dagblog - Comments for "The dagbuzz for 2/18/09: (Cars and Houses and Chimps, Oh My!)"

If you define "stimulus"

DF — Fri, 20 Feb 2009 23:02:00 +0000

In reply to we're in agreement that tax

If you define "stimulus" narrowly as being "increase in monetary velocity", then you're going to have the sort of problems you mention. First, it's hard to get a real measurement of how fast money is changing hands. Usually I see velocity being estimated by dividing GDP by some share of the money supply, most often M2. That's fine, but it doesn't necessarily tell you a real measured value velocity. If that's a big problem in your book, then that's one thing. However, I would say that the key here is not exact measure, but close enough measure. No measure is exact, not even in physics. There's an error bar on every measure in every field of science.

However, is velocity really the most meaningful measure? Can we generalize to the point where we say "an increase in monetary velocity is good"? If you buy MV=PQ, then it's easy to see how a big increase in velocity could lead to inflation if the money supply and output remain constant. This could arguably be the opposite of good. In fact, this isn't a terrible description, from a velocity perspective, of where we are right now. Money was flying around like crazy, but we weren't really increasing our output.

Additionally, there is the "signal to noise" problem that you allude to. If we cut taxes, for example, and we see a correlated increase in monetary velocity (and we're still sure that this is generally a good thing), how confident can we be that this was caused by tax cuts? The correlation would have to big significant enough for us to "hear the signal above the noise". I'm not aware of any compelling evidence that tax cuts do this very strongly. Maybe they have an effect on velocity, but to me this is an indicator that whatever changes they might be encouraging aren't really "loud" enough to worry about. If the overall tax rate was very, very high, then tax cuts could conceivably have a bigger impact. It doesn't seem out of bounds to conclude that we probably aren't very far from an optimal tax level and that this sort of policy change won't do much.

Similarly, the people who are typically making this argument are the same people who make the argument that tax cuts increase long-term government revenues that at least make up for the short-term loss in revenues (or, more boldly, surprass them) on similar grounds. Unlike the relationship between tax cuts and monetary velocity, the relationship between tax cuts and long-term government revenues is much easier to measure and has been tepid at it's most successful.

As such, I think that it's more meaningful to look at metrics like real wages, employment and income equality. Maybe there's compelling evidence that tax cuts really do push these figures in the right direction, but I'm not aware of it. The EPI, for example, has not found the Bush tax cuts to have been helpful in these areas.

OTOH, it's pretty easy to measure the effect of putting people to work with fiscal policy. We know how much we spend on it, how many people we were employed from a certain date to another, how much they made, etc. These figures are far less mysterious than monetary velocity.

And we're essentially where we're at due to process of elimation right now. We've been dong the tax cut thing, with still more on the way (over a third of the stimulus bill is tax cuts). We've run out of rope on monetary policy. Combine this with the fact that there are actually things that we do need to spend money while putting people to work along the way, and I don't really see how what we're doing is all that tenuous.

Additionally, I will say this: If we believe that tax cuts to be inherently stimulative because individuals are better at deciding how to spend money on consumables (which isn't a bad premise) and tax cuts effectively put more money at their discretion, then shouldn't it be even more stimulative to put the unemployed to work? Those who are already employed can choose to put this marginal increase in resources into more consumables or, as they have done most recently, into paying off debts. OTOH, someone who is currently unemployed will almost certainly be delivering the lion's share of their income right back into the economy via consumption upon employment. If we just want to look at this through the eyes of common sense, sans data, then I don't see how you can assert the stimulative nature of tax cuts without acknowledging similar principles in respect to expansive fiscal policy.

Finally, there are projections like this one from Moody's (see page 9) and this one from the SF Fed. Of course, these are estimates of future outcomes based on previous econometric data and data, of course, cannot be trusted. ;)

EDIT: One more thing.. given that the biil is passed, the conversation is turning toward what to do about banking. I agree with you (at least I'm pretty sure this is where you stand, correct me if I'm wrong), that this is terribly important and that, academic discussions of economic stimulus aside, how this is handled will have very significant economic impact in both the short and long run. Major banks are effectively insolvent and there seems to be a high degree of uncertainty as to what moves will be made on this point.

This thead is so interesting

Bluesplashy — Fri, 20 Feb 2009 01:33:38 +0000

In reply to The dagbuzz for 2/18/09: (Cars and Houses and Chimps, Oh My!)

This thead is so interesting and informative, thanks guys. This got forwarded to me- Simon Johnson and Bill Moyers. Nothing about tax cuts but it is about the crisis.

http://www.pbs.org/moyers/journal/02132009/watch.html

I'm sure you will correct me if I am wrong but thinking about Bushes plan (send the people money and tell them to spend it) and Obamas plan (jobs, jobs. jobs) I think the Obama plan has much better chances of LONG term sucess than the other.

we're in agreement that tax

Deadman — Thu, 19 Feb 2009 22:45:42 +0000

In reply to I don't see how tax cuts can

we're in agreement that tax cuts can't do the trick (and most certainly not the tax cuts we're getting in the stimulus bill) altho i also question whether spending will do the trick either. government spending by itself may ease the pain, but the only way it will stimulate the economy is if it kickstarts private spending. If people are as scared as I think they are, with household balance sheets in as much disarray as I think they are, then you won't see much of that either.

