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    Macroeconomics 101: Spending versus Stimulus or "How I learned to stop worrying and love recession"

    By DF on Mon, 02/02/2009 - 2:10pm | Politics

    Par for the course, the "national dialogue" (read: what the MSM deems to be fit for their truncated list of trite and nonsensical talking points) regarding our current economic quandary has detiorated to the sort of semantic sophistry that every single anchor on CNN will be all too happy to entertain with brows furrowed and lips pursed just so, subtle psychological cues meant to persuade the viewer that they should take this earful of horseshit seriously.

    Supposedly, everyone agrees that the economy is on the ropes.  It requires stimulus.  Everyone knows that.  Duh!

    But just what kind of stimulus does it require?  A back rub?  A game of catch?  A bicycle ride?  Perhaps an episode of Nova?  Some Dostoyevsky?  I know: A few minutes of Brahms should have us back on the right track.

    No, alas, the word is recession.  I think that by now most people probably know that modern macroeconomists throw a flag on the play and call an official recession after two consecutive financial quarters of negative GDP growth.  Or, in simpler language, the economy shrank overall for half a year.  Of course, this development can precipitate all sorts of nasty conditions, not the least of which is widespread unemployment.

    So, if everyone agrees that we're in a recession (a point on which there was plenty of denial in the not too distant past) and everyone agrees that this is bad, then getting out should be easy, right?  All we have to do is identify a solution and implement the prescribed course of action.  Sally forth!

    Not so fast, recession warriors.  It seems it's become a bit difficult for everyone to agree on what the proper solution should be, and by "everyone" I mean the collective whole formed when combining group the first, or "people with a basic grasp on reality", and group the second, or "congressional Republicans".  That being as it may, it's time to go back to school so we can figure out who's been doing their homework and who hasn't.  Lesson one: Definitions.

    First, we all have to agree that a recession is what I've stated it is above and that this is an undesirable condition in which we all have a vested interest of avoiding.  We can now state, by virtue of the subsitution of equivalent terms, that GDP is negative, this is bad and our job is to make it positive again.  Brilliant!  Then our definition of stimulus will be "that which makes GDP positive once again".

    Now, all we need to figure out is this: What's GDP?  At the risk of being overly pedantic, GDP is an aggregate figure that comprises what every individual, firm and our government spent (or made, depending on which method of aggregation is used, which should yield the same figure regardless) over the course of a year, plus whatever we exported less what we imported.  Macroeconomists called GDP Y and they say that it is then defined as the sum of C for individuals, I for firms, G for the government and X for our net exports.  This gives us the formula Y = C + I + G + X (or Y = C + I + G + (X - M) if you prefer).

    A bit of competency in arithmetic should tell us that if we want to make Y bigger, our stated goal, then at least one share of Y has to get bigger.  In fact, this alone doesn't guarantee that Y will get bigger, for instance in the case that you have an increase in one share that is proportional to a decrease in another share, but it's impossible for Y to get bigger if all four shares are getting smaller.

    It may be advantageous to then ask what each particular share of GDP is doing right now.  Consumer spending is down and unemployment is on the rise.  This is bad news for our friend, C.  Investment spending, or the expenditures made by firms, is also down.  Retailers are sitting on excess inventory and the constipated credit markets have this share on the ropes as well.  As for net exports, I give you exhibit A, General Motors, and exhibit B, Wal-Mart.  In short, we don't make much that other nations wantand we buy plenty abroad.

    If individuals and firms can't spend, C and I will not increase.  We have no hope of shifting the net exports situation in a meaningful way in the near term.  This leaves one share that we can turn to if we want GDP to increase: Government spending.  This is where the wisdom of John Maynard Keynes comes in.  Keynes saw this writing on the wall so clearly that he even wrote, although somewhat facetiously, that it doesn't even really matter what the government spends the money on, although it's obviously better in the long term to spend it on something that's needed (we can quibble about what this means at some other juncture).  Keynes would also probably tell us that we need to be concerned with how to increase aggregate demand across the entire economy in the long term, but.. baby steps, shall we?

