CBO: Stimulus Created At Least 1.4M Jobs In Q2

By Justin Gardner | Related entries in Economy, Jobs

The stimulus did nothing for our economy?

It didn’t prevent a second Great Depression?

It didn’t help create demand when we literally had deflation?

It didn’t prop up a system that relied on consumer spending when consumers weren’t spending?

The CBO shines the light:

In its latest quarterly assessment of the act, the CBO said the stimulus lowered the unemployment rate by between 0.7 and 1.8 percentage points during the quarter ending in June and increased the number of people employed by between 1.4 million and 3.3 million.

And, by the way…

The higher figure would come close to making good on Obama’s pledge that the act would save or create as many as 3.5 million jobs by the end of this year.

So, let’s talk about that now infamous 8% unemployment number that was floated in 2009. If the Obama administration hits its employment projections…how is it responsible for employers laying off more people than they had expected?

As always, there are the usual caveats…

The CBO cautioned that the the act’s effects are expected to “gradually diminish during the second half of 2010 and beyond,” leaving the private sector to pick up the slack in an economy that is already showing signs of deteriorating rapidly.

So, the question remains…should we just allow the economy to go back into the hole? Or should we figure out a way to stimulate it once again? Because if you’ve studied history and you look at The Great Depression, the deficit hawks swooped in after The New Deal and essentially forced Roosevelt’s hand to start cutting spending.

What happened?

The economy went into a tailspin again…

By 1936, the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high at 11%, although this was considerably lower than the 25% unemployment rate seen in 1933. In the spring of 1937, American industrial production exceeded that of 1929 and remained level until June 1937.

In June 1937, the Roosevelt administration cut spending and increased taxation in an attempt to balance the federal budget. The American economy then took a sharp downturn, lasting for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. As unemployment rose, consumers’ expenditures declined, leading to further cutbacks in production. By May 1938 retail sales began to increase, employment improved, and industrial production turned up after June 1938.

But we didn’t truly recover until the war started and we began spending like crazt. Obviously we don’t want something like that to happen, but to ignore history and call for spending cuts right now seems short sided and almost guarantees a double dip Great Recession.

Still, what should we do moving forward? I put the question to all of you.


This entry was posted on Tuesday, August 24th, 2010 and is filed under Economy, Jobs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

58 Responses to “CBO: Stimulus Created At Least 1.4M Jobs In Q2”

  1. Bhanu Tiwari Says:

    The instant I found a link to this stunning The End Of Nations piece on Hubpages I determined that Donkiephant’s visitors really must be able to pass judgement on this: http://hubpages.com/hub/Global-Union-The-End-Of-Nations

  2. wes Says:

    I was recently laid off because ARRA Funding ran out. 13 full time staff and 5 part time staff joined me as well.
    what was my job? write success stories on how the Stimulus helped people.
    In a department that has only about 60 people, 18 people having jobs directly because of the Stimulus is a success story, i’d say.

  3. kranky kritter Says:

    The stimulus didn’t do what everyone hoped, which was to turn things around. That was the implicit promise. Might we have been even worse off economically without that spending? Sure.

    I don’t pretend to know with any level of certainty how much good the stimulus bill did, and I think folks who make such claims ARE pretending to know.

    But one thing I do believe is that one-time bursts of government spending can’t create real jobs. Real jobs come from real economic demand.

    What we need right now is to produce more, and to spend less. And we need to create more enterprises that provide goods and services that other people want enough to open their wallets to pay for.

    That’s not very complicated, but it IS very difficult. It’s quite possible that the market still has to adjust to a new post-crash environment where family-deficit spending occurs at a much lower level. If families wait until they need to spend instead of spending because they want to, that’s a fundamentally different economy, isn’t it?

    I don’t think we see a real economic rebound until the oversupply of distressed real estate inventory gets unwound.

  4. WHQ Says:

    But, KK, you have to keep in mind that the stimulus was a compromise. The implicit promise is premised on the details of the stimulus, not the existence of it. Had there been less opposition, it would have been larger and better targeted. You can argue that Obama and the Dems in congress compromised too much, but that’s a different argument.

    There are myriad ways the government can spend to create employment and demand while adding value to facilitate long-term growth in the private economy. Just fixing our existing infrastructure would get us a long way in that regard. Expanding it would get us further. Doing something about education would get us further still. But too many people are worried about the debt.

    The debt can grow two ways: The private sector can continue to save more than it invests while we have a trade deficit that isn’t going away any time soon, which will reduce incomes and government revenues while increasing welfare payments (in other words, in whatever way the economy decides the debt will grow, which will likely include contraction and the social cancer of long-term unemployment) or the government can target spending on public goods that will facilitate long-term economic growth such that revenues will someday rise and the debt will eventually stabilize. (It would help if we could spend less on wars, both military and drug-related.)

    Unfortunately, political will may be lacking as the deficit drums keep beating.

  5. Justin Gardner Says:

    kranky, it has turned things around. All of the indicators were negative and heading down, now they’re heading back up. How is that not turning things around?

    Sure, indicator aren’t heading back up at the same pace they plummeted…and is that any surprise? The world economy nearly collapsed. We were losing 750,000 jobs a month. Turning that around is going to take time, and I think people forget that the stimulus only really kicked in about a year ago.

    About real economic demand, that’s a false comparison. Government needs to provide the infrastructure in order for everything else to work. That takes goods, services, etc., much of which is provided by the private sector. That is REAL demand since it’s the bedrock of our society. We’ve been snowed that it’s all about consumer spending, but that model is flawed because consumers can only take on so much debt. We were spending more than we saved. That was unsustainable, as you mention.

    So what do we need to do? We need to return to a strong manufacturing base where the middle class can reemerge and make the type of money where they can create demand for the houses and the cars and the big purchases that help push the economy in a positive direction.

    Still, agreed that the housing market will continue to hurt us because there’s really no easy fix for that. People overextended and now they’re losing their shirts. I doubt anybody will ever look at real estate’s investment viability in the same way again.

  6. Alistair Says:

    That’s true Justin but the home sales dropped 12.4% which sales year over year fell 32.4%. So while the stimulus saved jobs the housing market continues to fall. They are going have to come up with a rent a homes program.

  7. Edith H Says:

    Good news The stimulus did boost demand. Imports are up $200B in the first 6 months of this year compared to the first 6 months of last year. It’s just that the demand is not for American products. Oops, that’s not going to create jobs is it?
    I hear that the German’s stimulus, which was, relatively speaking, much smaller than others but was intelligently designed, targeted, and took globalization into account, has worked in Germany. Ours was like dumping all those resources into a leaky bucket so those resources could gush into the low-cost production economies either through the purchase of consumer goods, materials or investment. Indonesia, India, Mexico, and China should be erecting statues to Clinton, Bush, and now Obama. Myopic anyone?
    Apparently even the infrastructure projects did not require made in America. Several used Chinese steel.
    And it is the private sector, especially manufacturing, that generates the revenues for infrastructure.

  8. WHQ Says:

    Apparently even the infrastructure projects did not require made in America. Several used Chinese steel.

    This may have been true in some cases, but certainly not all. I personally was involved in bidding an ARRA-funded project administered through the FTA. The standard “Buy America” clause was in the contract.

    Even if some of the raw materials for infrastucture projects comes from outside the US, it is because they are cheaper and we can get more for our money. The important factors are the construction jobs, which can’t be outsourced overseas if you’re building stuff here, and the value that the projects add to the domestic economy in the form of public goods that American firms and individuals benefit from.

  9. Justin Gardner Says:

    Ours was like dumping all those resources into a leaky bucket so those resources could gush into the low-cost production economies either through the purchase of consumer goods, materials or investment. Indonesia, India, Mexico, and China should be erecting statues to Clinton, Bush, and now Obama. Myopic anyone

    You know why money went into those economies? Tax cuts. Money for the states and core infrastructure projects did not. So cite a couple instances all you want. As WHQ mentions, the vast majority of that money was funneled to US businesses.

  10. Edith H Says:

    Nice try, LOL Who do you think you are kidding?? Wages paid out of the government purse aren’t spent at Walmart? Tax cuts too.

  11. Edith H Says:

    I’m just the messenger. Allow me to refer you to Andy Xei’s article on Bloomberg from Aug 17: “China Swallows Obama Stimulus meant for US Economy” with a follow up by Gordon Chang in Forbes. I’m not singling out Obama, nor is it particularly unique to the US, and I am not suggesting China is the only beneficiary. I assume we have been shooting ourselves in the foot since 2000 whether tax cut or faux $800B stimulus. It does underscore how naive and out of touch the political class is along with their shills, sycophants, and hangers-on. The US is not a singular, interdependent, cohesive domestic economy to the degree it once was; so it was silly to expect the proceeds to circulate and multiply here.

  12. kranky kritter Says:

    kranky, it has turned things around. All of the indicators were negative and heading down, now they’re heading back up. How is that not turning things around?

    Some are headed back up and some are not. Others headed up for awhile during the period of influx of gov’t capital, and are now heading back down. Like home sales. Still other indicators, like unemployment, remain moribund, resistant to stimulation, apparently.

    I wouldn’t seriously question anyone who says that all that extra government spending did some short term economic good. It had to, at those levels of spending. Whether that good is sustainable without continued spending at those levels is something I doubt.

    There are myriad ways the government can spend to create employment and demand while adding value to facilitate long-term growth in the private economy. Just fixing our existing infrastructure would get us a long way in that regard. Expanding it would get us further. Doing something about education would get us further still. But too many people are worried about the debt.

    I don’t question the idea that infrastructure improvement is worthwhile in and of itself. Better roads, safer bridges, and modern electrical and communications grids are a good thing.

