Thomas Sowell on slow stimulus programs

From Paul Kedrosky:

"Sowell on Slow Stimulus

Nice quote from Thomas Sowell on slow stimulus programs:

"Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire."
- Thomas Sowell on the CBO's analysis showing only $26bn of Obama's $355bn public works package will be spent this year, 30/01/09.

[via Popular Delusions]"

Me:

Paul, The stimulus has many aspects. Tax cuts and social safety net money and aid to states will be quite quick. The infrastructure will not, but, it has a different rationale. It is to show that we have the confidence to invest in our future. Tyler Cowen mentions that it can seem like a placebo affect. However, I don't agree. The government needs to be seen investing in the future. Unless you're an anarchist, you believe in government infrastructure spending of some sort, so, as long as the investments make sense, what's the problem? They have an upside, which is more than just a placebo. They're also just part of the stimulus. They're more than I would have spent, but by no means the whole bill or crazy.

For a good discussion of the notion of the importance of confidence in an economic recovery, go to Free Exchange. You can certainly disagree with me on this, but I'm certainly free to disagree with Rational Expectation Theories and Ricardian Equivalence.

Paul again:

• +1
• Vote up
• Vote down

Paul Kedrosky • 88p

Nicely put, Don. As I read Sowell's comment, however, it wasn't an
either/or, it was more that the entire package tilted massive long,
which arguably over-emphasizes the "confidence" aspect over the
"stimulus" aspect.

Post reply

» 3 hours ago

And me again:

• 0
• Vote up
• Vote down

• Don the libDem

Everyone has fair comments. My approach is behavioral. Let me give you an example. Oddly, productivity is rising. I account for that as being the result of employers proactivly laying off workers. In other words, layoffs are exceeding the fall in demand. Hence, productivity can go up for a while. I interpret the Real GDP numbers similarly. We expected a larger drop than actually occurred.
I call this a Proactivity Run. It is simply my view of Fisher's classic Debt-Deflation article. We will also have a Savings Spree. The only difference between my view and Fisher's is that I account for these actions using behavior. Hence, I see what we are experiencing now as the opposite of what we've just gone through: namely, exuberance and panic while ignoring fundamentals. If we can diminish the fear and aversion to risk, and focus on fundamentals, then we will find that we can move out of this crisis much easier than many believe. I find that Fisher's model is a very useful guide to what we are going through. My views are also a lot like Shiller's. Sadly, our debt level doesn't allow the kind of temporary stimulus that Shiller wants. But I agree with him that human agency, behavior, is the key to economic behavior. Other models I consider mechanistic, and based on a faulty view of human rationality and the relation of math to the world. I am also not an economist. I am just a citizen, which I why I appreciate all of the comments, especially Paul's. Many bloggers don't take the time to interact with posters.

Me responding to a comment:

The facts are otherwise. Normally, Productivity declines. Read Mulligan here for his view of why things are different this time around:

http://economix.blogs.nytimes.com/2008/12/24/are-...

I would write more about this but I have to go out to dinner. I'd be interested in whether you find my explanation or Mulligan's more convincing. Dean Baker has a view similar to mine.

The fiscal stimulus ... will lay down the first steps of a massive generation-long technological overhaul...

From Mark Thoma:

"Sachs: 21st-Century Capitalism

Jeff Sachs seems to be pleased with the new administrations commitment to "a new age of sustainable development":

Rewriting the rulebook for 21st-century capitalism, by Jeffrey Sachs, CIF, The Guardian: One of President Barack Obama's historic contributions will be a grand act of policy jujitsu - turning the crushing economic crisis into the launch of a new age of sustainable development. ... Obama is already setting a new historic course by reorienting the economy from private consumption to public investments directed at the great challenges of energy, climate, food production, water and biodiversity.

The new president has taken every opportunity to underscore that the economic crisis will not slow, but rather will accelerate, the much-needed economic transformation to sustainability. ... The fiscal stimulus ... will lay down the first steps of a massive generation-long technological overhaul...

Obama has started with the most important first step: a team of scientific and technological advisers of stunning quality... He has also focused on two core truths of sustainable development: that technological overhaul lies at the core of the challenge, and that such an overhaul requires a public-private partnership for success. Taking shape, therefore, is nothing less than a new 21st-century model of capitalism ... committed to the dual objectives of economic development and sustainability...

Consider the challenge of a bankrupt automobile sector... In the Obama strategy, GM will not be closed to punish it... It's worth far too much as a world leader in the electric vehicles of the 21st century. ...

Conservatives are aghast. The bail-out of the auto industry was hard enough to swallow. Government investments in infrastructure and research and development are viewed with scorn, compared with the tried and true (if disastrously failed) tax cuts of the Bush era. Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so. Free-market ideology is an anachronism in an era of climate change, water stress, food scarcity and energy insecurity. Public-private efforts to steer the economy to a safe technological harbour will be the order of the new era.

There is plenty of room for blunders... Government activism can founder on the shoals of massive budget deficits, tax-cutting populism pushed by the right, politically motivated investments such as corn-based ethanol..., and more. Yet Obama is absolutely correct that we have no choice but to try. ...

A better, or, at least, different view:

"Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so."

This post is a plan for disaster. A massive commitment to spending without assessment along the way is foolish. It's much better to start off slow and show how the spending is working, both for reasons of common sense and political backing. It is also foolish to start telling people we're in the business of micromanaging more and more of their lives. At the very least, an approach like Sunstein and Thaler's would be more likely to work and gather approval.

Fortunately, I don't see our President as likely to follow Sach's advice. I like what he says about more money for the third world, but this clarion call for massive government intrusion and spending is off base.

By the way, I'm trying to understand how our current crisis leads one to believe that we need to spend massively for all time going forward. Sachs seems to believe that our current crisis shows that government can effectively spend and manage our money going forward. How does this follow?

Posted by: Don the libertarian Democrat | January 29, 2009 at 07:13 AM

If the government takes our money (through taxes), and spends it on our behalf, does that increase aggregate demand?

From Nick Rowe:

"Ricardian Equivalence and government spending

If the government takes our money (through taxes), and spends it on our behalf, does that increase aggregate demand?

If the government borrows our money, making us pay back the loan (through future taxes), and spends it on our behalf, does that increase aggregate demand?

The answer is: it depends. It depends on what the government spends the money on. It depends on whether we are able to borrow ourselves. It depends on whether we, or new immigrants, or people not yet born, will pay the future taxes. H/T Kevin Quinn.

I'm going to assume that the central bank wants aggregate demand to increase (because output is below the natural rate), and so does not raise the rate of interest, or allow the exchange rate to appreciate, to offset any effects of fiscal policy.

Let's start with three simple cases.

1. Suppose the government takes our money in taxes, and gives it back to us as transfer payments. It takes $100 from my right pocket and puts $100 in my left pocket. No effect on Aggregate Demand. Unless it taxes the people who would have saved an extra dollar and transfers it to people who will spend an extra dollar.

2. Suppose the government takes our money, spends it on goods we would have bought anyway, and gives them back to us. No effect on AD. The government is just doing our shopping for us. It's like transfers in kind, instead of in cash. If the tax was $100, we cut our own consumption spending by $100, and save the same as before.

3. Suppose the government takes our money, spends it on goods which are totally useless to us (or spends it on useful goods but then throws them away). We are poorer, and so save less, and our consumption falls, but by less than the $100 tax increase. AD increases, output may increase too, but we are not better off. The best that can happen is we get the "balanced budget multiplier" of one, so a $100 increase in taxes and government spending causes output to increase by $100, but useful output to stay the same.