    So, we want GDP to get bigger and we know that the only share of GDP that we can increase is G.  Furthermore, the increase in G has to be more than the aggregate decrease in the other shares.  In other words, whatever is not being spent by consumers and firms has to be made up for, and then some, by government spending.  This is where figures like $819B come from.  If GDP is about $14T, this represents a little over half a percent of GDP.  If we're losing somewhere in the neighborhoood of, oh, 3.8%, then this starts to look like a very conservative figure when we're talking about long-term stimulus.

    Why, then, are our fine GOP congresspersons saying stuff like this?  Pay close attention to the moment when it is stated that the current proposals represent a spending bill, not a stimulus bill.  Hopefully, I have convinced you of the level of nonsense that is present in such a statement.  If we can agree on what a recession is, that it is undesirable and that stimulus is what counteracts recession, then we should easily be able to agree that spending is stimulus.  In fact, if individuals or firms had the money to spend this would also be stimulus.  However, they don't.  We're down to the spender of last resort.

    Now, we could be spending our energies pondering much more interesting questions like, "In a world of finite resource, what does it mean to have an economic system with an outlook that is dependent on a figure that must increase exponentially, ad infinitum?"  Or perhaps we could ask, "Why is there no protest heard when private banks are given free license to lend money into existence, but there is such an uproar when government prepares to spend it into existence?"  However, we can't even begin to ponder these slightly less banal propositions when we can't even seem to rise above semantic games that portend the obfuscation of basic facts and terminology.

    In a future post, I will examine more broadly the tenets of economic ideologies that drive this debate in such ludicrous directions.  Also, I will reference Sarah Palin and treat her, as sincerely as I possibly can, as politically relevant.  Stop by and join the fun!

    Topics: 
    Politics

    Comments

    first of all, thank you for writing about the economy. i know that's usually my field of expertise (and by expertise i of course mean field-i-like-to-talk-shit-about-and-pretend-i-know-things-when-often-i-am-clueless, but I have been so frustrated and overwhelmed by all the nonsense being spewed that I've been quite quiet on the issue for some time.

    I think you nailed the crux of the debate simply and effectively. I have some issues with your thesis, however.

    There IS a difference between stimulus and pure spending, although it is somewhat subjective. Stimulus is government spending that then encourages corporations and/or individuals to spend money of their own as well. Government spending by itself certainly adds to GDP but without a stimulative component of that spending it can have very little impact in terms of reversing a recession (the C in GDP is almost 2/3ds of the total in the US).

    Now where the subjective part comes in is you can have a legitimate debate about what types of policies are more stimulative than others (for instance, giving people money, or tax refunds, would seem by its nature to be stimulative but that stimulus package last year ended up being nothing more than an ineffective short-term stopgap with most of the money going to shore up corroded balance sheets - not the worst thing in the world but not necessarily stimulative).

    And where I really disagree with you is that you seem to think government is in a better position to spend than consumers or corporations. With consumers, maybe you could argue the point, given how badly household balance sheets have gotten, but aside from the financial industry, corporate balance sheets are actually in very good health and they could probably invest a lot more capital in the system if they had confidence (and arguably lower tax rates).

    But the government?? Obviously, they CAN spend the money since they control the printing press, but that won't mean it's a good idea. At $1.2 trillion dollars (prior to any stimulus plan being passed), the U.S. deficit equates to over $4000 per person in this country, and that exceeds the average credit card household debt of $3,235 (which you can easily argue is too high as well).

    Increasing the deficit will only place a bigger burden on this country's future generations - at some point, guess what, the Chinese and other foreign governments will stop wanting our debt because they'll wake up and notice the crappy state of the balance sheet, and at that point, you will see and feel pain like you've never experienced.

    If we are spending money on things that are needed, like long-decaying infrastructure or intriguing alternative energy technologies, then perhaps the additional onus on the country's balance sheet will make sense. But I am very skeptical that we'll be able to spend $800 billion without seeing much of it going to waste.

    I guess when you get down to it, I have a problem with your main thesis

    First, we all have to agree that a recession is what I've stated it is above and that this is an undesirable condition in which we all have a vested interest of avoiding.

