There are signs that the economy might be recovering. This optimism may turn out to be unfounded. Or it may turn out to be justified. But the reason I mention that only $36 billion of the stimulus has been spent in the first 3+ months since the stimulus bill passed is to remind people that we were told that we needed to spend $787 billion urgently without discussion or thought to save the economy and that the reason it would work was because It—and "it" is the spending of this enormous sum of money—would create jobs. It would create jobs by stimulating aggregate demand in the face of a slump in consumer spending. If indeed the economy does recover—the so-called V shaped recovery, then it cannot be via this increase in aggregate demand caused by government spending.
UPDATE: The total spending as of May 22 has been adjusted upward from $35.9 billion to $36.7 billion. So please adjust the number in the above paragraph to $37 billion…
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Frankly, I am not sure what the terms economic recovery and economic downturn mean. What if people in a country affirmatively decide to consume less and AD falls, is this an economic downturn? Why are we in a downturn right now? What makes it a downturn and not a shift in the composition of the economy? It is a silly way to look at things, I think.
Jeremy, it's not the reduction consumption qua the reduction in consumption which makes the downturn. It's the fact that it occurs as a surprise to the country in general, and therefore causes disasters via the friction of restructuring large sectors of our economy. Unemployment is an obvious example of that.
Is it silly to think that large-scale unemployment is a negative thing, even if it leads to a more productive economy later on? I don't see it that way.
Prof. R. I'm disappointed in you.
Here goes:
A. we're not out of the woods yet
B. The presidents confidence and take charge attitude is reassuring the nation and giving investors confidence. So even if the money isn't spent yet, just the knowledge of it coming is enough to inspire confidence in the economy.
C. We need this in order to prevent another recession. That's right. No more recessions ever again.
Now, please cease questioning the pure motives of our selfless public servants or we'll have to haul you in front of congress for a little televised chat.
Jeremy P -
I think the point is that a lot of the fall in consumption now is not an "affirmative decision" as you state, and that's why it's considered a downturn. Much of the decline in consumption is because of increased unemployment – which was certainly not a decision of the workers. The burst bubble also reduced the wealth of households, which I think arguably cut into consumption in an involuntary way.
But it's an interesting thought. I don't know if such a thing – an affirmative decision to consume substantially less – is even a real prospect, so I doubt people have thought to hard about how to classify such a change. But certainly a substantial portion of the decline in consumption now isn't voluntary.
On Russ's post, I think this is exactly right. We'll only know in the future if the stimulus worked to resist or moderate a persistent slump a la Japan and the Great Depression. The uptick now is almost wholly attributable to the natural recovery of the economy, and the commendable work of Bernanke (I know, I know…). Maybe a tiny "confidence boost" associated with Obama, but I doubt that had much to do with it.
We do know, however, that even if we have reached the bottom of the downturn and things start picking up tomorrow, unemployment is going to continue to climb for quite a while after GDP starts to climb again. I'm personally very very skeptical of these "green shoots" arguments. I think it's way too soon to tell. So it may not be the bottom, but even if it is the bottom we don't know yet that we won't (1.) putter around near the bottom for years like Japan did, or (2.) even if we start climbing again, we know labor markets will be depressed for awhile afterwards.
So:
- To soon to tell what will happen
- Stimulus didn't do what we've seen so far
- Stimulus can still prove useful because we know labor markets will stay weak and a lot of the stimulus is specifically targeted to weak labor markets.
DAVE -
One good point and two points of wishful thinking
I have to admit that Obama is helping the economy over the next few years in one way. My wife and I are delaying our planned retirement 2-3 years in order to build an even larger nest egg. We need to protect ourselves from the higher than previously expected inflation we now foresee. So Obama's damned plans will force the Dewey household to remain productive for longer than we wish.
Younger folks may be happy to hear of our decision. But please know it won't change the total amount of our social security benefits you will fund.
daniel kuehn: "Maybe a tiny "confidence boost" associated with Obama"
Obama sure as hell hasn't boosted my confidence. I decided to delay buying a new car as soon as I learned the socialist was elected to the White House.
RE: "My wife and I are delaying our planned retirement 2-3 years in order to build an even larger nest egg. We need to protect ourselves from the higher than previously expected inflation we now foresee."
Yes – the counterfactual option out there of deflation on a fixed income does sound like it would have been a sweet deal. They really screwed you over on that one.
