CRITICS AUGUST 19, 2010
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This month, various contributors to TNR have argued about economic stimulus: It works, it doesn’t work, or we don’t know if it works or not. On August 17, Josef Joffe asserted (with caveats) on Entanglements that we know stimulus doesn’t work because (1) economic trendlines in the United States have not improved dramatically since it was instituted here, and (2) those countries that have spent a lot on stimulus don’t seem to be doing as well as some countries that have not. In a fairly jocular way, Joffe criticized his own analysis by saying, “[I]t is silly to draw so much conclusion from so little evidence,” but he nonetheless argues that “the prima facie evidence is pretty compelling” that “stimulus spending doesn’t work.” (Presumably, Joffe believes that he is providing useful evidence that demonstrates this—or else what is the point of the post?) Six days earlier, Kenan Fikri and Mark Muro reminded us on The Avenue that:
In November 2009 we and the National League of Cities (and many others) warned that steep state and local public sector cuts loomed on the horizon, and that these cuts could undermine any nascent economic recovery just as the federal government’s unprecedented stimulus spending wound down.
Fikri and Muro clearly believe this kind of spending has a stimulative multiplier effect beyond the specific jobs that would be cut:
How is it that the local government fiscal crisis threatens the entire economy’s recovery? Essentially because every local or state cut acts as a stroke of “anti-stimulus” by reducing demand.
Two days before Fikri and Muro’s post, Jon Chait argued that we can’t measure whether the stimulus had an impact or not:
The truth is that you can't prove whether the stimulus worked or not. You can try to reconstruct the effects of the stimulus (and other government interventions) as Alan Blinder and Mark Zandi did. But you're still making assumptions on the basis of economic models--mainstream assumptions shared by most economists, but assumptions nonetheless. Actually proving the case would require going back to 2009 and re-running history with everything the same but no stimulus. Since we can't do that, all we can do is guess.
So who in this debate, if anybody, is right?
Chait is right. The reason we don’t know whether the stimulus has worked in the United States is fundamental. And I believe it has significant implications for how we should approach public policy in the recession. Here is what I wrote in a recent article in the policy quarterly City Journal:
In early 2009, the United States was engaged in an intense public debate over a proposed $800 billion stimulus bill designed to boost economic activity through government borrowing and spending. James Buchanan, Edward Prescott, Vernon Smith, and Gary Becker, all Nobel laureates in economics, argued that while the stimulus might be an important emergency measure, it would fail to improve economic performance. Nobel laureates Paul Krugman and Joseph Stiglitz, on the other hand, argued that the stimulus would improve the economy and indeed that it should be bigger. Fierce debates can be found in frontier areas of all the sciences, of course, but this was as if, on the night before the Apollo moon launch, half of the world’s Nobel laureates in physics were asserting that rockets couldn’t reach the moon and the other half were saying that they could. Prior to the launch of the stimulus program, the only thing that anyone could conclude with high confidence was that several Nobelists would be wrong about it.
But the situation was even worse: it was clear that we wouldn’t know which economists were right even after the fact. Suppose that on February 1, 2009, Famous Economist X had predicted: “In two years, unemployment will be about 8 percent if we pass the stimulus bill, but about 10 percent if we don’t.” What do you think would happen when 2011 rolled around and unemployment was still at 10 percent, despite the passage of the bill? It’s a safe bet that Professor X would say something like: “Yes, but other conditions deteriorated faster than anticipated, so if we hadn’t passed the stimulus bill, unemployment would have been more like 12 percent. So I was right: the bill reduced unemployment by about 2 percent.”
Another way of putting the problem is that we have no reliable way to measure counterfactuals—that is, to know what would have happened had we not executed some policy—because so many other factors influence the outcome. This seemingly narrow problem is central to our continuing inability to transform social sciences into actual sciences. Unlike physics or biology, the social sciences have not demonstrated the capacity to produce a substantial body of useful, nonobvious, and reliable predictive rules about what they study—that is, human social behavior, including the impact of proposed government programs.
Amusingly, and as if on cue, the Wall Street Journal had an article on July 29 about the stimulus debate. The article opened:
Eighteen months after President Barack Obama administered a massive dose of spending increases and tax cuts to a weak economy, a brawl has broken out among economists and politicians about whether fiscal-stimulus medicine is curing the illness or making it worse.
