Yet another example of an economist whoring out to sit in Obama’s circle of love. It’s summed up at The Slack Wire:
Looks like Goolsbee is the perfect pick to succeed Romer — his advice is already being ignored even before he’s been hired.
This is said in the face of Obama’s call for new business incentives of which Goolsbee previously wrote in his academic research:
Although there appears to be an abiding faith among policy makers that tax incentives can influence the investment decisions of firms and serve as a tool for stabilizing the economy, empirical evidence for the connection is weak. Econometric research has commonly found that tax policy and the cost of capital have little effect on real investment. Economic theory predicts that the marginal user cost of capital should be the primary determinant of investment demand but actual estimates of the price elasticity of nvestment … mostly lie between zero and -0.4… The evidence that investment is only modestly responsive to price has been one of the most robust findings of the empirical investment literature…
In addition to their large revenue costs, investment tax subsidies may give large, unintended rents to capital suppliers without increasing real investment until several years later because of the short-run asset price responses of capital goods. For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.
With the recovery faltering less than two months before the November congressional elections, President Obama’s economic team is considering another big dose of stimulus in the form of tax breaks for businesses – potentially worth hundreds of billions of dollars, according to two people familiar with the talks.
In the 1930s Americans supposedly lost faith in markets and rallied to government. But if you go back and look at public opinion polling then, you find something rather different. You find majorities grumbling about Big Government, scorning Big Business and opposing Big Labor.
The 1940s were different. Facing the threat of total war, Franklin Roosevelt transformed himself from “Dr. New Deal” to “Dr. Win the War.” He fostered cooperation between Big Government, Big Business and Big Labor. Roosevelt was brilliant at selecting, from all these sources, the best men (and women) for jobs he considered important.
The result was a war effort that was brilliantly successful. America was the arsenal of democracy, vanquishing its enemies and inventing the atomic bomb. Big Unit governance gained enormous prestige and held onto it for a generation after the war.
When I was an undergrad in finance I had a remarkable teacher, Dick Smith, who taught a course in Banking. Smith’s resume included a long stint as CFO of Potlatch Corp which made him unusual as a Biz Prof simply for his deep real world experience.
Fortunately for us (and I suppose Smith too) Smith authored the course text book which included a chapter titled: The Unfortunate Fact That Balance Sheets Balance. This notion raised eyebrows amongst the students who were all well taught in financial accounting (which doesn’t presuppose that we were all well learned in such.) But the Cliffs Notes on the chapter are that the there is an illusion of legitimacy from the equal footings represented on a financial statement which, if not there, would cause a credit analyst to dig further into the “accounting risk” that all financial statements have. As a young credit analyst this notion served me better, or at least as well, as anything I learned in collage.
Dave, Methodological shortcomings acknowledged. But if I have to choose between the CBO and Boehner, Limbaugh, Hannity, et al, guess where I’m going.
I have to agree with David that given this (false) choice I would defer to the CBO as well. The problem is, of course, that supporters of the ARRA hold up the CBO numbers as proof positive that that jobs were “created or saved” due to the stimulus. My challenge to those is: prove it! The whole idea behind the fiscal multiplier came from Keynes General Theory of Employment which, to date, is still theory and still general.
I suspect that a big reason that mathematics took over economics is that it gives you a sense of mastery. Indeed, it may give you a false sense of mastery. As you learn mathematical economics, you realize that you are getting really good at doing something that only a small group of people is able to master. And you get the sense that because you completed a mathematical proof that you accomplished something. It is very seductive.
Which brings me back to Dr. Smith’s “unfortunate fact(s).”
Now, as you might guess, I’m not convinced that the multiplier works at all or, at a minimum, any fiscal stimulus can be a Pareto improvement – a state where it is possible to make someone better-off without making someone else worse off. But let’s take Dr. Smith’s advice and dig deeper. Megan McArdle does the thought experiment:
How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But let’s take the CBO’s estimates as representing a rough consensus of those who favor stimulus: for our $800 billion, we got a reduction of 0.7 to 1.8 percentage points.