    How much value they add over the long-term is IMO highly debatable. I am also skeptical of how much is created in the ay of sustainable long-term employment. Essentially, a big part of your argument is that it’s the government that is best suited to providing and maintaining the playing field on which we all play the game of economic growth. And I’m sure there is something to that. Just how much though. I have to wonder.

    And underlying all this are my concerns about unsustainable debt levels. I am deeply skeptical that pouring tons of additional borrowed money into infrastructure and education (Kids are our future!!!) will allow us to somehow grow our way out of this mess.

    Even if it could work, I don’t think we can afford it. If we don’t bring the budget back near balance within the next several budget cycles, we’re likely to see a debt crisis. Here’s Arnold Kling’s conclusion from his paper:

    Scanning the tables in the previous section, it would appear to be quite likely that the United States will experience a debt crisis within the next two decades, unless the path for fiscal policy changes from what is projected by the Congressional Budget Office. However, international capital markets continue to treat U.S. Treasury debt as a fairly safe asset. One way to interpret this phenomenon is that investors expect the United States to take steps to get its fiscal house in order.

    The assumption that the United States will have the political will to stabilize its fiscal position is based more on hope than on recent experience. If the political process continues to enlarge the government’s commitments to spend in the future, investor expectations will change at some point. That change in market perception is likely to be swift and severe.

    In other words, America’s ability to continue to deficit spend (borrow) is largely dependent on the way that lenders (folks like China who buy our bonds) perceive our ability to make good on those loans. For the time being, we’re still viewed as a comparatively safe and low risk investment. Thankfully. But the level of doubt in the minds of investors is probably higher than it has ever been. We can’t be blithe. We can’t expect investors to simply have faith that America will be able to pay its bills no matter how much we spend. That’s just silly.

  13. Justin Gardner Says:

    Edith, then by your definition we’ve been shooting ourselves in the foot forever. And that goes especially for tax cuts.

    Listen, something has to fuel the economy, and consumer spending has been doing it recently. It obviously can’t in the future and that’s why we need to spend on infrastructure, health care and other basic things that we need to move forward and continue to stay competitive.

  14. mw Says:

    Megan nails it:

    The CBO has another report out on ARRA. Every few months, this comes out, and every few months, a bunch of commentators treat this as if this were an empirical analysis, rather than a case of the CBO sticking the numbers back into the same model, re-running them, and conclusively proving that . . . their model still generates the same results. Because I believe in gains from trade, I outsource the snark to the Official Asymmetrical Information Spouse:

    Once again, the Congressional Budget Office reruns the same models that it used to estimate that the stimulus would create jobs and finds that, to the surprise of no one, that the model still says that the stimulus creates jobs. Hooray for the stimulus! Nevermind that the CBO’s director has confirmed that these reports do not serve as independent checks on the real-world effects of the spending, it’s news!

    No criticism of the CBO is implied; they do what they are legally required to do. But given that this has now happened several times, I’m disappointed that we’re still seeing commentators treat these reports as if they involved new research.

    I’m wondering who she is talking about… can you think of any commentators that might apply to?

  15. Edith H Says:

    Just an FYI: 1/3 of the stimulus was tax cuts. Remember the “make work” malarky and schedule M on the 1040.

    As to your point, exactly, that is correct and that is why it is so difficult and why we need someone with NEW ideas (beyond the worn out supply side vrs demand side mantra). We have had stimulus upon stimulus and tax cut upon tax cut since 2000 without much bang for the buck. Our inept politicians are in a pre 1990 time warp. It’s the herd mentality. When you are as old as I am, you will understand and appreciate that there is very little that is new under the sun. Real visionary, creative and original thinking is indeed rare.

    Consumer spending fueled import demand, yes.

    I don’t have a problem investing in infrastructure if it will be productive in the future. I do object to featherbedding and make work jobs, however. And yes, we need to fix health care. Since I am from Chicago and view government as a sanctioned form of racketeering, I am skeptical of the government’s management. Personally I was hoping for something intelligent like Australia which is a kinda hybrid between ours and Canada.

    Look yourself, you can’t have a first world economy without manufacturing.
    HR4692 just passed with overwhelming bipartisan support. I don’t think much of ithe bill but hope it will bring attention to this most critical of issues. Why it wasn’t the first thing Congress addressed, I have no idea. Fixing manufacturing will take more than platitudes and panel discussions. In your post you barely scratched the surface as for as competitiveness is concerned. For anyone who actually cares, see the 2004Commerce Dept Round Table which has input from the manufacturing sector rather than the gassing of some academic or political hack ,who has no first hand experience. Ralph Gomory (IBM, Sloan) has a few Utube videos which are long and somewhat boring but worth watching including the follow up questions and answers.
    In short, the country was ill prepared for globalization, it’s like an experiment gone wrong. There is a big disconnect between the theory of Free Trade and how, we the people experience Free Trade.

  16. Jim Satterfield Says:

    McCardle nails nothing in this piece. Neither does Reason. Ideologues are ideologues and they are as incapable of producing anything new as they claim the CBO is. From the CBO director’s blog.

    CBO’s Estimates of ARRA’s Impact on Employment and Economic Output

    Looking at recorded spending to date as well as estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about the effects of previous similar policies on the economy and using various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the second quarter of calendar year 2010, ARRA’s policies:

    * Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent,
    * Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points,
    * Increased the number of people employed by between 1.4 million and 3.3 million, and
    * Increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 4.8 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

    The effects of ARRA on output and employment are expected to gradually diminish during the second half of 2010 and beyond. The effects of ARRA on employment and unemployment are expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.

    Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

    Limitations of Recipients’ Estimates

    CBO’s estimates differ substantially from the reports filed by recipients of ARRA funding. Those recipients reported that ARRA funded nearly 750,000 FTE jobs during the second quarter of 2010. Such reports, however, do not provide a comprehensive estimate of the law’s impact on employment in the United States. That impact may be higher or lower than the reported number for several reasons (in addition to any issues about the quality of the data in the reports):

    * Some of the reported jobs might have existed in the absence of the stimulus package.
    * The reports cover employers that received ARRA funding directly and those employers’ immediate subcontractors (the so-called primary and secondary recipients of ARRA funding) but not lower-level subcontractors.
    * The reports do not attempt to measure the number of jobs that were created or retained indirectly as a result of recipients’ increased income, and the increased income of their employees, which could boost demand for other products and services as they spent their paychecks.
    * The recipients’ reports cover only certain ARRA appropriations, which encompass about one-fifth of the total either spent by the government or conveyed through tax reductions in ARRA during the second quarter; the reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments (including unemployment insurance payments) to individual people.

    Consequently, estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide.

    He doesn’t say he’s wrong, he’s just extremely cautious. And as far as what Elmendorf said in his speech in March…I notice that McCardle and Reason both leave out the mention of plugging in more data, treating actual information as something worthless. Maybe that explains how well they hang on to ideology that disconnects so often from reality. Now who does that remind me of….?

  17. mw Says:

    Sorry Jim, You are wrong. CBO Dreictor Elmendorf was quite explicit about the limitations of this exercise:

    See, the CBO doesn’t actually count jobs created. Instead, it uses models that assume that putting taxpayer money into the system results in additional demand, additional spending, and, consequently, additional jobs. Before the stimulus passed, it used these models to predict that the stimulus would create jobs. And now, in analyzing its effects, it’s using those same models to estimate that it has created jobs. But because the CBO relies on slightly updated versions of the same, original models throughout the process, it wouldn’t necessarily detect the fact that the stimulus didn’t work if that were the case.

    Stimulus-boosters have basically ignored this. But the CBO, to its credit, has been fairly forthcoming about its methods and their limitations. In response to a question at a speech earlier this month, CBO director Doug Elmendorf laid out the CBO’s methodology pretty clearly, describing the his office’s frequent, legally-required stimulus reports as “repeating the same exercises we [aleady] did rather than an independent check on it.” CBO tweaks its models on the input side, he says—adjusting, for example, how much money the government has spent. But the results the CBO reports—like the job creation figures—are simply a function of the inputs it records, not real-world counts.

    Following up, the questioner asks for clarification: “If the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis, right?” Elmendorf’s response? “That’s right. That’s right.”

    Now it would be quite extraordinary if spending a trillion dollars borrowed from the Chinese over two or three years for our children to repay for the rest of their lives did not create some jobs during those 2 or 3 years. What is unknown is whether it created net jobs or whether it created public sector jobs at the expense of private sector jobs or whether it will actually have a longer term net negative detrimental effect on job creation.

    Tweaking the inputs into a flawed mathematical model does not mean that the model itself is improved. It is simply tweaking the identical output results predicted by earlier runs of the same model. If the model itself is wrong – and there is no real world empirical evidence to support the predictions of this CBO model – then the model will always be wrong no matter how you tweak the incoming data. The data is not the problem. The model is the problem.

    To state that this report says anything about the real world employment effect of the stimulus is – what is the phrase I heard so often in another thread? – Oh yeah – Intellectually Dishonest.

    Justin, – I’d like you to change this post by adding a disclaimer stating that there is no evidence – zero, none, nada – that provide real world empirical evidence to test the accuracy of the CBO’s theoretical mathematical hypothesis. No matter how many times they run it. Thanks.

  18. Edith H Says:

    I’d just like to clarify that the $200B in imports the first 6 months of this year reflects an increase over last year:first 6 months 2010 $900+B: first 6 months last year $700+B from census bureau’s Foreign Trade stats. Just for kicks and giggles, let’s extrapolate for the year; up $400B is not too shabby a marker for demand. Too bad, no one had the vision to try to funnel it into the domestic economy.

