- Paul Krugman: States of Depression
- Highly Unequal Income Gains During the Recovery
- Links for 2012-03-05
- Did the Stimulus Package Work?
- Discrediting Academic Voices
Posted: 05 Mar 2012 12:24 AM PST
Austerity at the state and local level is "exerting a powerful drag on the economy":
States of Depression, by Paul Krugman, Commentary, NY Times: The economic news is looking better lately. But after previous false starts — remember "green shoots"? — it would be foolish to assume that all is well. And in any case, it's still a very slow economic recovery by historical standards.
There are several reasons for this slowness,... the most important being the overhang of household debt that is a legacy of the housing bubble. But one significant factor in our continuing economic weakness is the fact that government in America is doing exactly what both theory and history say it shouldn't: slashing spending in the face of a depressed economy. ...
Adjusted for inflation, Reagan-era spending rose 10.2 percent in the first 10 quarters of recovery, Obama-era spending only 2.6 percent.
Why did government spending rise so much under Reagan, with his small-government rhetoric, while shrinking under the president so many Republicans insist is a secret socialist? In Reagan's case, it's partly about the arms race, but mainly about state and local governments doing what they are supposed to do: educate ... children, invest in infrastructure for a growing economy.
Under President Obama, however, the dire fiscal condition of state and local governments ... has led to forced spending cuts. The fiscal straits of lower-level governments could and should have been alleviated by aid from Washington... But this aid was never provided on a remotely adequate scale. ...
We're talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc...
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower..., or below 7 percent — significantly better than the Reagan economy at this stage.
One implication of this comparison is that conservatives who love to compare Reagan's record with Mr. Obama's should think twice..., in reality Reagan was much more Keynesian than Mr. Obama, faced with an obstructionist G.O.P., has ever managed to be.
More important, however, there is now an easy answer to anyone asking how we can accelerate our economic recovery. By all means, let's talk about visionary ideas; but we can take a big step toward full employment just by using the federal government's low borrowing costs to help state and local governments rehire the schoolteachers and police officers they laid off, while restarting the road repair and improvement projects they canceled or put on hold.
Posted: 05 Mar 2012 12:12 AM PST
Miles Corak notes that most of the income gains during the first year of the recovery went to the top of the income distribution:
Over 90% of the income gains in the first year of the recovery went to the top 1%, by Miles Corak: Emmanuel Saez of the University of California at Berkeley has updated his work with Thomas PIketty on the evolution of US Top Incomes to 2010.See also Brad DeLong.
Posted: 05 Mar 2012 12:06 AM PST
Posted: 04 Mar 2012 10:55 AM PST
John Cochrane cites the work of John Taylor in yet another rant about how complete crowing out, or at least near complete crowding out, renders government spending or tax policy multipliers small or non-existent.
But what did Taylor actually find? First, as he noted just the other day, he has no objection to the theoretical arguments concerning fiscal stimulus (this is from the debate that Cochrane cites to support his claims that fiscal policy cannot work):
I want to emphasize that I not saying that permanent or long-lasting changes in fiscal policy, such as tax reforms that lower marginal tax rates, cannot help the economy, or that the automatic stabilizers are ineffective.Thus this is an empirical question, not a theoretical one, and Taylor draws on his own empirical work with John Cogan to argue that the stimulus was ineffective.
But let's look at those results a bit closer. First, in testimony before Congress about his findings Taylor notes there were three categories of stimulus, and that it's important to distinguish among them:
Three components of ARRA are...: (1) Federal government purchases of goods and services (both government consumption and government investment), (2) Federal grants to states and local governments, and (3) Temporary transfers and credits which increase the disposable personal income of individuals and families.
For the purposes of assessing the impact of ARRA on the economy it is very important to distinguish between these three categories and consider each in turn. ...What does he find for government spending?:
Federal Government Purchases Perhaps the most striking finding in the data ... is that only a tiny slice of ARRA has gone to purchases of goods and services by the federal government. Of the total $862 billion in the ARRA stimulus package, the amount allocated to federal government consumption summed to only $24.2 billion in the two years 2009 and 2010. The amount allocated to infrastructure investment at the federal level was $5.6 billion in 2009-10, or only 0.6 percent of the total ARRA.
Measured as a percentage of GDP the amounts are even smaller. At the maximum level, reached in the third quarter of 2010, federal government purchases were only 0.2 percent of GDP and federal infrastructure was only 0.04 percent of GDP.
Clearly these amounts are too small to be a factor in the economic recovery. The debate over the size of the government purchases multiplier does not matter here because the multiplier has virtually nothing to multiply at the federal level. On this account ARRA has not been effective in stimulating economic growth and job creation.Taylor is not claiming that government spending didn't work, or can't work theoretically. He is saying there is no way to tell.
The second category is where Taylor puts most of his analytical effort, but before turning to that, what about the third category, temporary transfers and credits? Does that work? Here Taylor says:
These statistical techniques show that the effect of the temporary stimulus payments on personal consumption expenditures is much smaller than the effect of more permanent income changes and statistically insignificant from zero.In this case he is arguing the stimulus didn't work, but this is an argument about how the stimulus should be designed, not an objection to stimulus per se. He thinks the tax changes should be permanent, not temporary (however, permanent changes in taxes are a poor tool to apply against temporary cyclical problems, and I find the statistical evidence to be far more cloudy than does Taylor).
