Deficit Spending Is Fueling the Recovery

Deficit Spending and the Recovery: Talking Points for KQED Forum Morning Appearance, September 4, 2009, 9 AM PDT, 88.5FM, San Francisco

It truly is remarkable: the Republican-leaning economists who make a living by selling their analyses of the economy to manufacturing firms that need information about demand and to financial firms that need information about industry profits are overwhelmingly assessing that the Obama short-run deficit-spending program has been and is being and will be effective--they are seeing the same 0.5 within-quarter fiscal multiplier and the same 3% boost to the second-quarter growth rate that everybody else is seeing. It's only (a) the true ideologues and (b) those who have decided to make their living by pleasing Republican politicians who are saying that the stimulus is ineffective...

• -216,000 is a bad number. But it is a lot better than than -714,000 monthly numbers that greeted the Obama administration when it took office--it's less than 1/3 as bad.

• I went surfing on the internet this morning and found John Taylor [1] in 2003 as Undersecretary of the Treasury talking then about how Bush's deficit-spending plan would in the short run "creat[e]... more jobs... encourage [businesses] to invest... elimination of the double tax on dividends will... encourage investment and job creation.... The expansion of the child tax credit and the extension of the 10 percent income tax to more taxpayers are examples of how the tax cuts apply to all income tax payers..." The stuff about how deficit spending helps in the short run--"sustain[s] the recovery" was the phrase Taylor used--makes a lot of sense. Can I have the John Taylor from 2003 here to debate?

  • I should note that the parts of Taylor's 2003 speech that talk about how Bush's tax cuts and deficits are good for the economy in the long-run are politically-motivated bull. Destabilizing a government's finances so that everybody knows that taxes must go up or there must be a lot of inflation but no one is sure how or when is a very bad thing for a government to do. Deficit spending gives the economy a short-term boost when it needs it--like most of us need that one cup of coffee perks you up in the morning. But it's not a good idea to drink 24 cups a day, even if Starbucks will sell you the iced drink of your choice after 2 PM for only $2.

• It's a fact that the economists who make a living by selling their analyses of the economy to manufacturing firms that need information about demand and to financial firms that need information about profits are overwhelmingly assessing that the Obama short-run deficit-spending program has been and is being and will be effective. It's only those economists who make a living by pleasing Republican politicians who are skeptical.

• OECD yesterday reevaluated the state of the world economy and upped its assessments of the situation in those countries that did fiscal stimulus packages relative to those that did not.

• Deficit spending gives the economy a short-term boost when it needs it. It's not health to rely on it all the time. One cup of coffee perks you up in the morning when you nee it. 24 cups of coffee a day gives you a stroke. But that 24 cups of coffee a day gives you a stroke doesn't mean that you shouldn't drink that first cup that makes you awake and alert enough to be coherent on KQED.

• Claims that deficit spending doesn't work in the short run hinge on either (i) rapidly rising inflation so that increased spending doesn't mean increased production--we don't have rising inflation--or (ii) rapidly rising interest rates so that the rise in government spending is offset by falling private investment. We don't have rising interest rates.

• If in response to the Obama fiscal boost the Federal Reserve were about to raise interest rates and so reduce investment, it would say so. It doesn't. Ben Bernanke says that the stimulus is effective: "[CBO] estimates of the effects of the stimulus package on real GDP and employment... appropriately reflect... uncertainties.... [B]y the end of 2010... boost the level of real GDP between about 1 percent and a little more than 3 percent and [boost] the level of employment by between roughly 1 million and 3-1/2 million jobs..." If the Obama stimulus were not effective, it would be because Ben Bernanke at the Federal Reserve was taking steps to neutralize it. He isn't.

• You know, I know John McCain's three senior economic advisors--Mark Zandi, Douglas Holtz-Eakin, and Kevin Hassett. Had McCain won, there would have been a McCain short-run deficit-spending plan and Taylor would be here talking about how great it was and how much it had boosted employment. And I--I would not be here because I would have told KQED yesterday that the program was far from optimal but was effective, and they would have gone hunting for some moonbat to give "the opposing point of view."

