Krugman vs. Bartlett: A tale of two charts
Kurt Brouwer July 6th, 2009
Despite the fact that most of the existing economic stimulus program has not yet been implemented, Nobel laureate economist and New York Times columnist and blogger has been advocating a second government stimulus program.
Now, in this post, Krugman attacks Bruce Bartlett who believes it would be a mistake to pass another economic stimulus. Krugman chooses to do this by reproducing an image originally published in January by Christina Romer and Jared Bernstein in a paper that advocated the first stimulus program (The American Recovery and Reinvestment Act of 2009):
Bruce Bartlett Misstates the Problem (New York Times / Conscience of a Liberal Blog, July 5, 2009, Paul Krugman)
He says:
The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately.
Um, that’s totally false. Did Bartlett even look at the Bernstein-Romer paper? Here’s the key graph:
Source: New York Times
Essentially, Krugman is quibbling with Bartlett’s interpretation of the paper written by two economists — Christina Romer and Jared Bernstein — who are currently active in the administration. As such, this is pretty dry stuff about when the administration economists thought the stimulus dollars would start actually stimulating the economy.
However, Krugman left out some crucial information. Namely, it is now July and the graph above was produced in January as a prediction of the before and after effect of the economic stimulus program. Wouldn’t it have made sense for Krugman to update the chart to see how much of a positive effect the stimulus program has had? After all, if the humble Fundmasteryblog can find the updated information, couldn’t the New York Times?
Here’s the graph above as updated with current information on unemployment. This covers the same information as the one above, but I increased the size of the chart below a bit so you can read the added information (in red) more easily:
Source: Calculated Risk
As you can see, current unemployment is already higher than the Romer/Bernstein paper estimated unemployment would be without the economic stimulus program.
This New York Times piece attempts to figure it out what went wrong with the government’s analysis [emphasis added]:
A Forecast With Hope Built In (New York Times, June 30, 2009, David Leonhardt)
In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.
To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.
We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further [KB: it is now 9.5%]. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.
There are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions.
The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference.
The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.
At this point, it is clear that the economic stimulus program has not delivered as promised. It may be that the administration oversold the benefits in order to get it passed. Or, it may be that they underestimated the severity of the downturn. Or, perhaps they just were too optimistic as to the speed with which the program could be implemented.
Regardless of what went wrong, I believe it makes sense to figure that out before doubling down with another plan, don’t you?
Let’s give Bruce Bartlett the last word as it was his column that inspired Paul Krugman in the first place. Here’s Bartlett in the Financial Times [emphasis added]:
We do not need a second stimulus plan (Financial Times, July 5, 2009, Bruce Bartlett)
As the US unemployment rate has risen to 9.5 per cent from 8.1 per cent since the $787bn fiscal stimulus package was enacted in February, many Democrats have become very nervous. They say that another large stimulus may be needed to keep unemployment from rising well beyond the 10 per cent rate that President Barack Obama has predicted will be reached this year.
Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.
The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately.
The forecast also showed the unemployment rate peaking at 8 per cent with the stimulus and 9 per cent without. Obviously this was wrong. Yet it would be incorrect to conclude that the stimulus was doomed to failure, as many Republicans and conservative economists argued…
Bartlett points out that most of the job-producing activities from the economic stimulus package have not yet been implemented. In fact, only 11% of the spending on highways, transit and energy efficiency will be spent this fiscal year (that is by September 2009).
…just 11 per cent of the discretionary spending on highways, mass transit, energy efficiency and other programmes involving direct government purchases will have been spent by the end of this fiscal year. Even by the end of 2010 less than half the funds will have been disbursed and by the end of 2011 more than a quarter of the money will be unspent.
…While there may have been a few “shovel-ready” projects that could be started immediately, the vast bulk of public works projects take a long time to be effective, economically. Plans need to be drawn up, land purchased, environmental impact statements prepared, contracts written and put out for bid, and many other things before the first construction worker is hired.
As we have seen, the so-called ‘shovel ready’ projects are few and far between. But, never fear, some will be found as this photo from Business Insider illustrates:
Source: Business Insider
Bartlett continues:
…What all this means is that it is foolish to think that any sort of stimulus that is enacted now will have an impact on the economy any time soon. We just have to wait for the medicine we have already taken to work. Pushing ahead with another stimulus will only make it harder to tighten fiscal policy down the road to keep inflation in check.
Via: Instapundit
For more on this topic, see:
Why Isn’t the Economic Stimulus Working?
Feldstein: Weak & Wobbly Economy Ahead
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Kurt,
In January Romer and Bernstein forecasted that unemployment would average 7.6% in the first quarter. They also forecasted that unemployment would average 8.2% in the second quarter in the absence of the proposed stimulus. They also forecasted it would average 7.9% with the proposed stimulus. In other words they were forecasting that the stimulus would only reduce the unemployment rate 0.3% below baseline in the second quarter.