    Since I am very concerned about the severe contraction of manufacturing, I visit websites trying to gin up interest. Conservatives are as oblivious as Liberals. Nobody was concerned about what the loss of manufacturing jobs would do; apparently they imagined thay would be replaced by highly paid “creative / high tech” jobs, not realizing these jobs can be outsourced too. There are few well paid occupations that can’t be off shored. And, nobody asked what America would export.

    It’s not just the loss of jobs, it’s the loss of companies, dividends, hard won knowledge and proprietary information, loss of innovation, competition, and creative destruction, the loss of corporate, individual income, state income, payroll, and local property taxes. Local property taxes support local infrastructure (stoplights, sewers) and teachers and police etc. Once the downward spiral begins,it is self perpetuating and harder to stop. Ask the folks in the old rust bucket states or ride an Amtrak train. I didn’t even mention the social costs, especially for men or the impact on national security. The Dems were elected with unprecedented power to fix things; they could have been the heroes.
    If I have sounded snarky, I’m sorry; I am just exasperated.

  19. Desperate Says:

    You Obama boot lickers are on crack. I know. That makes me a racist now because I dared to criticize Obama. Read on for the real story.

    The economy is a horrendous mess. The government is literally about to collapse and governments around the world are wobbling, on the ropes and doing the rope a dope.

    In the meantime your defending your left wing buddies in office who are clueless as to how to fix things.

    Somewhere in the near future when all your social security checks stop. Unemployment is 30 percent. Retirements go the way of Argentina and we are all standing in soup lines the cry will be…..

    It’s Bush’s Fault!!

    Meanwhile back in the real world, as Barney Frank finally comes to grips and agrees with everyone with a fucking brain that Fannie is causing economic chaos in this nation, the spin will be. Its Them Republicans fault.

    AND MAYBE IT IS!! I do not care whose fault it is. I only care that the Democrats are in charge and its their responsibility to fix it! You guys will go to your graves believing a 2 trillion dollar government can finance a 100 trillion dollar economy.

    Get your heads out of your partisan Asses and tell your congressmen to fix this mess, because this is YOUR fault. YOU guys who are so partisan that you cannot see past your collective noses because doing something right might mean acknowledging that the other side might have a couple good ideas.

    No matter the tag behind their names and no matter the color of their skin. Because in the end Poverty does not respect ones skin color, religion or political persuasion.

    I have no political interest in Democrats or Republicans. They are all assholes out for a collective buck. But I do care about my retirement. My kids, grandkids and great grandkids future and the future of this country and so Im making the rounds on blogs now. All political persuasions.

    And telling everyone who might dare to listen.

    The economy is staggering and on the verge. I lived thru the great depression friends. Trust me. You people have no fucking idea what is in store for you.

    NONE.

  20. WHQ Says:

    apparently they imagined thay would be replaced by highly paid “creative / high tech” jobs, not realizing these jobs can be outsourced too.

    Even if those jobs couldn’t be outsourced, there’s still a big problem with the production that stems from innovation being shipped out once whatever it is that creative/high-tech types have developed is ready to be scaled up. Even if we figure out how to make the new chip here, once it’s time to pump them out in large numbers, it’s off to Asia to build the factory.

    I don’t question the idea that infrastructure improvement is worthwhile in and of itself. Better roads, safer bridges, and modern electrical and communications grids are a good thing.

    How much value they add over the long-term is IMO highly debatable.

    Then what makes them good things? If it’s highly debatable, the debate is between those things adding lots and lots of long-term value versus lots and lots and lots and lots of long-term value. In all honesty, it’s hard for me to fathom how anyone could think otherwise. How can you move materials or communicate on a modern scale without infrastructure? We would have no economy to speak of without it. How much value, indeed.

    As far as debt goes, we’re stuck with it either way. As I wrote yesterday:

    The debt can grow two ways: The private sector can continue to save more than it invests while we have a trade deficit that isn’t going away any time soon, which will reduce incomes and government revenues while increasing welfare payments (in other words, in whatever way the economy decides the debt will grow, which will likely include contraction and the social cancer of long-term unemployment) or the government can target spending on public goods that will facilitate long-term economic growth such that revenues will someday rise and the debt will eventually stabilize. (It would help if we could spend less on wars, both military and drug-related.)

    Unfortunately, political will may be lacking as the deficit drums keep beating.

    What you have to demonstrate is a strategy that, under current economic conditions, won’t increase debt significantly and that won’t cause more hardship than would higher debt. I don’t think there is one. The choice is between one under which there is a level of planning and control and one under which there is not.

    On a side note, I’m going to ask some radical questions: Why do we issue debt instruments on a dollar-for-dollar basis against our deficit spending? What does it mean for a government that creates fiat money to borrow? How do taxes “fund” anything?

  21. JimS Says:

    mw,

    Reason claims the model is flawed. Where is their proof? They offer none. None at all. Why do you and the others insist that it is flawed? Because it matches your ideology, that’s all. Look at your first paragraph after quoting the Reason article. If that isn’t an RNC talking point, I don’t know what is. A trillion dollars. Really? Exaggerate much? Public sector jobs at the expense of private? Where is any proof that the private sector has any interest in creating jobs. There isn’t any. That argument is far weaker than the ones you are attacking. And no libertarian has any basis to discuss real world effects, because they don’t have a clue about the real world.

  22. WHQ Says:

    Here’s an interesting article about the stimulus that goes into the more long-term aspects. It sounds a little over-exuberant to me, but I generally like the things being described.

    http://news.yahoo.com/s/time/08599201368300

  23. WHQ Says:

    And why is my earlier comment awaiting moderation, while my last one posted immediately?

    BTW, Edith H., I think we agree on many things, after reading more of your comments.

  24. mw Says:

    JimS,
    I’ll ignore the non-stop ad hominems as you are apparently constitutionally incapable of writing a comment without them.

    You are mis-reading both the articles and my comment. The complaint is that the theoretical CBO model is untested and unsupported with any empirical evidence or studies to show that it generates projections that match the real world. It poses a contra-factual scenario based on a mathematical model filled with best guess and congressionally constrained assumptions. The CBO and Elmendorf are very forthcoming about the the limitations of this approach. The complaint by McCardle and others is not so much with the CBO, but the way periodic announcements of what the model predicts is treated by news and commentators as if it is news. This model cannot ever say that jobs were not created as long as you put a positive deficit spending stimulus number as an input into the model. That is what it is designed to do – enter a stimulus amount, turn the crank, presto – the number of jobs created is spit out – as mandated by Congress.

    I did not say the model is flawed. I said that there is an inherent flaw in any theoretical mathematical modeling hypothesis that is not independently confirmed by empirical testing to show whether it matches or does not match reality. Certainly there is reason to suspect the model is flawed, as while it has been predicting millions of jobs created, real world unemployment has either gone up or been flat. I also said that “ if the model itself is wrong – and there is no real world empirical evidence to support the predictions of this CBO model – then the model will always be wrong no matter how you tweak the incoming data“. This is unarguably true. But – no worries – that CBO model keeps cranking out millions of hypothetical new jobs, which I am sure is a great comfort for the hypothetical people holding the jobs.

    Other economists and think tanks have alternative hypothesis, models and studies that show everything from net negative job creation, to minimal job creation, to creating public jobs at the expense of private jobs. So you have dueling contrafactual hypothesis. Everyone can pick the studies they like. But for some reason the CBO model gets covered like it is fact and these are real jobs in the real world. It is not.

    As I said in my comment, I expect some jobs were created by the stimulus. I cannot imagine how you could steal a trillion dollars (yes a trillion – probably more – the Chinese are not loaning us the money for the $787 billion ARRA interest free) from future generations and dump it in the economy over two or three years now without creating some jobs. There is just no evidence that the CBO model is accurately predicting how many, or where, or how these jobs are created, or whether the real world actual ARRA is as efficient at creating real jobs as the theoretical CBO is at creating hypothetical jobs.

  25. mw Says:

    @WHQ
    Sprung your comment from moderation prison. No idea what in your comment triggered the filter.

  26. WHQ Says:

    Thanks, mw.

    The CBO’s model supports the assertion that the stimulus created jobs, because that’s what it shows. The question of how strongly or weakly the model supports it is certainly debateable. No economic model can be empirically validated because we can’t do controlled expriments with the economy. It’s always a question of “what would otherwise have happened, but never did, versus what did happen.” You can demonstrate one empirically, but not the other, so the comparison between the two is necessarily theoretical, always.

    I wouldn’t get too excited either way over the CBO’s analysis. It’s support, perhaps evidence, but certainly not proof. Even if it’s completely wrong, it simply becomes meaningless, rather than support, evidence or proof of an opposite conclusion.

    It’s very hard to believe that many jobs weren’t created, regardless of the direction of employment numbers, because, as always, the comparison is not between what happened before versus what happened after; it’s between what happened after versus what would have otherwise happened after. Sometimes you have to exercise judgement based on what it is possible to know rather than expecting to know the unknowable. It’s an imperfect world. And we’ll all have our biases, of course. But sometimes biases are simply the result of learning through experience – what some might call induction. That’s life.

    I would have advocated for a larger, better targeted stimulus. I would also say that what we got was a hell of a lot better than nothing.

    I cannot imagine how you could steal a trillion dollars (yes a trillion – probably more – the Chinese are not loaning us the money for the $787 billion ARRA interest free) from future generations and dump it in the economy over two or three years now without creating some jobs.