Full employment is perhaps 4.5-5%. If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion. On the high end, it would have been in the $4-5 trillion range.
I’m going to go out on a limb and say that even if Republicans had simply magically disappeared, the government still would not have been able to borrow and spend $2.5 trillion in any reasonably short time frame, much less $4-5 trillion. The political support for that level of government expansion simply wasn’t there among Democrats, much less their constituents. Even if they had found the political will, I doubt that government institutions could have effectively channeled that much new spending. And assuming away those two problems, would lenders really have been available to fund 18% deficits at rock-bottom rates?
[...]
Which raises an interesting question: what if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields.
Well, I’m equally unconvinced that WWII cured the depression with negative real interest rates but, more likely, the lack of consumption goods forced the savings rate so high that, after the war, there was huge pent-up demand and a great deal of savings in the bank to satisfy it that finally stimulated the economy (amongst other factors like being the last industrial base standing.)
But so far no one has yet proved that the stimulus is noting but an economic transfer benefiting some cohorts at the expense of others. And the more I hear “but at least the stimulus made things better than they would have been” the more I believe that the conventional wisdom is nothing more than an unfortunate illusion.
Since we’ve already spent most of the money, I hope someone would prove me wrong. But I won’t hold my breath.
Even people who believe in Keynesian intervention would have to admit, I think, that President Obama and the Democrat Congress have made a terrible mess of it. I feel compelled to agree with Congressional Republicans who accuse “the administration of squandering stimulus spending on efforts that brought little gain.” I don’t believe in Keynesian policy because I think the private sector is far better at conducting economic activities than the government (as I believe the per job spending demonstrates), but even if I did, I would have to feel let down by my elected leaders because they have screwed the whole thing up so badly that any more ’stimulus’ is probably politically impossible.
Americans got angry when the federal government tried to bail out banks by buying assets or taking capital positions. Whatever you may think of those bailout programs, they at least had the advantage that taxpayers were getting something in return for their money. There is another bank bailout program going on now – one that allows the federal government to recapitalize banks with public money, receive nothing at all in return, and somehow escape criticism for doing so. That bailout program is called the Recession.
How does the Recession allow the government to bail out banks? With the recession going on, people are afraid to do anything risky with their assets, so they keep them deposited in banks, earning no interest. Banks can then invest these deposits in Treasury notes and credit the interest on those Treasury notes to their bottom line, thus improving their balance sheets. So the government pays to recapitalize banks while receiving nothing in return.
[...]
So the success of this bailout program depends on avoiding recovery, avoiding increases in inflation expectations, and avoiding major declines in Treasury note yields. Now do you understand why the Federal Reserve Bank presidents – representatives of the banking sector – are the most hawkish voices at the FOMC’s policy meetings?
I call it neutron-bomb monetary policy. The banks are still standing, while the people are getting killed. I don’t think that is the explicit intent of the Fed, but the structure of the organization makes it much more responsive to the thought process of bankers than to that of ordinary Americans.
This isn’t the first time this has happened and it bolsters the argument that the Fed’s mission creep needs to be reigned back to one of simple price stability (if we continue to allow them to exist at all.) Bailing out borrowers on the backs of savers is wrong from either an egalitarian or free market perspective – especially if the “borrowers” are zombie financial institutions.
But the unfortunate fact is that the average Joe has no idea they’re getting screwed.
I was feeling pretty optimistic this morning about 6:00 AM. Of course that optimism was little more than the fruit of a good night’s sleep. After all, there seems little that really gives the investing class much hope for finding any up-side catalyst. And I’m guilty of confusing optimism for lack of pessimism. Like the song says “I’ve been down so goddamn long that it looks like up to me.”