The more realistic cases are where the government spends our money on goods which are useful to us, but are not goods we would have bought ourselves. Unfortunately, these are less simple. It all depends on how it affects savings, and this depends on how the government spending affects our permanent income, current income, and whether the government buys goods that are substitutes or complements for current consumption and future consumption.

4. Suppose the government takes our money, and spends it on goods that will not directly affect our incomes, will give us utility, but will not affect the marginal utility of present or future consumption. Think art galleries, museums, or making the country look nice. The new art gallery does not affect our trade-off between present and future consumption or our savings decision. The result is exactly the same as in example (3), where the new goods were useless, except now they aren't useless. We get the balanced budget multiplier, and we really are happier because of the new art gallery, even though our consumption expenditure stays the same.

5. Suppose the government takes our money, and spends it on goods which are a complement to current consumption. Think of a firework display, which is free, but you need to buy a new lawnchair. (Sorry, I can't think of a more sensible example). This affects the trade-off between current and future consumption. People will save a smaller portion of their disposable income today, to buy a lawnchair. We get "crowding-in" of consumption. The multiplier is bigger than the standard balanced budget multiplier.

6. Suppose the government takes our money, and spends it on goods which are a complement to future consumption. Think of a scenic highway, which won't be completed until next year, and you may need to buy a car to enjoy it. People will now save a larger portion of their current disposable income, so they can buy a car next year. The multiplier is now smaller than the balanced budget multiplier. If the effect is strong enough, it can even be negative.

Now suppose the government spends on new investments, which don't directly make us happier, but do make us richer. Think infrastructure, education, R&D. With this sort of investment spending, it's simpler to think of them being financed by borrowing, not taxes.

7. Suppose the government borrows money, and spends it on a new investment project that will give the same rate of return as government bonds. If the return on the investment goes directly to the government, rather than increasing household income (think government toll road), then future taxes will not need to rise to repay the borrowing. It is exactly the same as an increase in private investment. We get the same large multiplier (1/[1-c] in the simple model). If the return on the investment goes to households instead (think education), then any rise in future taxes to repay the borrowing is exactly offset by the increased future income from the investment. So we get the same large multiplier effect. All this assumes, of course, that the government did not do an investment project that would have been done by the private sector anyway, and does not cause a rise in the rate of interest or shortage of inputs that would otherwise crowd out private investment or consumption.

8. And if the government borrows to invest in a project which has a greater (smaller) rate of return than on government bonds, the multiplier will be even larger (smaller) than 1/(1-c).

Now to compare spending financed by taxes to spending financed by borrowing. The Ricardian Equivalence Proposition says they are equivalent. The easiest way to do this is to consider:

9. Suppose the government borrows $100 per person and gives a transfer of $100 per person. According to REP, this is equivalent to (1) above, and so should have no effect on AD. The reasoning is that people will save all the transfer, so they can pay the higher future taxes, and will not want to change their trade-off between current and future consumption, since their lifetime wealth or permanent income is unchanged. There are many reasons that REP might be false. The most important are:

A. Some people are borrowing-constrained. They wanted to borrow more and consume more, but couldn't. Now the government has borrowed the money for them, they increase consumption.

B. Some future taxes will be paid by future immigrants, or by those not yet born. So the current generation is wealthier, and will increase consumption. (But some may not increase consumption, because they will want to leave higher bequests to their children to offset their higher taxes.)

C. Some people may not figure out the effect of borrowing on future taxes, so will increase consumption. (But others may panic at the increased debt, and may cut consumption).

D. Taxes may affect incentives, and may discourage future earning, or current investment, and so may reduce current consumption and investment.

Conclusion: if we can think of government investment projects that are productive, and give the government future income or give us future income, and which earn a good rate of return, this sort of government spending is not only good microeconomics, it can be good macroeconomics as well, if what you want is to increase aggregate demand."

And me:

"Conclusion: if we can think of government investment projects that are productive, and give the government future income or give us future income, and which earn a good rate of return, this sort of government spending is not only good microeconomics, it can be good macroeconomics as well, if what you want is to increase aggregate demand."

This is true of any investment. The problem is that, even in the private world, there's no guarantee that money invested will be productive.

By the way, since government spends a large amount of our money, we must believe, or at least some of us, that some government spending is warranted.

In other words, neither the productivity argument or argument about whether government can do anything better is very useful here. Rather, in Debt-Deflation, we are trying any number of ways to get out of it. One way is to stop a savings spree that is part of debt-deflation. The question is can government spending stop a savings spree?

I say that it can, because it helps create a perception of investment and employment, as opposed to continual job losses and little or no new investment.My argument would be based on what people say about how they might react to a stimulus. That interests me more than theories, which assume behavior not in evidence. There are so many countefactuals being bandied about, it's hard to see them as anything but a list of possible cases, none of which might occur.

Posted by: Don the libertarian Democrat | January 28, 2009 at 03:45 PM

Now Nick:

Hi Don:
" neither the productivity argument or argument about whether government can do anything better is very useful here. Rather, in Debt-Deflation, we are trying any number of ways to get out of it."

Surprisingly, it IS useful here. In normal times, we evaluate a government spending project in terms of whether it makes better or worse use of resources than alternative uses of resources (either government or private). And we choose the project if it has benefits exceeding the (opportunity) costs. But in bad times like these, all we care about is whether it will stimulate total demand - cause spending rather than saving. But surprisingly, it turns out that projects which meet one form of the first criterion - they create money income in the future - also give the biggest "bang for the buck" in stimulating spending now. This is because there is no "drag" from higher anticipated future taxes on current consumption. I may do another post on this, since I can expand on the reasons.

On your last paragraph: economists would phrase this as "yes, expectations matter". In this case, the more successful people expect the policy to be (in increasing income and preventing deflation) the more successful it will be. Usually, people can just learn from experience what the effects of various things will be, even if they don't understand why. But when new stuff happens, people can't rely on experience, so expectations aren't as well anchored.

Posted by: Nick Rowe | January 28, 2009 at 08:54 PM

Now me:

Hey Nick,

"they create money income in the future"

How can you guarantee that? Many projects have enormous overruns ( The Big Dig, The Bay Bridge) . As well, depending upon what we're talking about, the demand can change. For example, gas prices can lessen traffic and tolls. I'm assuming that what you're saying is that some projects can lead to such an increase in revenue.

My view is that infrastructure spending sends the signal that we are confident enough to invest in our future, thereby calming fears of the future.

Here's another problem: Everyday we make choices about what to do, spend, wear, etc. There are too many variables in human action to know how much people will save for a presumed tax. The theory of human action that allows such prediction doesn't exist for me. Perhaps, since you love philosophy, you can tell me what your philosophy of action is.

Posted by: Don the libertarian Democrat | January 28, 2009 at 10:18 PM

They thought that budget deficits would stimulate growth under all circumstances, not just those of a deflationary depression.

From Mark Thoma:

"Does Stimulus Stimulate?"

Bruce Bartlett:

Does Stimulus Stimulate?, by Bruce Bartlett, Forbes.com: ...The [Great Depression] didn't really end until both monetary and fiscal policy became expansive with the onset of World War II. At that point, no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal.

It was then and only then that the Great Depression truly ended. As a consequence, economists concluded that an expansive monetary and fiscal policy, which had been advocated by economist John Maynard Keynes throughout the 1930s, was the key to getting out of a depression.

Keynes was right, but many of his followers weren't. They thought that budget deficits would stimulate growth under all circumstances, not just those of a deflationary depression( I AGREE WITH BARTLETT HERE, AS I'VE POSTED. BARRO DOESN'T SEEM TO GET THE NATURE OF A CALLING RUN, ALTHOUGH HE SAYS HE DOES. ). When this medicine was applied inappropriately, as it was in the 1960s and 1970s, the result was inflation.( NOT HERE. NOT YET. )

Economists then concluded that it was a mistake to pursue countercyclical fiscal policy, and the idea of "fine-tuning" became a derogatory term. ...

