When it Comes to Stimulus, the Washington Post is Trigger Happy
My New Year’s resolution was to stay calm and just ignore the idiocy about economics that appears on the Washington Post’s editorial page, but I just can’t do it. The problem is that there are people who do take this stuff seriously. As a result, even if they began spouting creationism, it is still necessary to respond.
The immediate cause for breaking my resolution is the Post’s cautious acknowledgement that stimulus might be necessary to counteract the recession that it says may be coming. The piece is painful on several levels. First, they seem very proud to be citing three prominent economists who completely missed the housing bubble as their authorities on this topic (Ben Bernanke, Martin Feldstein, and Larry Summers). All three are very good economists, but this is sort of like rounding up the top advisors to Bill Richardson, Chris Dodd, and Joe Biden as your key experts for analyzing the Democratic primaries.The greater reason for pain is the absurd caution that the Post displays in its carefully measured attitude toward stimulus. The Post warns that we may not have a recession and it may not be a severe recession even if we do have one. (Note: economists do not predict recessions. Economists’ predictions of recessions are a lagging indicator showing that we are in fact in a recession.) The Post then warns readers that any stimulus “would also have to be offset by future spending cuts or revenue increases to avoid adding to the long-term deficit.”
I think that the Post meant “debt” not “deficit,” but who knows. Is the argument that the country should forgo stimulus and experience a long period of higher unemployment and slower growth because Congress can’t meet the Post’s deficit targets? I would love to hear how they convinced themselves that this one made sense.
Finally, there is the trigger. The Post endorses Martin Feldstein’s proposed stimulus trigger, which they wrongly describe as three consecutive months of negative job growth. (Elsewhere it has been described as a loss of jobs over a three- month period.) The latter trigger would have prevented any stimulus to counter the recession that began in March of 2001 until May of 2001. It would have delayed stimulus to counter the recession that began in June of 1990 until September of 1990.
But even more important than these delays is the absurdity that the Post is so worried about the possibility that we might have an unnecessary stimulus equal to 0.5 percent of GDP (the sum generally being tossed around in policy circles). Is there anyone who is worried that a stimulus of this size will overheat the economy? House prices are falling at a $2 trillion annual rate, is the economy really in danger of overheating? Given the relative risks on the two sides, it seems absurd that serious people would even argue the point.
Of course it is especially absurd coming from the Post editorial board. This crew was completely unconcerned about the damage to the economy from an $8 trillion housing bubble, but they are up in arms over the potential dangers from a $70 billion stimulus package. Arghhhhhhhhhhhhhhhhhhhhhhh, there goes my New Year’s resolution!
I always thought the stimulus was supposed to be automatic, as in a sharply progressive income tax combined with slightly overgenerous unemployment compensation.
January 13, 2008 7:55 AM | Reply | Permalink
Let's take the latest $70B for Iraq and use it at home. Problem solved.
January 13, 2008 9:01 AM | Reply | Permalink
Just to clarify:
The US annual military budget is roughly $700 billion, most of which (not all) is spent "at home" and on Americans serving abroad. Salaries and bonuses for a million people in uniform, civilians to administer military programs, and the procurement and maintenance of war material and munitions -- primarily (they tell us) to safeguard the fuel we pump into our vehicles and home furnaces.
Whatever US funds (as opposed to Iraqi oil money) are used to rebuild Iraq apply directly to what you've written. The way the administration keeps books who knows what this is.
Now if this US money would be spent on something productive instead of destructive, some projects that would improve life in the US, then that would be a positive step and probably (I'm no economist) be more "stimulating."
I'm not sure I've clarified anything.
January 13, 2008 9:41 AM | Reply | Permalink
If you want to provide rapid stimulus to the economy to lessen the immediate impact of a recession you'd put the money to direct use among consumers and not channel it through Halliburton or Blackwater or whoever we are bribing in Iraq.
Medium term, you'd put the money to use building schools or hospitals or whatever at home so all those construction workers out of jobs would have something to do other than joining the National Guard.
January 13, 2008 9:46 AM | Reply | Permalink
It would certainly good for the economy to spend the money currently going to fight the war on domestic uses, but the point of stimulus is actually increase spending -- we want a deficit. That would be the mantra that DC policy types would be saying right now if they understood economics, not "timely, targeted, and temporary."
January 13, 2008 9:19 AM | Reply | Permalink
This seems to be a theme running through the press. Here's the version from today's NY Times (front page!).
