Ramesh Ponnuru on fiscal stimulus

Ramesh Ponnuru has an excellent piece over at Bloomberg.com

Media fact-check organizations have no such doubts. Factcheck.org says it’s “just false“ to deny that the stimulus has created jobs. It cites the Congressional Budget Office‘s estimate that the stimulus had saved or created millions of jobs. But the CBO, as its director has explained, hasn’t really checked the effect of the stimulus. It has merely reported what the results of additional federal spending and tax credits would be if you assume that spending and tax credits are stimulative.

In other words: If you assume that stimulus works, it must have worked. This circularity doesn’t bother PolitiFact, a group that seeks to elevate the tone of our political debates but usually lowers it. Relying on the CBO and other groups that use similar methods, it says people who deny the effectiveness of the stimulus have their “pants on fire.”

The Research

Last summer, Dylan Matthews reviewed the research on the stimulus for the Washington Post and dug up six studies that found a positive effect. Three of them were based on models that assume the stimulus worked. Three of them were supposedly empirical confirmations of this effect. These three all found that states (or counties) that got more stimulus money had stronger economic performances than places that received less.

But nobody denies that the federal government can shift the distribution of economic activity. If Congress were to give me $50 billion, I am sure car dealerships and liquor stores in my area would see an uptick in sales. That doesn’t mean the nation as a whole would come out ahead. (I am willing to go along with the experiment if Congress doubts this.)

Great stuff.  One area I agree with Krugman is that those political “fact checkers” are not very reliable, especially when the issue is complex.  It’s sad that the six studies showing fiscal stimulus works contain 3 that simply assume it works, and 3 that suffer from the fallacy of composition.  That’s all they got?

Tyler Cowen has a good post today on the missing GDP mystery.  I liked this observation:

In general we undermeasure the gdp gains of successful export nations, because their outputs tend to have lower percentages of rent-seeking expenditures and more real stuff of value.

I suppose this is why countries like Germany seem richer than you’d expect from their GDP/person numbers, adjusted for PPP.   The classic example of this occurred in the old Soviet bloc, where countries like Romania claimed the fastest GDP growth rates in the world for significant periods of time.  It also tells me that the Singapore/Hong Kong GDP numbers are legit, as both places have extremely high ratios of trade to GDP.

But the US  jobs mystery remains, as both productive and non-productive GDP requires labor.



14 Responses to “Ramesh Ponnuru on fiscal stimulus”

  1. Gravatar of Major_Freedom Major_Freedom
    13. March 2012 at 10:28

    Excellent post.

  2. Gravatar of Eric G Eric G
    13. March 2012 at 11:22

    So, the stimulus didn’t work but GDP increased and jobs were created, right?

    Well, I have some other questions. If the stimulus was larger and gave more money to the states to keep from firing government employees wouldn’t that have been stimulative? I mean, if the 1.3 million state government jobs were kept, then we would have 1.3 million more jobs, right? Not only that, aren’t these jobs the type that governments create and aren’t created by free enterprise? Are there private police forces? Private firefighters? We have private school teachers but most people’s kids go to public schools, but you get the basic point.

    There must be a public sphere and a private sphere with little overlap. So, if jobs are created or saved in the public sphere then that would help the economy as whole, right? Didn’t Reagan hire more government employees? Didn’t Texas governor Perry?

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. March 2012 at 11:24

    Just when you think it’s safe to back into the water at DeLong’s;


    I don’t understand why “not distorting the market” would even be a goal we’d have. We already know that the market isn’t about to make enough roads, hospitals, and schools to make our society function. And if the interest rate were slightly better, the market still would not provide those things. The government distorts the economy to produce things that everyone wants, but no individual is willing or able to provide. That’s what it is for.

    Shouldn’t we just write out a giant wishlist to Santa of all the stuff we’d like the government to make, and then whenever we need economic stimulus we could grab items off the list and finance them until we were at full employment? It’s not like we don’t need power grid upgrades and bridges and air ports and rail lines in every state. And monetary policy has been and will continue to be completely ineffective in getting our infrastructure modernized.

