Most telling, a reporter contacted the economists cited in the report as in one way or another supporting the Romney camp's claims, who responded like this:
Each of these sections include supporting documents from independent economists. And so I contacted some of the named economists to ask what they thought of the Romney campaign’s interpretation of their research. In every case, they responded with a polite version of Marshall McLuhan’s famous riposte. The Romney campaign, they said, knows little of their work. Or of their policy proposals.
The real point of controversy for me was this assertion by the four idiots:
The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved new car purchases ahead a few months with no lasting effect.
DeLong responded thusly:
Such policies are supposed to shift demand forward in time into periods where the crisis is acute from future periods in which, it is hoped, demand is less slack. When Mian and Sufi present their work, they characterize it not as showing the failure but rather the success of programs like CFC.
In actuality, of the studies done on the effect of the stimulus, 13 of 15 found it worked. Put another way, "a number of empirical studies" does not support the conclusion that the stimulus didn't work. In fact, the exact opposite is true. And for God's sake -- the textbook written by one of the authors of the study (Greg Mankiw) argues for stimulus in the event of recession (Mankiw's place in the study has been criticized by Professor Marc Thoma, who asked, "Why would someone undermine their professional reputation defending Romney's indefensible economic policies? What's the expected payoff?).
But more to the point, I'm still amazed at the continued existence of the "stimulus doesn't work" argument because it does -- clearly and effectively.
How do we know this?
First consider that the effect of fiscal stimulus during the great depression:
You'll notice that GDP returned to 1920 levels by 1937. That's a very positive effect.
Then there is the experience of China during the last recession, which spent about 1/3 of their GDP on stimulus, leading to strong growth rates.
And as for the countries that are in the middle of an austerity program right now? They're all slowing down or in recession (see the UK as a prime example). And about the "Baltic miracle" -- you might want to look at the data because the US economy is actually performing better than they are.
Here's the deal: counter-cyclical stimulus spending works. It worked in the Depression. It worked for the Chinese in 2008. The vast majority of studies (13 of 15 or 86.7%) say it worked. The opposite fact pattern -- austerity programs -- leads to contraction.
How much more data do you need?
Simon Wren-Lewis has this to say:
Now the quote comes from a paper prepared for the Romney presidential campaign. It is clearly political in tone and intent. As both academics are Republican supporters, it may therefore seem par for the course. But it should not be. The Romney campaign publicised this paper because it was written by academics – experts in their field. It allows those who oppose fiscal stimulus to continue to claim that the evidence is on their side – look, these distinguished academics say so.
It is one thing for economists to disagree about policy. It would also be fine to say I know the evidence is mixed, but I think some evidence is more reliable. It is not fine to imply that the evidence points in one direction when it points in the other. I say here imply, because the authors do not explicitly say that the majority of studies suggest stimulus is ineffective. If they chose their words carefully, then you have to ask whether ‘intending to mislead’ is any better than ‘misrepresenting the facts’. Was that the intent, or just an isolated unfortunate piece of bad phrasing? All I can say is read the paper and judge for yourself, or this post from Brad DeLong.
This is sad, because it tells us as much about economics as an academic discipline as it does about the individuals concerned. In the past I have imagined something similar happening in physics. It actually stretches the imagination to do so, but if it did, the academics concerned would immediately lose their academic reputation. The credibility of their work would be questioned. Responding to evidence rather than ignoring it is what distinguishes real science from pseudo science, and doctors from snake oil salesmen.
10 comments:
It doesn't take an economist to see that following in the footsteps of Europe (socialism, big government, big spending, etc) is not the way to go.
Regarding stimulus, you also must take into account the added dent, as well as the effect of the stimulus in the medium term. For the Great Depression, the govt added a huge amount of debt per unit of GDP growth. Plus, GDP collapsed in 1937. So the economy nearly had to start over again in 1938 from a GDP and unemployment basis, but with far more debt. The George W Bush stimulus did much the same. It kicked off a 5+ year boom cycle. It added a huge amount of public and private debt, the thing collapsed, and unemployment and GDP ended up worse than before the stimulus began, yet there was far more debt. So you have to weigh these longer term factors as well. You can just look at a few years of increased GDP and claim the stimulus was worth it.
Dear anon
Please read more carefully. I specifically referred to "counter-cyclical stimulus spending.:
Second Anon
1.) GDP didn't crash in 1937, although it did contract, largely because Washington attempted to balance the budget too soon.
The debt/GDP ration during the Great Depression was a fairly constant 40%, largely because GDP was growing at a 10% annual clip 1933, 1934 and 1935, and a 5% clip in 1936. That's one of the reason a strong spending program works so well.
Shouldn't the lesson from Europe be "No austerity" rather than "no socialism"?
Aren't the social democratic states of northern Europe doing quite well thank you?