Exactly how high are you and your wife expecting inflation to reach?
RE: "Obama sure as hell hasn't boosted my confidence. I decided to delay buying a new car as soon as I learned the socialist was elected to the White House. "
Ummm… ya – I doubt this was really a substantial effect either. And I'm capable of admiting that without parading around that tired old accusation.
I am not saying that today is an example of voluntarily reduced consumption. However, why is a temporary increase in unemployment in and of itself a recovery? A recovery from a production structure that was inefficient and unsustainable? Law firms aren't hiring, but is this a bad thing? People are choosing to consume less litigation and are using ADR methods that may be more appropriate. How can an economist distinguish between unemployment created by changes in preferences from one that is caused by fear or "animal spirits?" The composition of the workforce is changing and probably becoming more efficient now during this "economic downturn." So why is this not a good thing or a recovery from inefficiency?
Isn't the economy somewhat like a process, and they government imposed changes like controllers?
That is, for a process controller, in a system, there are two basic adjustments. First the size of the adjustment, and second how long to wait before applying another adjustment. Too much adjustment too soon will cause a wild swing in the opposite direction.
So, it seems as though the system (the economy) is starting to turn but the full effects of the adjustment (the $786 B spending) has just started. Or, it may not have been needed at all. Therefore if full effects of the $787 hits but the economy didn't need it, something else will go out of control in the other direction.
Could that be inflation?
Jeremy P -
RE: "How can an economist distinguish between unemployment created by changes in preferences from one that is caused by fear or "animal spirits?" The composition of the workforce is changing and probably becoming more efficient now during this "economic downturn." So why is this not a good thing or a recovery from inefficiency?"
I'm not sure it's not considered a good thing. Recessions are instances of creative destruction – they do restructure the economy in a good way. I don't think this is denied by anyone. But unemployment implies that the adjustment is still occuring and people are suffering in the process. Unemployment also inefficiently destroys more jobs insofar as it reduces aggregate demand (which we've already been over).
But clearly recessions are good insofar as the restructure the economy and introduce creative destruction – that's not in doubt. And when people talk about fighting or preventing recessions, it's an issue of smoothing out the creative destruction over time, rather than letting things build up and burst. Those bursts – those deep recessions may be an instance of creative destruction, but they're also characterized by patently uncreative and unnecessary feedback loops.
And I'm capable of admiting that without parading around that tired old accusation.
…no matter how accurate it is.
Keith -
Short answer is yes – and that's the problem with thinking about the economy as a machine we can just tweak at will. We're way too likely to overcompensate.
But look at the stimulus relative to the shortfall in GDP. It's not a small stimulus, but it barely makes a dent in the shortfall. We may see moderate inflation out of this – and for reasons that have been reviewed all over the place that could be a good thing – that might be the side we WANT to err on. But relative to the size of the downturn, the stimulus isn't as massive as you're making it out to be (which is fine in my mind – we should be cautious because we're not very good process controllers).
And when people talk about fighting or preventing recessions, it's an issue of smoothing out the creative destruction over time, rather than letting things build up and burst.
Ooh, "smoothing", a pretty theory.
The V shaped recovery is only in the stock market. The stock market is NOT the economy and bubbles in the stock market aren't exactly unprecedented. The bond market is smarter and larger and flashing a giant red "INFLATION AHEAD" sign.
The stimulus – even if spent – is dwarfed by the activities of the Fed. We've had a tenfold increase in the money supply. The Fed is literally monetizing all sorts of assets by buying everything it can get its hands on directly or indirectly to prop up prices – and that's in addition to a Fed funds rate of zero.
RE: "We've had a tenfold increase in the money supply."
I'm going to have to call "BS" on this one.
Jeremy, I agree.
Stewart, I don't see unemployment as an inherently bad thing. In fact, I think the ideal society would be one in which very few people "labor" and most everyone else participates in the creation of luxuries or leisure. So putting people back to "labor" is not necessarily the answer. The answer, as Jeremy suggests, is a recomposition.
I take that back, methinks. I suppose if you start counting from far enough back, and ignore the fact that the economy has grown in the meantime, then the tenfold increase thing may be a reasonable statement.
But you really oughta clarify exactly what you're implying.
Dave,
"…please cease questioning the pure motives of our selfless public servants or we'll have to haul you in front of congress for a little televised chat."