He also finds that the second type of stimulus, Federal grants to states and local governments, is ineffective, but it's important to understand why. As he notes here:
The large federal stimulus grants sent to state and local governments for infrastructure spending were mainly used to reduce borrowing and thus did not result in an increase in purchases. ... The explanation is that local governments in effect acted as many American households did: when they received the stimulus money, they saved it rather than purchased goods and services. ...
To better understand this explanation one can look at other countries, and in particular at China's recent stimulus package. This week I went to China and explored the question.
Local governments in China apparently did increase infrastructure spending in 2009 following the stimulus package. Why didn't these governments simply reduce borrowing as did U.S local governments? Professor Chong-en Bai of Tsinghua University gave me the best answer using simple economic reasoning: the local governments appeared to behave more like liquidity constrained households than permanent income households. In China, local governments do not have much access to capital markets. They get their funding mainly from the central government, including loans from the central bank, and of course only for projects that are approved by the central government. At any point in time local governments are submitting new infrastructure projects for approval; some are being rejected and some are being accepted. If the central government wants to increase infrastructure spending by the local governments all it has to do is lower the acceptance criterion, instruct the central bank to provide the funds, and the volume of projects increases. This is apparently how the stimulus worked in China.
Note that the mechanism is essentially built into the structure of the economy, with characteristics similar to an automatic stabilizer in which the criteria are raised and lowered administratively according to the state of the business cycle.Thus, the finding here is really about the institutional design of the stimulus. He is arguing that transfers to state and local governments can work, and work well. Just look at China. If the stimulus package is designed so that state and local governments cannot use the money to finance existing projects, i.e. substitute federal money for state money rather than increasing overall spending, then it will work just as well as it worked in China.
Thus, the lesson here isn't that stimulus won't work, not at all. The lesson is that the stimulus package must be better designed, e.g. so that state and local governments cannot substitute for other types of spending (though I should note, again, that I don't think the empirical evidence is anywhere near as clear as Taylor implies). I think this is an important lesson. One of the biggest problems in our response to the Great Recession, something Paul Krugman has been highlighting recently, was the decline in state and local spending and employment. Getting the design of the stimulus right could have prevented that, and that rather than the more simplistic "stimulus doesn't work" is the lesson that we need to take away from this experience.
Update: Paul Krugman notes that Christina Romer has rebutted the Cogan and Taylor results "in devastating fashion":
...I thought I should point out something else about Taylor's claim (pdf) that aid to state and local governments had no effect, because they would simply have borrowed the money. Christina Romer (pdf) has already answered this, in devastating fashion:Update: See Brad DeLong as well:
...I had thought that we had gotten John Cochrane to admit that the national income identity was not a behavioral relationship--that when the government spent money there was no necessity (or even likelihood) that the people who would eventually pay the taxes to ultimately redeem the debt issued by the government to fund its spending program immediately cut back on their spending by as much as the government increased its. But here we have Cochrane again expressing what sounds a lot like the totally-wrong British Treasury view of the 1920s, again expounding what I call Eugene Fama's fallacy:
Posted: 04 Mar 2012 10:00 AM PST
Does college make students more liberal and less religious? Nope:
The Indoctrination Myth, by Neil Gross, Commentary, NY Times: THE Republican presidential candidate Rick Santorum recently ... called colleges and universities "indoctrination mills" for godless liberalism. But is this true? Does attending college actually make you more liberal and less religious? Research indicates that the answer is: not so much.
It's certainly true that professors are a liberal lot and that religious skepticism is common in the academy. ... But contrary to conservative rhetoric, studies show that going to college does not make students substantially more liberal. ... Studies also show that attending college does not make you less religious. ...I've always thought this is more about discrediting academic voices than the supposed indoctrination itself. The author gets this:
So why do conservatives persist in attacking higher education? There's no doubt that in terms of overall curricular content and campus culture, most colleges and universities do skew more to the left than to the right. And research by the sociologists Amy Binder and Kate Wood confirms that this can be a frustrating and alienating experience for conservative students, even if it's not serving to indoctrinate anyone.
But that alone doesn't explain the intensity of the animus. Doing so requires some historical perspective. Conservatives have been criticizing academia for many decades. Yet only once the McCarthy era passed did this criticism begin to be cast primarily in anti-elitist tones: charges of Communist subversion gave way to charges of liberal elitism in the writings of William F. Buckley Jr. and others. The idea that professors are snobs looking down their noses at ordinary Americans, trying to push the country in directions it does not wish to go, soon became an established conservative trope, taking its place alongside criticism of the liberal press and the liberal judiciary.Academics provide a powerful counterforce to conservative ideas, both through evidence and argument, and to the extent those voices can be discredited, it benefits conservatives. At least politically. But there is a danger in this as well. Discrediting professors as out of touch, elitist, individuals discredits the entire institution of higher education, and this undermines our pursuit of basic science and education that will be needed to compete in a globalized economy (e.g. by making taxpayers less willing to fund these institutions). Most of the academics I know don't have a political bone in their body, and if they do it does not affect their research in any way. They simply want to find the truth, and discrediting the entire institution of higher education to mute the few who do speak out reduces our ability to solve important problems.
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