Thursday, July 07, 2011

About the economy

So recently, a friend an I got into an email debate about the effect of the stimulus and the efficacy of government in helping the economy recover from the recession. We are very close, have similar upbringings and have very similar views on the world overall, but I think our views on government have been changing over the past few years - in particular because his disappointment with Obama has been more acute than mine. As it turns out, we had our debate over email and looking over it as I was writing my final message I thought that it very interestingly demonstrated two well-reasoned, relatively centrist views about the current situation in this country, so I thought I would share.

I know, not as exciting as mermaids or waterfalls or the blueberry picking we hope to do this weekend, but still, I humor myself in thinking that some of you might be interested.

My friend -

"White house released their stimulus report on Friday. $772 billion 'created or saved' between 2.4 million and 3.6 million jobs. That's between $210k and $320k per job. I'm actually generally in favor of the stimulus, not because I think the government is effective or more intervention is a good thing, but just because doing nothing seemed like a really bad idea in 2008 and 2009. My guess is that it smoothed the trough of the recession but didn't make it end faster (it's not solving the structural economic problems or healing the economy, it just helped staunch the bleeding at the time) or put the recovery on a better footing. And I think now the debt worries that are partially exacerbated by the spending are creating a hangover that is affecting economic prospects also. But I do think that it's a good example of how bad government is at effectively allocating resources. They literally could have cut a $50k check to each of the 14 million unemployed and would have been better off financially. Plus, kind of disingenuous to release a report on a Friday before a long weekend ...."

Me (I know, I have logorrhoea ... even in email) -

"So I am also in favor of stimulus (I guess that makes me a Keynesian - I just think that the majority of the evidence that I can see suggests that stimulus is the key to ending recessions, and I think the stimulus should have been bigger) but putting that aside, since we are both agreeing on it for now, I think that your overall comment is mostly right, although I think I disagree some of the things you said. Where we agree is that I think that you are right about the inefficient allocation of resources, and I would continue to say that despite why one thinks the resources are allocated inefficiently - I for instance would likely argue that because of Republicans 1/3 of the stimulus devoted to tax cuts was wasted and would have been better off as more aid to states to prevent teacher/fire fighter lay offs, but that is only my perspective and I think a credible argument can be made for many (not all) different ways to allocate resources - anyway, whyever the money was spent badly, I think that our government, run by people who are pandering to special interests and to the mob and massively undereducated about the majority of the things they decide on, is inherently inefficient.

I suspect that the founding fathers had no concept that government would become so large and complicated (this is either an argument for smaller government or an argument for the government to become larger by necessity of a more complicated world) and that the structure they would have set-up today would look vastly different. However, I would ask, given today's government and world, is there a better way that we could have done it.

We disagree is the efficacy of the stimulus (although I think this might actually be a semantic argument) - I think that it worked (in that it not only stopped the bleeding but started healing the economy) and not only smoothed but prevented the trough of the recession from being much deeper, it seems like you think that it was basically a band-aid. If you take the report at face value, then what it suggests is that the stimulus did in fact heal the economy, that economic growth from January to March 2011 was anemic, at 1.9%, but without the stimulus there would not have been growth at all. One could argue that we would have come out of recession eventually and that if the stimulus just hastened that it was only patching something that would otherwise have healed on its own, but that is like saying that using anti-biotics does not cure bacterial infections, it just holds them back and eventually the healing happens on its own.
I totally agree with you that the debt worries that are partially exacerbated by the spending are creating a hangover that is affecting the economy.

However, I think that your argument about how the government could have simply cut a check to 14 million people is wrong (it is also straight out of the Weekly Standard and is the popular right-wing talking point of the week p:// I think it is wrong because the stimulus did a lot more than just create jobs, it funded infrastructure projects, gave a lot of aid to states, went to education investments, and a lot went to tax cuts. I could go on here, but I sound like a left-wing talking point - in fact I sound like the White House (here is a quote from them).

