The failure of the US stimulus at Catallaxy Files

The failure of the US stimulus

Usually, the public is too dazzled by the seen to take account of the unseen. So politicians often get away with saying they have “created” this or that many jobs by spending taxpayers’ money. Few follow the trail back to where the money came from or project it forward to divine the consequences. That was not the case this time. Quite the opposite, in fact.

In the current crisis, advocates of stimulus and of government intervention in general have been badly hurt by two developments. First, the short-term effects of the stimulus—the “seen”—have been extremely disappointing. The stimulus was signed into law on February 17, 2009. In the preceding month, unemployment stood at 7.7 percent. A study released at the time by Christina Romer, who shortly thereafter became chair of the President’s Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Biden, predicted that unemployment would never exceed 8 percent and would fall to 7.5 percent by June 30, 2010, if the stimulus were enacted. Without the stimulus, they claimed, unemployment would rise to 9 percent.

Instead, unemployment rose above 10 percent and was a still horrific 9.5 percent in June 2010. Perhaps a lack of stimulus spending would have made matters even worse. No one knows. You can’t do a controlled experiment. But you can understand the public reaction: We spent all this money, and got almost nothing.

Bastiat would have appreciated one of the obvious explanations for the impotence of the stimulus. In 1957, Milton Friedman argued that attempts to increase consumer demand through government spending are doomed. The reason, Friedman wrote, is that individuals make their decisions about consumption by looking at their likely income and wealth far into the future. (He called it the “permanent income hypothesis.”) If the government starts spending huge sums today, consumers foresee higher taxes and, by inference, presume that their lifetime incomes will drop because of the increased level of their tax burden.

If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.

Because of these policies, the “unseen” became “seen” in a fashion devastating to the politicians supporting them. Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your “permanent income” is going to decline, and your gut response will be to husband your resources.

More disastrously for the Democrats, the “unseen” became “seen” almost immediately, in the form of metastasizing budget deficits. In order to spend all that money it didn’t have, the federal government was, of course, forced to borrow. So Treasury debt held by the public has grown from an easily manageable 36 percent of GDP at the end of fiscal 2007 to a troubling 62 percent at the end of 2010. Only once in U.S. history—during and right after World War II—has the debt-to-GDP ratio ever exceeded 50 percent.

James Glassman in the WSJ.

Written by Sinclair Davidson

August 29th, 2010 at 2:11 pm

Posted in Uncategorized

56 Responses to 'The failure of the US stimulus'

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When debt was high after WW2, as soon as the shooting stopped there was a massive stimulus in the form of people getting back to productive work instead of killing each other and destroying each others infrastructure. What is going to save the situation this time around? Sensible economic management and a predictable environment for business would help but the Big Government activists and Keynesians don’t understand.

Rafe

29 Aug 10 at 5:36 pm
“The failure of the US stimulus”

No, it wasn’t done properly and wasn’t big enough!

.

29 Aug 10 at 5:38 pm
Mark Zandi shows the econmy strengthens when the stimulus operates and starts to become sluggish when it becomes a negative for the economy.
for those who believe fiscal policy has no impact.
Take a trip to Ireland, the Baltics, hungary , Ireland

Butterfield, Bloomfeld % Bishop

29 Aug 10 at 7:24 pm
Take a trip to Ireland, the Baltics, hungary , Ireland

Homer, you disingenuous nutball. Stop picking places no one knows anything about.

But I do know a little about Iceland.

You moron. You complete moron. Iceland had no money left. Their currency had literally collapsed. There was no possibility of even contemplating a spending program there, you idiot.

And you should be in bed. Lights are turned off in the cellar at 6 PM sharp.

You got out again, right?

JC

29 Aug 10 at 7:35 pm
homer mentions Ireland twice. Maybe it has sepcial significance.

Boris

29 Aug 10 at 7:53 pm
“No, it wasn’t done properly and wasn’t big enough!”

And the situation would have been even worse without it.