• Consider Mark Zandi: Mark Zandi was one of John McCain's most senior economic advisors last fall. Mark Zandi's estimates of stimulus spend-out are that it amounted to $89 billion as of the end of June--$2 billion in February, $7 billion in March, $13 billion in April, $32 billion in May, and $35 billion in June; with (so far) about 60% of the spend-out coming in the form of tax cuts and about 40% in the form of aid to states (with a trivial amount in direct federal government spending).[2] In Zandi's assessment: “Early results suggest the stimulus is performing close to expectations.” The economy is not performing close to expectations as of last December, but the Obama deficit spending plan is.

• Three tranches to the plan: tax cuts, aid to states, infrastructure spending:

  • Tax cuts hit immediately but help short-term employment only to the extent that they are spent rather than saved. So far we really don't know--although there is suggesting cross-country and cross-state evidence suggesting that a considerable portion is being spent.

  • Aid to states is clearly a big win: it has helped states maintain spending and cut less. One big worry was that in this recession we would see it snowball as Fifty Little Herbert Hoovers started firing people left and right, and as they lost their incomes they would stop spending and those they bought from would lose their jobs, etc. That's happening. It would have been nice to have much more aid to states. But what we are doing is working.

  • Infrastructure comes later--so far only trivial amounts of direct federal spending. We will see. No reason to think it's going to be ineffective.

• Mark Zandi, a former senior McCain advisor and as good an economic forecaster as you, thinks that the stimulus package boosted the rate of GDP growth by 3% in the spring and by another 4% this summer--meaning that the $80 billion in stimulus spending in this third quarter of 2009 is boosting production and incomes by $65 billion. Because the $80 billion is being used to buy useful goods and services that in normal times have a value of about $60 billion, the stimulus package looks like a clear win: The government is losing $20 billion by being a hurried and hasty shopper, but we as a country are gaining $65 billion in incomes and production. That is a benefit-cost ratio better than 3 to 1.

• This is an old, old argument. Back in the Great Depression, Joseph Schumpeter--who was certainly no Democrat, not with a big "D" and not with a little "D"--argued that the economy was then undergoing a "healthy cold douche" and that there was "a presumption against" the government lifting a finger via expansionary monetary policy or New Deals or deficit-spending fiscal boosts to try to keep things from getting worse. John Maynard Keynes disagreed, writing then that: "Some austere and puritanical souls regard [the Depression] both as an inevitable and a desirable nemesis on so much 'overexpansion,' as they call it. ... It would, they feel, be a victory for the mammon of unrighteousness if ... prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right.... I do not take this view.... And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity." I think Keynes was a smart guy: right then, and right now.

• I was looking at the latest CBO "Economic and Budget Outlook."[4] What I took away from it was three things:

  • We have a huge problem after 2030 or so no matter what as the Baby Boomers retire--not because they are drawing Social Security but because CBO projects that private-sector health costs will continue to explode and Medicare as currently constituted pays doctors what the private sector does. We cannot afford that without raising everybody's federal taxes by 25%.
  • We have no problem until 2030 if congress sticks to its PAYGO budget rules.
  • We have a substantial problem starting in 2012 or so when the economy gets back to full employment if congress doesn't stick to its PAYGO rules. And you can tell that the CBO is not optimistic--the only time that congress stuck to PAYGO was when Clinton was president and made sticking to PAYGO a priority.

---

[1] John B. Taylor, Undersecretary of the Treasury for International Affairs:

John B. Taylor Remarks before the Brazil-U.S. Business Council: President Bush['s]... recently announced program of tax cuts has the goal of raising economic growth, sustaining the recovery... creating more jobs... in the short run.... [M]ore generous expensing provisions for small businesses would encourage them to invest in the technology and other equipment they need to expand and create jobs.... [T]he elimination of the double tax on dividends will... encourage investment and job creation.... The expansion of the child tax credit and the extension of the 10 percent income tax to more taxpayers are examples of how the tax cuts apply to all income tax payers...

