stimulus spending doesn't work

[Azazello1313]

which would be relevant if I had posted the article to prove my point

 

but I didn't

 

you did though

 

and failed

 

their conclusion bolsters my point pretty well. my point was that stimulus spending doesn't really work, and their conclusion is that stimulus spending doesn't really work.

 

In particular, we have found that, in economies open

to trade and operating under flexible exchange rates, a

fiscal expansion leads to no significant output gains .

Further, any gains will be, at best, short-lived in highly-indebted

countries. Since, over the last decades, many

emerging countries have become more open to trade

and moved towards greater exchange rate flexibility

(typically in the context of inflation targeting regimes),

our results suggest that seeking the holy grail of fiscal

stimulus is likely to be counterproductive, with little

benefit in terms of output and potential long-run costs

due to larger stocks of public debt.

[wiegie]

doesn't really matter, perhaps you can just focus on the post-1950 measurement.

ok, fine, the multiplier for the post 1950 period is .77.

 

Let's assume this is correct. What does it mean?

 

For every dollar that the government spent on defense, it raised GDP by only 77 cents.

 

Why could this be? And why might not this multiplier be relevant for today's situation. Let's think about it.

 

Defense spending is not investment spending. If I spend money to buy a tank, the tank is not going to increase the nation's productivity. However, if the same money is spent to build a road, school or some other piece of domestic infrastructure, it could very well increase the nation's productivity--thereby causing an increase in GDP.

 

Now, let's think about the geography of defense spending. How much of a multiplier will there be if the US government spends money to build and maintain a military base in a foreign country? Not much--although it would have a nice multiplier effect for the foreign country. Now, let's think of what happens if the money is spent building something at home. Then there indeed will be a multiplier effect as the money increases incomes and people spend that money again and again.

 

How much of the military spending went to pay soldiers who were stationed abroad? Again, same thing as above. No multiplier domestically.

 

There are other things to consider as well, but to even get a .77 multiplier is not bad. Especially if much of the spending is done during normal times when the borrowing could really crowd out private investment (which is not the case today).

 

I guess mostly Barro's paper shoots down the notion that spending money on defense gives a net gain to the nation's economy. But I'm not sure how you can really draw much else from it.

[wiegie]

their conclusion bolsters my point pretty well. my point was that stimulus spending doesn't really work, and their conclusion is that stimulus spending doesn't really work.

and yet the authors go out of their way to talk about the US economy today to suggest that maybe their results don't apply

 

(I do apologize, though, if you were just trying to have a basic theoretical discussion on fiscal multipliers and are not trying to make any commentary at all about our real-world current economy.)

[Azazello1313]

Personally, I trust the comments at marginalrevolution.com more than an economics professor. Solid work here.

 

just to make the point, the guy (robert barro) who wrote the original paper/op-ed in this thread is #3 on this list.

[Azazello1313]

and yet the authors go out of their way to talk about the US economy today to suggest that maybe their results don't apply

 

maybe they hadn't seen the latest unemployment numbers

[wiegie]

just to make the point, the guy (robert barro) who wrote the original paper/op-ed in this thread is #3 on this list.

and to further make my point, check out this op-ed piece written by the guy who is #2 on the list:

 

Stimulate or Die

August 2009

By Joseph E. Stiglitz

 

NEW YORK – As the green shoots of economic recovery that many people spied this spring have turned brown, questions are being raised as to whether the policy of jump-starting the economy through a massive fiscal stimulus has failed. Has Keynesian economics been proven wrong now that it has been put to the test?

 

That question, however, would make sense only if Keynesian economics had really been tried. Indeed, what is needed now is another dose of fiscal stimulus. If that does not happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment.

 

 

 

The Obama administration seems surprised and disappointed with high and rising joblessness. It should not be. All of this was predictable. The true measure of the success of the stimulus is not the actual level of unemployment, but what unemployment would have been without the stimulus. The Obama administration was always clear that it would create some three million jobs more than what would otherwise be the case. The problem is that the shock to the economy from the financial crisis was so bad that even Obama’s seemingly huge fiscal stimulus has not been enough.

 

But there is another problem: In the United States, only about a quarter of the almost $800 billion stimulus was designed to be spent this year, and getting it spent even on “shovel ready” projects has been slow going. Meanwhile, US states have been faced with massive revenue shortfalls, exceeding $200 billion. Most face constitutional requirements to run balanced budgets, which means that such states are now either raising taxes or cutting expenditures –a negative stimulus that offsets at least some of the Federal government’s positive stimulus.

 

At the same time, almost one-third of the stimulus was devoted to tax cuts, which Keynesian economics correctly predicted would be relatively ineffective. Households, burdened with debt while their retirement savings wither and job prospects remain dim, have spent only a fraction of the tax cuts.

