Deficit Spending and the Recovery: Talking Points for KQED Forum Morning Appearance, September 4, 2009, 9 AM PDT, 88.5FM, San Francisco
Audio File: 20090904_DeLong_Taylor_Graybell_KQED_Forum
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  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). 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." 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.
 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...
 Mark Zandi:
 Christina Romer:
"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...