In the 1980s and 1990s, economists came around to the view that only monetary policy could act quickly enough to reverse or moderate a recession. ... [But...] As we have seen, the Fed could not prevent the greatest financial downturn the world has seen since 1929. This has revived the idea that fiscal policy must be the engine that pulls us out.

Somewhat surprisingly, there has been rather heated opposition to the very principle of fiscal stimulus... We have now had several tests of the Keynesian idea--most recently with last year's $300 tax rebate... According to a new paper by University of Michigan economists Matthew Shapiro and Joel Slemrod, only a third of the money was spent, thus providing very little "bang for the buck."( TRUE )

The failure of rebates has shifted the focus to public works and other direct spending measures as a means of stimulating aggregate spending. A study by Obama administration economists Christina Romer and Jared Bernstein predicts that the stimulus plan being debated in Congress will raise the gross domestic product by $1.57 for every $1 spent.

Such a multiplier effect has been heavily criticized by a number of top economists, including John Taylor of Stanford, Gary Becker and Eugene Fama of the University of Chicago and Greg Mankiw and Robert Barro of Harvard.( I LIKE ALL OF THESE PEOPLE ) The gist of their argument is that the government cannot expand the economy through deficit spending because it has to borrow the funds in the first place, thus displacing other economic activities( THIS IS WRONG ). In the end, the government has simply moved around economic activity without increasing it in the aggregate.( WRONG )

Other reputable economists have criticized this position as being no different from the pre-Keynesian view that helped make the Great Depression so long and deep. Paul Krugman of Princeton, Brad DeLong of the University of California at Berkeley and Mark Thoma of the University of Oregon have been outspoken in their belief that theory and experience show that government spending can expand the economy under conditions such as we are experiencing today( I AGREE WITH THEM IN THIS CASE. ).

I think the critics of an activist fiscal policy are forgetting the essential role of monetary policy as it relates to fiscal policy. As Keynes was very clear about, the whole point of fiscal stimulus is to mobilize monetary policy and inject liquidity into the economy. This is necessary when nominal interest rates get very low, as they are now, because Fed policy becomes impotent. Keynes called this a liquidity trap, and I think there is strong evidence that we are in one right now.( ZIRP )

The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year( I AGREE ). But if much of the stimulus doesn't come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. ... Thus the argument really boils down to a question of timing. ...( I AGREE COMPLETELY )

For this reason, I think there is a better case for stimulating the economy through tax policy than has been made. Congress can change incentives instantly by, for example, saying that new investments in machinery and equipment made after today would qualify for a 10% Investment Tax Credit...( MY IDEA )

Stimulus based on private investment also has the added virtue of establishing a foundation for future growth, whereas consumption spending( OFTEN ) does not. As economist Hal Varian of the University of California at Berkeley recently put it, "Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future?"

I don't agree with all of this, e.g. the "government is always the problem" emphasis in the analysis, and casting the debate as a tradeoff between private investment and private consumption rather than between private sector activity (consumption or investment) and public investment overstates the case for private sector solutions. [These arguments from yesterday apply as well.]

I've never objected to tax cuts being part of the package -- I have also argued that the desire for an immediate impact may necessitate some tax cut components in order to maximize the prospects for a faster recovery. And as tax cuts go, there are far worse choices than an investment tax credit( GOOD. THEN JOIN US. ). But just as there's a limit to the number of public sector projects that are shovel ready, there's also a limit to the number of private sector projects that are ready to go (though the planning stage does involve some spending, just not as much as when the public or private sector investment projects are going full throttle)( YES ). There's also a question about how strong the reaction will be to a tax credit when the economic outlook is so gloomy( TRUE. IT MIGHT ONLY MARGINALLY HELP. BUT WE NEED TO TRY. ), a question that doesn't arise when government is making the investments. So, sure, let's get as much out of the private sector as we can, but we shouldn't rely solely upon the private sector response to a tax credit to turn things around( AGREED ). It's very unlikely to be enough on its own, and it may not provide much help at all, Thus, even with tax credits, the public sector response - government spending in particular - still needs to be aggressive."

I agree. Infrastructure investment also sends a positive message. Oh my God. I actually resorted to talking about how people might behave in the real world. A real benefit of the stimulus in Infrastructure ( I said $100 Billion ) would be emotional. I will spend more money if I FEEL LIKE IT. Crowding out, a purely mechanistic explanation, is a fairly useful model, no more, under normal circumstances. Using math to describe correlations between various economic factors doesn't make you a scientist. All that the math does, or any correlative reasoning, is give you some useful guides to understanding how people might react in various circumstances. Crowding out is NOT a law of nature. Adam Smith understood philosophy, politics, economics, history, etc. What education do many of these economists receive? They have a philosophy of math that is hilarious. Of course, so do many mathematicians and philosophers, so let's not go there.

Let me repeat my plan:
1) $100 Billion on infrastructure, to be built only when benefits exceed the costs.
2) Sales tax cut $200 Billion
3) Investment incentives $100 Billion
4) Social safety net spending is not included in my stimulus. It is simply money that needs to be spent as part of the social contract.

"These efforts, akin to avoiding bank runs in prior periods"

Robert Barro in the WSJ:

"Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called "multiplier" effect of government spending on economic output is greater than one -- Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment.

The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services.

If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.( THIS IS TRUE )

What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff( ONLY IN AN ECONOMIC CRISIS ). Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out( THE FEAR AND AVERSION TO RISK IS NOT RATIONAL ). In other words, there is something wrong with the price system.( THERE IS. FEAR AND AVERSION TO RISK. )

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall( WE SHOULD DO THIS ). So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports( NOT IN A CALLING AND PROACTIVITY RUN ). In other words, the social cost of one unit of additional government purchases is one.

This approach is the one usually applied to cost-benefit analyses of public projects. In particular, the value of the project (counting, say, the whole flow of future benefits from a bridge or a road) has to justify the social cost. I think this perspective, not the supposed macroeconomic benefits from fiscal stimulus, is the right one to apply to the many new and expanded government programs that we are likely to see this year and next.( HERE I COMPLETELY AGREE )

What do the data show about multipliers? Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.( ONE COULD ARGUE THAT THE WAR, BEING A WAR, EFFECTED PEOPLE'S ATTITUDES IN ANY NUMBER OF WAYS. )

We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War -- although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before. (These estimates were published last year in my book, "Macroeconomics, a Modern Approach.")

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot( THAT DOESN'T FOLLOW. A WAR COULD IN FACT DAMPEN DEMAND BY EFFECTING HUMAN BEHAVIOR. ). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate( THAT'S ALL YOU DID ) directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

As we all know, we are in the middle of what will likely be the worst U.S. economic contraction since the 1930s. In this context and from the history of the Great Depression, I can understand various attempts( YES ) to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods( YES. THAT'S WHY I CALL THEM A CALLING RUN AND A PROACTIVITY RUN. ), recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions.

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant( TARGETED TOWARDS INVESTMENT. ). On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis( I AGREE ). Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free."

I'm beginning to realize that economists are using preposterous views of Human Agency as a matter of course. Wars can have a myriad of effects, and simply assuming that, if they don't last long, consumption will remain the same, seems totally unjustified to me. Much depends on the nature and context of the war. Barro sees people as robots. I don't. One reason economics is so useless to us is its use of and reliance on Mechanistic Explanations.