 

In the US and elsewhere, much attention was focused on fixing the banking system. This may be necessary to restore robust growth, but it is not sufficient. Banks will not lend if the economy is in the doldrums, and American households will be particularly reluctant to borrow – at least in the profligate ways they borrowed prior to the crisis. The almighty American consumer was the engine of global growth, but it will most likely continue to sputter even after the banks are repaired. In the interim, some form of government stimulus will be required.

 

Some worry about America’s increasing national debt. But if a new stimulus is well designed, with much of the money spent on assets, the fiscal position and future growth can actually be made stronger.

 

It is a mistake to look only at a country’s liabilities, and ignore its assets. Of course, that is an argument against badly designed bank bailouts, like the one in America, which has cost US taxpayer hundreds of billions of dollars, much of it never to be recovered. The national debt has increased, with no offsetting asset placed on the government’s balance sheet. But one should not confuse corporate welfare with a Keynesian stimulus.

 

A few (not many) worry that this bout of government spending will result in inflation. But the more immediate problem remains deflation, given high unemployment and excess capacity. If the economy recovers more robustly than I anticipate, spending can be canceled. Better yet, if much of the next round of stimulus is devoted to automatic stabilizers – such as compensating for the shortfall in state revenues – then if the economy does recover, the spending will not occur. There is little downside risk.

 

Nevertheless, there is some concern that growing inflationary expectations might result in rising long-term interest rates, offsetting the benefits of the stimulus. Here, monetary authorities must be vigilant, and continue their “non-standard” interventions – managing both short-term and long-term interest rates.

 

All policies entail risk. Not preparing for a second stimulus now risks a weaker economy – and the money not being there when it is needed. Stimulating an economy takes time, as the Obama administration’s difficulties in spending what it has allocated show; the full effect of these efforts may take a half-year or more to be felt.

 

A weaker economy means more bankruptcies and home foreclosures and higher unemployment. Even putting aside the human suffering, this means, in turn, more problems for the financial system. And, as we have seen, a weaker financial system means a weaker economy, and possibly the need for more emergency money to save it from another catastrophe. If we try to save money now, we risk spending much more later.

 

The Obama administration erred in asking for too small a stimulus, especially after making political compromises that caused it to be less effective than it could have been. It made another mistake in designing a bank bailout that gave too much money with too few restrictions on too favorable terms to those who caused the economic mess in the first place – a policy that has dampened taxpayers’ appetite for more spending.

 

But that is politics. The economics is clear: the world needs all the advanced industrial countries to commit to another big round of real stimulus spending. This should be one of the central themes of the next G-20 meeting in Pittsburgh.

[bpwallace49]

Advantage . . . weigie

 

Az, your rebuttal?

[AtomicCEO]

actually, the guys at Marginal Revolution ARE economics professors (and very good ones at that)

 

I'm assuming that they don't restrict comments to economics professors. He quoted the comments.

[Clubfoothead]

What about public works spending? If you've caught The Crumbling of America yet, there's tons of spending there that needs to be done without regard to the stimulative effects. There's alot of empirical evidence that public works spending is stimulative, but it appears we are supposed to write it off because of when it happened in relation to war? That doesn't make much sense.

Edited October 3, 2009 by Clubfoothead

[Jimmy Neutron]

Didn't Japan spend trillions upon trillions on public works and infastructure beginning when their economy collapsed in the early '90s? Not sure, but I think they just entered their like 18th year of recession (based on their pre-90s economy).

[Clubfoothead]

Didn't Japan spend trillions upon trillions on public works and infastructure beginning when their economy collapsed in the early '90s? Not sure, but I think they just entered their like 18th year of recession (based on their pre-90s economy).

 

I'm no expert on Japanese economics history but everything I've found referenced deregulation of banks and the real estate and stock bubbles correcting themselves as the culprits. The island airport probably wasn't the best idea. So what?

 

And of course you are ignoring the fact that in America it seems pretty necessary regardless of the stimulative effects. Or do you disagree with the issues presented in the show?

 

China's economy has weathered the current recession better than most others. I doubt you advocate a managed economy.

[Brentastic]

Contradicted by his own link... Az falls back on his old friend, Semantics.

Goddamit, dude - you are frickin' hilarious! That's just comedy gold right there

[Scooby's Hubby]

TheStimulus package was merely all of the construction jobs and kickback jobs that Dems had been trying to push through a

gop congress has been not voting on the last 8 years. Now that Dems have the votes they bundled all that leftover pork and called it "Stimulus". Al it did was stimulate the Dem, lobbyists and good ol boys

[Clubfoothead]

TheStimulus package was merely all of the construction jobs and kickback jobs that Dems had been trying to push through a

gop congress has been not voting on the last 8 years. Now that Dems have the votes they bundled all that leftover pork and called it "Stimulus". Al it did was stimulate the Dem, lobbyists and good ol boys

 

And the recession proof and democratically controlled Exxon.