    Recessions are necessary parts of the free market business cycle. Sure, we'd love to avoid or shorten them, but it's my belief that without them you can't have the good times. The key in my opinion is to pursure policies and regulations that limit the extremes on both sides of the cycles, but unfortunately, we threw ourselves one big consumption and credit orgy over the past decade, and we must pay the piper.

    We need to be very careful we don't throw good money after bad, and make the problem even worse by sapping oomph from any eventual recovery or setting us up for a bigger, more painful fall later.


    by Deadman on Mon, 02/02/2009 - 4:19pm

    one addition to my argument above: when i talk about corporation having relatively healthy balance sheets and the ability to invest capital, that is obviously predicated on credit flowing freely and the current financial crisis being addressed (which is at least as important as any stimulus package)


    by Deadman on Mon, 02/02/2009 - 4:48pm

    One word:  GAAP.

    Deregulation doesn't just mean derivatives are WMD.  Deregulation doesn't just mean hedge funds are ponzi schemes.  Deregulation also means corporate financial statements are works of fiction.

    I'd be very hesitant to call corporate balance sheets healthy right now, even relatively so.  Did SOX save us from the current mess?


    by littleblackprop... on Mon, 02/02/2009 - 7:30pm

    LBP!!


    by DF on Mon, 02/02/2009 - 9:27pm

    I'm not sure that's really my thesis.  My thesis is that the content of the public discussion around these issues is utter nonsense.

    As for the statement you've highlighted, I think it's accurate.  There's a pretty well-understood definition of recession at work here and I think that, all other things being equal, we'd avoid it completely if we could.  Whether or not it's an inevitable part of a business cycle is debatable.  I suppose you can take the view, accepting the inevitability of recession, that it's a sort of medicine that must be consumed one way or the other, but I think that's a choice in attitude rather than real opposition to the notion that it tastes bad.  Even so, it's a certainly a relevant point of interest when considering economic points of view.  It would be a much more interesting if we were a little more self-conscious about these things and could have debates about the real differences in ideology.  I would gladly welcome that over what I see and hear presently.

    Along these lines you raise another interesting point, which is to raise question about what form of spending has the greatest velocity, i.e. is the most efficient in terms of having a net positive effect on GDP.  This gets a bit closer to what's being danced around on television news.  It's a valid question, but I think that presently it's being answered on both sides by flat, ideological assertions.

    Unemployment is a real and serious factor here.  You are correct about consumer spending, but this is the reason that unemployment becomes so important.  Fewer people with jobs means fewer people that have income and more people drawing on entitlements.  In order to reverse this, you need to stimulate a very specific type of spending.  I think this is the strongest indicator that corporate balance sheets aren't as good as one might think.  We're losing a lot of jobs right now.

    In that sense, I think that the assessment that government needs to spend is probably correct.  It is, in a way, a confidence game.  Banks won't or can't lend, firms won't or can't spend and now they're slashing labor expenditures.  In any case, these are all goods questions, but the debate that is occurring appears to be revolving around very thin premises, and mostly around the "spending bad, taxes bad" mantra.

    IMHO, one of these reason that all of this is so prevalent is that we don't really put numbers on any of this stuff.  Some of it is difficult to quanitfy, but let's take deficit for example.  The conventional wisdom some time ago was that an unbalanced budget would be certain doom.  No one thinks that way any more because it's been proven that deficits aren't as detrimental as was once assumed.  It certainly has effects, some of which may be quite negative, but how much is too much?  If you'd told someone in 1928 that their grand-children would be holding $4k worth of the national debt, they'd surely have thought that the nation would have collapsed and that we'd all be in servitude.  More to the point, the current public debt isn't really any higher than it was in the Clinton years right now and it's down as a share of GDP from the early 2000's.

    This doesn't mean that it won't someday become a problem.  You mention that one day China won't want it.  They don't seem to find it very attractive at the moment.  There's also the issue of who to sell it to.  The US government can't sell it, so who does China sell to?  This isn't a situation where they can just take their ball and go home.  They have as much of an interest as we do in seeing that those notes don't turn sour.

