Is The Stimulus Working?

I expect the Stimulus to have some impact, and hence believe in a double-dip W-shaped recession: it works but we fall back down when government life support is removed. 

An op-ed this week has thrown the issue front and center: John Taylor and others wrote The Stimulus Didn't Work. Core point is in this chart: consumer consumption has continued to decrease. Taylor shows more evidence that temporary tax rebates simply do not change behavior. Ford did one; Bush did two; and now Obama is doing one (the largest part of his stimulus was tax rebates to people). It takes a permanent tax or income change to change behavior. Oh why haven't we learned that lesson? 

Taylor looked at the Q2 GDP and noted how the largest change came from private investment, not consumption; and yet it is hard to see where any government spending affected that. Instead he attributes it to a snapback from a freefall several quarters earlier. So where the government asserts that stimulus added 2-3% of the improvement, Taylor's model has it less than 1% (which is more in line with my Peak Stimulus analysis). He notes that 1.8% of the 5.4% GDP improvement according to govt stats came from govt spending, of which more than half was defense not stimulus.  Hence the less than 1% estimate. 

The reply from the neo-Keynesians such as Brad De Long was swift. He first oddly enough cited Goldman Sachs for this viewpoint:  

Our second problem with the Cogan-Taylor-Wieland analysis is the absence of a serious attempt to construct a counterfactual baseline – the path the economy or some part of it would have followed in the absence of fiscal stimulus. Analytically, this is a much more serious issue than the lack of sufficient data availability, which will take care of itself. Nobody can know for sure what the baseline is, but it is incumbent on economists claiming either an effect from stimulus or the absence of one to provide some defense of the implied alternative path...

I say oddly since when have econ professors become shills for Wall Street? Not for a while, and not from Berkeley! The Keynesian side has not done this either, and yet made claims of the Stimulus working. The government did do this, and got caught out - see for example this chart on actual unemployment vs. government predictions with and without stimulus, courtesy Innocent Bystanders. Taylor is using the government's own assertions of where the GDP change came from. 

Sigh. Oh for a better economic discourse! 

Brad is unfortunately fiercely partisan, and it makes his commentary highly suspect, especially when it is filled with snarky ad hominem attacks. As an example he states in this post: "right-wing pieces that serve Republican political interests that are published on the Wall Street Journal op-ed page should always be regarded with grave suspicion."

He does state his economic view near the end:

[V]irtually every builder of structural macro models besides Taylor and company (see, for example, the survey Douglas Laxtonhttp://tinyurl.com/dl20090918a) finds that the test of whether expansionary fiscal policy is successful lies in what happens to interest rates: if interest rates rise far and fast in response to an expansionary fiscal policy it is probably ineffective; otherwise it is effective. Interest rates have not risen far and fast in response to Obama policy.

This is heavily ironic since Taylor is the originator of the Taylor Rule of how to figure out the correct Fed interest rate! Or maybe like Muhammed Ali in the Rumble in the Jungle, De Long was right jabbing the champ (right jabs should never work in championship boxing since the distance of the punch is much farther than a left jab, but Ali did it over and over, infuriated Foreman; Ali was treating him like a chump, not a champ. This led to the famous Rope-A-Dope strategy). 

Most of us would see the test as whether the private sector revitalized. Interest rates themselves are enablers; a high rate can stop private investment, but low rates may not restart it. Clearly the consumer is not back, and there is lots of speculation that a sea change of consumer behavior has occurred, making all those vaunted models worthless. Despite the snapback in private investment, private debt continues to drop (see chart, courtesy Thought Offerings. 

Government debt to fund the stimulus is filling the gap, and in a second delicious irony may be crowding out private borrowing. This deleveraging is of course deflationary, and should keep interest rates low. De Long gets his low rates while things fall apart! Three cheers for Keynesianism and snarky tenured professors!

Comments

[DG]

Brad is unfortunately fiercely partisan

Brad DeLong is one of the biggest a-holes on the planet, and Krugman is his "mini-Me".

A good response to the neo-Keynsians here:

http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

Especially effective is the way he compares the historical progress of other sciences to economics at the beginning and the way he uses Krugman's own past work to undercut his current "argument", such as it is.