Still, his recommendations are like mine. One reason is that I believe that the focus on the amount of the stimulus is also a mechanistic explanation. Tax incentives are a Human Agency approach. Spending money on a cost-benefit basis is more like common sense and fiscal prudence. There is some sense in government spending when investors are frozen by the fear and aversion to risk. However, the spending should still be prudent and wise. It should not mechanistically be spent in order to hit an artificial target.

"now we must make our congress the direct investors of last resort."

From Notes on Credit Spreads:

"Why Infrastructure Spending is Preferential to Tax Cuts

by David Levy

Much concern exists over Obama’s proposal to make tax cuts a major portion of fiscal stimulus. Through a tax cut, we (the government) are increasing the income of those still employed( NOT IF THEY'RE DIRECTED AT INVESTMENT AND CREATING JOBS. ). Hopefully, tax savings will buy goods and services, increasing GDP. In today’s environment, we’re not enacting a stimulus to buy goods, we’re enacting a stimulus to buy jobs.

GDP = government spending + investment + consumption + net exports. The marginal dollars in a tax cut will either be saved or spent.

While savings should be encouraged in the long term, a savings glut currently exists. Fed Funds rate trades near zero, while cash reserves within the Fed have ballooned.

More damaging, marginal spending could be directed at imported goods. From Martin Wolf to Warren Buffet, many shudder at no improvement in our trade balances. Dollars used for imports are either locked up as foreign reserves or exchanged for investments in future US cash flows. Those future cash flows are either US tax receipts or profits distributed as interest or dividends. Those tax receipts could have put new teachers in the class room. Those profits could have built new factories. Those cash flows will never to be re-invested in the US.

By definition then, an increasing current account deficit means the same standard of living - GDP - costs more. If this is not the purest form of inflation( WE WANT INFLATION ), I do not know what is.

Many believe too great a mismatch exists between jobs lost and jobs needed for “shovel ready”. Cokie Roberts on “This Week” opined on finance professionals helping on infrastructure: “Well maybe instead of going to their personal trainers, they can actually get out there and start digging.”

The purchase of infrastructure projects buys jobs across the food chain. Almost every project will go out for private competitive tender. Forget defunct residential home construction (shovel ready employees), companies bidding will require talent to prepare bids, obtain financing, manage payroll, and review costs. Every contract guarantied by the government (state or federal) will give lenders the confidence to finance, spurring new growth.( THAT'S THE POINT OF THE STIMULUS. TO ATTACK THE FEAR AND AVERSION TO RISK. )

The long term benefits (aside from jobs) are then improved transportation, reduced energy costs and reduction of barriers to education( MAYBE YOU COULD LOOK INTO THE BIG DIG AND THE BAY BRIDGE AS RECENT EXAMPLES OF INFRASTRUCTURE. THEY CERTAINLY COST A LOT OF MONEY. ). Thus reduction of risks for future runaway inflation - those risks prevalent in increasing current account deficits. Faith in government is presently difficult yet now we must make our congress the direct investors of last resort( I CALL THEM THE SPENDERS OF LAST RESORT. )."

I agree with the need for a stimulus, and that the government needs to be a SOLR, but I don't understand the problem with tax cuts targeted towards encouraging investment and jobs. What am I missing?

"See here for how the federal government should and shouldn't distribute money for a broadband infrastructure build."

On Seeking Alpha, an interesting post by Tom Evslin:

"Bobbie Johnson, technology correspondent for The Guardian, was kind enough to quote me along with Vint Cerf (nice to be in good company) on the importance of building an online economy and an online government. Vint said: "You know how they say opportunity lies on the edge of chaos? Maybe that's going to be true here too."

So far our telecommunications infrastructure has largely been privately built and financed. Why should that change now? It's unusual for government to do anything as well as the private sector.( I AGREE )

The US must become an e-nation. Network economics means that even those locations that already have decent communication gain by subsidizing( HERE WE GO ) the locations which do not. Everyone gains from a universal transportation or communication network; even those who already have local transportation and communication. Remember Metcalfe's law: The value of a network is proportional to the square of the number of endpoints. Even if you are already connected, you gain by having the network you are connected to become universal( MAKES SENSE ).

Even before we were a nation at all, Ben Franklin was appointed Joint Postmaster General for the Crown and, realizing the value of universal national communication, cut the time for mail delivery in half. Ironically( THANKFULLY ), that postal service, subsidized by the Crown, was critically important in coordinating resistance to Parliament by the colonies.

The railroads that made the US a continental economy were subsidized by massive land grants and other government giveaways( VERY TRUE ). Incidentally, there was massive fraud both in the private financing of the rest of the cost and in the competition to get the government money( TRUE ). Public financing, any financing where there is lots of money involved, is tough to get right and keep honest.( I AGREE )

Rural electrification and the Eisenhower Defense Highway System (the Interstates) made us the country we are today. Both involved subsidies meaning that urban areas (which were already electrified and already had highways) subsidized the buildout to the rest of the country. Both the urban areas and the rural areas benefitted.( IT'S TRUE, BUT IT CAME AT THE COST OF SUBURBANIZATION, WHICH I'M NOT A BIG FAN OF. )

When we rebuild highways and bridges (as we must and will), we just get back to where we should have been. When we build a communication infrastructure which is both universal and the best in the world, we build a path to the future. By the way, when we rebuild the roads it would be dumb not to make them smart roads with mobile communication everywhere available; when we rebuild our electrical grid, it's got to be a smart grid with photons of information guiding the use of electrons of energy.( FINE )

Government investments ought to be made counter cyclically both because they're cheaper( HERE WE GO. WE CAN'T WAIT FOR DOWNTURNS IF THE PROJECTS ARE WORTH IT. ) then and because they cushion the pain of private contraction( OK ). Clearly, this is such a time. Universal high quality broadband ought to be one of those major investments for at least four reasons:

1. The private sector has failed us. We've slipped from being the world's leader in Internet access to number 15 and the slippage is still going on. IMHO that's due to lack of competition. Government subsidy of backbone and middle mile can build the highway on which competitive telecommunications providers reach retail customers.( MAYBE )
   
2. We all gain from universal connectivity (see above).( A GOOD POINT )
   
3. If government and the private sector can assume that everyone will have true highspeed access at home and on the move, if we are an e-nation, then new government and private programs can be developed as e-programs assuming that connectivity. We make the lowest common denominator higher; we get better service cheaper.( GOOD )
   
4. If the US is the world's first e-nation, the we will be the place where many of the e-applications for the rest of the world are invented and first deployed( I GIVE UP ON "DEPLOYED". ). If we are not, we sacrifice the advantage of being a huge market for first deployment and cede that opportunity to the eurozone, China, and India.( FINE )
   

See here for how the federal government should and shouldn't distribute money for a broadband infrastructure build."

Here's the post:

"Federal Broadband Money Should Go To States

The carriers and cablecos are hard at work trying to influence the broadband portion of the Obama stimulus package according to an article by Amol Sharma in today's Wall Street Journal. That's no surprise, of course, and their lobbyists are just doing what they're paid to do. But it would be a terrible mistake to have any of this money strengthen the duopoly whose uncompetitive nature has resulted in the US slipping from fourth to fifteenth place in broadband deployment since 2001.( OK )

The money should be given to the states with a requirement for state matching funds to assure that the states only spend federal dollars where they are willing to put some of their own very limited money. The allocation to the states ought to be similar to the allocation of federal highway funds which takes into account both population and the higher cost per capita of building infrastructure in rural areas. There should be no earmarks or congressionally-mandated "demonstration" projects. (Obama spokespeople have already promised no earmarks in the stimulus package. If Congress goes along, that will be change that I can believe in( ME TOO ).) In 1981 and 1982 I was Secretary of Transportation in Vermont and saw firsthand both the strengths and the limitations of the federal highway program including the damage done to local planning by earmarks..