    If I'm going to have to see and feel pain like I've never experienced, then I think I'd like to see Obama hire Randy Savage or perhaps the Ultimate Warrior to do the PDB.


    by DF on Mon, 02/02/2009 - 5:46pm

    i'm not sure you're right about the US public debt comparisons - It certainly has been higher as a percentage of GDP in American history but its been rising since 2001 and I think the total has doubled since the Clinton years. source: usgovernmentspending.com

    but if the thrust of your argument is that most of the public discussion about these issues boils down to a lot of nonsense, then we are in significant agreement. I just happen to think it's fair game to debate where these 'stimulus' dollars go and what they're used for. If we dont get the credit situation resolved, I think it'll all end up being wasted, so we might as well just have a spending bill that focuses on needed societal improvements. good luck trying to get congress to agree on how that is defined.

     


    by Deadman on Mon, 02/02/2009 - 6:08pm

    Inflation adjusted, this doesn't look catastrophic to me.  Another way to think about this: When do we reach zero hour?  Is there a figure?  The US is in an unique position economically because we're still the best game in town.  There likely can't really be a meaningful estimate of how much debt is actually problematic unless you could come up with a way to quantify how invested the rest of the world is in sitting at the table.

    Another thing about government spending is that, inflation adjusted, it never goes down.  This is another part of the silliness that we're subjected to.  The congressional Republicans that are suddenly so opposed to spending of any kind  are the same ones who were rubber-stamping the worst of it, so long as it was their party at the helm.


    by DF on Mon, 02/02/2009 - 6:22pm

    damn, i dont know how you can look at that wikipedia article and all the stats on our public debt and not be worried - catastrophic is a loaded word, obviously, but why should we not be concerned about zero hour? i know we've heard rumors of the US demise as the best game in town before, only to watch upstart countries like Japan run into their own issues. Europe may be too fragmented and socialist to challenge us anytime soon, but China is a threat. It certainly has its challenges - most notably how to evolve their quasi-communist/capitalist society without formenting a revolution - but it also seems a very likely candidate to overtake us one day, and even more likely given the percentage of our debt they hold.

    as to your second point, i 100% agree that it's even worse that a party and an administration committed to fiscal discipline let things spiral out of control so badly. I would find it very gratifying indeed if a democrat had to be the one to start reversing the situation ... again! (btw, govt spending may never go down, but i think the salient comparison is debt as a % of GDP, which needs to go down).


    by Deadman on Mon, 02/02/2009 - 6:57pm

    Well, how worried should I be?  How close are we?  I keep hearing people say that we're going to collapse under the weight of our own debt.  Maybe that's true, but I don't think we have any idea of knowing when that might happen.  As for right now, there's no one who will buy the debt, whether it's from China or Japan or anyone else.  Maybe someday China's consumer economy eclipses ours, but that day hasn't come.  That's a monster out in the woods somewhere.  Maybe it strikes, maybe it doesn't.

    What's certain is that we're in a recession right now with no indicators of a near-term change in trajectory.  Being concerned about marginal increases to national debt right now strikes me as a bit like not parachuting from a plummeting aircraft because you might not land within walking distance of a four star hotel.


    by DF on Mon, 02/02/2009 - 9:34pm

    I thought the DF was talking about the public discussion of the issues.  I think the GOP is way out in the field blowing dandelion seeds or something.  I've been snickering about the GOP being lost but I just didn't think they were that FAR away.

    Does anyone think the banks are holding on to the money because they are afraid of the what is going to happen with all those maxed out credit cards? 

     


    by Bluesplashy on Mon, 02/02/2009 - 11:16pm

    Snorting dandelions rather...


    by Michael Wolraich on Mon, 02/02/2009 - 11:48pm

    It's late and you are getting silly Mr. G.  I said BLOWING not snorting.  Blowing the seeds around is a mindless wastefull activity.  It has been too long since I was snorting to remember what that was all about but it wasn't mindless. 

    I had an excellent comment and then it dissapeared somewhere, dammit, so I come back here and see this reply - I thought DF was talking about how people are not taking the economic crisis seriously - he is right.


    by Bluesplashy on Tue, 02/03/2009 - 12:09am

    Good post DF.  I want to read more from you.  And I think you should corner your nearest GOP congressperson and go through the whole procedure just like you did with us and THEN maybe they will understand. 


    by Bluesplashy on Mon, 02/02/2009 - 4:19pm