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But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence.
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The Obama administration is stocked with heirs of Mr. Keynes, including academics Christina Romer and Mr. Summers. Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It’s 9.5% today.
Some Obama administration officials privately acknowledge they set job-creation expectations too high. The economy, they argue, was in fact sicker in 2009 than they and most others realized at the time. But they insist unemployment would have been worse without the stimulus.
Why does this matter? Because our inability to establish this causal relationship is inherent to the problem. There is no correct answer out there that we can access if we just listen to the people who “know what they’re talking about.”
I believe that recognition of our ignorance should lead us to two important, though tentative and imprecise, conclusions.
First, we should treat anybody who states definitively that the result of stimulus policy X will be economic outcome Y with extreme skepticism. And weaseling about the magnitude of the predicted impact such that all outcomes within the purported range of uncertainty still magically lead to the same policy conclusion doesn’t count; we should recognize that we don’t even know at the most basic level whether stimulus works or not.
Second, “boldness” in the face of ignorance should not be seen in heroic terms. It is a desperate move taken only when other options are exhausted, and with our eyes open to the fact that we are taking a wild risk. Actual science can allow us to act on counterintuitive predictions with confidence--who would think intuitively that it’s a smart idea to get into a heavy metal tube and then go 30,000 feet up into the air? But we don’t have this kind of knowledge about a stimulus policy. We are walking into a casino and putting $800 billion dollars down on a single bet in a game where we don’t even know the rules. In general, in the face of this kind of uncertainty, we ought to seek policy interventions that are as narrowly targeted as is consistent with addressing the problem; tested prior to implementation to whatever extent possible; hedged on multiple dimensions; and designed to be as reversible as is practicable.
What I am trying to describe here is not a policy per se, but an attitude of epistemic humility.
15 comments
A brawl has broken out among sicentists over whether the moon is made of cheese. It's an imprtant fight because there are many hungry people here on earth who like cheese. On one side are the sicentists who, through years of observation through telescopes, are certain that the surface of the moon resembles cheese. On the other side are the scientists who, while watching on television, observed that the astronauts who landed on the moon didn't eat any of it and brought back rock, not cheese, samples. This teaches us an important lesson about humility. We should not continue to spend billions on missions to the moon in search of cheese when there are other more certain options available. Wisconsin may not have the same appeal as trips to the moon, but we "know" that Wisconsin has cheese.
- rayward
August 19, 2010 at 7:01am
I think the government should buy cheese (or energy efficient cars or roads) because it is better to have bought and owned than just giving the cheese manufacturers money hoping for a cheesy economy.
- Nusholtz
August 19, 2010 at 7:41am
All that this article says is that it is impossible to know with any precision how effective the stimulus was, particularly since there are so many other factors to be considered. But it is impossible to deny that the economy is better off (at least in the short run) than if there had been no stimulus. The idea is not complicated -- if the government pumps money into the economy which is spent on payments to employees and purchases of goods and services, money will flow into the broader economy in the form of purchases by the employees and companies, etc. The formely unemployed truck drivers now have some additional money to spend at the grocery store, etc., and the grocery store owner can now afford a Florida vacation, , and on and on. Three important points: 1) It is not clear that the stimulus money has been used in the most effective manner to get things moving quickly and to keep things circulating within our economy. 2) Employment statistics while important, particularly on a human level, are not the sole measure of improvements in the economy. 3) I suspect that more than ever there is a great deal of "off the books" money flowing, which is not accurately measured by most statistics.
- PeteBeck
August 19, 2010 at 10:06am
All that this article says is that it is impossible to know with any precision how effective the stimulus was, particularly since there are so many other factors to be considered. But it is impossible to deny that the economy is better off (at least in the short run) than if there had been no stimulus. The idea is not complicated -- if the government pumps money into the economy which is spent on payments to employees and purchases of goods and services, money will flow into the broader economy in the form of purchases by the employees and companies, etc. The formely unemployed truck drivers now have some additional money to spend at the grocery store, etc., and the grocery store owner can now afford a Florida vacation, , and on and on. Three important points: 1) It is not clear that the stimulus money has been used in the most effective manner to get things moving quickly and to keep things circulating within our economy. 2) Employment statistics while important, particularly on a human level, are not the sole measure of improvements in the economy. 3) I suspect that more than ever there is a great deal of "off the books" money flowing, which is not accurately measured by most statistics.