Boris

29 Aug 10 at 7:56 pm
Well here, Homer, you numbnut.

As was mentioned earlier, Germany spent 1.1% on stimulus and has recently registered a 9% annualized growth rate and it’s unemployment levels are reaching the same as before the GFC hit.

How do those apples work for you, you dolt.

JC

29 Aug 10 at 8:17 pm
homer mentions Ireland twice.

To be sure, to be sure.

Infidel Tiger

29 Aug 10 at 8:28 pm
“Zandi shows…”

Zandi wanted a second US stimulus. How can they do that when they couldn’t sell their bond issues at the end of 09?

.

29 Aug 10 at 8:39 pm
Its probably still early days, but according to Eurostats, the baltic states experienced economic growth in 2Q of 2010.

Estonia: 2%
Latvia: 0.1%
Lithuania: 2.9%

No data for Ireland in 2Q 2010, but in 1Q its economy grew (yes, grew) by 2.7%.

Capitalist Piggy

30 Aug 10 at 2:46 pm
Only if Homey read a little!

.

30 Aug 10 at 2:51 pm
oh gosh countries eventually grow.

What is the output gap?
what is the unemployment rate?

What is the investment rate because afterall investment always rises because of austerity measures.

However the idiots that inhabit the catallaxian universe believe austerity economics actually boosts growth.
oh dear!

If only catallaxian crackpots could read.

Only halfwits rely on annualised quarterly figures.

There are some who compare annualised six monthly figures and compare it to the annual rate

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 2:58 pm
Cap;

The Baltics were fucked well before and in fact were experiencing currency related troubles as far back as 2007.

Th resident laboratory monkey, Homer, wouldn’t have a clue.

These places had serious currency problems as they were tied to the Euro, borrowed billions, turfed it into real estate speculation and then were keelhauled.

They had no fucking money for any sort of “stimulus”.

In fact that alone probably saved them from a worse fate.

Like Iceland.

Iceland’s currency was basically worth zero and had no possible way of borrowing a dime from offshore sources to even try and enact a stimulus of any meaning. They had lost their banking system and their currency.

The website’s laboratory monkey deserves a few slaps across the ears for even bringing up these places or failing that sent to the town square for a few good round of rotten tomato throwing at his stupid noggin.

JC

30 Aug 10 at 2:59 pm
Man you are going to have some egg on your face over the next few years.

.

30 Aug 10 at 2:59 pm
From the idiot who brings us quarterly annualised figures.

you idiots already have egg all over your faces.
That is why you cannot read and cannot think!

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 3:00 pm
Homer:

You’re an embarrassment to the human species. Don’t embarrass us in front of other mammals please. We have standards.

JC

30 Aug 10 at 3:01 pm
“From the idiot who brings us quarterly annualised figures.”

???

Homer, this is as silly as sfdc’s claim that GDP isn’t measured in real terms.

.

30 Aug 10 at 3:07 pm
Homer:

The German annualized figure may not hold up. In fact we hope it doesn’t hold up. Credit Suisse has their growth at 4% next year primarily as a result of the dislocation caused by a Euro-wide monetary policy targeting the laggards.

This means their growth rate will higher than ours, which means you still have to explain how a forward looking market projects 4% German 2011 vs 3ish% for ours but their 10 year bond rate is 2.2% while ours is 4.90ish%.

You failed. You hypothesize is essentially a crock of shit and no amount of foot dragging abuse will change it.

Apologize please. If not to me then to Sinclair. Once you do that go the fuck away for a couple of weeks as we’re all sick to death of you.

JC

30 Aug 10 at 3:08 pm
Homer

I know you despise me at the moment, so I’m going to make you feel a little better.

Buy a little of the German CAC ETF… EWG on the NYSE. I gives you exposure to the German stock market and if my hunch is correct that economy is going to seriously rock and roll next year due to the monetary misalignment in the EU.

I even think as a hunch that 4% could be a little on the low side.

Thank me later.

JC

30 Aug 10 at 3:15 pm
No Mark what I said was that budget balance to GDP ratios are measured in terms of nominal GDP. It’s a pretty basic concept that you continue to fail to grasp.

sdfc

30 Aug 10 at 3:36 pm
the bond market disagrees with CS you fool.

Can’t you even price a bond.

of you can’t.