I for one would love to see that. Russell, any way that you can get yourself hauled before Congress?
daniel kuehn: "Exactly how high are you and your wife expecting inflation to reach?"
We had been expecting 3% to 4% over the next 15 years. We now fear inflation will reach 6% to 7% within 5 years. The longer tax and spend Democrats retain control of the government, the longer we expect to see those higher inflation levels.
It's not the fixed income portion of our retirement that worries us. Private defined benefit pensions are a small part of our retirement plan. We expect Congress to continue adjusting social security benefits. But our equity holdings are likely to suffer if inflation impacts corporate earnings – that is, if corporations cannot adjust prices as fast as input costs rise.
daniel kuehn: "Recessions are instances of creative destruction – they do restructure the economy in a good way. I don't think this is denied by anyone."
We do not need recessions to trigger creative destruction. Inefficient firms lose customers even if boom years. Recessions tend to accelerate creative destruction, but I don't see how that is a good thing. When inefficient firms are contracting during boom years, it is much easier for displaced workers to find new employment. It is also much easier during boom years for the contracting firm's suppliers to find new customers.
I'm not arguing that recessions are preventable. I'm just saying that recessions – even your hypothetical "smoothed" ones – are not "good" for an economy.
Oh boy, deja vu all over again…
Sure it can. The markets already reflect the expected affects of this spending and that is what's driving AG.
John- If you are that sure of the coming inflation why not take a bear position on $ and make a lot of money? Or at least why not take a hedging position and undo the effect of inflation? You can do either one of those with a few clicks of a mouse. No need to postpone the well-deserved retirement.
DISCLAIMER: THIS IS NOT AN INVESTMENT ADVICE
John Dewey -
RE: "I'm just saying that recessions – even your hypothetical "smoothed" ones – are not "good" for an economy. "
I'm not saying that recessions are a good thing – I'm saying that creative destruction is one good thing that they do. In that post I also pointed out that recessions are bad precisely because the concentrated failures associated with recessions introduce feedback loops that worsen the recession with no conceivable "creative" upside. Trust me – I'm not saying recessions are good! But the question concerned the reallocation of labor as a result of recessions, and I think we can say that recessions are bad things at the same time that we say good reallocation happens during them. There's no reason economic phenomena have to be all good or all bad. Most often, there's a tradeoff.
EX-GMU-Student: "John- If you are that sure of the coming inflation why not take a bear position on $ and make a lot of money? Or at least why not take a hedging position and undo the effect of inflation?"
First, I am not sure of the timing and size of coming inflation, and so I'm hesitant to short the dollar. Too risky a strategy for me.
The major issue is not protecting the value of the dollars we now own. It's the effect stagflation will have on real equity returns over the next 30 years of our lives. As I explained earlier, we doubt that corporations will be able to grow revenues faster than inflation increases costs.
Lower earnings growth => lower real equity returns.
Lower real equity returns => lower distributions from our 401K's/IRA's.
daniel kuehn: "I'm not saying that recessions are a good thing"
Well, thanks for the clarification. After reading your 11:16:58 AM post, I certainly thought you were saying mild recessions are "a good thing".
John Dewey -
RE: "Well, thanks for the clarification. After reading your 11:16:58 AM post, I certainly thought you were saying mild recessions are "a good thing"."
Ha – only if you completely ignore the two sentences that immediately follow the sentence you decided to selectively quote. I swear, sometimes I feel like no matter what I write you're going to read into it what's most convenient to read into it.
Danny, you can dress it up in silk and call it your wife for all I care. The fact remains that the Fed hasn't stopped printing money at a furious pace since it began QE (a.k.a heavy money printing).
I'll spoon feed it to you. Since December 2007 the Fed has printed over one trillion fresh new dollars. The Fed's balance sheet exceeds $2.1 Trillion (compared to $874B in December 2007). The Fed has the authority and has stated an intent to buy an additional:
$1.25 Trillion of agency issued MBS
$200 Billion agency debentures
$300 Billion of Treasuries
$1 Trillion new TALF
How many trillions is that? Just counting the projected decline in the U.S. Fiscal balance and the actions the Fed has ALREADY taken, the intervention now stands at around 19% of GDP. If we add the authorized increase in the Fed's balance sheet over the next year, the intervention grows to 28-30% of GDP.