There should be very little restriction on the funds other than that they be used to build backbone and middle mile infrastructure open for any legal use by wholesale and retail providers as well as commercial users (like the highway system but with tolls). It should not be permissible for the funds to be used to have the states themselves become retail ISPs (too much big brother potential( I AGREE )). However, separately, universal funding should be reformed and made available to the needy in order to allow them to purchase connectivity services from providers of their choice.( OK )

The states don't own the equipment to build infrastructure any more than they own the equipment to build highways: they will contract with the private sector for building and possibly operating infrastructure. They may buy or lease existing infrastructure from the carriers and cable companies that have built it; they may simply decide that in some areas there is already sufficient backbone and middle mile so that they don't have to spend any money.

The federal money should not mandate whether fiber, radio, or other technology is used to provide the needed facilities. The states'll figure that out on their own and have the opportunity to build infrastructure appropriate to their own needs. States should assure that any roadwork they do with federal highway money includes conduit for fiber whether the fiber is placed in the conduits now or not. Federal money spent to improve the electrical grid should have the proviso that high capacity fiber is part of the build.

Here in Vermont the legislature has authorized forty million dollars of state revenue bonding for communication infrastructure. The Vermont Telecommunications Authority (VTA) has already issued an RFI so that carriers and others can help shape the process of putting together the infrastructure improvements we need in Vermont. We'll go ahead with or without federal help but we'll do more faster if there is a federal allocation. On our own, we'll give Vermont equal or better telecommunications to any other state in the US; with federal money we could be part of a plan to raise the standard for the whole country so that America again leads the world in Internet quality and availability.( THIS MIGHT FIT WELL INTO GREG MANKIW'S STIMULUS FOCUSED ON SENDING MONEY TO THE STATES WITH NO PROVISIONS )

Full disclosure: My wife, Mary, is Chair of the VTA (a volunteer position) and I also volunteer doing odd jobs for that organization. We have a personal although not a financial stake in the success of this program. The opinions in this blog, however, are mine alone and are neither approved by or attributable to any organization."

It's possible that this is a good idea, but I need to know more about it.

"experts say much of the stimulus spending may promote urban sprawl while scrimping on more green-friendly rail and mass transit. "

Patrick Deneen with a post that I agree with in spirit:

"Road Dependency

A recent article in the Washington Post outlines what is likely to be a battle that the political Left is likely to lose more decisively than the choice of Inauguration Day pastor - namely, whether the lion's share of the infrastructure stimulus will go toward existing transportation projects, or toward the creation of a new, "green" economy. Obama has already signaled that he will push for immediately effectual stimulus through the funding of "shovel ready" projects, meaning projects aimed at enlarging or reinforcing the current transportation system( IT'S FINE WITH ME IF THERE ARE SAFETY ISSUES INVOLVED ). Even without the exigencies and pressure for immediate stimulation of the economy (and the creation of large numbers of unskilled jobs), there was a strong likelihood that the lion's share of any stimulus package was going to go to "traditional" sorts of public works projects that have been at the heart of the great American build-out for the past 50+ years. There are simply too many interests, organizations and lobbying groups to ignore( I AGREE ); demands by Congress alone would have ensured that legislation would be over-brimming with a variety of locally desired pork projects( THEY'VE PROMISED NOT TO, SO WE'LL HAVE TO SEE ). With the added pressure for immediately effective economic stimulus, any efforts for long-term and not immediately stiumulative investment in a new, alternative "green" future are all-but likely to be put on permanent hold. Path dependency is simply too determining, especially in this case.

It is either farce or tragedy that we will invest further in an economic model premised on permanently cheap and readily available energy sources at a time when we have had our first taste of the reality and experience of peak oil. We will sink more of our increasingly limited funds (or, increasingly limited ability to borrow funds that we can no longer create) in maintaining or expanding a transportation system that, for a few months at least in the last year, was decreasingly being used as the price of energy rose so high to be a disincentive to travel. We saw - and continue to see - the housing of the far-flung suburbs losing its value as people began to re-think the wisdom of purchasing more house at distances that not only entailed lengthy and deadening commutes, but which were becoming so cost prohibitive to force people - for the first time in decades - to consider distance to be a factor in considerations of where to live( I HOPE SO ). And, we are likely to sink more money into a transportation system at just the moment we witness the collapse of America's automobile industry - the industry for which the massive investment in roads was largely built to support and expand( TRUE ). Growing up alongside the massive public investment in roads, bridges, and the corresponding build-out of auto-based businesses, that in one way or another employs so many Americans that the taxpayer was not only on the hook in making the growth to such massiveness possible, but is now on the hook in preventing its collapse. The reason for its demise was long in the making, but the nails in its coffin were being nailed in when it was decided that it would continue on its own path dependency of massive energy wastefulness in placing all its bets on the SUV even after our first and second experiences with various energy shocks and the industry's (and government's) awareness that the era of fossil fuels was reaching its apogee. ( WE'RE NOT HELPING THEM OUT BECAUSE OF ECONOMIC REASONS, BUT SOCIAL REASONS, WHICH ARE IMPORTANT )

The decision to bail out the automobile industry is essentially born of the same set of necessities that will orient the stimulus package in sustaining and expanding our current transporatation system, and more fundamentally, our current economic model. At the most obvious level, we have thrown so much of America's wealth into the creation of this system that it cannot be allowed to collapse( TRUE. IT ALSO HAS MANY ADHERENTS ), even though that collapse is taking place because of our confrontation with a permanently constrained energy future. More deeply, it cannot be allowed to collapse because the American way of life has become defined by the massive expenditure and waste of finite resources( I AGREE ). We will continue to maintain this system - of roads, automobiles, suburbs, vast and wasteful supply lines, and in general our "consumer" culture - because it is who we have become( TRUE ). Yet with each additional dollar that we throw into this black hole of unsustainability, we spend ourselves closer to the collapse of this groaning, creaking, crumbling system that has no future. Nearly every dollar we spend privately and that is appropriated publically now goes to sustaining the unsustainable. Yet we can be certain that we will continue to spend what is remaining to be spent to do just this - holding off, if for only a few years or months longer, the demise of a way of life that was from the outset based on wishful thinking, short term thinking and deeply flawed assumptions about a future of bottomless energy and infinite growth. "

I agree with how he feels, but I don't really know how much oil is left, or want to tell people what to buy. I simply dislike cars, suburbs, shopping malls, consumer culture, etc., personally. So, if these things were to decrease, then I would be happy. There is some economic and political sense to weaning ourselves off of oil, suburban development, more roads, etc., but the American people need to vote for these with their own money. I don't mind a nudge, but can't accept more than that. For me, it's a moral and cultural issue, which politics can only partially address. The rest is up to me or others being able to convince people through cogent argument and analysis that the things we favor are desirable for them as well.

As for the Obama Administration, from Bloomberg:

"Dec. 24 (Bloomberg) -- Missouri’s plan to spend $750 million in federal money on highways and nothing on mass transit in St. Louis doesn’t square with President-elect Barack Obama’s vision for a revolutionary re-engineering of the nation’s infrastructure.

Utah would pour 87 percent of the funds it may receive in a new economic stimulus bill into new road capacity. Arizona would spend $869 million of its $1.2 billion wish list on highways.

While many states are keeping their project lists secret, plans that have surfaced show why environmentalists and some development experts say much of the stimulus spending may promote urban sprawl while scrimping on more green-friendly rail and mass transit( I OPPOSE THIS ).