"The Recovery Act was more than a measure to create and save jobs; it was also an investment in American infrastructure, education and industries that are critical to America’s long-term success and an investment in the economic future of America’s working families. Thanks to the Recovery Act, 110 million working families received a tax cut through the Making Work Pay tax credit, over 110,000 small businesses received critical access to capital through $27 billion in small business loans and more than 75,000 projects were started nationwide to improve our infrastructure, jump-start emerging industries and spur local economic development."

While this quote is quite a bit of propaganda, it also makes the point that the stimulus did a lot more than just create jobs. So overall I absolutely agree that we could have spent the money a lot more efficiently, although I am not sure if it would be possible in the reality of the US today. But the idea that it was just 250K per job is not really accurate.

And in regards to releasing the report just before the long weekend - I think that the report shows that the stimulus worked, that it actually produced jobs (something that Republicans have been denying for years now), so you would kind of think that the administration would trumpet this news, rather than to hide it on Friday afternoon before a holiday weekend ... it makes it seem not disengenuous but rather truthful, as if they published the report when it came out. However, if one is inclined to see the administration in a negative light, I can understand how it would be seen as hiding something ... similarly, if one is inclined toward the administration in a positive way, one could look at things the way I do.

My friend -

"Wow - long reply. A couple of questions / observations:

1. Do you think the stimulus accelerated the recovery or just prevented a lower nadir? I.e. do you think the economy is better off today because of the stimulus or that it was just less painful than it could have been Mar 08 - present? I'm not sure if we're where we would be anyway, if we're actually very slightly worse off now, or if we're a little better. I do agree that either way a $770b intervention in a $14t economy over a couple years (so, what, 2.5% intervention per year?) is pretty minor.

2. Totally agree that sending a check to participants doesn't have the same indirect impacts as hiring construction workers to repave roads which then helps smooth transportation of goods and services and cuts down wear and tear on personal automobiles. But they would spend some of the money also. At the end of the day, government waste is economic stimulus also - money is neither created or destroyed, it's just spread differently through a relatively closed system. Mostly where my problem is is when the government puts up silly roadblocks to business that restricts economic activity. Please note that I do think some regulation (level playing fields, antitrust, stringent environmental protections, etc...) are totally reasonable and long term supportive. So the difference between me and Rush Limbaugh is our relative, totally subjective definitions of "silly" here.

I'm totally prejudiced against this administration and I fully acknowledge it. I was an ardent supporter of the president from early in the primaries (and had been listening to his weekly podcasts and other media stuff since shortly after his breakout for the democratic convention in 06 or whatever). He has more than not lived up to my expectations - the reasons I supported him seem to have been largely thrown by the wayside either because of base politics, ineptitude, or lack of leadership. I'm just really disappointed that we don't have Kennedy 2 in office right now, and actually it seems to me to be more Carter 2 than even a George Bush Sr. or some middling version. I'm voting for Jon Huntsman (who has no shot in hell at making it through the religious base-pandering comically terrible republican primaries).

4. I still think the reason they quietly released the report on Friday and they haven't been trumpeting it so far this week (unless I've just missed it) is that they see it as either being unfavorable/below expectations, or politically risky in some other way.

Me -

"I do think the stimulus accelerated the recovery, but the difference between a lower nadir and an accelerated recovery is tough to quantify. Also, all of this is tough because its not like we have actually evidence of 'what would have happened'. But I look at things like Japans lost decade and I think without the stimulus we would have kept losing jobs and had much longer negative growth - I mean we started losing less jobs pretty quickly after the stimulus was passed in Feb/Mar of '09, so that suggests the stimulus accelerated the re-growth of jobs (see chart). Also, if you look at the chart, the recovery from the relatively small recession in 2001 took about 2 years without stimulus, while the recovery from the 2008 recession (in terms of re-starting positive job growth) took about as long despite the much larger recession, also suggesting the stimulus did something. And I think that some good evidence for the stimulus accelerating the recovery is what is happening to the economy right now. It is slowing down and doing worse, just when the last dregs of the stimulus left the economy. However, I do think that it is possible to logically argue the stimulus was just fortuitously timed and that while it maybe arrested downward growth, we were already close to nadir and would have been growing anyway - and I acknowledge that I am totally oversimplifying the picture, because surely many of the things the government did were essentially 'waste'.