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 3:38 pm
“No Mark what I said was that budget balance to GDP ratios are measured in terms of nominal GDP. It’s a pretty basic concept that you continue to fail to grasp.”

When they’re being compared historically? No.

.

30 Aug 10 at 3:38 pm
Marky believes a VAT is a proportional tax. budget balances as a % of GDP is a bit beyond him

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 3:39 pm
“the bond market disagrees with CS you fool”

What the hell does this mean?

“Can’t you even price a bond”

Bullshit Homer, you’ve never bought or done any fixed income research. We have.

.

30 Aug 10 at 3:39 pm
I was pricing ,researching , buying and selling bonds before you were told to leave Kindergarten at 18

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 3:41 pm
“Marky believes a VAT is a proportional tax. budget balances as a % of GDP is a bit beyond him”

You dope Homer, how many times do I have to point out to you that the GST was net a progressive tax and your theory about tax proportionality would see the abolition of a regressive tax labelled as “regressive reform” because you are too thick to think through the numbers.

.

30 Aug 10 at 3:49 pm
“I was pricing ,researching , buying and selling bonds before you were told to leave Kindergarten at 18″

Right Homer, you’re a bond trader in 2000?

I will never believe this. Your business acument consists of refusing to sell impulse items at a petrol station to infer there are benefits to Fuel Watch.

You muppert.

.

30 Aug 10 at 3:50 pm
Mark you are obviously out of your depth on the subject of the measurement of budget balance to GDP ratios.

As a further hint as to why you are wrong, for a ratio such as debt to GDP to have any meaning the numerator and the denominator must be expressed in consistent terms.

I’ll play along though. How about providing a source which compares a nominal budget balance to a real GDP figure.

Whoever told you the US Treasury were having trouble selling paper at the end of 2009 has no idea what they are talking about.

sdfc

30 Aug 10 at 3:59 pm
Whoever told you the US Treasury were having trouble selling paper at the end of 2009 has no idea what they are talking about.

How about Bloomberg that was reporting US bond auctions having very long disturbing tails and the fact that the Fed cut down on the maturity schedule materially. Does that work, or is it taken out of context? LOL.

JC

30 Aug 10 at 4:10 pm
Here’s Marky at work.
a person on $10k and a person on $100k buy a car worth $10,000. the VAT at 10% is $1k.

so in Mark’s world 1,000/10,000 equals 1,000/ 100,000.

Oh notice how the lowest price for petrol has changed days but petrol deliveries haven’t.
Oh dear Marky’s world takes another hit

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 4:14 pm
#

I was pricing ,researching , buying and selling bonds before you were told to leave Kindergarten at 18

Computer games don’t count Homes

jtfsoon

30 Aug 10 at 4:15 pm
Statman,

can you tell Marky a VAT cannot be proportional?

Why is he allowed out during the week?

Butterfield, Bloomfeld % Bishop

30 Aug 10 at 4:17 pm
Rafe

Actually the “big stimulus” came in the form of billions of greenbacks from the US [marshall plan], and then 40 years of subsidized security/defence care of the US, including protecting access to the middle east oil fields.

Keynes, my ass!

Peter Patton

30 Aug 10 at 4:19 pm
I was pricing ,researching , buying and selling bonds before you were told to leave Kindergarten at 18

Huummmm. Hummmmmm. I’m speechless.

In the immortal words of Jackie Chiles… I’m shocked and chagrined.

JC

30 Aug 10 at 4:20 pm
Drop the insults.

I was taught by fine people and my benefactors are not idiots.

Why have a and b consistent, but inconsistent to c and d which are consistent to each other, when all a-d can be consistent? I don’t follow your reasoning. Maybe you can introduce something usefu/authoritativel I can go off to change my methodology. If not, it’s staying the same because it makes more sense to me.

As for bonds, you can inform me more if they’re wrong.

.

