Fiscal stimulus fails to create jobs and the US continues to ignore its own advice

This NYT story suggests that the fiscal stimulus may not be very effective.  Note that one of the economists interviewed is my colleague, Aaron Jackson.

In this post I argued that we are making all the same monetary policy mistakes that we warned the Japanese not to make.  Now Simon Johnson points out that as far as bank regulation is concerned, we are disregarding all the advice we gave the Koreans under similar circumstances.



10 Responses to “Fiscal stimulus fails to create jobs and the US continues to ignore its own advice”

  1. Gravatar of thruth thruth
    12. January 2010 at 19:29

    In both cases I’m wondering about the counterfactuals

    The NYT story about stimulus is scant on detail, big on claims. How do they know what the job situation would have look like without the programs?

    With regard to the Simon Johnston interview. He’s blaming the Fed for “blowing up the bubble” and Bernanke specifically for his failure to do something about it and his failure to address moral hazard. This doesn’t seem to fit very well with your counterfactual world in which Bernanke acted much more aggressively. Those actions would have propped up housing values, mortgage asset, bank balance sheets and prevented bank failures. People still would have been complaining about Bernanke blowing up the next bubble and failing to deal with moral hazard.

  2. Gravatar of rob rob
    12. January 2010 at 21:01

    Hmmm. I know that good U of Chicago economists dont make predictions, but luckily i dont fall into that catagory. My sense is that the Fed is going to continue to do all the wrong things and I am thus happily short te S&P now. That and of course my The Economist Fund, which I will stick to by the letter.

  3. Gravatar of Doc Merlin Doc Merlin
    12. January 2010 at 22:31

    Short S&P, like buying short S&P ETFs? You are way more pessimistic than I am. Sales of Ford Explorers are up 60% over the same time last year. That alone gives me a lot of hope.

    Housing starts are way down, but prices aren’t down too much again, another sign of hope, that we are eating through the housing glut.

  4. Gravatar of Doc Merlin Doc Merlin
    12. January 2010 at 22:37

    Oh, Scott.

    From Businessweek:
    “The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.”

    This sounds like an attempt to make 401(k) and IRAs into funds that buy treasuries, my question is…. does this make us Argentina?

  5. Gravatar of thruth thruth
    13. January 2010 at 05:07

    Doc Merlin: your cynicism about that plan may be well placed, but I would have thought it was intended to suck some of the maturity mismatch out of the banking system.

  6. Gravatar of StatsGuy StatsGuy
    13. January 2010 at 06:35

    I don’t see Simon Johnson’s views and Scott’s views being all that dissimilar on this issue – back in October of 08, Johnson was strongly advocating more aggressive stimulus, and in particular coordinated international action.

    Johnson is a very sophisticated individual, and is well aware that TBTF is not the only problem facing the world. However, he also knows that it is a narrative that has stuck in the minds of the public – and it’s an issue in which he can make a positive impact.

    One of the great fears of levying more aggressive regulation on the banks during the middle of the crisis (or shutting more of them down) was that this would have contracted the money supply even more. Scott has long argued that more aggressive monetary action could have been used to compensate for this – and thus that more aggressive monetary action would have politically facilitated harsher response to TBTF institutions by easing the economic costs of enforcing that punishment.

    Johnson is a former IMF person – and is well aware that bank rules have an impact on higher order money supply.

    As an aside – as to shutting down banks based _solely_ on “mark-to-market market valuation” of their assets, this is sheer lunacy. For institutions with cap/asset ratios of even 10%, a small decline in the nominal value of assets due to a change in one of the types of risk (which was not fully insured) would imply insolvency. MtM rules are incredibly pro-cyclical, and encourage manipulation. For example, a naked short attack on a bank could induce a market flight from that bank’s assets, which would drop the liquidity of those assets and their MtM value. This is partly because the creditworthiness of an institution (like AIG) is dependent on that institutions ability to raise capital in ALL markets, including equities. An _administrative_ rule which would shut down a bank in a liquidity crisis can trigger all sorts of nastiness. And, we probably did have an element of that in October 08 – but the Fed didn’t see when this became a full fledged demand crisis.

    But recognizing the demand crisis does not necessarily mean the liquidity crisis was not real.

  7. Gravatar of Philo Philo
    13. January 2010 at 08:11

    The NYT article seemed more journalistic than scientific. Tyler Cowen has been asking for details about the study on which the article was (supposedly) based, and apparently not getting them. Can you vouch for the validity of the study?

  8. Gravatar of Simon K Simon K
    13. January 2010 at 11:31

    Simon Johnson was calling for more concerted and coherent action on the big banks back in 2008. He’s still right. Were the US a small country, the IMF would have told us to nationalise the insolvent banks, sell their viable assets and wind up the rest. Instead we got this half-arsed TARP business where we just lend the banks money under the guise of taking ownership (preferred stock is just fancy debt), dumping their liabilities on taxpayers, and let their shareholders and managers go on their merry ways.

  9. Gravatar of thruth thruth
    13. January 2010 at 12:00

    Statsguy: Scott and Simon might be in more agreement than say Paul Krugman and Gene Fama, but I don’t think their views are all that close.

    Let me quote from the man himself:

    “The overall US policy response did well in terms of preventing spending from collapsing. Monetary policy responded quickly and appropriately. After some initial and unfortunate hesitation on the fiscal front, the stimulus of 2009 helped to keep domestic spending relatively buoyant, despite the contraction in credit and large increase in unemployment. This was in the face of a massive global financial shock – arguably the largest the world has ever seen – and the consequences, in terms of persistently high unemployment, remain severe. But it could have been much worse.”

    “There is no question that passing the TARP was the right thing to do. In some countries, the government has the authority to provide fiscal resources directly to the banking system on a huge scale, but in the United States this requires congressional approval. In other countries, foreign loans can be used to bridge any shortfall in domestic financing for the banking system, but the U.S. is too large to ever contemplate borrowing from the IMF or anyone else.”

    That hardly sounds like he is channeling Scott.

  10. Gravatar of scott sumner scott sumner
    13. January 2010 at 17:22

    thruth, I believe it was a cross-sectional study. employment should have risen faster in counties that spent more on stimulus.

    Yes, Simon Johnson and I disagree on monetary policy.

    rob and Doc, The Economist’s bubble predictor vs. Ford Explorer sales. Let’s come back in a year and see who was right. If the S&P is above 1150 Doc wins.

    Doc Merlin, Fortunately, we are still a long way from Argentina. For some strange reason a lot of foreign governments like our debt.

    Statsguy, I agree with your comment. It seems to me that regulators have a problem. If you use MtM you have problems in a crisis, but if you don’t you may let banks take too much risk. I don’t disagree with anything you say about MtM, it just shows one of the complexities regulators must deal with in a fast changing financial environment, and we know regulators aren’t always the most nimble and flexible people.

    Philo, Unfortunately no. I had thought there was some kind of paper associated with it, and only found out otherwise when I saw Tyler’s post. Perhaps I shouldn’t have linked to it. All I can say is that when my colleague looked at the information they gave him, the results looked valid. My hunch is that transport projects are just not big enough to make a significant difference, even if the Keynesian multiplier model is right. They are a modest share of the total stimulus and it’s a big economy.

    Simon K, I agree, although again my first best solution was monetary stimulus. 5% expected NGDP growth would have massively inflated the value of bank assets. What’s good for America (in a macro sense) is good for banks. But what is good for banks isn’t always good for America. 5% expected NGDP growth would have been good for America and banks. TBTF is good for banks but not America.

    thruth#2, Yes, Johnson definitely differs from me in many areas. As do most economists.

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