[bushwacked]

TheStimulus package was merely all of the construction jobs and kickback jobs that Dems had been trying to push through a

gop congress has been not voting on the last 8 years. Now that Dems have the votes they bundled all that leftover pork and called it "Stimulus". Al it did was stimulate the Dem, lobbyists and good ol boys

 

Who needs American infrastructure improvements? We should have spent the same amount on welfare in a different country.

 

 

Oh wait.......

[bpwallace49]

Who needs American infrastructure improvements? We should have spent the same amount on welfare in a different country.

 

 

Oh wait.......

 

It would be if is wasnt sadly true

[Clubfoothead]

It would be if is wasnt sadly true

 

There are quite a few America hating communitsts who have been opposed to a Starbucks and X-box for every Iraqi since early 2002.

[Azazello1313]

and to further make my point, check out this op-ed piece written by the guy who is #2 on the list:

 

that's well played and all, but I was pointing that out in response to atomic's asinine "well I'm gonna go with what the economics professor says" schtick...when the guy who wrote the original article would appear to be one of the top economics professors in the world.

 

but more on topic, I'm wondering if the articles by barro and stiglitz completely contradict each other. barro says stimulus spending isn't very effective at actually stimulating the economy. well, one logical reaction to that (barro's choice) would be, ok, we are wasting money. but another logical reaction (stiglitz') would be, if we're actually going to have much impact we have to throw a LOT of money at the problem. and apparently, $800 billion doesn't qualify as "a lot" these days.

 

so, faced with the reality that stimulus spending doesn't have a huge bang for the buck, perhaps the two most logical responses are 1) back off, or 2) double-down. and between those, perhaps it comes down to philosophy of government more than anything else.

 

lastly, I just want to share one more thing I read about this whole issue yesterday that seems to be on point:

 

Mark Thoma is raising the issue that it is too soon to back away from economic stimulus. See, for example, Paul Krugman, Robert Reich, Tim Duy, and other recent posts. All of these appeared before this morning's employment release, which reinforces the view that the economy remains weak.

 

You may recall that when this year's stimulus bill was being debated, I pointed out the oddity that one of the arguments for a big stimulus was the fact that there is a consensus that many countries at different times have tried small stimulus, which failed. An interesting question is whether these stimulus efforts were thought to be small at the time, or whether "small stimulus" is what you call a big stimulus after it fails.

 

Did this year's stimulus fail? I think it is too soon to tell. My biggest complaint about this year's stimulus has always been that while the bill was enacted this year, most of the spending takes place in the out years. If stimulus works, its effects should be cumulative. If it starts slowly, the effects will accumulate slowly.

 

If we try to address the weak economy of 2009, and the likely weak economy of 2010, by enacting a big spending boost for 2012 and 2013, that would not be good policy. I hope we can all agree on that.

 

Given how difficult it is for government to spend money both quickly and efficiently, I would hope that those who wish to see more stimulus would at least be open to the idea that Bryan suggested and that I tried to promote, which is eliminating, for some indefinite period, the employer contribution to the payroll tax (explicitly putting more IOU's into the Social Security trust fund, if you are worried about that). We need private sector job creation. Let's have a stimulus that focuses on that goal, rather than on other goals.

Edited October 3, 2009 by Azazello1313

[Clubfoothead]

So you see public works spending and stimulus spending as different things?

[Jimmy Neutron]

I'm no expert on Japanese economics history but everything I've found referenced deregulation of banks and the real estate and stock bubbles correcting themselves as the culprits. The island airport probably wasn't the best idea. So what?

 

And of course you are ignoring the fact that in America it seems pretty necessary regardless of the stimulative effects. Or do you disagree with the issues presented in the show?

 

China's economy has weathered the current recession better than most others. I doubt you advocate a managed economy.

 

I think Japan's problems were caused by many of the same conditions that led us to where we're at. Their government responded to the crisis much the same way ours is reacting. Bailouts and cheap money were used to prop up bad business and it only prolonged the pain. I hope we don't see a prolonged recession like Japan, but there are signs that we're far from the light at the end of the tunnel. American local real estate is in the brink and teetering right now. In Japan, real estate values dropped 70-75% between '90 and '97.

 

I think China is weathering the storm better than most becuase their production primarily provides a lot of basic needs people are still buying. China also has considerable savings on hand. Grandma's rainy day fund idea was a pretty good one.

 

Much of the spending we're doing is not necessary, the bail outs and much of the stimulus in particular.