    Liquidity trap or no, having the government distort the economy so that everyone is fed and everyone gets healthcare and we can ship goods to every part of the country is an unalloyed good thing. The Mankiws of the world tell us that unlike fiscal policy, monetary policy will get us crap that we could have anyway just by waiting. In what universe is that considered a good thing?

    Yes, Brad, your blog is waaaaay too sophisticated to corrupted by anything like facts and logic.

  4. Gravatar of Steve Steve
    13. March 2012 at 12:49

    I’m a “natural stabilizers” guy when it comes to stimulus. Leave education, health, and infrastructure alone. Let tax receipts fall and social insurance rise, and ignore the cyclical deficit. Apply monetary stimulus aggressively. There’s plenty of cyclical deficit to apply QE if necessary. I can’t prove this is better than the alternatives but it seems less disruptive. Just my intuition / prejudice.

  5. Gravatar of Matt Waters Matt Waters
    13. March 2012 at 14:00

    Ezra Klein, who is normally one of the most sensible commentators on fiscal subject, makes no sense on his piece in response to Ponnuru’s piece.


    “As far as 1933 goes, part of the expansionary policy was driven by Europeans sending gold to America because they were afraid of Hitler, and part of it came later, when we went off gold altogether. We really can’t do that again. And note that quite a bit of the research on the Fed’s stimulative policies in the 1930s was done by Christina Romer and Ben Bernanke, both of whom happened to be in office in 2009, and both of whom called for massive fiscal stimulus.”

    Actually this brings up an interesting question. I know FDR’s executive order decreed that all gold owned by Americans or brought into the US would be bought with newly printed money. Since America had a big gold inflow due to Hitler and other miscreants in Europe, that translated to a highly expansionary monetary policy. The interesting question for me is whether America lucked into the right monetary policy due to the gold inflows.

    All that said, though, these arguments against market monetarism always break down at some point. I always notice some bit of economist hand-waving which is actually some assertion without evidence or argument from authority. In this case, Ezra says that Bernanke and Romer have argued for big fiscal stimulus and left it at an argument from authority.

    All that said, the more I think about it, the less sure I am that the effect of the fiscal stimulus was in fact zero. Clearly from mid-2008 to early 2009, the Fed signaled that it would not do any unorthodox monetary expansion until unemployment hit 10%. While the Fed action provided an upper limit to unemployment, it also signaled that it wouldn’t actively tighten policy to get back down to 10% unemployment. The worst it would do is keep policy the same.

    If we assume there is no supply shock or something that would get the Fed to unexpectedly tighten policy, we could see a continuum where the Fed tightens when we start nearing full unemployment, the Fed does nothing from, say, 6-10% unemployment and then the Fed has looser policy at 10% unemployment. If that’s the function the Fed follows, then fiscal stimulus can in fact decrease unemployment in the 6-10% range.

    The best argument against fiscal stimulus is still the fact that any practical, true Keynesian spending is inefficient, wasteful and too small to matter. The size of Obama’s active stimulus package (which was really 200-300 billion a year in spending (not taxes), a tiny sum) was less due to Obama not having the guts to go bigger and more due to a dearth of worth-while projects in a short time-frame. That’s why practical fiscal stimulus has to either be World War II style deficits (which did work) or some sort of massive, indiscriminate helicopter drop. And in the latter case, it acts more like monetary policy, which raises the question why we don’t just do monetary policy in the first place.

  6. Gravatar of marcus nunes marcus nunes
    13. March 2012 at 14:29

    The “jobs mystery”. An illustration

  7. Gravatar of Matt Waters Matt Waters
    13. March 2012 at 14:44

    On the jobs mystery, this is a complete WAG, but could non-sticky pay in bonus-driven (and fringe benefits driven) sectors like finance be going down enough to offset the extra NGDP growth going to all other sectors hiring again? I’ve read a lot about how lean times on Wall Street are here to stay and all that. The lower bonuses in finance and other sectors wouldn’t hurt NGDP a lot, but the recent job growth didn’t need that much NGDP either.