    This notion that we’re stealing from future generations ignores the intent of stimulus spending. It ignores that, even without the stimulus, the debt would grow automatically. Revenues goes down with the economy and welfare payments go up. So does the idea that we’re simply “dumping” the money in the economy. You could say that about parts of the stimulus – mainly the emergeny, high-speed injections – but not all. Creating value is investment, not dumping. Future generations will benefit from that value. That value will be realized as future economic gains. Those gains will help to pay back that debt. You wouldn’t describe taking out a student loan as stealing from your future self, would you, if it enabled you to pay the loan back and then some with your greater future income?

  27. WHQ Says:

    It looks like I need another springing.

  28. mw Says:

    @WHQ

    Apparently the moderation filter has a philosophical objection to you and/or your posts. I had no idea that the code was so discerning and sophisticated.

    “I would have advocated for a larger, better targeted stimulus.” – WHQ

    Well, we half agree. I would have advocated for a smaller, better targeted stimulus. In fact that is exactly what I advocated at the time:

    “It is incumbent on our Federal government to help cushion the blow for those Americans devastated by this economic contraction. That includes unemployment extensions such as are in the current stimulus bill. If there are infrastructure projects that we know we really need, like upgrading the electric transmission backbone, and repairing dangerous bridges, why not do the projects now to cushion the recession impact? I’m on board. The operative word being “need”. But to spend a trillion dollars, just for the sake of spending a trillion dollars, because some economists and politicians have an unproven dogmatic ideological belief in Keynesian theory – or – more likely – using unproven Keynesian theory as an excuse to load up a porker the likes of which we have never seen before – strikes me as insane.

    My guess is that the stimulus did indeed soften the depth of the recession, at the cost of dramatically slowing and extending the length of the recovery. This is the slowest, longest, most anemic recovery from recession in the modern era. Other post-WWII recession/recoveries were roughly symmetric. Slow declines had slow recoveries, fast declines had fast recoveries. As I’ve pointed out before – all recessions end, regardless of whether you have large, small, or no government stimulus. This one is anomalous as it was a very sharp deep decline, and a long slow climb out. It is also anomalous with the size, scope and waste of the government stimulus and continuous government tinkering. I suspect that a much smaller more focused stimulus would have a resulted in a slightly deeper recession but a shorter faster recovery. We would have been well out of it by now and the Democrats would have been well on their way to stunning mid-term success. Lets call it – Karma. That is my counter-factual scenario and I have exactly as much real world empirical support for it as does the CBO for theirs.

    “You wouldn’t describe taking out a student loan as stealing from your future self, would you… – WHQ

    Well yes I would. That is exactly what it is, and what I did. The difference is that it was a decision that only had consequence for myself, as opposed to burdening future generations with my education. As it turns out, it was a good bet, paid off well for me, and I paid off the loans quickly. It was also at an earlier time, before massive amount of government support for student loans and grants had the unintended consequence of driving tuitions through the roof – far far in excess of inflation. Students today have a much tougher decision on whether to make that bet. I am astounded at the level of student debt incurred by today’s graduates and question whether it is indeed worth it.

  29. WHQ Says:

    At some point, elite schools figured out what the education (or credentials) they were providing were worth to the people receiving them. They decided it was high time to extract the economic rents that they could. Others followed their lead.

    I’m not sure by what mechanism the stimulus would have slowed and extended the recovery. But we agree on one thing – I don’t want people to be employed digging holes and filling them back in. I value value, and despise waste.

  30. JimS Says:

    It is not ad hominem to point out that you are an anti-government ideologue. You are one and your own posts show it over and over again, mw. Even the quote you use to show that you “supported” the idea of government action displays it.

    Consider this one.

    My guess is that the stimulus did indeed soften the depth of the recession, at the cost of dramatically slowing and extending the length of the recovery. This is the slowest, longest, most anemic recovery from recession in the modern era. Other post-WWII recession/recoveries were roughly symmetric. Slow declines had slow recoveries, fast declines had fast recoveries. As I’ve pointed out before – all recessions end, regardless of whether you have large, small, or no government stimulus. This one is anomalous as it was a very sharp deep decline, and a long slow climb out. It is also anomalous with the size, scope and waste of the government stimulus and continuous government tinkering.

    The only people who believe that this, especially the section I put in bold, constitutes rational analysis also consider Beck and Limbaugh masters of factual argument.

  31. Edith H Says:

    I reread the article again and my argument with you is the same one I have with the folks who worship Reagan. FDR and Reagan presided over cohesive interdependent singular domestic economies. If they cut taxes or stimulated it with make work jobs, the benefits stayed in country. When I talk about people, even smart people, looking through a 1990 prism that is what I am driving at. While everyone was looking the other way the economy morphed into something most of us are not going to like. I think globalization is a game changer and the old ways of thinking may not apply. It’s as if you are following the rules of t-ball while you are playing major league baseball.

  32. JimS Says:

    Edith,

    I can definitely agree with you about people who think the same rules apply in 2010 as applied in 1930 ignoring a lot of things. Even in the Reagan era much of the job drain was just getting started.

  33. kranky kritter Says:

    What you have to demonstrate is a strategy that, under current economic conditions, won’t increase debt significantly and that won’t cause more hardship than would higher debt. I don’t think there is one. The choice is between one under which there is a level of planning and control and one under which there is not.

    Well, I doubt we’d be able to calculate hardship. But I do agree with you that what you describe is what I am looking for, less overspending and less hardship. I guess I think that once the real estate bubble collapsed along with all the other stuff it was sustaining, a high amount of hardship was inevitable. And what I wonder is whether the stimulus decreased overall hardship that much, or instead spread it out. I think it’s pretty plausible to think that we traded what would have been a more abrupt and harder landing for a softer one. A softer one that as a consequence will be longer. Defensible, maybe better than nothing, but not exactly swell, right?

    I would have advocated for a larger, better targeted stimulus. I would also say that what we got was a hell of a lot better than nothing.

    I think it’s quite defensible to believe that the stimulus was better than doing nothing. Honestly, I don’t pretend to know how much good it did. I think it probably mitigated, prevented, or forestalled some very painful crises. And I think that because it was as large and as quickly passed as it was, there was lots of waste.

    The skeptic in me has to laugh at the notion that the stimulus could possibly have been both bigger and better targeted. Instead. increasing the size would likely have led to poorer targeting. Seems to me that as it was, the government really struggled to find all those “shovel ready” projects and other ideas that would get folks going again. In that environment, It seems almost certain that handling out more resources would have been achieved via even lower standards and even less oversight.

    For example, as you know, I’ve been out of work for some time now. Let me just point out some things I’ve experienced while job hunting.

    •lots of the posts for jobs were actually suck ins to get me to do some sort of job training: sounds like a job…click through…give us your info…pitch for training

    •many of the “education” jobs I looked at were related to job training and schools that offered this

    • very few of these jobs were for instructors, they were mostly for things like “admissions counselors” whose job was to troll for students

    •when you looked at the job descriptions for these jobs, it was clear that they were extremely sales oriented…in other words, convince people to come to this or that program…incentives to put student arses in seats

    •I got lots of phone calls and many emails from folks reminding me that I was eligible for funding for IT training

    Now anyone can read into that what they want. And I’m sure some a-hole will want to ask me what are you, anti job training?”

    But here’s the thing…it’s pretty clear to me that the amount of money on the table for this stuff led to iffy enterprises more concerned with sucking up federal funds than carefully matching folks with potential to suitable jobs that there was good reason to expect would materialize.

    It’s hard not to be cynical when you see the nature of the ads on daytime TV. I don’t doubt that some of these schools include good training and legitimate opportunties, but there’s little doubt in my mind that the brains behind these enterprises viewed their potential students as little more than a vehicle to capture their share of the federal wad for training. And that troubles me. It makes me very cynical, because I can see the cynicism oozing through the ads and suck ins.

    But then, I am not a huge urgency guy, not if speed leads to waste and poor quality. One of my favorite sayings is “sat cito si sat bene” which means, it is done soon enough if it is done well.

    IMO, we could have done just about as well by spending a somewhat smaller amount with more care.

    @Jim, in re

    The only people who believe that this, especially the section I put in bold, constitutes rational analysis also consider Beck and Limbaugh masters of factual argument.

    What was that you were saying about not being ad hominem? Your “argument” here is as sad as it is preposterous. It’s simply astonishing to me that you really and truly believe that anyone who disagrees with you about the economics of the stimulus must be a choir member of Glenn Beck and Rush Limbaugh, the go-to rightwing boogeymen for all good unthinking liberals.

    Seriously. Dude, You need to get out more, And by out, I mean out of the echo chamber,

    And, I sh!t you all not, my captcha was warfor incentive

  34. Edith H Says:

    Sorry Jim, I know zip about the 30′s. The stimulus does not address the gutting of American manufacturing so as far as I am concerned it barely rates and only as a stop gap solution. The jobs that paid a decent living are not coming back anytime soon, if ever. I am trying to get people to rethink the juggernaut of Globalization or Freetrade which really got rolling in the 90s. It has contributed to the shrinking of real wages and the withering of career choice and opportunity. It was foisted on us by the FreeTrade INTERESTS who wildly extrapolated from the economic theory of comparative advantage even while they debated the downside out of public hearing. To me, this is the larger more serious problem. Now that it is a doctrine and the elites have been completely sucked in; it has become very difficult to discuss dispassionately without being treated dismisssively or called names.
    Only Manufacturing workers were supposed to suffer from the competition of cheap foreign labor, everyone else was supposed to enjoy the cheap foreign goods. Everone is happy, until EVERYONE begins to suffer the consequences of a depleted industrial base.”
    I apparently lack vision because I just don’t get how flea markets, beaders, and aroma therapy candle shops will make up for the jobs that generate “real wealth”. Maybe we’re all going to stand around all day working for the government, giving each other flu shots. I just don’t see how dead end service jobs, stoop labor, or government jobs are going to make up for the significant revenues and infrastructure that would have been generated and supported by the manufacturing sector. So there you have it, I must be a complete nutter.