30 Aug 10 at 4:22 pm
“a person on $10k and a person on $100k buy a car worth $10,000. the VAT at 10% is $1k.

so in Mark’s world 1,000/10,000 equals 1,000/ 100,000.

Oh notice how the lowest price for petrol has changed days but petrol deliveries haven’t.”

Now you dope Homer, describe the abolition of such a tax either in terms of progressivity, proportionality or regressivity.

.

30 Aug 10 at 4:38 pm
Bid cover ratios did not suggest any difficulty in selling T-notes. Saying they couldn’t sell a bond suggests one or more failed auctions. Nice of you to come to Mark’s aid though.

sdfc

30 Aug 10 at 4:53 pm
<i.Bid cover ratios did not suggest any difficulty in selling T-notes.

Jesus fucking H C, we’re not talking about T-notes you disingenuous twerp. That’s why the Fed brought the auction program into the T-note spectrum.

The discussion was (EXACTLY) about the US experience in selling bonds (NOT T-Notes) .

The Fed had a very unpleasant experience of finding a large and embarrassing tail in its Weekly auctions for longer maturity bonds, so it lowered the maturity pattern by drastically bringing it in.

You can try and spin this shit as much as you like, SFDC. But facts at times are really unpleasant, hey?

You know… not for nothing… you’re as bad as Homer but disguise your incompetence with slightly better diction.

JC

30 Aug 10 at 5:03 pm
“Mark you are obviously out of your depth on the subject of the measurement of budget balance to GDP ratios.”

Don’t you feel a tad embarrassed about this since you haven’t explained yourself, shown any authoritative source and then confuse bonds with Treasury notes?

.

30 Aug 10 at 5:12 pm
I’m guessing you’re getting notes confused with bills.

sdfc

30 Aug 10 at 5:14 pm
For people who don’t understand the lingo here, let me explain, so you understand what a disingenuous dishonest little jerk SDFC is.

Dot correctly mentioned earlier that the Fed had the unpleasant experience of markets beginning to reject their bonds issuance in late ish 2009.

This was true. It’s a fact.

SDFC chimes in that whoever told this to DOT “didn’t know what they were talking about”.

Again, it is true. Dot is correct.

Arcane terms like bills, notes and bonds are used in the US to describe the maturity period.

I can’t recall exactly what they are, but from memory, I think bills are in the up 3 years duration, notes 3 to 5 and bonds thereafter.

A long or short tail describes the range of bids tendered to the Fed at their auctions. Long tail means trouble because it spells a wide level of expectation.

What Dot is correctly describing is that the Fed was really experiencing an embarrassing time of finding large tails to their bond issuance which resulted in issuing more shorter term paper. They were also finding lightly bid bond auctions too.

SDFC then bullshits by stating the obvious: shorter maturity paper had a smaller tail. Duh.

It’s really almost impossible ever having a reasonable discussion with social democrats because they’re always lying. They really can’t help themselves, as lying and generalized dishonesty seems to go hand in hand with them.

JC

30 Aug 10 at 5:20 pm
I’m guessing you’re getting notes confused with bills.

Well I’m not guessing that you’re lying, SDFC.

Dot is correct. US bond auctions in 09 were embarrassing which is why they moved down the maturity spectrum.

JC

30 Aug 10 at 5:22 pm
Discussion of the german situation:
http://www.marginalrevolution.com/marginalrevolution/2010/08/krugman-on-germany.html

pedro

30 Aug 10 at 5:31 pm
More shit
http://finance.yahoo.com/news/Japan-central-bank-eases-apf-4014404032.html?x=0&sec=topStories&pos=main&asset=&ccode=#Scene_1
“TOKYO (AP) — Japan’s central bank has decided to ease monetary policy amid a strong yen and growing political pressure to take action on the faltering economic recovery.

The decision came during an emergency board meeting called by Bank of Japan Gov. Masaaki Shirakawa.