- PeteBeck
August 19, 2010 at 10:06am
Mr Manzi, I have to see the comments/papers by the former laureates you quoted (Becker et al.) and see which models did they use for coming up with their conclusions. The whole point of a crisis is that there is a lot of uncertainty -of course, you can't predict how bad it is- but most of mainstream economics IS FIRMLY IN AGREEMENT that an economics stimulus package helps, and a lot, in the face of contracting demand. Chait made an error there, and that is something that you learn in ECO 101. Of course you can't rewind history, but that's not an excuse to be "extremely cautious" and doubt in the models that have been developed and tested by an entire field of professionals. Sure, adjustments to the best models will have to be made after this crisis, but c'mon, dithering in the face of a double digit recession is a perfect recipe for more economic uncertainty and for political disaster.
- candela
August 19, 2010 at 10:23am
"What I am trying to describe here is [a bias toward inaction in the face of disaster]." Gee, who'd have thought that a conservative would have the same prescription for the global financial catastrophe as he has for the global warming issue? "When in doubt, do nothing. P.S. One conservative's opinion is sufficient to indicate doubt." A government that refuses to create bold policy lest it create bad policy ill-serves the public it is sworn to defend. The last concern on anybody's mind during a collapse in demand and employment should be the federal budget deficit no matter how many zeroes it has at the end -- rent and grocery bills arrive every month, and thus carry a lot more urgency than the hypothesized effects of stimulus spending on private lending five years down the line.
- austinexpat
August 19, 2010 at 11:05am
Ah, Nusholtz, but that will that lead us down the slippery slope to where everyone is "cheesing" (ala South Park)? However, picking up from my post on the Joffee thread, I guess it depends on what we mean by "stimulus". Does anyone really think we would be better off had all of those (largely ungrateful it appears) public sector works had also lost their jobs?
- Nari224
August 19, 2010 at 11:58am
Nari writes "Does anyone really think we would be better off had all of those (largely ungrateful it appears) public sector works had also lost their jobs?" We've lost some 8M jobs since this recession started. The government cost to keep or save a job is around $200,000, so it would have been $1.2T to save all these jobs. For one year. Now, you could wonder how come the jobs we decided to save were union jobs. And perhaps that gets to the root of peoples frustration. The poor guy making $50K a year with no retirement gets laid off. The teacher with a $1.5M retirement package gets saved. Yes, perhaps that is part of the anger folks are feeling. it could be argued that it's insane to pay that much to create a job. It's better to create an environment in which the employer NEEDS to hire that employee and thus the job is created from demand. And perhaps there's something that can be done to instead make the environment more friendly to employers.
- seattleeng
August 19, 2010 at 12:24pm
Seattle - what does resentment have to do with whether we would be better off? It's utterly irrelevant to the question. Obviously the federal government is not going to be able to save everyone's job, and nor would we want it to for obvious reasons. However a non-trivial part of the stimulus kept people in their *existing* jobs, the "stimulatory" effect of which would appear to be very non-controversial. Or are you saying that had they all been laid off, this would have had no negative impact on the economy whatsoever, and that absent this part of the stimulus, the demand for employers to hire people that you speak of would magically have appeared?
- Nari224
August 19, 2010 at 1:00pm
Since: 1) we can't prove that stimulus works, and 2) the only way to pay for stimulus is to imprison those who don't pay the taxes to fund it, the correct course of action is to abstain from stimulus.
- karlwk
August 19, 2010 at 1:03pm
Seattle, it's curious that conservatives like you criticize Rahm Emanuel and his boss for using the financial crisis to pursue health care reform and create new financial regulations, because they are just seizing the opportunity created by a crisis to push through their long-favored policy prescriptions -- all the while musing that the economic crisis should be used as an opportunity to reform public sector wage and benefit arrangements whose reform has been one of your long-favored policy prescriptions. Or is it simply that your policy prescriptions are objectively admirable and correct while theirs are objectively mischievous and wrong?