Then, at 6:30 exactly, the Durable Goods Report was horrible with a top line print of .3% and ex-transportation a -3.8%. And it gets worse; if we exclude defense spending the number is closer to -7% (is this where all you Keynesians will encourage more defense spending?). Shortly thereafter Dr. Doom (Nouriel Roubini) tweeted that the risk of a double-dip recession just increased to 40% by his metrics. And since then numerous economists (not that we should believe any one of them) forecast the 3Q growth would be something less than 1%. Well, if recession is your problem, 1% following 3% growth ain’t your answer.
Yes, I know, if you can understand the chart you see that both the New York Fed and the ISM index are marginally expansionary. But there is no denying the trend.
And to top it off, the normally sanguine (and also most excellent neo-Keynesian) Scott Sumner was ready to throw in the towel
[Note: If you lean towards Keynesian theory, Sumner is the go-to guy. I read him every day and he has a remarkable series on the Great Depression that everyone should spend time reading]:
OK, I’m ready to throw in the towel. I just made the mistake of checking Drudge. His website is frequently shameless, but you have to admit he often picks up the zeitgeist. All the news about the economy is dreary. Then I looked at Bloomberg and here are the latest TIPS spreads:
Both have been falling like a stone. This suggests that a sharp slowdown in NGDP growth is very likely. Until now I’ve tried to remain an optimist, disappointed in the pace of recovery, but assuming that we were at least muddling forward. But it is now clear that we are no longer recovering.
Read the whole thing. You actually might find a ray of hope on what he thinks can be done – although I’m skeptical to say the least.
But I guess all of this news is already baked into the cake. The market shrugged it off and even closed with a marginal gain. Just goes to show you that traders should think twice before trading their moods.
But at the end of the day I’m glad I read Todd Harrison channeling Chauncey Gardner:
The evolution is akin to a forest fire; scary and dangerous yet necessary for a fertile rebirthing for future growth. Yes, I’ve seen my fair share of change from the inside-out in industries the last twenty years, and the only thing I can say with absolute certainty is we ain’t seen nothing yet.
Enjoy the journey; we live in dynamic times.
I do have faith in the long term ability of American entrepreneurs to find the profitable economic dynamics in spite of the expanding Leviathan. I just need to – hell, we all need to - keep that in mind.
But for Obama and Biden’s recovery summer: I ain’t seen nothin’ yet. And summer’s almost over.
the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines.
Kling responds:
Old consensus: we need Freddie and Fannie in order to make housing “affordable.”New consensus: we need them in order to “prevent further house price delicnes,” in other words, to make housing less affordable.
The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.
Didn’t this have something to do with our getting into this position in the first place?
The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.
Some workers agree that unemployment benefits make them less likely to take whatever job comes along, particularly when those jobs don’t pay much. Michael Hatchell, a 52-year-old mechanic in Lumberton, N.C., says he turned down more than a dozen offers during the 59 weeks he was unemployed, because they didn’t pay more than the $450 a week he was collecting in benefits. One auto-parts store, he says, offered him $7.75 an hour, which amounts to only $310 a week for 40 hours.
I don’t know how accurate it is on a large scale, but I am sure that there are some people who could find work. I liked this:
Yet it [sparsely attended job fair] received a tiny amount of interest despite the massive pool of unemployed Americans. Which makes one wonder what kind of economic downturn this is. It certainly isn’t anything like the American depression given unemployed Americans’ ability to be picky.
The president’s chairwoman of his Council of Economic Advisers, Christian Romer, has decided to turn the page and go back to academia. Since some of us noticed a long time ago that she previously traded in her well justified credentials for a tour as a politically appointed economic call girl, one might question how she might get her reputation back.
Christina D. Romer isquitting as chairwoman of President Obama’s Council of Economic Advisers.The ordinary function of government is to destroy talented people, but Romer’s epic failure has an additional element of tragedy. As an economist, Romer did an excellent job [pdf] of establishing that New Deal stimulus failed to end or seriously mitigate the Great Depression. As an Obama team player (and poignantly, a sunny supporter of the then-senator’s campaign), she made a 180-degree turn toward pro-stimulus hocus pocus. Romer will be remembered as the main advocate of the mythical “multiplier” phenomenon, in which every federal dollar spent producers more than 100 pennies worth of economic activity. This is the kind of economics you’d expect to hear from a fine arts major.
