Hoisted from Archives: The Jobless Recovery (July 20, 2009)
David Dayen Thinks He Spots Dingbat Kabuki

Hoisted from the Archives: The Obama Fiscal Boost: A Note (January 10, 2009)

You know, I really wish that I had not been just talking to myself...

From January 10, 2009: The Obama Fiscal Boost: A Note:

Paul Krugman writes:

Romer and Bernstein on stimulus - Paul Krugman Blog - NYTimes.com: Christina Romer and Jared Bernstein have put out the official (?) Obama estimates of... the... American Recovery and Reinvestment Plan would accomplish.... Kudos, by the way, to the administration-in-waiting for providing this — it will be a joy to argue policy with an administration that provides comprehensible, honest reports, not case studies in how to lie with statistics....[I]t [is] hard to evaluate the reasonableness of the assumed multipliers. But... the estimates appear to be very close to what I’ve been getting.

[T]hey do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7.... They have the plan raising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so average over 2 years, again not much difference. So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.

One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010... the CBO estimates an average unemployment rate of 9 percent for 2010.... Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.

If I were in the Obama White-House-to-be right now, I would announce that we would be using CBO numbers as our baseline for everything, and focus on providing analytical input to CBO so that its numbers are as good as possible. Doug Elmendorf is honest and reliable and will do his best. And if there is no daylight between the administration and CBO, that is one fewer way that the David Brookses and the John Boehners and the other bad actors can confuse the gullible, lazy, and dishonest among reporters and commentators who do so much to degrade the level of the policy debate.

I agree with Paul that this fiscal boost plan is too small, but I do want to admit that doing this well is harder than it looks. The tax-cut part does not look terribly effective as a stimulus--it is a step toward compensating for higher income inequality and a political play to make it more likely that Republicans will lose politically by trying to block the package rather than a significant boost to employment. Thus I do not think you would want to make the tax-cut part larger. And it is hard to find a lot of additional spending projects that can be ramped up quickly and do a lot of good--relatively soon in that endeavor the short-term fiscal multiplier falls below one. They are trying their best.

Nevertheless, I agree that there best is almost surely not enough. I also believe that conventional monetary policy is tapped out, and unconventional monetary policy is of doubtful efficacy. So I am in favor of doing something else on the banking/finance side. My favorite idea right now is that of nationalizing Fannie Mae and Freddie Mac completely and unleashing them to buy up every single mortgage in the country at market rates. Their ability to borrow at the Treasury rate means that they should be able to make money by doing this. When they own mortgages they can renegotiate and refinance them all with the public interest in mind. And as they squeeze banks out of the mortgage business the fact that banks are looking for yield should push other financial asset prices up--and make it possible for those businesses that should be expanding to get financing right now on terms that make expansion profitable.

So at the moment my preliminary judgment of the Obama fiscal boost is that it is a good first bid, but that the administration ought to be doing a lot more.

It was clear--to me and to anybody else who had eyes to see that the fall of 2008 had inflicted a more-than-Great-Depression-sized shock to the global financial system--that the ARRA was not going to be enough: it wasn't big enough to fill anything near to the aggregate demand gap that anybody with eyes could see coming, and everybody with eyes knew that the odds were that a financial crisis-generated recession follows the pattern of not a "V" but an "L".

So why is John Harwood now writing about the "mystery" of the high jobless rate? This was baked in the cake--the most likely outcome if the government did not take substantial additional action beyond the ARRA--eighteen months ago.

Why oh why can't we have a better press corps?

John Harwood of the New York Times:

Mystery for White House: Where Did the Jobs Go?: [T]he biggest conundrum facing President Obama.... Why is unemployment so high? The whodunit has flummoxed economists in both parties for a year.... Part of the uncertainty concerns why. More consequential now, as the administration and Congress determine what to do, is whether the unemployment spike reflects a short-term or permanent shift in demand for workers. “The stakes are enormous,” said Alan S. Blinder, a Princeton economist who advised President Bill Clinton, because the answers are “going to dictate the pace at which jobs come back.” And that, in turn, may dictate whether Democrats keep control of Congress or surrender at least one chamber to Republicans. So long as the job market remains weak, even substantial achievements like the passage of new financial regulations won’t alleviate voter discontent with the party in power. With eight million jobs lost since the recession began, “We’re climbing out of a gigantic hole,” said David Axelrod, Mr. Obama’s top political adviser. “Until we fill the hole, we’ll get limited credit.”...

In January 2009, Mr. Obama’s economic advisers predicted that unemployment would peak around 8 percent if Congress passed their recommended stimulus program. As Republicans never tire of pointing out now, the rate hit 10.1 percent by October and has fallen less than one percentage point since.... [T]he rise in unemployment far exceeded what economists would have forecast.... Under Okun’s Law... the jobless rate at the end of 2009 would have been around 8.3 percent instead of 10 percent. “I don’t blame the administration for being off in these forecasts,” said R. Glenn Hubbard, dean of the Columbia Business School and chairman of the Council of Economic Advisers under President George W. Bush. He called the rise in unemployment “a mystery”...

But in both of the previous financial shock-generated recessions--the dot-com bust of early 2000s and the S&L crisis bust of the early 1990s--Okun's Law broke down too:

Econ 101b: Fall 2003: The Erosion of Okun's Law: Archive Entry From Brad DeLong's Webjournal

It was not terribly prudent to forecast that it would hold in the late-2000s recession...