    “The reducto ad absurdum of the Free Trade arguement is that if 90% or even 100% of the population is impoverished by competition with cheap labor, we will still be better off because goods will be cheaper”

  35. WHQ Says:

    IMO, we could have done just about as well by spending a somewhat smaller amount with more care.

    I agree. I also think we could have done much better by spending a larger amount with more care. Larger doesn’t have to mean faster, either, so I don’t buy the idea that we couldn’t have spent more and been more careful about it. But there was some amount of panic and some amount of hungry, hungry hippoism involved in the stimulus that led to some amount waste, so we agree on that.

    Edith H., I’m in favor of some form of globalization in principle. It just seems that what we have is a form of globalization that is, in part, something like off-shored slavery. Here’s a funny if hyperbolic comment from another blog that captures a bit of that, though from another angle:

    Jacob, the war is very affordable, as long as creditors continue to accept US dollars as payment for real goods and services.

    The Iraq War cost over a trillion dollars. But so what? Over its duration, didn’t the Chinese accept more than much US paper, in exchange for real goods?

    Don’t the Saudis part with their non-renewable national patrimony, in exchange for stuff that, as Bernanke so nicely put it, can be created at will and dumped out of helicopters?

    As long as the USA is in a position to repay its debts in inflatable dollars, the Chinese, the Saudis, and all the other creditor saps around the world can be made to effectively pay a substantial proportion of the real cost of empire.

    Does this sort of system distort the world economy? Of course it does! e.g. If you’re one of those poor losers in the USA trying to make a living by selling real goods and services, then obviously you didn’t get the memo!

    At least the Chinese can console themselves that, even if they are getting effectively shortchanged in terms of how much consumption they get from their production, at least their nation as a whole is benefiting from an expedited transfer of know-how.

    The Saudis, on the other hand, are just plain getting cheated by the unaccountable stooges who rule them. But it doesn’t matter what Saudi people think. If they try to overthrow their monarchy, the Marines will shortly arrive to protect it.

    The economy of empire works just fine. It’s sustainable at least on the time-frame of decades, and if history is anything to go by, parasitical oppressive empires can often last for centuries.

    How much value-added did the Romans really give the peoples of the Mediterranean basin? How much did they repay the Egyptians, say, for growing all that grain?

    Oh, I know, they repaid everyone with what can be described as “enforcement and administrative services.” The Romans could go all around their world and declare, “we are proud to be your exclusive provider! You feed us, and in return we graciously agree to undertake the onerous burden of ruling over you.”

    What did this mean if you were some ordinary Quintus, living in Latium? It meant that unless you get yourself the qualifications to participate in the burgeoning global enforcement and administration services sector, you’re going to be reduced to paupery. Having a farm and selling food just won’t get it done–not when Roman administrators and enforcers can get the stuff from Egypt at much lower cost. A central Italian peasant, as the Roman Empire grew, faced two main choices: the first option was to find a way to get hired into the enforcement and administrative sector (perhaps by enrolling in the legions, perhaps by investing in an educated Greek slave to help learn rhetoric). The second option was to become a landless, displaced member of the Roman populus, a client of some affluent patron, doing odd jobs, collecting a bread dole, and occasionally watching rebellious slaves or religious fanatics get slaughtered in the arena.

    No ordinary Roman could make a living selling real goods and services when the scale economies and specialization in the Mediterranean world meant that Rome’s regional economy was increasingly based on the provision of worldwide enforcement services.

    Nice market, huh?

    Now ask yourself: how many peer competitors exist in today’s global enforcement services market?

    For those who need to consume global enforcement services, what brand has the most consistency and easiest recognition?

    And even if global enforcement services consumers were unhappy with their current provider, what would be the costs and risks associated with trying to change providers?

    What are the lead times and capital investments required to participate in the global enforcement services market?

    Dead Afghans mean better brand recognition. The brand is defined like this: “what other global enforcement services provider can maintain indefinitely a military occupation of a rugged country on the other side of the world?

    “Who can better guarantee the sanctity of property and contract, on a worldwide basis? Some developing country threatening to nationalize your assets? Need an enforcement services provider? Just call America at 1-800-MARINES. We have no peer competitors!”

    To crush Iran is in a way an investment aimed at discouraging the formation of any kind of alternative, in-house, DIY enforcement services provision. Iran’s never could be a competitor, but who wants customers opting out of their long-term contracts? How could we continue to “grow our business” if that happened?

    Now when the global enforcement services market is as centralized as it is now, the leading provider becomes, like a massive bank, “too big to fail.”

    Even if their directors have made lousy decisions, even if they’re not efficient, everybody else is forced to swallow their bile, and bail them out.

    Of course, this leads to moral hazard. Why would the directors of the world’s dominant provider of global enforcement and administrative services be motivated to be less exploitative, and take fewer bad risks? Why would they listen to their clients, their employees, or even their own shareholders?

    The dominant global enforcement and administrative provider will probably enjoy its position than much longer than the efficiency of its services would theoretically warrant, because by the time it becomes dominant, it’s also “too big to fail.” A “run on the bank” would worry even those getting foreclosed! Isn’t that hilarious?

    That’s why the Roman Empire could last for four centuries AFTER Nero took up the fiddle!

    In a later post on this blog, a Professor exhorts his students to restore the Republic. But if he had their best interests at heart, I think he should have advised them to position themselves for a job in the Beltway, on Wall St, at a NGO (the janitorial department of global enforcement services), or with such a promising subcontractor such as Xe.

    If not, chances are they’ll have to work as temps, collect food stamps, and entertain themselves by watching Muslims get killed in real time, on live streaming webcast, in HD.

  36. JimS Says:

    kk, like it or not, mw’s argument that I quoted is horribly weak. The number of factors that went into the creation of this recession that it ignores that make it different from previous post-WWII recessions is tremendous. Yet he claims that the two most anomalous things about it were the rapidity of its onset and the size of the government response. You in turn say that it’s plausible that the government intervention makes for a slower recovery. Why? Where is some proof other than ideological bias? My comment about the Beck and Limbaugh crowd was meant to say that IMO only a right wing ideologue could consider it a strong argument. Consider this factor. Or this.

    BTW, the education scams have existed for a long time now. They just sense more desperation and hope to take advantage of it.

  37. kranky kritter Says:

    kk, like it or not, mw’s argument that I quoted is horribly weak.

    Then why not say THAT the first time, instead of accusing anyone who sees truth in it of being in thrall to Glenn Beck and Rush Limbaugh? You accuse other folks of ad hominem, then engage in it practically with you next breath. If you maintain that someone’s argument is weak, for god’s sake say that, and explain why. Is that really too much to ask?

    You in turn say that it’s plausible that the government intervention makes for a slower recovery. Why?

    No. What I said was that such an intervention could soften the short-term pain while also making the recession-recovery process longer. There’s a trade off: short term pain is reduced, but the period of the cycle is extended.

    This idea is inherently plausible to anyone who understands mathematics, physics, graphs, cyclical behavior, symmetry, and so on. Political ideology has nothing to to do with it.

    The vast majority of conservatives who were in hardcore support of non-intervention acknowledge that one result would have been a deeper more painful trough for many folks. Essentially they argue that the trade off for deeper pain would,be a quicker rise. [Generally, the weakness in that argument is that it's hard to gauge how deep a trough can be without downward velocity becoming too great to overcome. In other words, the risk of catastrophic failure is discounted or dismissed.]

    Why is it that for you so many of the discussions here have to be about ideology?

    I glanced at both of your links. I don’t question either idea. I am certain that banks and hedge funds played substantially negative roles in fostering the economic collapse of 2007. For a good accounting of its mechanics, refer to the lengthy Daniel Drezner book review at http://nationalinterest.org/bookreview/bank-living-dead-3926?page=1. Begin with the para that starts there were four…. It spares no actors.

    While I question neither idea you have cited, I don’t see how they are particularly relevant to the question you challenged:

    Is it plausible to think that a side effect of gov’t intervention to soften the short-term pain of an economic crisis could extend the period of the recession-recovery cycle?

    You seem convinced that it’s preposterous. I don’t. And you go on to think that my belief classes me with a couple of idiots for whom I have no sympathy. That’s not supposed to bother me?

  38. kranky kritter Says:

    My answer is in comments moderation purgatory.

  39. WHQ Says:

    This idea is inherently plausible to anyone who understands mathematics, physics, graphs, cyclical behavior, symmetry, and so on.

    Sure, it’s plausible. (I’m not sure why it would be inherently so, but that’s a minor point, I suppose.) But I haven’t seen anyone suggest the mechanism by which the recovery would be made to take longer simply because the stimulus reduced the depth of the recession. (And what does physics have to do with this particular idea? There’s no spring constant or such that applies to recessions.)

    It’s at least as plausible to say that the recovery would be faster, because there wasn’t as much ground to be made up. That seems more sensible.

    The suggestion that reducing the depth of the recession makes the recovery slower seems to imply a predetermined “total pain,” sort of like ripping off a bandage. You can pull it fast and it will hurt intensely for a short time, or you can pull it off slowly, and it will hurt less intensely for a long time. I just don’t see why this should apply to an economic recession, and no one has given me any reason to think it should, other than saying it does with no explanation why.

    Saying that someone hasn’t made an argument isn’t the same as saying that their conclusion isn’t plausible. It just means there’s no particular reason to believe it.