I don't have the data you're looking for but apparently DF does . I think here are so many inputs going into the economic cauldron at any one time, it's vitrually impossible to isolate the influence of one particular tactic. But DF will probably disagree!

While I don't have hard figures to back it up, I absolutely believe that cutting the capital gains and income tax rates helped contribute to our economic growth in the 80s and 90s (which believe it or not wasn;t all just a bubble-induced illusion).

according to wikipedia as of aug. 2008 we had spent $550 bln directly on the war, which would be a significant but not ungodly percentage (about 11%) of the approximately $5 trillion in public debt that bush tacked on to our deficit during his eight years. This estimate, however, importantly excludes other indirect costs of the war, such as future interest payments, long-term health care costs for veterans, weaponry replacement costs, etc.

im not sure it says anything about the stimulus effect of tax cuts, except in that it would distort any data you'd get.

forgot about your policy lag

Deadman — Thu, 19 Feb 2009 22:30:17 +0000

In reply to I thought that you were

forgot about your policy lag argument. yes, that does shift things a bit, though i still think we may be acting too early.

in terms of the savings rate, i think we just ot too complacent, and it's very likely that this economic crisis will do the trick, esp. if it gets as bad as i think it will (my grandfather saved like a madman because he was so scared of seeing another great depression). of course, with the baby boomers retiring, even if we get religion and go on a massive savings kick, it wont be enough to compensate for their consumption.

I thought that you were

Michael Wolraich — Thu, 19 Feb 2009 22:12:56 +0000

In reply to i didn't realize the issue

I thought that you were arguing that tax cuts were more stimulative than spending.

I've never disagreed that we have to pay the piper, but as I recall, you agreed with me that we have to enact stimulus plans now if we want to see a stimulus effect in a year after we've paid said piper. Otherwise, we might overpay him. The growth at that time would give us revenue to pay down the deficit, which I trust Obama (though not Congress) to do.

As for savings, I agree with you that our savings rate is abysmal and will have consequences. After we begin to get out of this recession, let's agree to write about how the government should encourage saving.

I don't see how tax cuts can

Bluesplashy — Thu, 19 Feb 2009 22:08:20 +0000

In reply to Wow, DF, this is a post in

I don't see how tax cuts can generate enough spending in the 'crisis' we are in now to make a difference. I think so many people are in hock up to their ears and are so scared that they are going to put any extra they get toward bills or if they don't have to - it's going in the bank. You guys may be fine in your personal finances but there are millions of people that aren't. They are in credit card hell and have been for years. And tax cuts for the unemployed are not going to stimulate spending. I really want some figures on tax cuts stimulating the economy because I don't see how it can happen. Not in the amounts we need now. I did hear the 'Tear down this Myth' author say that while Regan did cut taxes in his first year, he ended up raising them a couple of time while he was still in office. And I think that if tax cuts were the miracle worker some maintain, wouldn't politicans be doing more of them. Does anyone know the percentage of debt incurred in the last adminstration that was not due to war? Or was it all? If some of it was wasn't what does that say about the tax cut stimulus theory?

i didn't realize the issue

Deadman — Thu, 19 Feb 2009 21:57:00 +0000

In reply to Wow, DF, this is a post in

i didn't realize the issue was are tax cuts or govt. spending more stimulative in recessions. if that's the case, then i can buy your argument, G. i particularly despise the tax cuts and credits in this bill - all poorly targeted, half-hearted, temporary measures that will do nothing to change investment behavior.

however, if people are really scared of losing money, then i don't think you'll find either one - tax cuts or government spending - being particularly stimulative (govt spending is only stimulative if it increases the velocity of money) - and that's why I believe attempts to stimulate an economy before the time is right are doomed to fail.

(This is an argument we've rehashed before - and I fully understand why this philosophy is not attractive as it assumes we will have a lot more pain to bear no matter what we do and that it's very likely anything we try will delay a recovery)

it's interesting you bring up the savings argument, because a) it's a very important consideration in terms of trying to find a solution to our current mess and b) it's a great example of how people can twist data to mean whatever they want it to mean. After a couple of decades of seeing American's personal savings rate decline at a frightening pace, the rate turned slightly negative in 2005 and has hovered at right about zero since then. (a phenomenon only previously seen in the great depression, when people couldn't afford to save).

Yet economists everywhere dismissed concerns about these numbers by suggesting the data wasn't accurate, or inclusive enough, that it ignored the personal wealth that rising stock markets and home price appreciation were generating (how are those gains looking now???) and that the last thing we wanted to do would be to turn into a bunch of saving namby-pansies like the Chinese, Japanese and Germans. Keeping up with the Joneses was a good thing, and it was the reason America had it so good.