No Quick Fix to Economic Downturn
Surprisingly it's from Floyd Norris, who doesn't usually engage in this type of pontificating.
--- Policies not Politics
Daily Landscape
January 13, 2008 9:58 AM | Reply | Permalink
Let's see, what could we possibly do for both the deficit and the stimulus?
How about raising the gasoline tax by a nickel? Using that level of additional revenue as the guarantor, the feds could fund a change in the current infrastructure paradigm from privatization of roads to the expansion of the public system. If you want economic growth in particular areas, build a road there. There are common metrics (I don't know them, but perhaps there are a few consultants in this mix) for how much economic growth should be yielded by an infusion of (x) miles of new or improved roadway.
With state spending on traffic infrastructure at current levels, rebuilding unsafe bridges is beyond their capacity, and a fitting role for the feds and the highway trust.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
January 13, 2008 11:50 AM | Reply | Permalink
We WANT deficit! We WANT deficits! that is what stimulus means. Keep saying it until it sinks in.
January 13, 2008 12:10 PM | Reply | Permalink
Then it seems the The BushCo Republicans are your kinda guys....and the nickel a gallon price increase probably will seem like "the good old days" when the oil company price manipulation "summer driving season" pops the price at the pump a dime a week.
Given the crumbling nature of the transportation system, $70 bil is just the downpayment. So in a longer term to fix the worst-of-the-worst and the next tier down from that could give you red ink as far as you could see......
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
January 13, 2008 2:34 PM | Reply | Permalink
Yes Bush had deficits in 2002 and 2003 and FDR and just about every economist I know supports deficits as a way to boost the economy out of a recession. As far as I know, Bush also believes in gravity. I hope that doesn't cause progressives to reject the law of gravity.
January 13, 2008 3:43 PM | Reply | Permalink
The price of gas for next Summer is already expected to average $3.50 per gallon. The additional nickel does nothing for the economy, while it would lower the amount of money available for consumption.
This is a consumption-driven Recession. You don't want to lower consumption. You want it increased, and not on oil and gas.
January 13, 2008 4:30 PM | Reply | Permalink
Exactly my point. You also don't want consumption on the same worthless geegaws that the balance of the Bush Administration has been about. Open the taps to spending by the feds but not so much on the tax cutting but by direct injection into the economy that also does some long term good. Like repairing bridges. Building a dam. Resurfacing and widening roads. Maybe high speed rail on it's own tracks on the eastern corridor instead of it running on the freight tracks.
You know, the good 'ol WPA kinda stuff, including the funding of artists and writers.
Alphonse ( Al ) Kada
Iranians are fighting the Americans in Iraq so they don't have to fight them on the streets of Tehran
January 13, 2008 6:24 PM | Reply | Permalink
The Alaska "Bridge to nowhere" is not productive economically because there isn't enough population in Alaska to actually use the bridge, and it's not going to open any new markets.
Similarly, the purchase of new F-22 fighters provides jobs here in Fort Worth, followed by nothing economically productive. Instead, the new fighters will be another addition to the demand for increasingly rare and expensive fossil fuels. It's a government patronage operation, nothing else.
January 14, 2008 7:27 AM | Reply | Permalink
That one works like a charm. And, somebody has been chanting your mantra too, since we certainly have deficits as far as the eye can see.
Dean, you are a magician!
Hoppy in Sacramento
January 13, 2008 8:53 PM | Reply | Permalink
Well let's see. The last stimulus was tax cuts for the very rich. That worked so well.
If we gave money to consumers, they would spend it largely on stuff made in China. I'd much rather see a massive public works program to rebuild infrastructure with a requirement that US firms be employed. That way we would put money in workers' hands, but get something for it even if they do decide to buy more Chinese goods at Wal-Mart.
Here's another idea. Grants to localities to help people stay in their homes, provided they have made payments and could make reasonable future payments.
Finally, I'd ban collaterized debt obligations.
January 13, 2008 11:59 AM | Reply | Permalink
And tax hedge fund managers' compensation at ordinary income rates. And raise the top rate 1% a year for 3 years. And replace the 15% dividend tax rate with an exemption for the first $3000 of dividends (including mutual fund dividends) and tax the rest at ordinary income rates. There was something like that (a $600 exemption) when i started paying taxes in the mid-'60s and I thought it was a good idea. A real middle-class tax cut that encourages investing.