  40. Jim Satterfield Says:

    kk,

    First let me apologize. I am just frustrated by any argument that implies that economics is a hard science with hard and fast rules. The idea that of necessity anything that eases short term economic pain must therefore cause a more extended lesser pain is one of those ideas.

    whq makes my point before I had a chance. Physics has nothing to do
    with how an economy works. There are, in fact no inherent absolute answers in what is essentially (Despite hard work by some economists to pretend otherwise.) a social and psychological field of study. There is no economic principle nearly as absolute as the Second Law of Thermodynamics. I happen to think that those that do believe this think so mostly as a consequence of bias which often, though certainly not always, comes from the same roots as political ideology. Most of the people that I hear trying to justify the idea of doing nothing and that people who are suffering through no fault of their own should just take their lumps tend to listen to the people from the U of Chicago school of economics, which is definitely ideological.

    Recently I saw an article titled “Is Economics Inherently Ideological?”. Didn’t have time to read it but it is a viable question. Can economics actually be separated from core beliefs that also shape political philosophy? I’m not certain it can and how that interaction can express itself isn’t necessarily as obvious as you might think. whq had some very good points, imo, about how some basic core beliefs of economics that were shaped in another time and political/economic/technological environment just might ought to be questioned in the modern world.

  41. mw Says:

    @WHQ
    The “mechanism” is pretty straightforward, and I don’t think it is even controversial (but I’m not an economist and could be wrong about that). It has to do with the business cycle – in the boom phase capital is misallocated and pricing distorted (lets say for multimillion dollar McMansions built in Florida scrubland, for people hired to build McMansions, for materials and factoriies expanded to build McMansions, etc). A recession is a necessary market mechanism to correct pricing, take losses, rebuild and reallocate capital. Until that process takes place, private sector recovery does not really get started. Interventions like stimulus spending, cash for clunkers, free money for more mortgages to buy overpriced housing inventory, distort reality and delay the actual correction (by temporarily artificially propping up housing sales and temporarily preventing the pricing from finding a true bottom), capital continues to chase government initiated stimulation ghosts, and the private sector recovery continues to tread water. The more stimulus and tinkering, the more you hide the real damage and losses, the the longer it takes for a full recovery. Some would suggest this is why Japan has never fully recovered from their boom and bust in the eighties.

    I’ve been collecting some links for a possible post on the topic, but have not really sorted through them – I’ll include them here without comment- just as indicators that this is a widely accepted proposition in academia and some economic schools of thought…

    Edward Harrison founder of Credit Writedowns and a former strategy and finance executive with twenty years of business experience. He started his career as a diplomat and speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College:

    “Let’s be clear. Stimulus is no panacea for significant malinvestment. Yes, it can goose the economy over the short-term and it can prevent a debt-deflationary spiral. But the cost is higher and higher debt levels where the marginal rate of GDP return is ever-decreasing. Until the economy restructures and re-allocates resources to more efficient uses, GDP growth will remain low, putting the economy at permanent stall speed and ensuring that business cycles will remain short… This is exactly what has happened. The last line is where we are today and what is critical to appreciate. I would expand this to include fiscal policy saying instead “an expansionary monetary and fiscal policy in a post-bubble environment can cushion a hard landing. But in the absence of a purge of malinvestment does only lengthen the period before full economic recovery.”

    Robert Barro is a professor of economics at Harvard University and a senior fellow at Stanford University’s Hoover Institution.

    “We can now put the elements together to form a “five-year plan” from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier”—the response of GDP when government spending and taxes rise together—is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term. The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal. The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.”

    ROBERT F. MULLIGAN professor of economics at Western Carolina University.

    Murray Rothbard’s (2000a) monumental study of the Great Depression persuasively argues that credit expansion as demonstrated by an increase in the monetary base created an unsustainable boom in the 1920s, and that government policy frustrated the efforts of economic agents to liquidate inefficient capital, resulting in a protracted secondary contraction. Thus, the New Deal transformed what would have been a relatively short recession into the Great Depression by preventing prompt liquidation of overinvestment. Valuable resources which could have been used for more productive purposes, and for output more urgently desired by consumers, were kept tied up in counterproductive attempts to maintain labor employment in the same industries which had overexpanded through the malinvestment boom.

    Peter Roff US News and World Report

    “It’s a shame really, because the latest employment figures–real unemployment figures–show it is still failing to deliver as promised. According to a table put together last December by the Republicans on the House Ways and Means Committee, payroll employment declined everywhere except for North Dakota and the District of Columbia in the nine months since the stimulus had been signed into law… As I wrote at the time, “It is not just that the $789 billion package has not had the effect the White House promised it would; it’s that it may actually have been counterproductive, actually lengthening the recession by effectively taking money out of the private economy, where it could have been used to create jobs and for investment purposes.” “

    To some degree I believe this is the Austrian School vs. Keynesian School debate, but I think even Keynesians accept that artificial stimulus can delay and extend the time for real recovery. They argue more about what causes the boom in the first place. Again I could be wrong on that – I’m strictly an interested amateur in this 100 year old debate. If you want a quick overview of it – you can do worse than this video.

  42. WHQ Says:

    mw, I can see where certain incentives could do what you describe, and as I was pondering the idea of the recovery being prolonged yesterday, Cash for Clunkers was one thing that came to mind.

    One thing that bothered me about Cash for Clunkers was that real value had been destroyed. The intent was to replace that value with greater value by getting rid of gas guzzling, high-emission vehicles and replace them with more efficient ones, but I think the process was too destructive. The vehicles with useful life left in them could have been used until they were no longer of value, at which point replacing them with more efficient ones would have had no downside. On the flip side, the US auto industry does seem to have recovered fairly well, so it’s hard for me to see a negative effect of Cash for Clunkers on the overall economic recovery when the industry it most directly targeted is doing better.

    The housing market is a different animal altogether because of all the speculative capital flow into housing and mortgages. (There was no auto bubble to speak of.) I would suggest that letting the housing bubble burst with no intervention would have been disastrous. One thing a short-term intervention can do is give the market participants time to evaluate the situation without entering a state of total panic. The idea of a “true bottom” is somewhat dubious because it seems to ignore the possibility of a market failure resulting from bad decisions and leading to an unnecessary crash. In such a case real value can be lost (and some was) as entire neighborhoods are blighted and real physical assets deteriorate or are destroyed. In such a case, a self-reinforcing spiral can result in a bottom far worse than warranted, far lower than actual values and causing real physical losses.

    There may be a rapid initial recovery from such a total crash, but how would the pace of recovery look once the “non-panic bottom” was reached? Why would you expect that, once things stabilized and the market returned to where it would have otherwise been without a panic or with government intervention, that the pace from that point on would be any different?

    Some of the things I read in your quotes are confounding. What does it mean for the government to “take money out of the private economy?” When it spends money, it puts money into the private economy. Taxes take money out. The private sector in aggregate wants to save more than invest and companies are sitting on piles of cash. Since we have a trade deficit, there is no sector but the government to make up for that savings. Take this one:

    The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier”—the response of GDP when government spending and taxes rise together—is negative.

    Notice the correlation between government outlays and GDP. What he may be arguing for without wanting to admit it is prolonged deficit spending. It makes sense that GDP will fall if the private sector continues saving more than investing and the government attempts to balance its budget. And there’s no mention of what the government plans to spend money on. It’s certainly possible that the government could squander money (on, say, needless wars) without creating public goods for the benefit of future private sector growth. I wouldn’t advocate foolish government spending any more than I would advocate destructive austerity programs during recessions. But to suggest that government spending takes money out of the private economy is silly.

  43. kranky kritter Says:

    @Jim and WHQ thanks to both of you for making the effort to appreciate the core of what i was arguing about. All I was aiming at was getting folks to notice that itsplausible to worry that the effect of government economic intervention might displace pain instead of avoiding it. At no point did I make a truth claim about it. There’s a world of difference between saying “that’s plausible” and “you must be a beck-limbaugh idiot.”

    The former provides basis for discussion, the other invites an immediate devolution of a thread. In other words, the core of my point relates to etiquette.

    And what does physics have to do with this particular idea? There’s no spring constant or such that applies to recessions.

    I like analogical thinking quite a bit. Folks who debate a lot are prone to a desire to shoot down analogies. There’s never anything wrong with questioning them, of course. But lengthy experience tells me that eagerness to dismiss them because they are inconvenient for your own working hypothesis is a mistake. I could unleash a huge chautauqua on it, but I’ll hold off for now. Let me just say for now that over time, I have found that comparing social concepts to available parallels in the hard sciences almost always suggests insights.

    Just to give a brief example, in science the idea of tolerance usually involves both upper and lower bounds, say, too tight and too loose. Because almost invariably more than one variable is important over time. When I think about tolerance in sociocultural contexts, I use that sort of model, of striking a balance between multiple important variables. Too loose and too tight both have negative consequences.

  44. kranky kritter Says:

    The suggestion that reducing the depth of the recession makes the recovery slower seems to imply a predetermined “total pain,” sort of like ripping off a bandage. You can pull it fast and it will hurt intensely for a short time, or you can pull it off slowly, and it will hurt less intensely for a long time. I just don’t see why this should apply to an economic recession, and no one has given me any reason to think it should, other than saying it does with no explanation why.

    Agreed. 100%

    Now, has anyone given you any reason to think it shouldn’t? If you have taken it upon yourself to identify reasons why it shouldn’t and doesn’t apply, how come?Ask yourself, is it because its inconvenient for what you have already conceptualized? If an idea is immediately irritating to me, my first impulse is to perform a search for reasons why it can be dismissed. It takes tremendous effort to also consider reasons why it deserves further consideration.