We’ll never know for sure what the unemployment rate would have been in the second quarter without the stimulus but it averaged 8.1% in the first quarter and 9.3% in the second (yes, the most recent unemployment report was for June and that is part of the second quarter). Thus unemployment was already rising 1.2% a quarter even before the stimulus was forecast to have any effect, not the 0.6% or 0.7% a quarter forecast by Romer and Bernstein. (And actually the baseline forecast really came from the CBO if you want to spread blame.) The only large forecasting body that forecasted the correct rate of first quarter unemployment was the OECD and their forecast of a 9.0% average rate of unemployment in the second quarter was to my knowledge more pessimistic than anyone’s and it still fell short.
The stimulus that passed was not the one that was initially proposed. It had substantial amounts of state transfers removed (that would have prevented some of this summer’s substantial and counterproductive state level budget cuts) in exchange for the AMT patch and other nonstimulative nonsense. It will likely have less of an impact than the the one that was analysed by Romer and Bernstein. However even if the existing stimulus functioned as Romer and Bernstein’s forecast of the proposed stimulus for all we know unemployment might have averaged 9.6% in the second quarter instead of the 9.3% that it did.
Krugman and Bartlett’s quibble over the effects of the stimulus is really a small one. Bartlett was in favor of the stimulus. But their quarrel over the need for a second stimulus is a large one. Bartlett is right that a fiscal stimulus will take time to have an effect. (Romer and Bernstein forecasted that the maximum effect of the proposed stimulus to be in late 2010 for example.) But I think he is wrong that this will at all matter.
Remember, I would not be in favor of a stimulus were it not for one singular fact: we are definitely in a Hicksian liquidity trap. This is the one occasion (with highly mobile capital and flexible exchange rates) that a fiscal stimulus is effective or necessary. And the fact that the employment situation has taken this truly alarming trajectory only implies it will get much much worse before it ever approaches full employment again. Thus, unfortunately, there is all the time in the world.
When I try to describe the effects of the stimulus to noneconomists I sometimes resort to a gardening metaphor. Imagine you have a hole in your backyard. A stimulus is akin to buying some soil and filling in the hole. The hole in our case has turned out to be much larger than anyone initially forecast. Instead of the ten pound bag we should have sprung for the 50 pound bag. But it’s not to late to out and get more soil. The hole will still be here when we get back from the hardware store.
Good points Mark. Unfortunately, this administration oversold the benefits of the stimulus program in an attempt, I believe, to get it passed.
I do have a fundamental disagreement with the idea that an effective, timely and targeted stimulus program can or will be enacted. Congress has no clue as to what effective action would be and, unfortunately, President Obama is leaving the details of any stimulus up to Congress.
Further, the first stimulus had counterproductive elements, most notably the Buy American provisions.
In addition, the administration and Congress have made it very clear they plan to raise taxes and that is counterproductive during an economic downturn.
Stimulus spending in the vein of “government making up for a loss of aggregate demand” is a bunch of hogwash. When was the last time the the government created funding for itself? Oh wait, that hasn’t happened yet in ~236 years of trying. Repeat this after me: the federal government doesn’t create any capital, it only acquires such funds from private sources through various means (taxes, fees, tariffs, etc). Also, the only thing that is even partially “stimulative” to short-term spending is rapid monetization of US sovereign debt, which while possibly juicing some expenditures in the short-term fails to have any long-term impact on an economy and creates future taxation and acts as a drag on future output (not to mention any kind of inflation impact down the line from massive currency devaluation). One lesson we should remember from this current currency devaluation we’re putting on ourselves is that this sort of thing has never ever worked in all of recorded history. From the Romans to the princes of Italy, to the Spanish and British Empires, right up until the good old U.S. of A today, there is no possible way to devalue yourself out of a crisis. Devaluation as a strategy always always always turns out badly.
The federal government spending “stimulus money” is nothing more than diverting capital that was already available to the economy into something that the administration deems “stimulative”, such as road signs labeling a project as ‘sponsored by the 2009 stimulus bill’ (to the tune of ~$6 million) and other such fruitless pursuits. \
With respect to unemployment being worse than expected, I (as a non-economist) can put the US at virtual full employment in a matter of weeks….it’s quite simple really (in a twisted Keynesian sort of way). I propose that the US government ban mechanized digging equipment such as bulldozers. backhoes, etc and require all holes to be dug by American citizens. Icing on the cake: the minimum wage for those hole digging jobs could be set at $75 per hour! We’d create a nation of middle class within 12 months…
With all the earth needing to be moved in order to implement the government’s vaunted infrastructure stimulus, we’d be at 0% unemployment in no time at all. Now, those companies who rely on manufacturing and/or selling mechanized digging equipment might go out of business as an unintended consequence of this economic policy to maximize employment, but then in the Keynesian world, those unemployed workers could just go to work digging/filling said holes and all is made whole, correct?