“It’s a lot of more of the same,” said Robert Puentes, a metropolitan growth and development expert at the Brookings Institution in Washington who is tracking the legislation. “You build a lot of new highways, continue to decentralize” urban and suburban communities and “pull resources away from transit.”( I OPPOSE THIS )

In proposing a stimulus plan that could total as much as $1 trillion, Obama has promised a new federal infrastructure program that would dwarf President Dwight Eisenhower’s interstate highway system that began in 1956. Obama told reporters at a Dec. 7 news conference that his effort would go beyond “roads and bridges” and fund more innovative projects.( LIKE WHAT? )

Fiscal Shortfalls

His plans are colliding with deep fiscal shortfalls among states with a backlog of road-building needs and pressure from lawmakers to use his economic recovery package mainly for “ready to go” projects that will immediately bolster the economy.

Highway construction advocates say numerous projects are needed because of years of neglect of the nation’s infrastructure. Along with new roads, these include resurfacing existing ones and guardrail installation. As evidence of the economic impact of such work, they cite President Ronald Reagan’s $12 billion investment in federal highways during the 1982 recession that created 700,000 jobs by 1985.

Caterpillar Inc. executives have said the U.S. needs as much as $700 billion in road, port and airport investments to remain competitive with countries like China. The largest maker of construction equipment stands to see a boost from the spending plan, along with rival Deere & Co., crane makers Terex Corp. and Manitowoc Co., and material producers U.S. Steel Corp. and Olympic Steel Inc.( LOBBYING )

Little Oversight

Members of Congress and some officials with the incoming administration are moving toward legislation that gives states funds through existing formulas that provide little oversight to ensure the spending fits into a broader plan to modernize the nation’s infrastructure grid and promote energy efficiency, according to several lobbyists and congressional aides.

“We like the environmentally friendly way of doing things but the charge we were given was to come up with something that can happen quickly,” said Jim Berard, a spokesman for House Transportation and Infrastructure Committee Chairman James Oberstar, a Minnesota Democrat. “We can’t lose sight of what the primary goal here is, and that is to put people to work.”( I DON'T AGREE WITH THIS PRIORITY. THE PROJECTS SHOULD BE GOOD INVESTMENTS. )

Urban planners and mass transit advocates say that approach may undercut Obama’s goal of more innovation in upgrading the nation’s infrastructure.

‘Bad Projects’

“The fear is that you would begin a bunch of bad projects that would have to be funded all the way,” said Petra Todorovich, director of the New York-based America 2050, a coalition of transportation officials and civic, business and environmental groups. That would make it “a lot harder to make the big investments needed to build high-speed rail and public transit.”( WHICH ARE WHAT I SUPPORT )

Advocates of surface-road and highway building say these projects would prove environmentally friendly because they would help relieve congestion.

The U.S. Department of Transportation has identified 220 bottlenecks that significantly increase the number of vehicles idling in traffic. “If you can eliminate the congestion, you can dramatically reduce greenhouse-gas emissions,” said Jeff Solsby, a spokesman for the Washington-based American Road and Transportation Builders Association.( OK )

The Missouri plan reflects the current needs of the state, where 90 percent of travel is by cars on highways and roads, said Sally Oxenhandler, a spokeswoman for the Missouri Department of Transportation.

‘Strike a Balance’

“We had to take a look at the needs and strike a balance, and also look at projects that we had ready to go in 180 days,” she said.

Polly Trottenberg, director of Building America’s Future, a Washington-based group promoting innovation in infrastructure improvements, counters that “there are plenty of projects that can put Americans back to work immediately and also start the transformation that is needed.”

Her organization and other groups have pinpointed $16.5 billion in mass-transit projects on which work can start within a year, and in many cases within four months( GOOD ).

In Europe and Southeast Asia, governments are investing tens of billions of dollars in high-speed rail projects that include systems designed for the rapid transport of merchandise. Proponents of a new approach to transportation in the U.S. are pushing for the stimulus package to fund similar projects.( SHOULD BE LOOKED INTO )

They also are backing a provision in the stimulus legislation that would require states to spend funds on maintenance before building new roads( GOOD ). And they also want to direct funds to metropolitan planning authorities and to create a national oversight group to help coordinate the spending( GOOD LUCK ).

This could be similar to President Franklin D. Roosevelt’s creation of a national resources planning board during the New Deal that developed long-range plans for infrastructure spending, Todorovich said. It laid the groundwork for the interstate highway system 20 years later."

It seems that Deneen is correct. I would rather the money go, after safety, to green and environmentally friendly investments for the future. I simply hope that some of it does.

"If the new president had a target of full employment, and if Americans believed that he could reach it the confidence problem could be quickly solved

Robert J. Shiller has a post in the NY Times:

"IN the current crisis, discussions of economic policy have often centered on uninspiring, short-term goals. To restore confidence in our economic future, we need appropriate, firm targets that will clearly put us where we want to be."

I think that we can be excused for dwelling upon the immediate danger in these circumstances.

"For example, President-elect Barack Obama has framed his economic stimulus package in terms of the number of jobs he will create. The goal is to add 2.5 million jobs, he says, by hiring people to improve our highways, fix up our schools and do other infrastructure work around the country. All of that is fine, but it does not represent a commitment to full employment — providing a job for everyone who is willing to work. As a result, confidence remains abysmal.If the new president had a target of full employment, and if Americans believed that he could reach it, the confidence problem could be quickly solved."

I have spent years, ever since reading "The Share Economy", in trying to devise ways to get to full employment. Let me also remind readers that I favor, if I had my druthers, a Guaranteed Income with Health Care being provided within the bounds of that income. In doing this, I am following ideas first propounded by Milton Friedman, and most lately developed by Charles Murray. Within that guarantee, it would obviously be better to find ways for full employment.

"The Great Depression provides an analogy. Presidents Herbert Hoover and Franklin D. Roosevelt had at least a vague idea that economic stimulus would help the situation, but even Roosevelt lacked clear targets for such policies during the New Deal. The economic stimulus applied was inconsistent and inadequate. Confidence waned, and the depression was longer and deeper than it needed to be."

I don't agree with this. I believe that in many ways Roosevelt was more Conservative than Hoover, and found that, in the necessity of dealing with the Depression, he had to alter those beliefs as he went along. I would say that he was Pragmatic, and the fact that we survived is proof of his effectiveness. I've also tried reminding people of the context of the 30s, which is not our context, which was that many people believed that Capitalism was dead, and that Totalitarianism, namely Communism and Socialism, were the only choices. You simply cannot denude any decisions of that time, even Economic ones, of that context. His targets were necessitated by massive threats to our very survival.

"People still remember aspects of that depression history. The Works Progress Administration and the Civilian Conservation Corps tackled infrastructure projects, much as Mr. Obama proposes — but these New Deal programs were not enough to restore full employment. That history reduces the current credibility of Mr. Obama’s target of 2.5 million jobs."

That's because they were experimental, and were being tried out in order to assess their effectiveness.

"On the other hand, there have been some worthwhile targets in monetary policy in recent years. A number of central banks have adopted firm inflation targets, which has helped to contain inflation expectations. Those expectations have tended to coincide roughly with the targets."

I agree.

"At the moment, of course, inflation is no longer the fundamental risk. Our current problems are deflation and recession — possibly even depression — and so we must rethink our targets."

I agree.

"An immediate shift to a full employment target may not be possible, simply because there is no confidence right now that we can hit it. While people seem to believe that central banks can control inflation, there is little consensus that central banks can prevent a depression under circumstances like this."

Here's where I believe that I differ from him and most everybody else. I believe that, prior to Lehman, and even after for a time, people did in fact still believe that the government could avert and deal with this crisis effectively. There has been an ongoing deterioration in that belief throughout this year, with it being almost completely shattered by the performance and effectiveness of recent government policies. A large part of this deterioration, I believe, has to do with a general feeling that the Bush Administration will manage to make things worse. However, because this belief was so widespread and endemic to our actual system of governance and finance, there was no Plan B. Consequently, when the crisis hit, everybody had placed their bets on the government.

