Posted by Pete Davis
A few minutes ago, I watched two top economists, Mark Zandi and John Taylor, debate whether the government's massive fiscal and monetary stimulus was effective on the PBS Newshour. The video will be posted here tomorrow. Wednesday, Zandi and Alan Blinder published a Moody's macro simulation that estimated 8.4 million more jobs and 6.6% of real GDP would have been lost 2010 without either stimulus. Taylor argued that much of the stimulus was ineffective, that the economy revived because of business investment, and that now we are saddled with massive debts which will burden future growth. It's hard for an experienced economist to come to an informed choice between these two positions, so most viewers tonight came away with one conclusion: Economists can't agree on anything, just like our political leaders.
No model is perfect, or even that accurate. I'll never forget when I dug into the macro simulation from a top economics consulting firm years ago and found that nearly half of the variation in the simulation resulted from add factors and not from the equations themselves. That doesn't mean I didn't find that model useful. It just had to be used properly, and it's limitations had to recognized.
Was some of 2008-2009 stimulus ineffective? Yes, of course. But that's not the right question. The right question is what would have happened without it? We can't observe that, so we have to simulate it.
Taylor, who should have won a Nobel Prize by now for his work on monetary policy and who has performed yeoman service in the Washington and international economic policy jungles, posted his
critique on his blog today. Read his
testimony before the House Budget Committee on July 1, 2010. It presents other macro model simulations from the European Central Bank's Research Director Frank Smets and from Harvard Professor Robert Barro showing little and no effect from stimulus.
When such highly qualified economists disagree so completely, what do we do? I'm sure some would push for more research, but this debate has been going on for 80 years, ever since John Maynard Keynes took on the entire economics profession in the middle of the Depression, so I'm skeptical that another few years of research will resolve this disagreement.
Therefore I fall back on something I've learned from my experience making policy and flying small planes: Doing something is usually better than doing nothing. Isn't that why Franklin Roosevelt beat Herbert Hoover in the 1932 election and kept getting reelected until he died?
zandi taylor and tax increases
Note that they totally agreed that taxes should not be raised in 2011.
The problem is ideology
In a February 2009 piece in the WSJ, Taylor stated, "government actions and interventions, not any inherent failure or instability of the private economy, caused, prolonged, and worsened the crisis".
If your starting point is that the government, and not market failure, caused the crisis, then you are unlikely to come to any sort of solution that involves government intervention.
Imagine an epidemiologist investigating a food poisoning outbreak STARTS with the premise that all foodborne illnesses arise because people eat meat and then proceeds in her investigation from there. It's unlikely any of her findings will involve lettuce contaminated by the fecal matter of farm workers, restaurant employees who did not wash their hands when preparing food, or a dish left out at room temperature too long.
Just wondering why Taylor
Just wondering why Taylor wasn't screaming bloody murder while he was in a position of authority in the Bush administration. Surely he didn't think that the policies driving up the deficits then, while the economy was in expansion, was good macroeconomic policy.
Bush deficits
Maybe if you looked at the actual deficits before Bush left office (e.g., excluding FY09), you might find your answer
deficit was 4.9% of GDP in
deficit was 4.9% of GDP in 2003 and 2004. 4.0% of GDP in 2005. Nominal GDP grew at an annualized rate of 5.93% between 2002 and 2006 (according to http://www.measuringworth.com). Seems like the numbers support his statement.
"the economy revived because
"the economy revived because of business investment"
The conservative talking point is that businesses are not investing because of uncertainty created by Obama's regulations and potential tax hikes. At least Taylor has discredited that bogus claim. Nonresidential fixed investment grew at an annualized rates of 17% last quarter according to figures released today.
Sorry for the double post but
Sorry for the double post but I just listened to the interview and Taylor's claim that investment has slowed down is contradicted by the data released today. Investment has "rocketed to 17%" from 7.8%
Taylor says yesterday: "And now the slowdown is because investment has slowed down, and people are getting nervous about the increased debt that has partly resulted from the stimulus."
NY Times says today: "The crucial driver of growth in the second quarter was nonresidential fixed investment, which covers items like office buildings and purchases of equipment and software. This sector rocketed up at an annual rate of 17 percent in the second quarter, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years."
"Therefore I fall back on
"Therefore I fall back on something I've learned from my experience making policy and flying small planes: Doing something is usually better than doing nothing".
This recalls a quote attributed to Eric Severeid: "the chief cause of problems is solutions". Doing something just for the sake of doing something is rarely good policy; however, I suspect it might often be good politics. There is a difference, you know.
Do Something!
Why we are in such a mess is that politicians feel that they have to do something.
Farmers hurting? Price supports and subsidies! Banks in trouble? Guarantee deposits! Enron falls? Enact accounting reforms! Housing expensive in New York? Price controls! Minorities having problems getting started in the housing market? Legislate minimum quotas! Steel industry hurting? Limit imports!
If my airplane is stalling, yes, doing something is better than nothing. However, the economy, when left alone, is a self-correcting mechanism. Only governments can enforce bad bargains. Seemingly well-intentions programs always have a cost and distort the market. People take advantage and exploit these distortions at the expense of someone, usually the taxpayer.
The stimulus package is another example of shabby government policy. Spend money! It doesn't matter where, just spend it!