The initial recovery from the Great Depression under FDR was indeed swift. Real GDP growth averaged 9.4% a year from 1933-37 and unemployment dropped from 20.6% to 9.1%. However, we know based on analysis by E. Cary Brown, Christina Romer, Barry Eichengreen etc. that the contribution of fiscal policy to the recovery was minor. It was primarily a monetary policy led recovery, initiated by the end of the gold standard.
Total government consumption and investment spending accounted for 10.8% of the increase in real GDP over 1933-37. Based on E. Cary Brown's estimates fiscal stimulus contributed less than 5% to the recovery during this time period. Eichengreen has estimated that the fiscal multiplier was 2.5 on impact and fell to 1.2 after a year. Thus a its level of contribution might be more than that, but not significantly so. This matches the fact that total government debt actually declined by a sixth as a percent of GDP during this period.
The U.S. in 1933-37 is indeed an example of a successful stimulus in a liquidity trap, just not of a fiscal stimulus.
"Monetary developments were a crucial source of the recovery from the Great Depression. Fiscal policy, in contrast contributed almost nothing to the recovery before 1942."
- Christinia Romer,
"What Ended the great Depression?"
Mark
I would disagree for the following reasons.
1.) According to the BEA, government spending accounted for following percentage contributions to growth in 1934-1937: 17.5%, 1%, 17,8% and -13%.
2.) There are several ancillary benefits to the government action, such as the increase in incomes from WPA style projects and the increased confidence this created, which in turn led to increased PCEs over the same period.
3.) Despite the traditional complaints from conservatives about government spending, private investment also increased smartly over the same period. This was a direct result of confidence in the overall demand situation, which was a direct result of the government working to solve the problem.
Hale,
I hate to get nitpicky, as I think agree with almost all of your other points, but in my opinion this is important.
1.) Your figures are close but not quite right, but that's a minor issue. Note that the progress in government consumption and investment was very uneven. Given Eichengreen's estimates of the fiscal multiplier at no point did fiscal stimulus account for even one half of economic growth and in 1937 it may have initially subtracted as much as a third of from economic growth. Given the quick decline of the fiscal multiplier from time of impact I think it is reasonable to say that about 10-15% of the total real growth from 1933-37 came from fiscal stimulus.
2.) Income is the flip side of expenditures, consequently the compensation (it is not considered a transfer) of the Federal Emergency Relief Workers (FERW) is already counted in total government consumption and investment. There's no need to count it twice.
3.) Indeed, Eichengreen has written on the role that confidence played in generating the recovery, but he attributes this mostly to monetary and not fiscal policy. Roosevelt considered monetary policy important enough that he repeatedly and extensively addressed the need to raise the price level in his early Fireside Chats. See for example this:
http://rortybomb.wordpress.com/2011/06/21/president-sets-a-price-level-target-in-a-depression-fdr-1932-edition/
In the final analysis, your disagreement is not just with me but several imminent economists who are actually quite friendly to fiscal stimulus.
Mark
Thanks for your comments. But I disagree with their conclusions on the matter
To Sadowski, the unemployment rate during the 1933-1937 period never got even close to 9%. It got better than 15% for only a month or two. That's what hte official data back then shows.
Now some on the political left wing have have claimed that those on some of the relief programs should be counted as employed, but those folks were only allowed to be on those relief programs for a maximum of 1 year, were putting in part time hours, if any, - at most 1-20 hours per week, and they were doing things like hand out pamphlets and rake leaves, if they did anything at all.
As for the 1937-1938 depression, industrial production plunged 30% and unemployment went back up to 25%.
About the 1933-1937 recovery, someone made the very correct point above that al the stimulus can't be credited for that entire recovery. Every other recession previous to that the economy recovered with no stimulus at all. The post-WW2, post-Korean war, and the 1957-1958 recessions (all were very deep), all recovered with no stimulus whatsoever. And to think that the economy after 1933 wouldn't have recovered at all without stimulus simply defies all logic. Note that there was the beginning of a strong recovery, an inventory rebuild, in 1932, before Roosevelt became President, but once everyone heard in late 1932 that Roosevelt would take the US off the gold standard, the economy collapsed again, hitting a new lower low. So the economy was at absolute bottom at the moment he took office. So all factories had to do was turn back on and there would be significant GDP growth.
Anon
1.) The unemployment rate dropped from 25% to 15% -- which makes the GD one of the fastest growing employment rates in US history.
2.) To argue that people who work and receive paychecks aren't employed is, well, stupid. Using your definition, people who are temporarily employed currently aren't employed, a method of classification which the BLS would disagree with.
3.) The GD was a credit deflation recovery -- an entirely different recovery than other post WWII recoveries, save the current one. Read the "Deft Deflation Theory of the Great Depression" by Irving Fisher for further information.
4.) IP returned to 1936 levels by 1939.
5.) The country had a recession because the government attempted to balance the budget too quickly with unemployment too high -- a mistake currently being made by the UK which has also led to three quarters of contraction.
6.) There is ample evidence that fiscal policy was a driving cause of the of recovery. Note my comment above for but a few salient indicators.
Post a Comment