You are totally right about money functioning no matter how it is spent, although I would say that 1) if the money is saved and not spent it is very ineffective stimulus (this has been a lot of my problem with the bank bailout, that there was not some requirement for the banks to reinvest the bailout into the economy) and 2) while all money that is spent comes back into the economy, there are studies that show that things like food stamps (provide 1.61 of stimulus per dollar spent) are much more effective means of stimulus than many of the things we spent money, meaning (back to your original point) that government spending is highly inefficient and that the government could have gotten us a lot more bang for our buck, so to speak.

I have to say, not working in the private sector (per se) I am a bit out of my depth with my perspective on regulation (still think Rush is nuts though). I probably think more of regulation than you do, precisely for that reason, but I agree that much of what government does restricts free economic growth. But there are instances where the public good and policies good for economic growth conflict. i.e. regulations for much of the energy sector - oil spills and coal mine collapses are bad for the public, but requiring massive safety regulations, inspections, retrofits not only costs those companies money, it also slows down our energy supplies, messes with the energy futures markets - particularly when the government is dithering about whether or not to have new regulations .... I think you are right when you say that uncertainty is very bad for growth, in fact I think the impact has been marginalized because people like me generally consider it only a republican talking point and not a real thing. So I think the major place that reasonable people (i.e. not Rush, Bachmann, Nader or Kucinich) differ about this is which regulations are important enough to the public good to enact despite their effect on economic growth.

As a side note, I also think the need for regulation is a case where a small number of private corporations who are not good corporate citizens give the corporations which are a bad name. I think a lot of private companies self-police, have good environmental practices, and are adequately controlled by market forces. But when companies get so big they can weather local, or even regional market forces, they necessitate the need for regulations which have a much more negative effect on all companies.

It is sad to me that you feel the way you do about Obama, not because you feel that way but because it is a feeling that is echoed by most people our age that I know. I am incredibly sad to have been mostly lost by Obama, I very much believed in him - and you never know, his resolution to this debt issue or his second term might redeem him and in 6 years we might be looking back on the most transformative president of our lifetimes. But, I don't know if I believe that any more and I have said to a number of people (probably including you), that I hope that the Republicans nominate some crazy person (Bachman) who has no chance of winning so that I can feel safe voting against Obama in an effort to support a 3rd party, because he has been tremendously disappointing to me as well.

I wish he was Jimmy Carter 2.0 (at least that guy had the guts to tell us to wear sweaters), he is more like Reagan 2.0, minus the communication skills - which is shocking, because one of the things I thought would be most amazing about Obama would be his communication skills as a former professor and such a great speaker - its not that he can't communicate, I seem to get him fine. Its just that somehow he does not seem to get his point across and inspire the energy he did during the campaign. If Huntsman was nominated and I truly thought that he is simply lying right now to get through the Republican primary (not sure that I do), I would vote for him in a second - but that to might be false hope, because I think he has was Obama had, the sense of newness, difference and professionalism we originally all wanted in Obama. What we really need right now is Eisenhower 2.0.

What struck me the most about this conversation - other than the fact that a) I ended up wishing for the reincarnation of a dead, republican WWII hero and b) I am really blessed to have such thoughtful friends with whom I can interact on such a high level - was how positive our interaction was in terms of respecting and learning from each points of view. I don't think I won him over, nor he me, but I do think we now have a better understanding of each others opinions, and through that, a (a least slightly) broader perspective on our national situation. I wish our politics was more like this and less like reality ...

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