From a philosophical perspective, these assumptions limited and limit our possible responses, in the same way that a sentence's meaning is limited by its context and presuppositions. That's why, contrary to what many Kantians believe, you simply cannot toss in any theoretical plan that you can come up with and expect it to work in this context. In fact, it will be as effective as gibberish is in a conversation.

"In a forthcoming book I’ve written with Professor George A. Akerlof of the University of California, Berkeley, we argue that current circumstances call for a couple of intermediate targets. If we can hit them, we may credibly be expected to hit the ultimate target of full employment — and keep inflation at bay. The intermediate targets should be announced forcefully, with an immediate effort to achieve them."

Yes Sir. On the double, Sir.

"First, there should be an intermediate target for conventional fiscal and monetary policy, one ambitious enough to restore full employment in a typical recession. (Fiscal policy is the taxation and expenditure proposed by the president and voted by Congress; monetary policy is the province of the Federal Reserve Board.) "

What's the target?

"This target may be inadequate, however, because we are not in a typical recession. Conventional fiscal and monetary methods may fizzle, as they did in the 1990s in post-bubble Japan. After its stock market and real estate debacle early in the decade, the government of Japan moved its budget into deficit and brought interest rates down to zero. But the economy never entirely recovered, and in due course the government debt rose to 1.71 times the annual gross domestic product, versus a current multiple of 0.74 in the United States."

Does that mean that we might hit the target and yet that not prove target enough? Yes, we don't want to end in Japan's pickle. But we might.

"Similarly, we just do not know whether these measures will work in this country. That is why we also need a second intermediate target, for credit. The ability to borrow should be restored to an appropriate level for a normal economy at full employment."

I think that's what I've been calling a Credit Stimulus. I dimly remember expecting TARP to be that. Well, not really expecting. Praying, more like it.

"This is crucial because the most salient problem in our institutions is the drying up of credit. Without credit, companies that count on outside finance will go bankrupt, requiring an impossibly large fiscal and monetary policy stimulus to achieve full employment."

And your remedy is? Give us the most salient solution, friend.

"Furthermore, as long as the credit crisis continues, the economy’s response to conventional fiscal and monetary policy may be drastically reduced. A person who cannot borrow, for example, is unlikely to buy a car, even if a generous fiscal policy has provided him with the needed down payment. Under the current circumstances, the Keynesian “multiplier,” the economy’s response to fiscal policy, may be unusually low. Our best econometric models just won’t tell us how low."

Chuck them, mate.

"FOR months, the Fed has been working to expand credit, and has invented some good methods for doing so. On Nov. 25, it announced a smart method to jump-start credit, called the Term Asset-Backed Securities Loan Facility, which would issue loans, using securities backed by newly issued consumer and small-business loans as collateral. The Fed has started paying interest on reserves to control the inflationary impact of such a policy."

I think that paying interest on reserves was more like an incentive to save, rather than lend. But that's just me.

"This plan and others like it are promising. But all the government loan programs announced so far represent only a tiny fraction of the $52 trillion of total credit market instruments outstanding. We will need to go much further and extend credit to households and businesses that would otherwise be ignored."

Fine. How do we do that?

"Along with fiscal and monetary policy, credit needs to be targeted on a scale that would get us out of our current economic mess. That’s what Washington should do now."

It's fine to want full employment, but, unless he's arguing that the government just up and guarantee everybody a job, I'm not sure how to get it. If that's what he's saying, why not just say that the government should guarantee everybody a job?

The one point I definitely agree with him on is that this is a Crisis Of Confidence, and policies must address it.

"The installation of infrastructure increases economic growth in the future"

Mark Thoma answers some of my questions about Woodward and Hall's post:

"Romer and Romer do not look at government spending multipliers, so we don't know if the government spending multiplier is smaller/larger than the tax multiplier if they are estimated in the same model (note, though, the the confidence band for Romer and Romer's tax multiplier is 1.3 to 4.7, so a multiplier smaller than Ramey's estimated value of 1.4 for government spending - though not strictly comparable since it comes from a different model - is within the confidence bounds of these estimates; confidence bounds for Ramey's estimates are not reported). I should also note that Romer and Romer isolate different types of tax cuts, the multiplier of 3.0 (plus or minus about 1.7) is for exogenous tax changes intended to promote economic growth, not tax changes intended to stabilize the economy. Their results for tax cuts used for stabilization purposes are not encouraging:

The behavior of output following countercyclical tax changes ... suggests that policymakers' efforts to adjust taxes to offset anticipated changes in private economic activity have been largely unsuccessful.

Finally, many estimates of the Keynesian government spending multiplier can be criticized on the same grounds that the tax cut advocates like to cite. The installation of infrastructure increases economic growth in the future, but these dynamic effects are missing from the standard Keynesian analysis (and using history as a guide is not very helpful since we have had very few surges in government spending devoted to infrastructure spending, and we have little data on the effects of fiscal policy - or any policy - in severe downturns since they are so unusual). If the dynamic effects were to be included in the infrastructure spending mulitplier, the multiplier would be larger."

This would explain my belief that infrastructure spending does have positive benefits, and that tax cuts don't necessarily do a great job as a stimulus.

But he doesn't discuss targeted tax cuts in order to help move the fear and aversion to risk in investment. I still think that's an obvious move, and don't understand what's so controversial about them.

"“We are not that stupid. We are not that desperate in Japan,” he said. "

Wow. Check out the stimulus debate in Japan. I thought it was a done deal. From the FT:

"Yosano rejects increased public spending

By David Pilling and Mure Dickie in Tokyo

Published: November 30 2008 20:02 | Last updated: November 30 2008 20:02

Kaoru Yosano, Japan’s minister for economic policy, has attacked calls for higher public spending.

He said Japan could not afford to add to its gross public debt, already about 180 per cent of national output, the highest in the advanced world.

Mr Yosano told the Financial Times in an interview: “We are already deep in debt, so to create effective demand for instant pleasure would not be wise.”

The minister said the government was unlikely to find many worthy targets for stimulative funding."

I wonder how Yosano would do here.

"Constructing more public buildings – a favoured economy-boosting method in the past – would be “stupid” since maintenance costs would be a long-term burden, he said.

Faster expansion of the national Shinkansen high-speed rail network looked like a decent option, the economy minister said.

But policymakers in the ruling LDP party are not keen.

“We don’t have very good public works any more,” Mr Yosano said."

This guy's a barrel of laughs.

"Some may disagree. The government has been attacked for cutting incentives for private spending in technologies such as solar power that would help protect the environment and reduce greenhouse gas emissions.

Direct government investment could, for example, play a vital role in building the recharging infrastructure needed to make electric vehicles more commercially viable. Mr Yosano did urge more spending on unemployment benefit, saying the government could mitigate the social effects of recession by, for example, doubling to a year the period that benefits could be paid.

Conditions were unlikely to become as bad as 1929. “These difficulties are not impossible,” he said."

Thanks for the six months Yosano.

"Teizo Taya, special counsellor to the Daiwa Research Institute, said Japan had learnt that deficit spending was dangerous, and western economies would find that running big deficits could lead to uncontrollable inflation.

“We are not that stupid. We are not that desperate in Japan,” he said."

I'm definitely worried about inflation, but Taya and Yosano have me beat by a wide margin. Apparently, we are that stupid and desperate.

"However, Shijuro Ogata, a former Bank of Japan official, attacked what he said was Japan’s overly passive response.