The problem is, eventually you have to pay a price for that kind of profligacy. More and more income goes toward paying off interest payments, a particularly unproductive type of spending which crowds out investment.

and heaven forbid, if the stock market and real estate wealth you so heavily relied on proves to be not much more than a bubble-induced illusion, you're setting yourself up for a real disaster. Combine that all with the looming baby boom retirement, and oh boy, I'm literally getting sick just thinking about it.

do you really think the way out of the mess is to encourage people to spend again?? People who are nearing retirement age and now find themselves with nowhere near the savings they'll need to live 20-plus years in retirement???

Bullshit. We've got a piper to pay, and all the king's horses and all the king's men won't be able to put Humpty Dumpty together again.

Wow, DF, this is a post in

Michael Wolraich — Thu, 19 Feb 2009 21:15:44 +0000

In reply to Yeah, I definitely don't

Wow, DF, this is a post in itself and excellently argued. I'm going to add to it by taking Deadman's common sense argument about government versus private spending head on.

Individuals probably spend money more efficiently than the government, but they spend it on their own interests. The limitation of free market idealogy occurs at the point when individual interest and public interest don't match up. Take the basic concept of taxes. Most people would not voluntarily contribute taxes if they weren't required to. Individually, that would be to their benefit because they would have more money to spend. But if no one paid taxes, there would be anarchy, and everyone would be worse off. So individuals benefit by the government forcing them to pay taxes.

In normal conditions, the (mostly) free market works and makes the economy grow. But in recessive conditions, people don't invest because they're afraid they'll lose their investment. Individually, that's smart, but if no one invests, the economy continues to shrink, and everyone suffers. If you give me people more money through tax cuts during a recession, that won't necessarily encourage them to invest it. They might spend their money, which would stimulate the economy, unless of course they buy imports, encouraged by a deflationary dollar. Or they might just stick it in bonds. By contrast, the government might not spend money as efficiently as individuals, but at least its spending money and not simply hoarding it. (Yes, I know saving money has benefits as well but saving is not very stimulative; just look at Japan.)

That's a simplified common sense explanation for why spending during a recession is more stimulative than taxes. But I wouldn't believe it if it weren't also corroberated by data and the consensus of economists. Because DF is right that common sense explanations aren't good enough.

What I'm saying is: Who cares

DF — Thu, 19 Feb 2009 20:33:29 +0000

In reply to yes, i was way

What I'm saying is: Who cares if you can find data that says otherwise? What matters is where it came from, how it was collected and what kind of statistical analysis has been done on it. Does that deliver perfect information? No, but it's better than mere belief. I'd rather have a debate that pushes the state of the art forward rather than simplistic ideological warfare.

Sure, you can perhaps find data otherwise, but who cares? Is it good data? Is it relevant? Do you believe that you can find data that is germane or simply that you can find someone to say anything? I don't debate the second premise, but it's hardly relevant.

Inflation is a great example. Do we have perfect knowledge of inflation? No, but the CPI-U is generally accepted as a pretty good measure of what we mean when we say inflation. Is that the best, most meaningful possible measure? No, but as long as we allow ourselves to discuss the pros and cons to using the CPI-U we keep the door open for more refined understanding in the future. I find it odd that you seem to be concerned about the potential for inflation in the future, but that you don't really believe that we know anything about inflation in the meantime. It seems to imply that you do trust the data at least to the point that it may serve to correlate monetary expansion and inflation. With no such basis for understanding inflation, belief in this sort of consequence is just arbitrary.

I think it's problematic to simply believe that tax cuts are always good for the economy, just as it's problematic to simply believe that spending is always good. "Good", of course, is both qualitative and relative.

yes, i was way

Deadman — Thu, 19 Feb 2009 20:13:20 +0000

In reply to Yeah, I definitely don't

yes, i was way oversimplifying.

you just said that all or almost all the data you've seen suggested that cutting taxes wasn't very stimulative or had no real long-term benefits with regard to economic output, and I just believe you most certainly can find data to argue otherwise. modern economics is such a new field, relatively speaking, so the fact that many fairly basic concepts are still hotly debated, replete with contradictory statistics, is hardly a surprise.

i think data is important, and i think there are obviously economic conclusions that can be drawn, and theories that can be supported, from good, reliable, signifcant samples of data (of course, getting good, reliable, significant samples of economic data is often very difficult - what is the unemployment rate in this country after all?? how high is inflation?? we do so many contortions and manipulations with the data, it's very hard to know how accurate the numbers we get are - the best we can hope for in many cases is that they are consistently inaccurate over time).

but putting aside the data for a moment, it just makes sense to me that because i believe individuals spend money more effectively than government, that cutting taxes, all other considerations put aside for the moment, is a good thing for the economy.