    That could also get into sticky issues of how, exactly, one measures RGDP in finance. The 2002-07 RGDP in finance could have been small higher because of hidden tail risk in all their products making the real price higher than the nominal interest spread banks were charging. If today banks still have the same interest spreads but do not have the tail risk, the real price to savers of finance is lower and thus productivity is higher. Another reason, I guess, why RGDP and inflation borders on the non-sensical and NGDP is the real measure.

  8. Gravatar of Donald Pretari Donald Pretari
    13. March 2012 at 16:15

    You have to be sure you’re not using Two standards of Proof when you’re assessing data, etc. It won’t do to evaluate some claims as Making Sense or Doing Our Best when you like the claim, & then demand some kind of Certainty Beyond Doubt from claims you don’t like. I mean to say, people who advance an explanation generally assume it’s true or better than the alternatives, don’t they?
    There’s something comical in being shocked that people assumed they were right.

  9. Gravatar of ssumner ssumner
    13. March 2012 at 17:22

    Thanks Major.

    Eric, You said:

    “So, the stimulus didn’t work but GDP increased and jobs were created, right?”

    Yes, the stimulus didn’t work and thus we had by far the worst recovery in jobs from any recession in US history. Check out a graph of total employment in this recession vs earlier ones. It’s far and away the worst.

    Or you could say we did get a good recovery, due to unconventional monetary stimulus.

    Or you could say fiscal stimulus worked.

    Let’s not kid ourselves, none of this is science, it’s ideology. We simply don’t know.

    Most of your questions seem to just assume stimulus worked. But even Keynesian economists think the multiplier is zero when interest rates are positive. Yet your examples seem to imply the multiplier would be positive when rates are above zero, What gives?

    Patrick, Thanks, that doesn’t sound promising.

    Steve, I agree.

    Matt, I have a post that replies to Klein. I don’t agree that the Fed waited for 10% unemployment to move. QE1 occurred long before unemployment got that high, indeed about the same time as fiscal stimulus.

    Marcus, Thanks for the link.

    Matt, Interesting observation about the jobs mystery. That might be part of it.

    Donald, Nothing shocks me anymore.

  10. Gravatar of Eric g Eric g
    13. March 2012 at 18:19

    You didn’t answer the my question. If the federal government kept those 1.3 million jobs wouldn’t that have been stimulative in this economy?

  11. Gravatar of Ramesh Ponnuru on fiscal stimulus « Economics Info Ramesh Ponnuru on fiscal stimulus « Economics Info
    13. March 2012 at 21:00

    […] Source […]

  12. Gravatar of ssumner ssumner
    14. March 2012 at 10:22

    Eric, Not if it caused 1.3 million fewer private jobs to exist.

  13. Gravatar of Eric G Eric G
    14. March 2012 at 17:22

    Well, like I said are there are jobs that the public sector can only supply. The private markets do not supply us with a police force or firefighters for example. If you want to tell me exactly which types of jobs would have gone to the private sector then let me know or if you have a study let me know that. It does seems at least that the public sector provides jobs that the private sector cannot, so where’s the problem?

    If the public sector jobs were never eliminated (because the stimulus would have/should have covered the costs) then how is that a drain on private employment?

    Germany has strong pro-labor policies that prevented as many job losses, and even though these aren’t public jobs, it does lend to the idea that public policy not only matters but can spend public funds in a different way to keep jobs while GDP is declining or not rising enough.

    We already have a huge example of a public sector job policy: The military industrial complex only makes money from taxes vis-a-vis the government. I don’t buy Raytheon’s technology, only the government does. Yet, the 600-700 billion (an estimate obviously) is spent on people creating weapons to kill other people. Couldn’t we cut this and use the money elsewhere, for instance in a work-share program? Why do soldiers, defense contractors, etc. get to keep their jobs but those in other publicly funded jobs have to be fired?

  14. Gravatar of ssumner ssumner
    15. March 2012 at 08:51

    Eric, You aren’t even addressing any of the relevant arguments. Under inflation targeting fiscal stimulus has no effect, the multiplier is zero. Do you agree with that argument? If not what’s wrong with the argument?

    Don’t just tell me that you don’t see why private jobs would be lost, address the specific argument that any move to shift AD to the right via fiscal stimulus would be offset by tighter monetary policy.

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