[vipul garg]

""and should keep interest rates low.""

I think it is not that they will tighten by design, but it will happen to them because the markets will not give them the money because the Central Bank or a politician is never going to want to put up interest rates anywhere in the world. My sense is the markets would not have enough money to give them at the low rates that they hope they can keep on till 2010-end actually in their own minds.

(view of a senior guy at Enam-India.- quoted verbatim)

[Edwardo]

DeLong seems to be a bone head and/or "intellectually dishonest", which is a phrase I've never cared for, but one I'll employ here in honor of Mr. Delong who I feel sure has used it somewhere on someone. Linking interest rate behavior to fiscal stimulus and trying to make a determination about the efficacy of fiscal stimulus- especially in an environment, where the interactions of PDs and The Central Bank are, at best, murky- is utterly indefensible.

Nick Taleb is right, and here I paraphrase, economists are about as useful as astrologers.

[AJ]

Stimulus will never work where it is targeted at the consumer. I have to laugh every time you hear some eminent economist explaining that consumer spending is around 70% of GDP. The fact is, GDP is not really a Gross figure, more a net figure (ignores total spending between firms in the production chain on the grounds that it would be double accounting). This has lead economists and central banks down a wrong path. I think that they grossly underestimate the importance of business investment to the economy. As the following quote reveals:

For as Professor Slichter has well stated, the income of consumers depends directly, and largely, upon the volume of business spending: "This means that the fluctuations in consumer incomes, which produce fluctuations in consumer spending, are the result of changes which have already occurred in business spending. Consequently, the explanation of fluctuations in the total volume of spending must be sought, not in spending by consumers, but in spending by business enterprises." (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, pp. 228-229).

Great recent articles Yelnick!

[JM]

Paul Kasriel at Northern Trust recently put out a piece (free on their site) pointing out that only a fraction of the stimulus has actually been deployed. Easy to say a medicine hasn't done anything when the patient has yet to really take it.

[JM]

Here is the link: http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283678319_6.xml&TYPE=interior

[yelnick]

JM, thanks for the link, it adds to the discussion. I would refer you to my prior post Peak Stimulus at http://yelnick.typepad.com/yelnick/2009/08/peak-stimulus.html and look at the chart - this is the peak quarter for stimulus spending, meaning if it has any appreciable impact, we need to see and measure it now. After this it gets spent at a slower and slower pace and will have less and less an impact on a quarterly basis.

Taylor's core point is that the major part of the stimulus which are tax credits have not worked in the past and seem not to be working now. Instead of being spent, they are saved or used to pay down debt. Both good things to do, but neither stimulative.

[Newbietrader]

Stimulus doesn't work for the simple reason that the gov't has no money of its own. we have a deficit not a surplus/rainy day fund

It must tax me to get money. which means I have NO money - net stimulus is zero. Gov't up one, me down one

Or Gov't borrows, net this year is up two, me up one and gov't up one, but the rub is the NEXT YEAR. the gov't must tax me to repay the borrowed money PLUS interest. so my value goes down by one plus. also the gov't must cut back because it doesn't have money to keep last year's program going, down one. so the total net down is more than 2, so the net over two years is less than zero.

there are many recent articles that show how over the years each gov't stimulus dollar yields less and less return or addition to GDP

I guess to put it simply, if gov't stimulus was so great, why not just print all the dollars you want, tax citizens 100% so the gov't has max stimulus ability. in this scenario the economy should be gang busters, right? NO, why not?

this is an extreme example that shows how stimulus doesn't work. Gov't is simply an organization that steals from peter to pay paul and keeps a skim for itself.

[Eric]

The government creates wealth by investing in good companies and punishing those that aren't as profitable by withholding funds, firing employees, etc. We profit when the government allows us to be a part of the system by granting us citizenship. In return, we have the moral responsibility to vote for leaders who can best decide how to spend our money. Say what you want about Obama, but his decision to keep US car manufacturers afloat is best for everyone because, after evaluating those companies and the marketplace, he has made a decision too subtle and complicated for most of us to understand: Those companies will do the best job of providing excellent, affordable cars to consumer-citizens.