Then there are the Federal guarantees:
$1.8 Trillion to back stop the commercial paper market
$540 Billion for the Money Market Investor Funding Facility
$3 Trillion to guarantee Money Market mutual funds
$700 Billion to expand deposit guarantee
$1 Trillion to ensure the debt of assorted financial isnstitutions
$450 Billion in assorted other guarantees.
$400 Billion guarantee of Citigroup's and Bank of America's overstretched balance sheets
So, that's another 63% of GDP. So far, the response to this recession has been 12 times greater than the response to the Great Depression. And please please please don't come back with your usual "but the economy grew since then!". This is normalized by GDP, remember, so the expansion in the economy since the '30's is baked in.
But you really oughta clarify exactly what you're implying.
And maybe you ought clarify what you meant by this sentence:
Shortfall? That really is peculiar language used when discussing GDP. So, what did you mean to write there?
Compared to the Fed's actions, the piddly stimulus plan is just a drop in the bucket. It's just political show.
Methinks -
Wow – you're really in a bad mood today aren't you? There is no doubt the Fed has been expansionary. That's exactly what I consistently praise them for. I know that. My concern was over your "tenfold" increase in the money supply. That's insane. There has been expansion, but it hasn't been anywhere near a tenfold increase.
Then I gave you the benefit of the doubt because clearly we have increased the money supply by more than tenfold since the Fed began… but I'm pretty sure you were refering to the current crisis.
LCJ -
RE: "Shortfall? That really is peculiar language used when discussing GDP. So, what did you mean to write there?"
It's not peculiar at all – it's used a lot. The GDP shortfall is just the deviation from trend. The stimulus is very large, but not compared to the total shortfall was my point.
http://www.budget.house.gov/hearings/2009/05.21.2009_Elmendorf_Testimony.pdf
You see GDP shortfalls in monetary policy targeting discussion that use the Taylor rule too.
Figure 2 on page 3.
Bah – sorry. That was a bad link. put "_Elmendorf_Testimony.pdf" after the 2009.
>>The major issue is not protecting the value of the dollars we now own. It's the effect stagflation will have on real equity returns over the next 30 years of our lives. As I explained earlier, we doubt that corporations will be able to grow revenues faster than inflation increases costs. <<
But if you believe in a future stagflation then you are even better off! You don't need the growth in equity returns or good corporate performance to maximize the real value of your money. Just put it in a commodity fund and watch it grow big as stagflation happens! You will even have better purchasing power and bang for the buck than you would if the economy grew at a modest rate.
DISCLAIMER: THIS IS NOT AN INVESTMENT ADVICE
Unemployed labor. If people are only producing less because they want to consume less, then people don't report difficulty finding employment.
I understand your point. Defining "recession" as "falling GDP" is less credible in the future. Japan's labor force is already shrinking, and the China's labor force isn't far behind. Even the U.S. labor force will hardly be growing a decade from now, though it probably won't decline in the near future.
Serious demographers expect global population to peak and start declining by mid-century (hopefully within my lifetime). If they're right, labor force size declines much sooner.
Do we really expect total output to rise even while the population falls? Is that a reasonable expectation? Never mind changing attitudes toward consumption. Will fewer and fewer people consume more and more?
Recession is when your neighbor loses his job.
Depression is when you lose your job.
Recovery is when Obama loses his job.
I don't want to get too off topic, but…
I did a quick bit of math on how much of the stimulus has been spent as it relates to the curent economy. 37 billion in stimulus spent in a 14 trillion dollar economy equates to around one quarter of one hundreth of one percent.
A few weeks ago Paul Krugman made a comment in his NYT blog giving Obama credit for pulling the economy from the bring of unmitigated disaster. But only a few months before that, he wrote President Obama an open letter in Rolling Stone saying that in order to save the economy we would need 800 billion in spending PER YEAR.
Does anyone think Mr. Krugman just doesn't see the contradiction? Or has he become one of those policy entrepenures he so rightly deplored when he wrote "Peddling Prosperity"?
Jack of Spades -
RE: "Does anyone think Mr. Krugman just doesn't see the contradiction? Or has he become one of those policy entrepenures he so rightly deplored when he wrote "Peddling Prosperity"?"
If you want people to answer this question and don't mean it to be purely rhetorical, which blog post are you refering to? Krugman has been famously critical of Obama. I have a hard time he praised him without some serious caveats, but perhaps he did.