[wiegie]

that's well played and all, but I was pointing that out in response to atomic's asinine "well I'm gonna go with what the economics professor says" schtick...when the guy who wrote the original article would appear to be one of the top economics professors in the world.

Barro is one of the top economists in the world--which is why his article is so baffling (in that it seems quite strange to not consider why defense spending probably has a lower multiplier than many other types of government spending (as I explained above))

 

(It sorts of reminds me of a situation that occured when I was in graduate school. The department I was studying was trying to hire a new professor, so they brought in several candidates from top schools to interview. Part of the process involved the candidates giving a presentation of their research. One guy (I think from Northwestern) gave a presentation on gas prices in Hawaii to see if collusion was the reason why gas prices were higher in Hawaii than in other states. The techniques he used were extremely high-tech and his model was impressive. However, as his talk was finishing, one of the professors at my school said, "Isn't the most likely reason that gas prices are higher in Hawaii than in other states is because of the additional costs of transporting the oil to Hawaii?" The student literally looked stunned as though he had never considered that possibility before and no one else (including his graduate advisors) had ever asked him that question previously.)

[wiegie]

IMuch of the spending we're doing is not necessary, the bail outs and much of the stimulus in particular.

I'd argue that even though the bail-outs were structured poorly (in terms of them just ending up being a free money give-away to Wall Street) that if the bail-outs had not been done, we would be looking at a MUCH MUCH worse economic situation than what we are in now.

[Jimmy Neutron]

I'd argue that even though the bail-outs were structured poorly (in terms of them just ending up being a free money give-away to Wall Street) that if the bail-outs had not been done, we would be looking at a MUCH MUCH worse economic situation than what we are in now.

 

I don't disagree, but I do think we'd recover faster and to a state of real health. Our current course of action is laying roadblocks futher down the road and will leave us floundering for years, IMO. At some point in time, we're going to simply have to let businesses fail and absorb that pain to a higher degree than we could have originally? There are rumblings that Chrysler is done - we're not going to get that money back. Thankfully, that was a relatively small amount of money, but what about banks? Is there as sense that all of our big banks are restoring themselves to a state of real health? How well can they absorb a serious decline in the value of commercial real estate, a further decline in residential real estate or the coming rounds of consumer defaults that are sure to follow with still rising unemployment?

 

Then of course, there's the debt. It certainly didn't start with this mess, but we're not addressing the impending nightmare that will impede our recovery in the form of simply having to pay the interest. I honestly don't know and am looking for answers - what happens when that note (I know it's not that simple, but to use a term) comes due?

[Clubfoothead]

I think Japan's problems were caused by many of the same conditions that led us to where we're at.

 

That sure was my conclusion after about 45 minutes of reading.

 

Watch The Crumbling of America. I haven't been able to find anyone who disputes the meat and potatoes of the program, which concludes that America needs to spend billions, maybe trillions improving infrastructure without regard to the stimulative effects. You decide to do these infrastructure projects with a focus on renewable enregy and enviromnetally friendly methods of engineering and I don't see how it could not be stimulative.

 

The new bridge in Minneapolis is uber cool BTW.

 

The Highway Recovery Act is the best example but the one author wanted to write off it's stimulative effects because it came right after war. It cost tons to build our interstate highway system that was appreantly designed to last about 50 - 75 years. It created jobs and certainly helped businesses throughout the nation.

 

The bailout of Wall Street meh. I'm not smart enought to know if that was a good use of money or not. The last two presidents bit down on a leather belt and told us we had no choice.

[Jimmy Neutron]

Watch The Crumbling of America. I haven't been able to find anyone who disputes the meat and potatoes of the program, which concludes that America needs to spend billions, maybe trillions improving infrastructure without regard to the stimulative effects. You decide to do these infrastructure projects with a focus on renewable enregy and enviromnetally friendly methods of engineering and I don't see how it could not be stimulative.

 

The new bridge in Minneapolis is uber cool BTW.

 

Haven't seen the program, but it sounds like I agree with a lot of it. Our infastructure is in terrible shape and will be yet another stumbling block to our economic health in the long run. I'm not against spending money in this area, as it is critical to our health in the future. We do need to change the way these projects are awarded more planning needs to go into the way we do them. It seems we too often rebuild a road only to rip it up a year later to make an improvement. We should repair and build infastructure needs for 30 years down the road (to the best of our ability).

 

It kills me to see a new school be built that lacks the capacity for the students slated to attend there. I see it locally - new scholls regularly have portable classromms adjacent to them - sometimes the same year they open.

 

Not sure how we'll accomplish all of this. The federal government is not the only government entity living beyond its means. Many state and local municipalities seem to be in bad shape too. Makes me wonder how many state and fed pensions will not be there or will be significantly diminished down the road and what problems that will cause.

 

Prepare to be taxed.