- wildboy
August 19, 2010 at 3:01pm
Nari writes: "Or are you saying that had they all been laid off, this would have had no negative impact on the economy whatsoever, and that absent this part of the stimulus" If spending money to save 10% of the total jobs lost is a good thing, then why not increase the stimulus by 10X and save all the jobs? Looked at another way...we spent $150B in the first year of the stimulus. If all of that went to save jobs, and $200K per job saved, then that's 750K jobs saved. For a year. Not much. We've lost 6M jobs. How about an $8T stimulus to save everyone's job for the next few years? Or how about we just pay them $80K/year to exist and call them employed? That would be MUCH cheaper than keeping them employed. Nari writes "what does resentment have to do with whether we would be better off?" You don't see how the factory worker making $60K/year that lost his job might be a bit resentful that the government worker had his job saved, especially when that government worker is already being paid so much more than the private counterpart?
- seattleeng
August 19, 2010 at 9:37pm
seattle: No-where was anyone talking about the federal government borrowing $8T dollars to guarantee everyone's job. Although they are part way there, having saved a number of jobs on wall street and in the mortgage market (and obvious the auto sector). What I was asking about was the Federal government spending in a counter-cyclical fashion to offset the cuts the states are making as their tax receipts plummet. These are not jobs that are disappearing due to a collapse in demand; in fact in many cases demand for them is *up*. The borrowing required for this (considerably lower than the costs of the Bush tax cuts or either war) will be quite manageable, assuming the economy recovers. And if it doesn't, we have considerably bigger problems. And thus we are back to the original question - would we have been better off letting all of those jobs also disappear? Since you are normally pretty forthright when you disagree with something, I'm going to assume your dancing around the question and posing counter factuals and points that are unrelated to the economics indicates that you don't disagree, you're just not able to say so.
- Nari224
August 22, 2010 at 10:20pm
Manzi overlooks two points: 1) Government supplementation of consumer demand is in fact the orthodox and centrist position of basic macroeconomics in a debt-overhang recession like this one (and some other deep recessions, i.e. not the recession of 1982); it's the default position, and is only controversial among neoclassical economists who've been constantly wrong in their inflation predictions since 2008. 2) We actually do have good experimental evidence that stimulus works (in the appropriate circumstances), such as FDR's limited public spending that cut the Great Depression in half by 1937, followed by the partial resurgence of that recession when public spending was withdrawn that year, followed by a reduction of unemployment well below 'minimum' levels (i.e. eventually to 1%) from 1940, when war-spending tested Keynesian theory in recessions in earnest. So the theory is tested, and does work. Further evidence comes from Eisenhower's successful deployment of fiscal stimulus measures to combat the deep recession of 1958--which worked, until he withdrew spending on principle to avoid setting the precedent of being a spendthrift in his last year in office (the growth of 1959 settled back into a mild downturn lasting through most of 1960, allowing Kennedy to be elected on a mandate to manage the economy better by fixing monetary policy--which also has Keynesian effects). So, again, we have a test both ways: the stimulus worked when applied, resolved a major crisis, and caused economic damage when, for political and philosophical reasons, it was withdrawn six or nine months too soon. So there is scientific testing behind Keynesian responses to depressions in the US economy, even aside from the charting one can do on the relative success of the various European economies right now relative to their levels of austerity (which charts also clearly support gov't spending in the short term). The only negative to all this is the higher levels of government debt it leaves us with. For ideas about growing the economy at a sustainable rate in the long term, read someone like Joe Stiglitz, who has notions of what a long term economic policy for the US would have to look like.
- Curran1
January 31, 2013 at 10:44am
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PS - The only 'confusion' at TNR that reigns on this issue comes from Bill Galston, who should be fired summarily for the intellectual shallowness of his vision, its occasional disingenuousness as to what he's recommended previously, and his bias toward balancing the budget on the backs of the poor, all done through a comity in Washington that any non-brain-dead observer of our political system can see no longer exists and won't for the forseeable future; the right are just no longer willing partners in such a system, and have only succumbed to centrist policies when forced to by Democrats through an outside game (i.e. messaging and campaigning and calling them out for their unpopular positions) But I am digressing into everything bad about Galston's warped view of politics, here, when the important point is just that he is the only 'confusion' here at TNR aside from our in-house critic, Mr. Manzi, whom I find much more intellectually respectable. Keep Manzi on. Fire Galston.
- Curran1
January 31, 2013 at 10:50am