To boost liquidity, the central bank will expand a low-interest loan program for financial institutions to 30 trillion yen ($354.7 billion) from 20 trillion yen.”

pedro

30 Aug 10 at 5:33 pm
JC I think your mistake in terminology is only a minor matter, but since you seem intent on compounding your error I think it is necessary to clear the issue up. Bills are out to 12 months and notes 2 to 10-years. This may seem pedantic but considering your response it is worthwhile me being pedantic.

The 9 December 10-year note auction had a bid to cover ratio of 2.62. Hardly indicative of a failed auction.

sdfc

30 Aug 10 at 5:37 pm
Pedro;

Don’t worry about Tyler Cowan. I’m the resident expert on Germanic economics here

As far as we know Tyler doesn’t have a fuck load of German ETF EWG like I do banking on that place taking off like a rocket.

The other thing about Germany is that their labor rates were way under even “Grecian” levels in real terms.

Germany is going to hit the ball out of the park next year due to a misalignment of monetary policy in the Eurozone. It’s too lax for them and has to be kept lax for too long a period.

I’ve got such a big pos in that EFT I even frighten myself before I go to sleep thinking about it similar to how Brian B for LP scares himself to death over lightening bolts from space. But my panic attacks are based far more on reality. Lol

The good thing about Tyler’s piece is how he documents The Krug tangling himself up in a twisted heap over Germany. It’s hilarious.

JC

30 Aug 10 at 5:44 pm
SDFC.

Please stop the lying as it’s really getting annoying.

Dot said the Fed found the markets rejecting their bond auctions in 09. He’s right.

You implied he didn’t know what he is talking about. You’re wrong and you’re now fucking lying about it.

Stop it.

JC

30 Aug 10 at 5:47 pm
You have confused notes and bills with bonds sfdc.

I was referring to bonds. Which have a greater maturity than bills or notes. Which also had the most trouble being sold. Which you skirt around.

.

30 Aug 10 at 5:48 pm
“Bid cover ratios did not suggest any difficulty in selling T-notes. Saying they couldn’t sell a bond suggests one or more failed auctions. Nice of you to come to Mark’s aid though.”

This is where your obfuscation began, which you prjected onto others as “ignorance”.

.

30 Aug 10 at 5:49 pm
The 9 December 10-year note auction had a bid to cover ratio of 2.62. Hardly indicative of a failed auction.

Yea, pick one day out of 364 when the tail was short and when they tightened up on the issuance, SDFC.

Who the fuck do you think fooling with this bullshit?

Apologize to Dot and we move.

JC

30 Aug 10 at 5:50 pm
“The good thing about Tyler’s piece is how he documents The Krug tangling himself up in a twisted heap over Germany. It’s hilarious.”

I enjoy reading the Krug, but I reckon he’ll say anything if he has to support an earlier statement and he has no shame at all. He’s sure getting taken apart on a regular basis but you would never guess it from his column. Hide like a wild pig.

pedro

30 Aug 10 at 5:59 pm
Yea Pedro.

But you also never know who’s actually writing his column , or his blog these days, as he admitted his wife has total editorial control over his stuff.

He explained in the Vanity Fair piece how he could write something and then the boss/the editor (the wife) could completely change what he’s written.

So in a perverse sense The Krug may be could honest in that he’s strictly defending his own opinions as against those of his wife leaving the reader totally confused because we don’t know who’s writing the columns any more.

JC

30 Aug 10 at 6:08 pm
Mark

There was only one 30-year bond auction in December 2009 and with a bid to cover ratio of 2.45 it was also hardly a failure.

Before you dig yourself another hole, the 30-year is the only US “bond” maturity.

JC

Mark said at the end of 2009 that the Treasury couldn’t sell a bond which is why the one 10-year note auction in December of that year is the relevant data point.

I’m beginning to suspect you know two parts of f-all about this subject.

sdfc

30 Aug 10 at 8:28 pm
Dot said
How can they do that when they couldn’t sell their bond issues at the end of 09?

Mark is obviously using rhetorical license to describe the situation they were in. He’s right though as the US was forced to shorten the maturity schedule because it would have reached the point where they would not receive any bids if they continued asking auctioning in the longer maturities.

Do you doubt this? Really?