A far better stimulative course might be to have a federal tax holiday for a few months (you know, give the American people the full amount of money that they normally earn so they can spend or save as they wish). One of the major reasons American households aren’t spending is because they are still grossly indebted and have generally poor balance sheet health (too much debt, too little cash or equity). Giving individuals their full pre-tax paycheck over a period of time will have one of two outcomes: 1) households will save the excess salary and replenish cash balances/reduce debt [aka saving] of 2) allow households to have extra funds for various expenditures [aka spending]. Either way, it gives American the chance to crawl back from the abyss that we’re staring at right now.
Also, just for kicks, let’s do the same for businesses while we’re at it….imagine, corporations that didn’t have to pay taxes for 6-12 months might actually decide to not fire workers, or perhaps hire some back because they have the excess cash balance to invest in a growing product line.
Bottom line: forget government directed stimulus…give the American economic voters (aka consumers) their ballots (aka dollars) back and let the resiliency of the system (as well as the creative destruction) work its magic.
Actually, this would be a third stimulus.
How quickly it has been forgotten (swept under the carpet?) that G. W. Bush and Congress also passed a stimulus in early 2008.
The stimulus and bailouts just convinced me that the government doesn’t know what it’s doing, wants to take too much influence over the economy, will disregard the rule of law to bail out the politically powerful, and will use any crisis that it can find waste our money on its pork projects. The meltdown of the financial sector had to be controlled, but that has been done, at least for the short term. If I was confident that they could find projects with real value and apply idle resources in an efficient and cost-effective way, that could be okay, but I’m not convinced. Any additional stimulus will be wasteful and counter productive.
I’d rather leave it to Bernanke to stimulate the economy by keeping rates low and making money available. I want congress and Obama to balance the budget and deal with unfunded entitlements. This will be easier with lower interest rates. If they won’t control spending, Bernanke (and the lack of bond buyers) will eventually raise our rates, making the fiscal crisis even worse. Before Washington increases spending, it needs to prove that we can pay for the promises that have already been made.
Since Washington seems willing to bankrupt the country in the long term, I have become more conservative in my spending. The more they try to ‘fix’ or ‘stimulate’ the economy, the more I worry. I’m concerned about the next bubble that will burst – the federal budget. That’s when I see more probability of a Depression. I would be more stimulated to spend if they would put us on a sustainable course.
Polls show that many others are concerned about these fiscal issues. This economic crisis has a large confidence component. Washington is damaging our confidence in our country’s future.
Jon Do, you are absolutely correctly. Another stimulus would be the third and not the second. The Economic Stimulus Act of 2008 was signed by President Bush in February 2008. It was a stimulus program of about $150 billion or so. Small potatoes these days, eh?
Excellent comments by one and all. Thanks for advancing the conversation. I am particularly intrigued by a point Glen made, “This economic crisis has a large confidence component. Washington is damaging our confidence in our country’s future.”
I agree with this and I wonder how much of an impact this has had on overall economic activity.
[...] for Obamanomics, but when measured against the White House
I don’t think this is a confidence crisis at all. I think that the financial market meltdowns caused an actual crisis in credit. Since we are in the liquidity trap we are in, I fail to see how the private sector has the ability, much less an incentive to fix the problems (this is one of the many instances where what is good for company x, or fund manger x is really bad for the economy as a whole).
Now, as for the comments regarding Government spending having never created wealth… Lets think of a few words: Teflon, Velcro, Ballistics, Assembly Line, Railroad, Automobile, Highway System, Internet, University System, LCD, LED, Cathode Ray Tube, Cathode, Diode, Transistor, Silicon Chip, Nanotechnology, RADAR, CAT Scan, PET Scan, MRI Scan, and countless other profitable technologies…..
Are you sure you want to stand by that comment that Government spending doesn’t create any wealth? I would argue that providing for mutual defense and infrastructure is one of the only ways wealth is created.
Kurt O — Not sure where you got the idea that I said government spending has never created wealth. Obviously, government spending can create wealth for the seller of whatever the government is buying. If the government buys a million computers from Dell, that is helping Dell Computers build wealth.
You may be referring to a comment by Demosthenes below which has a very different point:
“Repeat this after me: the federal government doesn’t create any capital, it only acquires such funds from private sources through various means (taxes, fees, tariffs, etc).”
His point is that government does not create capital. Private enterprise creates capital, some portion of which the government takes and spends. The government may spend this capital it has acquired well or it may spend it badly, but government certainly did not create it in the first place.
To your point mentioning Teflon, Velcro, railroads and other things, I don’t get it. As a byproduct of defense spending or space exploration, certain advances have happened. However, the government had little or nothing to do with the commercial success of those advances. The government did not build the railroads, private companies did. Ford made the assembly line work. Dow Chemical made Teflon a brand and so on.
I’d like to see an updated chart. It’s July 2010. How are we doing now?