“These people are so fatalistic. They are always talking about the world’s impact on Japan, not Japan’s impact on the world.”

He said Japan could not be a locomotive for the global economy but it could take bolder emergency fiscal measures and try to stimulate personal consumption in the medium term."

It doesn't sound like the Japanese are Keynesians.

"he was prepared to hold off introducing new taxes for his first two years as president."

It doesn't look like President Obama will raise taxes. Good news. They will probably wait for the Bush Tax Cuts to expire, and deal with the issue then. From the FT:

"Democratic officials made clear on Sunday that the cost of Barack Obama’s economic rescue plan would run into hundreds of billions of dollars and hinted he was prepared to hold off introducing new taxes for his first two years as president.'

This is good news. Wise Policy.

"Over the weekend, the president-elect revealed the outlines of a sweeping programme aimed at creating or saving 2.5m jobs by January 2011 through investment in infrastructure, public services and “green” technology."

I believe that infrastructure spending should be the primary thrust of the stimulus. Remember, I don't consider UI and other social safety net provisions, which are very important, to be part of the stimulus as I define it.

"Chuck Schumer, a leading Democratic senator, predicted it could be as much as $500bn-$700bn. “It’s a little like having a new New Deal, but you have to do it before the Depression. Not after,” he told ABC’s This Week."

I'm fine with the figure, but would like to see actual plans on how it will be spent.

"In an olive branch to Republicans, Mr Axelrod floated the possibility that the president-elect might wait for the Bush tax cuts to expire in 2010 rather than acting sooner to raise rates for high earners."

What to do about these tax cuts should wait until we get to 2010. Period.

"a government that spends wisely, focuses on what works"

Here are a few points from President Obama's radio address today:

"I have already directed my economic team to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011 — a plan big enough to meet the challenges we face that I intend to sign soon after taking office. We’ll be working out the details in the weeks ahead, but it will be a two-year, nationwide effort to jumpstart job creation in America and lay the foundation for a strong and growing economy. We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.

These aren’t just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long. And they represent an early down payment on the type of reform my administration will bring to Washington — a government that spends wisely, focuses on what works, and puts the public interest ahead of the same special interests that have come to dominate our politics.

I know that passing this plan won’t be easy. I will need and seek support from Republicans and Democrats, and I’ll be welcome to ideas and suggestions from both sides of the aisle.

But what is not negotiable is the need for immediate action. Right now, there are millions of mothers and fathers who are lying awake at night wondering if next week’s paycheck will cover next month’s bills. There are Americans showing up to work in the morning only to have cleared out their desks by the afternoon. Retirees are watching their life savings disappear and students are seeing their college dreams deferred. These Americans need help, and they need it now."

I like it, especially "a government that spends wisely". I've already accepted the need for a stimulus, focused on infrastructure. So, I'll wait and see what's proposed.

"That is, if you really want to boost growth, then the infrastructure spending does actually have to be a good investment"

Here's an interesting idea which combines three things:

1) Fighting Urban Sprawl
2) The Current Stimulus Plan
3) What To Spend It On

"David Altig, research director at the Atlanta Fed and a blogger at macroblog, has a post up on the question of infrastructure spending as stimulus. He agrees that timing issues are not, at this point, important, but after examining the impact of public works spending on growth he concludes:

More than most of the currently popular stimulus ideas, the benefits of increased infrastructure spending really do seem to depend critically on the specifics. Best to think about those specifics sooner rather than later.

That is, if you really want to boost growth, then the infrastructure spending does actually have to be a good investment, rather than building for the sake of building (which would be consumption). In the Times, David Leonhardt agrees, writing:

And yet when it comes to the nation’s infrastructure, money isn’t the main problem.

A lack of adequate financing is part of the problem, without doubt. But the bigger problem has been an utter lack of seriousness in deciding how that money gets spent. And as long as we’re going to stimulate the economy by spending money on roads, bridges and the like, we may as well do it right."

Here's my comment on Paul Krugman's blog on Nov. 12th:

"I mean, surely on what and where you spend the money is as relevant as the total number? Or are you simply assuming that the money goes out and that’s it? Is this organic or mechanical?"

The post continues:

"We do a pitiful job of determining how to spend our money. Leonhardt suggests that we need to take a broad view of the contributions of any given project. Planners should have to prove that road construction will reduce traffic (good luck!), and transit projects should take into account things like emissions and energy consumption. He gets points for mentioning that congestion pricing is a useful tool to limit congestion and provide information about transportation demand (and demerits for excessiving lauding of Ma Pete). But what he doesn’t mention, but what is pretty critical, is that infrastructure projects ought to take into account their effect on land-use."

This seems correct.

"Banks are likely to steer money to the public works that Premier Wen Jiabao is making a priority in the stimulus package "

Here's a Bloomberg post which seems to confirm Brad Setser's post:

"In broad terms, China’s fiscal stimulus will offset a fall in domestic investment more than it reduces China’s purchases of US debt. Chinese banks that previously were lending to China’s property developers will be lending to China’s government instead. And the rise in the US fiscal deficit will offset a fall in borrowing by American households and firms. As a result it won’t need to be financed as heavily by the rest of the world. China’s fiscal stimulus will do more to keep China’s current account surplus from rising than to bring China’s surplus down. "

From Bloomberg:

"Nov. 18 (Bloomberg) -- China's small manufacturers are likely to be starved of cash even after the government directed banks to increase lending as part of its 4 trillion yuan ($586 billion) plan to buoy the economy.

Banks are likely to steer money to the public works that Premier Wen Jiabao is making a priority in the stimulus package unveiled last week. Those projects are considered a safer bet than manufacturers: Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government figures.

``Small businesses will continue to be in despair,'' said Wang Tao, an economist at UBS AG in Beijing. ``Despite the government's drive, banks are likely to concentrate on risk-free infrastructure projects.''

The stimulus allocates money for railways, roads and power grids and calls for an increase in lending for small and medium- sized companies, whose output represents 60 percent of gross domestic product and 75 percent of urban jobs. The banks, focused on returns to shareholders, may favor the state-backed projects, weakening the impact of the package.

``Default risks are almost zero,'' said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. ``The reluctance of banks to lend to smaller businesses will undermine the effectiveness of the stimulus package.''

This seems to argue that infrastructure spending won't be as effective a stimulus for the Chinese economy as spending by other companies.

"The nation's four largest banks, which account for more than half of total loans, have already lowered their lending to smaller companies to reduce risk from slowing growth at home and cooling demand in the U.S., Europe and Japan, according to the banking regulator. The International Monetary Fund predicts all three economies will shrink next year.

Liu Yingshui, owner of mushroom exporter Yin Zhao Food Co. in central Hubei province, said it is getting harder to obtain financing.

``I have heard all this talk of easing credit for small and medium-sized companies, the dropping of loan curbs and most recently the stimulus package,'' Liu said in a Nov. 14 interview. ``None of that helps us.''

It also seems to be suggesting that banks are doing this on their own initiative, because government projects are safer, being backed the government I guess.

"Bad loans at Chinese banks may increase by 20 percent in 2009, BNP Paribas predicted in a Nov. 10 report.

Banks have ``shifted their strategy and mindset from bullish mode into a much more defensive mode,'' said Dorris Chen, a Shanghai-based analyst at BNP Paribas.

Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, told banks on Nov. 12 to better grade lending risks to different industries and to prevent bad loans from mounting.

``Governments in China and elsewhere are all trying to talk banks into lending money and it doesn't work,'' said Andy Xie, an independent Shanghai-based economist who was formerly Morgan Stanley's chief Asia economist. ``You cannot ask banks to lend to companies that are not viable.''

This may work as Setser says for us, but it doesn't seem to a big winner for the Chinese non-governmental sector.