The longer tax and spend Democrats retain control of the government, the longer we expect to see those higher inflation levels
I don't even know where to begin on that one. Clinton handed off a surplus, and the surplus should have gone toward paying down the debt. Instead, Bush took the short-sighted view and lowered taxes… and then spent like a sailor in a whore house.
Servicing debt costs money. It's a tax.
As far as recessions go, a recession that adjusts for slack is a good thing. It's a sign of a healthy economy, and a lot of stuff gets done then. People and companies regroup, refocus, and reinvest. It's an economic douche.
This is not a slack-induced recession. The slack is a byproduct of this bubble-induced recession with a side order of credit crisis. The bubble was not housing, the bubble was debt.
These kind of recessions are not at all healthy. They may sweep up some of the benefits of a slack recession, but working down debt does not happen by refocusing, and it sure as heck doesn't happen by loading up on more debt.
Efficiency in this recession takes the form of downsizing. We would like to produce more and better things, but until customers balance sheets allow them to buy, then we must improve our own balance sheet by selling assets or cutting costs, and that means not buying stuff.
Once the balance sheet is restored, then growth will be moderated by wages, and that is a highly dependent on the employment rate. Not until unemployment is low will wages rise in the aggregate.
The poor will always have their revenge by not buying things, and that is why it is important to raise the standard of living for the bottom earners. Their rise fuels the rise of everyone else. Poor people don't save, they spend. If they saved, they wouldn't be called poor.
>>It's not peculiar at all – it's used a lot. The GDP shortfall is just the deviation from trend. The stimulus is very large, but not compared to the total shortfall was my point.<<
Hmm. I had never heard that term before. The link you provided does not work for me but I found the document through a search engine. The document only has the words "shortfall" and "shortfalls" in it twice apiece without giving it the concept of GDP shortfall any kind of context that i can find. Tell me what it means to you because I still do not understand what GDP shortfall is.
But look at the stimulus relative to the shortfall in GDP. It's not a small stimulus, but it barely makes a dent in the shortfall.
>>DISCLAIMER: THIS IS NOT AN INVESTMENT ADVICE<<
Nu-uh! On an Internet message board? Damned disclaimer! I was considering moving all my funds to commodities and seeing how it played out — thinking that if it didn't, I'd have a legal suit to bring against you. But your disclaimer spoiled all that wishful thinking.
Clinton handed off a surplus, and the surplus should have gone toward paying down the debt.
Clinton robbed Social Security replacing the "Trust" Fund with IOUs, and called the budget balanced.
Intergovernmental debt is still debt.
Poor people don't save, they spend. If they saved, they wouldn't be called poor.
You don't get rich by spending all your money.
Daniel Kuehn,
It was Krugman's op-ed "Falling Wage Syndrome", his exact comment was: "Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss."
(I'd link it, but I'm fantastically computer inept. Hopefully I'll start figuring these things out as time goes on.)
I agree that he has been critical of President Obama in general, although the general thrust of his of his critisism is that the Presidents economic policies have not been activist enough.
From Krugman's Rolling Stone piece, "You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround."
So my question is, given what Krugman has said in the past, how on earth can he seriously argue that Obama's actions are responsible for pulling the economy from the abyss?
Jack of Spades -
That does sound somewhat contradictory – I'd credit Bernanke more than Obama. But perhaps he's refering to the administration of the TARP program. As this post by Russ has highlighted, the stimulus obviously hasn't done much of anything to bring us to the point where we are today.
Thinks looking up? Really?
Don't worry, the Dems will fix it as soon as they catch on.
Right now they are sorta tied up surrendering to the Arabs, and trying to work out how to surrender to the Germans.
I smiled.
)
It's one quarter of one percent.
The "trust fund" has always been "invested" solely in special Treasuries (promises to raise more taxes later). Clinton isn't responsible for that.
It's more a like a political promise.
>>Nu-uh! On an Internet message board? Damned disclaimer! I was considering moving all my funds to commodities and seeing how it played out — thinking that if it didn't, I'd have a legal suit to bring against you. But your disclaimer spoiled all that wishful thinking.<<
LoL. I know it is silly, but can you blame me? There is always a lawyer who takes that case and by the time I defend myself I am ruined by the legal fees.