January 13, 2008 11:48 AM | Reply | Permalink
Ben Bernanke, Martin Feldstein, and Larry Summers all "missed" the housing bubble because it was to their benefit to miss it. Like the most significant cause of the housing bubble and the resulting credit disasters, Alan Greenspan, they were working support Bush's reelection in 2004 (note how the interest rate was held artificially low until after the election, and immediately increased starting in February 2005.)
Right now they have only "talk" to try to stimulate consumer purchases, but the consumer recession has already started and began to increase unemployment in December. (No, not yet official, but Merrill Lynch has already started acting on it.) Wall Street as a whole knows the Recession has already started, but they want it to be mild so as to minimize the Republican losses in November 2008 and avoid the populist rhetoric that the Democrats AND Huckabee are beginning to unleash.
It's a "There's no Global Warming" defense. They are delaying admission of the seriousness of the Recession as much as they can and for as long as they can, in hope that the lowering of the dollar will allow the export sector to grow enough to pull the U.S. out of the worst of the Recession. But exports aren't growing fast enough to counter the greater cost of oil as the dollar drops and oil prices increase.
The Post is one of the large corporations that feels threatened by the populist noises now coming from the politicians, and they also don't want to face populism. They are just another part of the corporate structure currently dominating the American economy.
There is not an official economist today in either the government or the fed who can be trusted, and probably none who look for government grants to fund their research. Those economists are the people feeding the misinformation to the Press, which the press is used to. Its about protecting the Reagan Revolution and the Republican Party, not about economics.
This next two years at least is going to be economically difficult for Americans. The lack of reliable information isn't helping a bit.
January 13, 2008 4:38 PM | Reply | Permalink
Rick B said:
Don't those 3 all support laisseze faire (unbridled)capitalism?
January 14, 2008 10:39 AM | Reply | Permalink
What's all this crying and moaning over a pending recession? Recessions are the natural follow-ons to and the appropriate cures of past economic stupidities and greedy self-indulgences. Let 'em rip!
In the absence of the 2001 recession Global Crossing would have circled the earth a hundred times over with "dark fiber." Lucent would have sold an internet router (on credit!) to every village on the planet. Warren Buffet would have been reduced to dumpster diving behind his local Burger King.
A few extra dollars for those temporarily unemployed? Yes, definitely! But folks; cool it! The sun'll come up tomorrow.
January 13, 2008 5:38 PM | Reply | Permalink
So recessions are natural and unavoidable events that simply have to be endured?
Crap. You said it yourself. The coming recession is a direct result of "past economic stupidities and greedy self-indulgences." It is both unnecessary and is highly destructive, like burning down the house to get rid of rats.
Your examples are clearly excesses, caused by one of Alan Greenspan's earlier stupidities as he set an earlier bubble into place and encouraged it for his own reasons. Global Crossing and Lucent should have met the top of their markets a lot earlier than they did, but the fed let them run for primarily political reasons, and the economy paid for it.
A few people got rich during the bubble, but a whole lot of people were badly hurt by the aftereffects. They won't recover, because our system has changed to make economic mobility the lowest in the industrialized world. The current situation, causing the Recession, is worse than the dot.com boom because there is no more economic slack for the fed to play jiggery pokery with to try to stave of the problems the way they did throughout the Bush administration.
You see, there is the fact that the Reagan Revolution has changed the distribution of money in our economy away from the middle class and towards the wealthy. As David Cay Johnston points out, the U.S. has abandoned the likes of the industrial nations of the world and is moving to an economic structure like that of Mexico and Brazil. A few very wealthy families, mostly a lot of poor families, and a small, struggling middle class. Welcome to Reaganland, the fantasy world created by the conservatives!
The housing boom was an economic trick - a patch - to try to reduce the political impact of the restructuring of the American economy into a Latin American mold, and it was a temporary fix that has failed as such patches ultimately do. The current Recession is the immediate price for that fix and for the clearly predictable results of the Reagan Revolution that is destroying much of the American middle class.
Everyone who has found they can't get a real pay raise anymore, and everyone who was suckered into refinancing their home to get the "excess" equity (created by the illusion of the fed's easy money and the elimination of regulation on financial providers like Mortgage brokers) out to spend to maintain the middle class life our economic structure no longer supports and now faces foreclosure needs to thank the Reagan Revolution.
This recession isn't a natural phenomenon. It is the direct result of the economic mismanagement that has resulted from trying to maintain the illusion that the U.S. is still one of the Industrial nations and not a Latin American economy.