    Remember, I’m not making a truth claim. I’m thinking out loud, and inviting other folks to join in. I think I do a good job of making it clear to folks when I don’t pretend to KNOW.

    whq makes my point before I had a chance. Physics has nothing to do with how an economy works.

    That’s pretty dismissive. I don’t ever employ analogy for any other reason than to see whether I can get some useful insight. How do we know that the way an economy performs in decline is not similar in some useful way to the rules that apply to a falling object?

    There are, in fact no inherent absolute answers in what is essentially (Despite hard work by some economists to pretend otherwise.) a social and psychological field of study. There is no economic principle nearly as absolute as the Second Law of Thermodynamics.

    Agreed, for the most part. I have a lot of experience with social sciences (psychology degree, for starters) AND with looking at different mathematical models as they apply to lots and lots of different situations. So I know that among the various social sciences, you get a very very broad spectrum when you ask how data-driven a discipline is. Even within a discipline, there’s a broad range when you look at methods of inquiry. In general, I see more useful data-driven insights from economics than from, say, sociology.

    I happen to think that those that do believe this think so mostly as a consequence of bias which often, though certainly not always, comes from the same roots as political ideology.

    And that’s definitely OK as long as that belief is held as a working hypothesis that you keep testing, and not as a broom to dismiss the suggested insights of someone who has done a ton of work and study. My guiding principle is that anyone who undertakes serious inquiry and makes a true good faith effort is bound to come up with some useful insights. And so the collar I put on myself is to try to recognize when I’ve just undertaken that one-sided inquiry for counterexamples that will allow me to dismiss what I don’t like.

    To my knowledge, even hard sciences are not free from political ideology. They’re probably freer than they were when folks were measuring brain size as a function of race, but they’re sure not free.

  45. kranky kritter Says:

    So, let’s look some more at one of WHQ’s core questions to me. What are some examples that lend some credence to my “displacement” hypothesis, my “conservation of pain” idea?

    Have we seen instances where gov’t spending intervention has provided an initial mitigation, and then a renewed decline after the intervention expires? We have, right? WHQ listed a couple himself. Cash for clunkers and the home buyer tax credit are two instances which lend credence.

    Now, how about historical graphs of unemployment rates during recession-recovery cycles? When I looked at these a few months back, I saw that they were very symmetrical. When the decline was steep and quick, the recovery tended to be similar. Shallow and slow? Same thing. So there’s some support there.

    So, IMO, it passes the sniff test to call the hypothesis plausible. And from there, I think it’s plausible (that word again!) to connect up to the idea of sustainable job growth as it connects to a legitimate sustainable enterprise, one that is linked to natural ongoing human demand and not temporary stimulus. If we want an economy on strong footing, I think we need jobs that come from enterprises that provide a good or a service that there is a natural demand for, without subsidy.

  46. Jim Satterfield Says:

    mw,

    You think that argument is Austrian vs. Keynesian to some extent? One author is a member of the Hoover Institution and another quotes Murray Rothbard approvingly, even stating that his controversial view of the Great
    Depression was persuasive? Perhaps to another Austrian school believer. The argument you are attempting to produce is highly persuasive…of my point about economics being largely ideological.

  47. kranky kritter Says:

    The housing market is a different animal altogether because of all the speculative capital flow into housing and mortgages. (There was no auto bubble to speak of.) I would suggest that letting the housing bubble burst with no intervention would have been disastrous. One thing a short-term intervention can do is give the market participants time to evaluate the situation without entering a state of total panic.

    I agree that no intervention was an untenable approach for a literal host of reasons. The question now is what interventions and how much are useful.

    What we have now is a market beset by destructive uncertainty, especially as that uncertainty relates to the outcome of distressed properties and bad loans.

    I don;’t see how the market can truly rebound until the vast majority of actors can feel much more confident about real estate values. And I don’t see how that confidence can come until after the “limbo inventory” is substantially diminished. There is right now WAY too much property still held

    •via underwater loans: the amount owed is greater than current valuation, and the current valuation itself is iffy

    •the loan holders themselves lack sufficient income and or sufficient motivation to keep paying on those loans

    The best argument for proposing up and/or saving the borrowers is to prevent further economic decline or collapse. But once again, we have the problem that the shot-term propping up is likely to delay the return to solid footing. It’s a real conundrum.

    IMO, there is a pretty narrow band of loans that deserve propping up. If the negative equity is too great or the income insufficient, those loans need to fail. It’s probably politically untenable to face that with hard policy changes, but I think it’s the hard truth. I have a friend in charge of a large bank’s program to support distressed mortgages, and he says that he and his company are under tremendous pressure to find ways to sustain loans that he is certain are untenable.

    AND, there is no political will to resolve these loans under the sort of compromise that might actually make the loans workable. Democrats want the principle amounts reduced, but without giving the banks any reasonable clawback if there is a valuation rebound.

    I took a careful approach to buying a house, spending far less than my mortgage broker approved. And I’ve kept my mortgage current despite being out of work for a year. Reducing principle amounts to people who bought big houses they couldn’t afford REALLY rubs me the wrong way.

  48. Jim Satterfield Says:

    If a method could be found of minimizing the pain for home buyers other than propping up real estate values then a lot of what you’re discussing would work, kk. The question is how do you let home values find a reasonable floor and not drive millions out of their homes and leave a glut of available property on the market that would further depress values.

  49. mw Says:

    @JimS
    The amusing thing about your comments Jim, is that you seem to be completely oblivious to the fact that you are guilty of every partisan hackery that you accuse me of, and you generally do it in exactly the same comment, usually the next sentence. So, as Kranky points out, earlier in the thread you launch ad hominems while accusing me of the same, you always reject any link or quote that comes from a right wing source without considering the idea itself, and only accept left liberal links as legitimate. Here you excoriate me of ideological blindness for including Austrian Economists because obviously – only Keynesians are acceptable from your tunnel vision ideological perspective. The funny thing is that you don’t seem even recognize what you are doing.

    That is the funny part. The annoying part is that you are so eager to make your ideological partisan charges, you clearly don’t bother to read or try to understand what I said. In fact, the first link (Harrison) starts his post by saying “I fully support deficit spending as a means to prevent a debt deflationary spiral in a deep downturn.” which strikes me a solidly Keynesian viewpoint.

    As I indicated in the comment, my intent in that comment was not to litigate the Austrian/Keynesian debate (although that would be a fun post and we should probably do that at some point). I was responding to a very narrow and specific question/comment from WHQ – specifically – What is the mechanism whereby a stimulus could cushion the depth of the recession and delay or extend the time of recovery? I quoted both Keynesian and Austrian perspectives giving similar explanations for exactly such a mechanism. Even if I was only quoting Austrians, it is widely held and respected school of thought in Economics, possibly with more adherents than Keynesians (outside of the political arena, where “we are all Keynesians” now, and even though Keynesians have a bigger popular megaphone on the pages of the NYT). The Austrian School of Economics is a perfectly reasonable source to answer this narrow question of what mechanism explains the phenomena.

    Unless, of course, you are a hard core, far left wing ideologue unwilling to accept any source except Krugman.

  50. kranky kritter Says:

    ___
    If a method could be found of minimizing the pain for home buyers other than propping up real estate values then a lot of what you’re discussing would work, kk. The question is how do you let home values find a reasonable floor and not drive millions out of their homes and leave a glut of available property on the market that would further depress values.
    ——-

    Here’s the thing…the negative effect of a “glut” exists whether or not the properties are on the market.

    If anyone has negative equity of more than a few points, they should default as a matter of sensible strategy. Many folks dispute this as moral matter. But the right way to approach big loans is to make sure that the borrower has a legitimate stake in the first place. If you put down a substantial down payment or collateral, then no one has to worry about will default depending on their moral perspective.

    I question how much, if anything is to be gained by propping up loans that everyone who can do the math knows are going to collapse sooner or later.

    So I question how smart it is to look at it as “driving millions from their homes.” The sooner someone gets out from under a crushing debt burden, the sooner they can recover. Delay the default, and you delay the personal recovery. If some folks are “driven” out of homes on which they owe way more than the home is worth, if they default on a mortgage they can’t afford and then rent a place they can afford, there’s a very good chance they’re closer to a more desirable future state, not further from one.

    We’re all of us, or most of us, stuck with the prospect of letting go of many of our unrealistic expectations of the past.

    You’re quite right that unwinding the bad real estate loans will lead to a big surplus of inventory. No doubt. But once the true inventory level is visible, we’ll get a re-valuation of existing properties based on tempered post-crash expectations. That the solid and more certain basis on which we can build a real recovery.

    I wish we could all just hold onto what we thought we had in 2007 and let time lead us to a place where all of our losses turn out to be only paper losses. But is that realistic or wise? I hate to be glib or seem callous. But it seems to me that there comes a point when we have to face the obvious likelihood that all the king’s horses and all the king’s men are just not going to put humpty dumpty together again. So all hopes and all chains of reasoning based on Humpty Dumpty made whole are fantasy.

  51. Jim Satterfield Says:

    To point out that someone writing on economics is a fellow at the Hoover Institute or is associated with the Ludwig Von Mises institute is not ad hominem. It is simply a consideration of the source, much as a competent journalist would wonder about the leaking of information from an organization that is favorable to the organization. Neither of those organizations has anyone on staff who is not dedicated to a conservative ideological framework for their economic positions.

    As far as the Austrian School, Wikipedia actually has an extensive, fairly well balanced article on the subject. But here is the criticisms section.

    Criticism of the Austrian School

    Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[106] but by using mainly verbal logic and what proponents claim are self-evident axioms. Mainstream economists believe that this makes Austrian theories too imprecisely defined to be clearly used to explain or predict real world events. Economist Bryan Caplan noted that, “what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics.”