The markets will continue to rise because we finally have a steady, intelligent hand at the tiller of progress: Barack Obama. Unlike his predecessor, Obama actually has a brain and isn't afraid to use it. It is my hope and belief that he will finally make health care efficient, affordable, and free to all citizens by investing in a government-directed health insurance organization that has no other motive for its existence than simply doing the right thing.

It's not difficult, people. But if you insist on it being so by believing in hocus-pocus Elliott Waves instead of believing in the proven abilities of a Columbia/Harvard educated man at the height of his powers, you will lose your shirts.

[Rob]

You are dreaming, Eric!

[Le Chiffre]

Come on Rob, Eric's post is obviously fiercely sarcastic.

It is, right? Eric..?

[Eric]

Yes, I am dreaming. Dreaming of a world without cynics. Without greed. Without mistrust. I am dreaming of a world where I submit freely and fully to government because I trust my fellow man and admit that I am not capable of making important decisions like, say, keeping GM afloat... extending copyright laws for Disney... keeping banks afloat... providing retirement income for people who need it... providing free, excellent, state-of-the art medical care to those who need it.

John Lennon wrote of a world without religion, guns, or killing. We are slowly but surely heading there. Trust --in Obama, praised be He-- is what will set us free. The state works for us if we TRUST it. Thanks to Obama, we can.

[Eric]

Let me add that, if more people spent their time in hospices and morgues and realized how brief and insignificant any single life is, we would come closer to living for others... to the realization that our lives are not our own, but The State's. And that will, finally, beautifully, thankfully, be the end of this monstrous past we call "History."

[Optionist]

Eric is obviously in a final fifth of a Grandiose Super Cycle, and ready for a significant crash into a long term major depression low requiring years to recover if ever. His only hope is to get out of his NSP (nonsensical position) immediately, and seek help from a good professional service. A clergyman might be able to give some insight into this perfect world he describes which someday will be established, but not by the alleged messiah Obama.

[Bollinger]

The third graph (called TotalBorrowingQuarterly) seems incorrect.
When I look at FEDs z.1 of Sept 17 which disclose different types of credit, I see different values and than given in the graph.

For instance, total debt is increasing each quarter. I.e., Q2 2009 > Q1 2009 > Q4 2008 > etc. While in the graph it is shrinking.
Household debt is actually decreasing the last two quarters, but with 0.2% and not 14-17% as indicated in the graph.

Is there an explanation for these differences?

[kallidromos]

I love it when the game-theorists are beaten at their own game.

Kallidromos

[da bear]

we are on the cusp of big bad wave 3 down from Figure 5-7 (DOW) in At The Crest of the Tidal Wave. Very similar to the chart of stocks in Figure 7 in the latest Elliott Wave Theorist.

after that we get Grand Supercycle B which will end in wurld gummit.
Grand Supercycle Wave C takes everything to double zero (or maybe just to DOW 41).

Grand Supercycle Wave 5 will then occur which is actually in the Bible, otherwise known as the Millennial Kingdom in the book of Revelation.

ok. so that is my wave count now until the end of the world.

any questions?

da bear

[Upstart]

Has anyone here ever subscribed to the Richebacher Letter and would offer their opinion of it? Thanks.

[New ewaver]

Hi

[DG]

Upstart,

Richebacher himself died recently. I would say that you get the same level of analysis or better from Mike Shedlock's blog for free. Richebacher was way ahead of the game in seeing debt deflation coming, but, much like Prechter, if you had used it for trading in any way, shape or form, you'd be hurting.

[JCM]

That chart on ZH certainly contradicts Kasriel's...if the ZH one is correct, then I agree with the "concerns"...but I also agree top-line GDP growth is probably the wrong goal in this de-leveraging economy...easy for me to say when I am not trying to get re-elected.

[Upstart]

Thanks DG.

[Neely the Guru]

"but, much like Prechter, if you had used it for trading in any way, shape or form, you'd be hurting."

Prechter was calling for continuation of the rally from the July lows to finish the ideal targets for wave 2. While Neely's scientific calculations called the market top in June 09.

He who lives in a glass house shouldn't throw stones.