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A commenter notes that my ideas on stimulus sound a lot like Greg Mankiw’s. This shouldn’t be odd as Greg and I have very similar view on how the economy works.
We have different views on underlying social morality, but that’s the point. From an intellectual perspective whether you think there should be more or less redistribution should have no bearing on whether you think stimulus is effective in closing the output gap and whether or not you think broad based tax cuts are the fastest and most effective way to get there.
One of the things I have noticed on the blogosphere, Facebook and other outlets where I have access to popular opinion is that skepticism goes out the window when it collides with cynicism.
In an only mild exaggeration, if I were to propose that the moon were made out of cheese, I would be met with a deep skepticism by almost everyone. However, if I were to propose to a unified subgroup, that their sociopolitical adversaries had conspired to make them believe the moon was not made out of cheese the skepticism level would drop dramatically.
Still most people would combat it, but far less forcefully and more on the grounds that “every knows that the moon is not made of cheese” rather than on genuine skepticism.
However, no matter how likely you think it is that some one is tricking you into believe the moon is not made cheese, that must be less likely than moon being actually made out of cheese. For someone to hide the truth from you, it must first be the truth.
Let me give a more concrete but unfortunately more charged example. There is a debate over whether or not the Obama Stimulus worked. As I have said before, I favored a different type of stimulus, both at the time and now. This gives me enough cachet to enter into non-heated conversations with strong Obama detractors.
They ask me frequently whether or not I “really believe” the stimulus worked. I say, “I presume so.” Then they counter with a line of reasoning more or less like the following:
The economy was bad even with the stimulus. It was worse in fact than the Obama administration said it would be without the stimulus. The Obama administration would like us to believe that it would have been even worse without their stimulus. However, this is just a convenient ruse. One cannot prove a counter-factual. Thus we cannot know whether the economy would have been worse without the stimulus. Thus we should not believe the Obama’s administration’s claim that stimulus worked.
This is all well and good except that its an argument that the Obama administration has no credibility on stimulus. That fact alone can’t lower your estimate of stimulus’s effectiveness from what it was before the crisis.
Why?
Well presumably the Obama administration, at absolute worst, will say whatever it needs to say to put the stimulus in the best light. If the stimulus worked, they will say it worked. If it did not work then they will still say it worked.
This implies that statements from the Obama administration are orthogonal to the truth. That is, utterly uninfluenced by it.
However, if a statement is orthogonal to the truth then it cannot rationally affect your estimate of the truth. That is, it simply doesn’t matter what the Obama administration says. Your best guess at the truth is whatever you thought the truth was before. You might as well simply ignore everything the Obama administration says.
Yet, this is not what the argument above is asking. It is asking that I lower my estimate that stimulus is effective based on the Obama administration’s lack of credibility. This is only rational if I think the Obama administration is anti-truth. That is, that they seek to lie even when it is not in their best interest to do so.
Or, said another way I have to believe if the stimulus had worked the Administration would lie to me and tell me that it didn’t. I have to believe they would do this because they enjoy lying or are otherwise motivated to spread disinformation for its own sake.
Said, in additional way, I have to believe not that the Obama administration has no credibility, but that they have negative credibility. If I take what they say and simply assume the opposite, I will be right more than not.
Its an easy proof but beyond this post that negative credibility is credibility. And, that someone who always lied no matter what, is just as trustworthy as someone who always tells the truth. You simply have to logically invert the questions.
So, back to the point, this implies that, at worst, the Obama administration has zero credibility. Negative credibility would be better than zero credibility.
However, zero credibility by definition means that you should believe whatever you believed before. It also by the way, means that the fact that the economy was worse than the Obama administration predicted means nothing. After all, they have zero credibility. Under that assumption, everything they say is meaningless.
The moral of that example is that there is no consistent amount of cynicism about the Obama Administration that should lead you to downgrade your estimate that stimulus worked.
Now, if you independent of the Administration, thought that unemployment would top out at 9% in the absence of stimulus, and you independently hold to that prediction then the fact that with stimulus unemployment rose above 9% is evidence that the stimulus failed. However, it’s a rare person that I meet, who is making this claim.
The moral of the whole post is that assuming your adversaries have low fidelity to the truth is not the same as assuming that they have high fidelity to lies. Generally speaking the worst I should think of someone is that, something is no more or less likely because they told me it was so. I should not lower my skepticism of their proposition being false, simply because they told me it was true.
There is a strong case for the prompt enactment of further timely, targeted and temporary fiscal stimulus…
Larry Summers, 2008
Remember when stimulus was supposed to be temporary, targeted, and timely? The departure from that notion by those calling for short-term austerity has been recognized and ridiculed. But there are those calling for long-term commitments and programs which are just as far afield from ideal stimulus. To wit, Michael Lind Policy Director at the New America Foundation, calling for permanent increases in the public sector and, yes, a new entitlement program for seniors.
One solution would be direct, permanent expansion of public sector employment in “quality of life” jobs like teaching, child care, public health care, and policing….
…Many democracies in Europe and Asia have had successful experiences with vouchers provided to individuals for in-home services. My colleague at the New America Foundation Lauren Damme and I have proposed a Dignity Voucher program along these lines. Qualified retirees would receive vouchers entitling them to a certain number of hours of in-home help each week.