Maybe it won’t matter on the lobbyist/lecture circuit, but at some point a person must say, “I told all those lies and this is all I get for it?”
I can’t wait to see who the next notable economist will be to shuck her/his integrity for the fast life of a political trollop.
Yesterday I referred to the possibility of what I called a “division between [public] employees and the taxpayers who pay them.” Then I stumbled across this in the NYT:
There’s a class war coming to the world of government pensions.
The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.
The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.
At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.
Aaron Flint reports from the UM Bureau of Business and Economic Research, Mid Year Update, in Billings:
Had the media have been there, they might have picked up on 2 key nuggets of information. First, a public employees strike similar to that back in 1990 may be in the making. Second, economists with UM’s BBER have lowered their economic growth forecasts for nearly every major city statewide. What does point two mean for you? Well, as one audience member pointed out, these growth numbers are even more skeptical of future economic growth in Montana than that predicted by State Legislative Fiscal Analyst Terry Johnson’s numbers. Johnson himself has been accused by Governor Brian Schweitzer (D-MT) of being too pessimistic about Montana’s economy. Nonetheless, Johnson’s numbers show Montana holding at least a $400 million deficit for the upcoming legislative session.
With the current pain in the private sector, a public employee strike would only serve to deepen the division between those employees and the taxpayers who pay them. I predict that in the next 5-10 years this division will be a significant point of contention in legislative budget talks, not just in Montana but nationwide.
Hokey smokes! 2010 is set to see more than 200 permits issued, up from only 20 last year.
That’s good news, but we still only have a handful of drilling rigs operating in Montana, compared to the 100+ in North Dakota.
I can tell you from my own frequent travels to the northeast that oil is causing a boom in Sidney, Culbertson, Plentywood and the smaller towns in between. Seems like there’s lots of new arrivals, finding a hotel room is difficult, and the restaurants and bars are bustling. Anyone skeptical about the future of Montana’s natural-resources economy need only go out east–or perhaps just take a gander at the state-gov’t budget–to see the vitality it continues to bring.
Moreover, it’s not just Montana’s part of the Bakken that is producing. Sources say that western rural Richland and Dawson counties, in places off the Bakken, have seen some of the most productive wells.
Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.
Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.
The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.
The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.
The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.
Many horrific results of legislation are intended. But this one, I suspect is more in the J. Alfred Prufrock category: That is not what I meant at all. That is not it, at all.”
As Hayek said in The Fatal Conceit:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
And it makes one wonder what effect that will have on GM, using taxpayer dollars, to buy a portfolio of garbage assets to boost sales. Anyone with experience in retail credit knows that the only way to cover losses in substandard credit is to grow the portfolio.
I have to defer to Tyler Cowen (but I’m too lazy to find the exact link) who thinks that the requirement to have one of the Big Three debt ratings should be eliminated. Caveat emptor and all that rot.
Congressman Aaron Schock (R-IL) has joined the chorus of Republican outrage over stimulus signs and claims at least $20 million has been spent on them. He told ABC News, “I think it’s a bit of an oxymoron to spend tens of millions of dollars of taxpayer money, borrowed money, on a bunch of signs to tell them how we are spending their taxpayer money.”
While I agree in theory with Massachusetts Democrat James McGovern that the signs are a pretty small drop in the bucket, it as at least bad form to spend our money bragging to us about all the great things you have done with…our money.
Still, the Obama administration already has launched the message that they hope will take Democrats into November: a “Recovery Summer” spent talking up 3.5 million jobs created or saved by the $787 billion stimulus bill passed by Congress last year.
Hmmmm. That’s just under $225,000.00 per job. What a bargain.