[2] Mark Zandi:

[3] Christina Romer:

[4] CBO:

---

Notes:

http://www.kqed.org/radio/programs/forum/

"So who else do you have on the show?"

"John Taylor from Stanford and Michael Graybell from ProPublica. No alien lizard people this time!"

KQED misunderstands me: my point last September is that it makes more sense to put someone on who wants to warn us about the threat of the Alien Lizard People from North Polar Jupiter than to put someone on from the Club for Growth. Alien Lizard People are more entertaining than the Club for Growth. And they are equally informative.

John Taylor is behaving badly: claiming that Mark Zandi's and Larry Meyer's and Doug Elmendorf's assessments that the stimulus package is working are simply repeats of things they said last January and that they "haven't looked at the numbers"...

Contrast between Taylor 2009 and Taylor 2004 on short-run effects of fiscal policy is quite remarkable...

ProPublica guy thinks his job is looking for "gotcha" stories about stimulus money going for "lion cages at the National Zoo." Not the best focus if you are in the inform-America business, I must say...

Comments

[Mark Bern:]

<Had McCain won, there would have been a McCain short-run deficit-spending plan and Taylor would be here talking about how great it was and how much it had boosted employment. And I--I would not be here because I would have told KQED yesterday that the program was far from optimal but was effective, and they would have gone hunting for some moonbat to give "the opposing point of view.">

I won't try to debate the author on such unimportant issues as integrity and objectivity since he has laid out his position so very well in the quote above. It would appear that he admits to lacking either. So, when an author admits that he is paid to provide a certain point of view how can we be expected to place any value what so ever to his opinions? I know I don't.

Sep 06 12:49 PM

[ebworthen:]

Here we have yet another intelligent person trapped in the house of mirrors called "politics".

Mr. De Long, if you are in debt, would you use your credit card and shake down your kids for cash to spend on lawncare and new kitchen counter tops? Would that make any sense? NO, but that is what we are doing.

A correction or contraction needs to be allowed to happen, otherwise, you are simply giving your alcoholic Uncle a fifth of whiskey, ca$h, and the family min-van to go on a bender in Vegas and thinking it will help.

Keep It Simple Stupid (KISS) applies to almost every situation in life. We CANNOT solve a debt crisis with debt spending, phony accounting, firing people from careers to gin up quarterly results, and outright manipulation of the markets and a fiat currency.

If it wouldn't work in your home, in an individual's life, it won't work for a city, state, or nation. The bill will come due and no amount of hope, charts, speculation, or buggery will prevent the comeuppance. We are repeating the greed, irresponsibility, and foolish policies of the Great Depression. Current rhyming timeline: September 1930.

Sep 06 02:13 PM

[Crocodilian:]

It would be worth stopping to consider what the deficits comprise. In the US, there is precious little direct "stimulus". Our deficits are composed of:

1) Bailout of the financial system
2) Tax cuts
3) collapse in tax revenues
4) extension of unemployment benefits
5) aid to state and local governments
6) A few, rather small direct Federal spending programs (eg "cash for clunkers). Most commentators seem to assume that this is a much bigger chunk of the deficit than it actually is.

A review of where our deficit has come from shows that there's actually relatively little direct addition to final demand in what the Feds have been spending-- rather, there's a safety net to prevent business and household financial collapses from cratering demand.

Sep 06 02:18 PM

[RECESSIONPROOF:]

its not called recovery, its called money printing

Sep 06 02:40 PM

[Roger Knights:]

Marc Faber analogized stimulus to something stronger than coffee. He called them "The crack of boom."

Crocadillion: Low interest rates made possible by a trillion or so of QE is the main form of stimulus. Support for real estate prices by backstopping a likely 2 trillion in losses from Fannie & Freddie is another costly form of stimulus.

