think the best evidence for expanding GDP comes from the temporary military spending that usually accompanies wars — wars that don’t destroy a lot of stuff, at least in the US experience. Even there I don’t think it’s one for one, so if you don’t value the war itself it’s not a good idea. You know, attacking Iran is a shovel-ready project. But I wouldn’t recommend it.

I don’t think this stimulus bill will do anything good. But it seems to be a done deal. It will be a long four years.

Tags: financial, Obama, stimulus

This entry was posted on Saturday, February 7th, 2009 at 5:30 pm and is filed under financial, politics. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.