    A related criticism[5][107] is applied to Austrian School leaders; these leaders have advocated a rejection of methods which involve directly using empirical data in the development of (falsifiable) theories; application of empirical data is fundamental to the scientific method.[108] In particular, Austrian School leader, Ludwig von Mises, has been described as the mid-20th century’s “archetypal ‘unscientific’ economist.”[109] Mises wrote of his economic methodology that “its statements and propositions are not derived from experience… They are not subject to verification or falsification on the ground of experience and facts.”[110] Murray Rothbard was also an adherent of Mises’s methodology, and though Rothbard assigned a quasi-empirical description to it, he comments that “it should be obvious that this type of ‘empiricism’ is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes”.[111] Additionally, the prominent Austrian economist, F. A. Hayek, stated his belief that social science theories can “never be verified or falsified by reference to facts.”[112] Such rejections of empirical evidence in economics by Austrian School leaders have led to the school being dismissed within the mainstream.[5]

    Another general criticism of the School is that although it claims to highlight shortcomings in traditional methodology, it fails to provide viable alternatives for making positive contributions to economic theory.[113] In his critique of Austrian economics, Caplan stated that Austrian economists have often misunderstood modern economics, causing them to overstate their differences with it. He argued that several of the most important Austrian claims are false or overstated. For example, Austrian economists object to the use of cardinal utility in microeconomic theory; however, microeconomic theorists go to great pains to show that their results hold for all monotonic transformations of utility, and so are true for purely ordinal preferences.[10][25] Caplan has also criticized the school for rejecting on principle the use of mathematics or econometrics.

    There are also criticisms of specific Austrian theories. For example, Nobel laureate Milton Friedman, after examining the history of business cycles in the US, concluded that “The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false.”[6][102][114] In addition to Milton Friedman’s criticism, Nobel laureate and neo-Keynesian economist Paul Krugman argued that Austrian business cycle theory implies that consumption would increase during downturns, and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession.[7]

    Economist Jeffrey Sachs has pointed out that when comparing developed free-market economies, those that have high rates of taxation and high social welfare spending perform better on most measures of economic performance compared to countries with low rates of taxation and low social outlays. He asserts that poverty rates are lower, median income is higher, the budget has larger surpluses, and the trade balance is stronger (although unemployment tends to be higher). He concludes that Friedrich Hayek was wrong when he said that high taxation would be a threat to freedom; but rather, a generous social-welfare state leads to fairness, economic equality, international competitiveness, and strong vibrant democracies.[115] In response to Sachs’ article, William Easterly states that Hayek, writing in 1944, correctly recognized the dangers of large-scale state economic planning. He also questions the validity of comparing poverty levels in the Nordic countries and the United States, when the former have been moving away from social planning toward a more market-based economy, and the latter has historically taken in impoverished immigrants. Easterly also argues that laissez-faire countries were the leaders of “the ongoing global industrial revolution” which is responsible for abolishing much of the world’s poverty.[116]

    How dare that well known liberal, Milton Friedman, criticize them? In addition, they’ve pretty much lost that old “gold standard” argument, though Ron Paul does love to keep trotting it out. And they’ve also lost the argument wanting to blame central banks for most of our economic woes. They may not be perfect but the lack of them didn’t seem to help with avoiding economic crashes in the days before they existed. Nah, the Austrian School isn’t nearly as well respected as libertarians would like to believe.

  52. WHQ Says:

    End blockquote!

    kk, I have no problem with using analogies to illustrate concepts (but not as proof, of course). It wasn’t clear that your intent was to imply an analogy. It seemed you were suggesting the direct application of physics. Since not, no problemo.

    What does everyone think about cramdowns for the housing problem?

    I know kk stated that he doesn’t like forgiving principal, but the result, AFAICT, would be the same in the end but far more messy by letting people default and leaving banks to put houses on the market. The bank will still be stuck with whatever they can get on the market, a new mortgage will have to be established for a new owner (if one can be found in a reasonable amount of time), the house may be unoccupied with no upkeep between owners for an extended period, and people will have to move – an unproductive activity when not done for advantageous reasons.

    If someone took on something untenable such that a cramdown wouldn’t help them, let them default. I wouldn’t cram down a loan below what the market would support. Those would be the most egregious loans, meaning that both the lender and borrower were likely at fault and deserve what they get. But I don’t see any advantage to letting people walk away from their houses for rational financial reasons when the result will be worse than making it rational for them to stay while staying within current market-pricing constraints.

  53. WHQ Says:

    End blockquote? (WTF?)

  54. WHQ Says:

    An interesting article in opposition to cramdowns, though radical in approach:

    http://finance.yahoo.com/news/How-Pimco-Is-Holding-American-minyanville-2306738131.html?x=0

  55. kranky kritter Says:

    I’m in basic agreement with the weaker/softer version of one part of that critique, WHQ.

    IMO, once you crunch the numbers, it’s hard to miss the evidence that home ownership is much better viewed as a lifestyle choice than as an awesome no-brainer investment.

    I don’t think cramdowns are going to happen. There’s no momentum for them before the midterms, and after the midterms. there will be even less support for the idea.

    BTW, I’m also in agreement with the author of that article’s view that PIMCO’s mortgage-jubilee idea is definitely an attempt to feather their own nest.

    On all the outstanding distressed loans, there’s a loss to be realized:the gap between the amount owed and the property’s current valuation. My first choice is to have borrowers take that loss or bail and make it the lender’s problem. My distant-2nd place choice is to force banks to write down the principal. And my far, far. far-distant 3rd choice is to have taxpayers stuck making up the difference as part of some nationalization of mortgage debt.

  56. kranky kritter Says:

    If someone took on something untenable such that a cramdown wouldn’t help them, let them default. I wouldn’t cram down a loan below what the market would support. Those would be the most egregious loans, meaning that both the lender and borrower were likely at fault and deserve what they get. But I don’t see any advantage to letting people walk away from their houses for rational financial reasons when the result will be worse than making it rational for them to stay while staying within current market-pricing constraints.

    Well, the problem according to my banking friend is that what you are talking about is a very narrow band. Most of the distressed mortgages aren’t close. AND, for the ones that are close, with small amounts of negative equity, borrowers don’t seem to be walking away.

    In essence, most borrowers are already behaving rationally. They’re paying their mortgages if the spread is close. As the spread increases more folks have stopped paying and are living rent-free. There isn;t a decent target sweet spot of loans that can be swung from one condition to the other.

    In any event, I see a simple cramdown as a dangerous precedent. Crossing out $330,000 as the listed debt and replacing it with $280,000, by itself, or with banks receiving no more than tax benefits bothers me. At the very least, I think banks deserve some sorts of clawback rights if the borrower later enjoys rapid appreciation in a better market later on.

  57. WHQ Says:

    Well, the problem according to my banking friend is that what you are talking about is a very narrow band.

    That is a distinct possibility. Your banker friend would know better than I.

    So, how did you (seemingly) manage this permanent blockquote thing, kk? (It started in one of your comments.) I tried the few HTML tricks I knew to end it, but it didn’t work.

  58. Tully Says:

    McArdle indeed nailed it. CBO punches new numbers into the same old theoretical model and produces “answers” with the same flaws of the earlier model runs. CBO knows this, BTW. It’s not even their fault. They are bound by law to stick to their formulaic absurdities. Here’s a hint: What doesn’t show in the CBO models — NET job creation. If your policy destroys 100 jobs but creates 50, then by CBO’s modeling you have created 50 jobs. (This is similar to the endless “economic impact” studies used to tout taxpayer spending on new arenas and such, studies that never mention the flip side cost of levying all the new taxes required to buil the venue, or the impact on revenues of existing entertainment venues.)

    If you want to know what the CBO’s next quarterly “assessment” of “jobs created” will be, simply plug in the amount of scheduled “stimulus” spending into the CBO model and read off the “answers.” They could release those figures today — the answer is in no way dependent on any real world data other than the input (scheduled stimulus spending) and the multiplier assumptions. The ONLY variation between the “answer” now and a future answer would come from any difference between scheduled and actually reported spending. But their multiplier assumptions are demonstrably wrong — GIGO*.

    Dissing CBO Director Elmendorf for telling the truth does not change the truth, however beloved a tool ad hominem dismissals are in political blather.

    REAL WORLD DATA. Compare/contrast July 2010 to July 2009 and attempt to show jobs “created.” Justify answer with real world data. Also compare/contrast with link in footnote. (Good luck with that, but fun to watch the creative back-flipping and attempted rabbit-up-the-sleeve magic tricks.)

    As I said months ago, the stimulus mostly just paid for pent-up pork and subsidies for fiscally-stressed state and local governments. It did this by kicking the can down the road, postponing the full pain and spreading it out over a longer period (leaving the pain at a lesser level, albeit for a longer period) but at very real cost in future growth. There are positive arguments to be made for some forms of targeted stimulus (extended jobless benefits in a receession is a good example) just as there are arguments to be made for buying a house on a mortgage rather than paying cash. But they are limited cases, not general ones, as any free-spending banana republic can attest.

    Not all of the “stimulus” was waste, but far too much of it was useless or counter-productive on a rational basis, unless your rational basis is paying off favored constituencies. And regardless, it’s still kicking the can down the road, and it still comes at a cost, not some wishful-thinking net profit. TANSTAAFL. No magic wands, no fairy dust.

    [*--Particularly amusing to the cynic in me is Romer's use of similar and in some cases even higher multipliers than CBO's in the White House's "Don't Worry Be Happy" stimulus projections, especially as her own research at Berkeley and most of the empirical research to date indicates that the generic government multiplier is somewhat less than 1, i.e., it generally costs more than it produces in results.]

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