Sep 06 03:42 PM

[Dialectical...:]

I am more politically liberal than probably most people on this site. So I am hardly a right wing ideologue. But even I can see the problems with where and how we have spent money that until recently didn't exist. Stimulus spending can be important. But the mismanagement of our national funds in the past 12 months has been an embarrassment to behold. We have essentially bought a trillion dollar sump pump from Iceberg Inc. to bail out the Titanic. I know I am no economist, but then that's a point in my favor I think.

True stimulus would have been targeted at job creation and consumer and small business. Instead we got bail-outs and back stops and buy-backs. This is debt we will be making payments on for a long time without having the benefits of increased productivity we should enjoy. To take a simple example from real working life. There is a point in the life cycle of every car where pouring more money into repairs makes less sense than letting the car die and getting a new one. We should have had this car towed away last fall when the transmission fell out.

Sep 06 04:39 PM

[Jan Paul:]

This article deals with recessions and spending to end them only to find that when you try to pull the money back, it causes a new recession.

www.wealthmoney.org/bu...

There is a lag factor so often the real cause of the next recession is blamed on the wrong things. Also, this recession is not an "inventory recession" like all since WW II. This is a "credit expansion collapse" recession like that in the 30's and while it won't play out the same, the cause is the same, too much personal, corporate, city and state debt. Too many spending outlays and not enough revenue whether from personal income or tax revenues.

For example, during the housing boom, California saw a 40% growth in tax revenues. Instead of preparing for the next downturn and you know one would come sooner or later, they instead, increased spending 43% or more than even the increase in tax revenues.

Now, the federal government is doing the same thing.

Sep 06 06:35 PM

[whidbey:]

If you had a case for your contention you would have laid it out, without the silly attack on Republican economists. Most of us would like to see some arguments that the deficit stimulus is indeed effective in some way. As it is you have added little.

Your work has been marred for some time by your bias, which appears to be combative support for Obama. Second rate work by any test.

Sep 06 06:37 PM

[atlasman:]

How on earth did we ever get out of past recessions without Governement spending.

Sep 06 06:55 PM

[reveigel@ms...:]

Only a moron would make a statement like that. No wonder this Nation is in such a mess. Where did all this stupity originate?

Sep 06 07:09 PM

[John Bowman:]

Heroin addicts get a short term boost from their fix. However, society suffers when they have lost a productive member and when they have to steal to pay for their next fix. And eventually, the user dies.

I would hope that the stimulus package would in the least give a very short boost, but the long term consequences are going to be brutal.

Sep 06 08:16 PM

[Moon Kil Woong:]

The author is completely right. The deficit stimulus plan is bad. Both parties would implement it, making neither much better than the other. Although its short term benefits are suspect, clearly the long term cost is obvious.

The problem is our political system has lost its moral bearing and sense of responsibility. The bailouts attest to the fact. The simple answer, the free today answer is always the one they ascribe to. Whether its manipulating statistics, asking the Fed to pump up money supply through low inflation or artificially through QE, asking quasi governmental organizations to backstop the banks or provide low interest loans which wreck the real mortgage market, or giving money to the same failed institutions without precondition and to the same executives who ruined them in the first place, all these actions point not just to a lack of foresight but to elected officials who are complacent and shirk their responsibility to their own constituents.

I suppose the only thing that can fix this is a constitutional amendment barring the government from reckless spending and duty shirking. Hoewever, even this is doubtful. Clearly laws can be overruled as we saw with the revocation of Glass Stegall. Even the Constitution can be minorly bent as with the formation of the Federal Reserve (they don't technically make money lol).

In the end, if morality and fair play (which bailouts are none of)doesn't reign supreme nothing can save us or this country.

Sep 06 11:36 PM

[Fighting Yoda:]

US has been deficit spending for last 20 -25 years, if running deficits was a solution to our problems - then we should not be having a problem to begin with. Govt can borrow and spend (deficit) to get over a hump - but America has been borrowing too much and spending even more - that is the source of our problems not the solution.