I’d first like to point out that this is exactly the opposite of what you want in countercyclical stimulus. It’s untargeted, untimely, and permanent. At most you could defend targeted, but “make more teachers, police, and health care workers” isn’t even a very targeted goal, let alone the vast and disparate array of policies necessary to actually accomplish that. You want to argue that we could get this done quickly? Take another look what he has in mind:
Many of these victims of the Great Recession have limited skills and were employed in low-wage jobs in the luxury sectors like restaurants and retail that catered to the big spenders of the bubble economy. The goal of public policy should be to directly and indirectly provide jobs for many of these workers in service sector jobs that address the needs of mainstream Americans, like health care and education, rather than return them to dead-end menial service jobs where they will work again for the affluent.
Your not going to turn waiters and GAP cashiers into radiologists and teachers overnight. This is going to take a long time.
I understand the need to plan for the long-term health of the economy, but unlike infrastructure spending these suggestions can’t be defended by appealing to long-term growth. Instead, this is a straight up plan for a larger, more redistributive government. One of the biggest problems today is that in the long-run we can’t afford the level of government, and in the short-run we can’t afford to cut back on spending or raise taxes. A slowly rolled out, permanent increase in government payrolls and entitlements doesn’t help either, and will probably make both worse. I mean this guys is seriously arguing for another entitlement program for senior citizens. He’s actually saying this.
That is the title of today’s Wall Street Journal Symposium [Gated]. And the overwhelming answer from preeminent monetary economists? Nothing.
Not that they didn’t answer the question. Most of the panelists’ answers amount to the Fed remaining passive. Here is John Talyor:
To establish Fed policy going forward, the best place to start is to consider what has worked in the past. During the two decades before the recent financial crisis, the Fed employed a reasonably rule-based strategy for adjusting the money supply and the interest rate. The interest rate rose by predictable amounts when inflation increased, and it fell by predictable amounts during recessions.
Fairly predictable. John Taylor has made this point numerous times, and is a very hard rules-based guy. I’m a rules-based guy as well…but I don’t see the inherent virtue in the Taylor rule, however defined. Essentially Taylor seems to want the Fed to stabilize NGDP growth around a Taylor rule at the current (reduced) output level, which puts us permanently behind the previous trend rate of output. As far as I can tell, he doesn’t care to make up the slack…which of course means elevated unemployment for an extended period of time.
Richard Fisher, who is a predictable hawk, lived up to expectations as well:
One might assume that with more than $1 trillion in excess bank reserves and significant amounts of cash held by businesses, the gas tank of those who have the capacity to hire is reasonably full. One might also conclude that the Fed, having cut the cost of interbank overnight lending to near zero and used quantitative easing to coax the entire yield curve downward, has driven the cost of gas to virtually nil for businesses that are creditworthy. And yet businesses still aren’t hiring.
This is a mind-bogglingly insane statement. When suffering an immediate deficiency of aggregate demand, supply-side factors are second order. Yes, we should streamline regulatory hurdles…but that has nothing to do with why firms aren’t hiring. Fisher must have missed a lot of economics, and apparently doesn’t understand that demand for safe assets (which in developed countries equates to cash) drives most recessions (especially during a time where there is a lack of supply of safe [private] assets), and that the Fed decided to pay banks to hoard cash…and so they did. I’m having a hard time figuring out how Fisher landed his current position.
On to the most depressing, Frederic Mishkin:
Purchasing long-term Treasurys might suggest that the Fed is accommodating the fiscal authorities by monetizing the debt—thereby weakening the government’s incentives to come to grips with our long-term fiscal problems. In addition, major holdings of long-term securities expose the Fed’s balance sheet to potentially large losses if interest rates rise.
Such losses would result in severe criticism of the Fed and a weakening of its independence. Both the weakening of its independence and the perception that the Fed is willing to monetize the debt could lead to increased expectations for inflation sometime in the future. That would make it much harder for the Fed to contain inflation and promote a healthy economy.
Expanding the Fed’s balance sheet through large-scale asset purchases can be necessary in extraordinary circumstances, such as during the depths of the recent financial crisis. But in relatively normal times, the costs of using this tool are sufficiently high that it should not be used lightly.
9.5% unemployment, falling CPI and inflation expectations, and exploding national debt due to the political anxiety to “do something” is now ‘normal times’? This amounts to saying that the Fed has the tools, but shouldn’t use them unless we’re in the Great Depression. The Fed’s job is to keep us out of financial panics like the Great Depression, not make its job significantly harder by passively waiting until the depths of the abyss, and then acting. I don’t agree with that at all.
I don’t really know anything about Robert McKinnon, but he is worried about international currency flows, asset bubbles in China, and thinks that the Fed should mediate interbank lending to stabilize the yield curve at “normal interest rates”. I’m fairly confident that China can sterilize any dollar inflows that happen upon its shores…so I don’t see this as a problem that needs to be addressed by anyone but Chinese policymakers, and I happen to think that the Fed should be much more aggressive than stabilizing yield curves AAAAAND raising interest rates now is, of course, insane punditry. Apparently so does the Vincent Reinhart believes the Fed should be more aggressive as well:
As a consequence, the Fed has to be both aggressive and nimble. The Fed should promise to purchase government and mortgage-related securities between its regularly scheduled meetings as long as activity is forecast to be subpar and inflation is low or headed down. Purchases of, say, $100 billion every six-to-eight weeks would add up to a number worthy of shock and awe for those with a somber economic outlook.
All-in-all a very depressing symposium. They should have interviewed Scott Sumner, Bill Woolsey, David Beckworth, Nick Rowe, and Paul Krugman. Then, perhaps, the world could be saved.
Update: Beckworth seems to have beaten me to the punch, linking to Mark Thoma, who did as well…a
Modeled Behavior 