JC

30 Aug 10 at 8:43 pm
So Mark was using poetic licence. Fair enough. However it is my understanding that Treasury is lengthening its maturity profile rather than shortening it.

sdfc

30 Aug 10 at 9:43 pm
No sfdc, I said the US was having trouble selling it’s bonds, which was true, and you proeeded to embarrass me and failed miserably, even confusing yourself THEN clarifying what I already said. To which you then attempt (failing miserably) to infer that I was wrong by essentially saying something like “the gradient is increasing because the trip is longer”.

Your apprehension of honesty is wearing thin.

FAIL.

If you have any decency or intelligence, you can answer the following:

“The fiscal problems in countries are invariably the result of years of running deficits and bailing out financial institutions. ”

This is only partly true. Obama’s stimulus has failed and he has even less of a tax base now to pay off the debt.

Here is a list of questions for you:

1.

“The national accounts tell us the stimulus spending worked.”

How?

2.

“Give me a reason why government spending during the downturn didn’t stimulate growth.”

*Cap ex growth turned negative after we returned to positive GDP growth, then accelerated down with more stimulus after a small bump from the public sector.*

Do you agree or not that the growth rate is a function of capital investment?

3.

“Fed also believed government borrowing had forced up credit spreads”

*To say that this never happens (or can’t) or the post 2007 could not reinforce the spread increase is absolute.*

What is the idea behind this?

4.

*What is wrong with the idea that stimulus does not work in open economies?*

5.

The above questions in 12.32 am….( which are)

“Direct govenment spending was responsible for 2.8pps of 2.7% growth.”

Where exactly do the national accounts say this? I gave you and Homer exact cell refs for a claim I made about RBA data. You should do the same or explain how you came to this attribution.

“RGDI fell ~2.5% yet the unemployment rate peaked at 5.8%. That is an exraordinary result given the unemployment rate has a history of rising sharply when RGDI slumps.”

We had labour market flexibility not seen since pre WWI. Hours worked falling equated to about 1.1% unemployment and the increase in discouraged workers/net emigration increased to about 1.1% as well – which was more than the “jobs saved”.

There’s a bit more to assessing spending than “let’s write copy about the national accounts”.

“And thats before you add in the effect of the cash handouts on household spending and the impact of the business investment tax credit on private investment.”

Which was?

“We’ve been through the Rudd stimulus ad nauseam. Simplicistic calculations like 300k per job fail to take into account the cost of lost output and bankruptcy which may have been incurred had the government sat on its hands. ”

For Australia it was $358000 per job. Such a calculation is *simplistic*, but it is also generous. It is unamortised and not scaled up with it’s own opportunity costs such as the cost of capital or deadweight loss.

The claims about lost output etc are wildly ambit claims, given; the stimulus from China, the role of monetary policy, our stimulus was late, it would never work since we are an open economy, we already had an infrastructure building programme unrelated to the stimulus which did not have the same cost blowouts, we had a very flexible labour market not seen since WWI or before.

Don’t agree?

Can you them rank them and the stimulus between 0 and 1 as a proportion of how you think they contributed to avoiding a downturn?

Note that we saw a drop in hours worked during the stimulus. Without a flexible labour market, this would have contributed 1.1% unemployment. We also saw a rise in hidden unemployment (something you wagered never would happen), which was equivalent to another 1.1% in unemployment.

The sum to 8.0% is around what most forecasters said. The fact that we simply brought forward growth from September to March 09. The net result was waste in poorly administered projects (necessarily inferring a lower demand for labour) but also a more permanent lower growth path. All we are left with is debt.

http://johnhumphreys.com.au/2010/02/11/what-would-have-been/

If you don’t agree, please tell me why John is wrong, or wrong in claiming that:

“Most of the leftie ALP cheer-squad are micro-economists who don’t understand the international macro accounting identity KAS = CAD. That single equation automatically means that at least half of the stimulus is wasted (and actually counter-productive)”

Final question about Australia: what was the value of the multiplier?

.

31 Aug 10 at 1:28 pm

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The failure of the US stimulus

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