Keynesian stimulus does not work - it simply is a feel good political promo - it simply wastes money. Govt cannot efficiently or correctly allocate capital. The capital that the Govt utilizes is taken away from other sectors - those perhaps maybe far more productive. This spending simply adds to the debt that has to be repaid with higher taxes in the near future.

Our problem is too much consumption and too much debt not lack of. So if we do not get the basics right we could simply be having one last party before bankruptcy.

Sep 07 01:56 AM

[Dave Wrixon:]

Yes, "Deficit Spending is Obscuring and Exacerbaing the Problem" might have been more apt as a title.

Sep 07 02:53 AM

[peterthepai...:]

debt is finite...

no amount of hot air will change that simple fact...

until the people elect a party that will take the necessary action to balance the books...

"someday the people are gonna get good government...an they aint gonna like it!

Sep 07 04:34 AM

[a fat panda:]

This guy is the equivalent of an economic Neville Chamberlain - we have recovery in our time. great.

What he doesn't say is: the recovery of what? We are recovering an auto industry that can't compete. We are recovering a banking system filled we people who can't manage capital. In the meantime, we are penalizing well-run businesses in the form of higher cost of capital and higher taxes to pay for all of the recovery.








On Sep 06 12:44 PM Roger Knights wrote:

> We're on our 20th cup of coffee.

Sep 07 08:46 AM

[EEB:]

Dear Alphameister,

If tax cuts are the answer, then you should be a huge fan of about half of Obama's stimulus plan because about half of the stimulus plan is tax cuts, which I, and every other working person, am already receiving in the form of less withholding being done by the federal government. The Bush tax cuts were good, but the Obama tax cuts are bad?

As for tax cuts alone solving our economic problems, not just the deficit, I think that the last administration showed that that is simply incorrect. The Bush administration cut taxes massively, but net job creation during the last administration was pathetic. Another burst of tax cuts occurred in 2008 to prop up the economy, but it did nothing in the long-term.

Also, at the end of the post, Cautious Investor, seemed to be saying that the problem with the Obama stimulus plan was not a lack of tax cuts, but focused spending on infrastructure. In other words, the Obama plan was spending too little on projects that would both create jobs now and facilitate economic expansion in the future. I wholeheartedly agree with that assessment.


On Sep 06 12:23 PM Alphameister wrote:

> Cautious investor is right on the money. Short-term deficits resulting
> from tax cuts will tend to promote greater economic activity in both
> the short-term and the long-term. Short-term deficits resulting
> from a huge increase in government spending will, like a drug, produce
> a short-term high while having highly deleterious long-term effects
> on the economy. Bush's great fiscal failure was not the tax cuts
> that he pushed through but rather his total lack of discipline in
> controlling federal spending.

Sep 07 08:48 AM

[OldFordTruck:]

Had I known this article had been written from a political view point I would have never read it. Now that I have read it, I must comment. Without a doubt had McCain won the election not much would have changed in dealing with the melt down. Your article would have been a more interesting read had you been a supporter of Ron Paul. I would have loved to see a different approach for a change. However I do hope they are successful, once again, at getting the drug user high without killing him. It will buy me time to better prepare for the next crash.

Sep 07 09:24 AM

[derryl:]

Phase II of any Keynsian stimulus is supposed to involve raising taxes after a recovery to payout the debt that was incurred by deficit spending in the recession. It is naive to think that a modern entitlement democracy is capable of Phase II. We don't live in an economy populated by objective rational value maximizers. We live in a political economy where people's irrational desires often lead to damaging economic behavior and policies.

The debt is never repaid, always increased. In good times the entitled electorate sings, "In a rich country like this..." before demanding whatever spending increase serves their immediate desires. "We have the money today, forget about paying our debt from yesterday. Spend!" Any politician who dares say "No" is labelled a skinflint Nazi and voted out in the next election. Voters elect whoever promises to spend more on them.

MoonKiWoong is right, "In the end, if morality and fair play (which bailouts are none of) doesn't reign supreme nothing can save us or this country."

No nation can prosper when its people believe they are 'entitled' to economic goods that they have neither produced nor otherwise earned. Socialism fails because individuals are not allowed to enjoy the benefits of their own efforts, and they are not allowed to suffer the consequences of their own failures. Why bother being conscientious and productive when most of what you earn is taxed away and given to people who do nothing?

Failure and the suffering it brings are supposed to motivate us to change our ways, to improve ourselves, to learn how to live in this world. Entitlement democracy removes this natural essential goad and allows people to live well without developing themselves. A population who fails to develop will stagnate and fall behind, become poorer. Bailing out failure teaches the moral lesson that nobody has to suffer from their errors, like a too-soft mother who coddles and spoils her children rather than preparing them for life in the real world where they have to perform in order to earn a living.

We are living out the reallity of "moral hazard". That horse has long since run galloping out of the barn. Failed bankers are paid millions and tens of millions in 'bonuses'. Today they are right back to engineering quarterly results that justify the 'bonuses', rather than learning to mend the error of their ways which, not incidentally, brought down the world's financial system which is only being propped up with the guarantee of taxpayer $trillions.

The Republic has devolved into an entitlement democracy which has devolved into an outright kleptocracy. Steal what you can today and damn the consequences for the nation.

I suppose this is the natural consequence of success. Hyman Minsky saw that stability leads to instability because we all become too complacent and take too many risks. When the Western world became rich after WWII people began to think our nations could afford entitlement programs, ignoring the moral hazard these carry and the other risks of promising to give everybody something for nothing. Who, pray tell, is supposed to be working and producing all those "somethings" that are so freely given away by politicians?

I am not advocating capitalist Darwinism where failures simply die off. I think we can afford a limited welfare state that provides a minimal safety net. But I don't know how it is politically possible to prevent ongoing expansion of the welfare state until it sucks the lifeblood out of the nation.

It used to be that people who needed help were given "charity" by good-hearted citizens who could afford to help. But liberalism decided that charity is too demeaning and told those people they 'deserved' to be helped, that they are 'entitled' to enjoy the fruits of other people's efforts. I think that is where the moral error was committed.

Falling into neediness is an unfortunate fact of life for some people, maybe even most of us at some point or other. How many young adults have never been helped out by their parents? Most of us regain our feet with a little well placed help at the right time. Charity is a virtue if it is limited to this kind of 'hand up', or to helping those who are permanently in need and are unable to help themselves. But a welfare state that enables, in capable people, vices like sloth and envy is not charity and is not virtuous. If we can relearn these old moral lessons then we can turn this ship around.

Sep 07 10:35 AM

[koot:]

Yes, Trying to put out a fire with more fuel and oxygen only deprives others from the fuel and oxygen they need. Reporting unemployment with birth/death model adjustments is the attempt to convert a normal lagging indicator into leading. This is causing all sorts of leading problems for the central bank and US governments as they are eating their own really bad cooking.


On Sep 06 06:35 PM Jan Paul wrote:

> This article deals with recessions and spending to end them only
> to find that when you try to pull the money back, it causes a new
> recession.
>
> www.wealthmoney.org/bu...
>
> There is a lag factor so often the real cause of the next recession
> is blamed on the wrong things. Also, this recession is not an "inventory
> recession" like all since WW II. This is a "credit expansion collapse"
> recession like that in the 30's and while it won't play out the same,
> the cause is the same, too much personal, corporate, city and state
> debt. Too many spending outlays and not enough revenue whether from
> personal income or tax revenues.
>
> For example, during the housing boom, California saw a 40% growth
> in tax revenues. Instead of preparing for the next downturn and
> you know one would come sooner or later, they instead, increased
> spending 43% or more than even the increase in tax revenues.
>
> Now, the federal government is doing the same thing.

Sep 07 02:28 PM