Oh, yeah, and all those cheap goods from China that also maintain the illusion that we still have a vibrant middle class? That system has a "Use by" date on it, and the end of it is coming up. That's what the deterioration of the dollar and the rising price of oil means.
This isn't necessary. It is all a direct result of the Reagan Revolution in which the very rich take control of the economy and shut the rest of us out of the rewards. The Recession is just another symptom of the "Reagan Revolution" changes.
January 14, 2008 8:19 AM | Reply | Permalink
That editorial was one of the dumbest things ever written.
I guess I would qualify your assertion that "economists do not predict recessions"; some do. But the good ones generally don't, and not those the WaPo approvingly cite. They put an estimate, with caveats, on the likelihood of a recession; or, as has happened with several Wall Street economists, they have opined that the data is already showing recession.
This however, is just one of numerous WaPo errors. Like you, I find it hard to tell if they meant debt when they referred to "the long-term deficit"; it could make sense, at a stretch, but it is embedded within worse clangers that you have to assume the worst.
For example:
So the dollar is now responsible for fighting recessions? Okay, I won't be a literalist pedant, what they mean is that a fiscal stimulus would ease pressure on the dollar. Given structural deficits have put pressure on the dollar for the last 5 years at least - historic $/Euro rate here - how a larger fiscal deficit helps the dollar is a little obscure. And let's not begin to talk about the IMF austerity medicine that any emerging economy would be prescribed in the same situation.
This is straight out the wingnut lexicon. I give you this, from the ever-dependable stupid-traffickers at Newbusters:
Their definition of a recession is wrong. From the NBER:
Enjoy the irony... the WaPo, approvingly cites Martin Feldstein only to have his organization debunk their assertions.
At this point, the clangers become contradictory arguments:
And as you suggest, we will only know officially after the event if there has been a recession. So it is not only acceptable, it is in fact imperative, to point to signs we are in a recession - as Summers, Feldstein, Goldman Sachs etc all have done - and use that as a trigger for a timely stimulus. Even the Post agrees with this - "Any stimulus package would have to kick in just when economic data confirmed a recession ". (Economic data, technically, do not confirm a recession; the WaPo believes they do, but only because they have a mistaken understanding of how recessions are defined.)
So the WaPony is this: prepare a stimulus package designed to start six months after a recession has begun, assuming the whole world can agree it has begun (even though the NBER won't be anywhere near official confirmation). Except they want to follow the Feldstein formula of starting after three consecutive months of negative job growth, at which point the WaPo's own definition of recession would not have not been met.
And just to crown the stupidity - after 200 words of umming and arring about the merits of a stimulus package, the WaPo tells us we must "rely on the fast-acting Fed and its independent experts". To increase spending, to cut taxes, or both? I hope the WaPo will soon publish another editorial explaining how the Fed will pull off this constitutional coup de'tat.
In summary, the WaPo has an idea what is wants stimulus to look like, but has no clue about when it should start and is confused over who can bring it about.
Classic.
January 14, 2008 4:02 AM | Reply | Permalink
So, after all is said and done, what level of which sets of economic statistics and/or what level of agreement among which economists should we use to decide when an economic stimulus package is called for?
N.B. Since most recessions are relatively short-lived, anyway, and any stimulus package must be put in place early on to be of substantial prophylactic benefit, these "levels" must be reached and be apparent well before the recession takes hold.
January 14, 2008 5:43 AM | Reply | Permalink
I dunno, really. But I would at least try to make a coherent argument if it was my job to. Also, interesting that you say "most recessions are relatively short-lived"...
In my lifetime, that is true so far. But I know better than to use the past as a predictor of the future, and the wealth evaporating at the moment is, arguably, unprecedented; so I am in pessimistic agreement with Dean here.
January 14, 2008 7:58 AM | Reply | Permalink
The severity of the recession of 2001 was limited by Alan Greenspan lowering the interest rates and creating the housing bubble. The only thing that kept that recession "short" was continued consumption, but since consumers have not had a real pay raise in the 21st century, that consumption has come from the largely artificial increase in equity in homes and the loosening of standards for refinancing those homes so that consumers could get at that equity.
Alan pushed that as far as he could so that he could get Bush reelected in 2004, as is indicated by the unrealistically low interest rate the fed maintained until February 2005, when they started to raise the rate and set off the mortgage/credit crisis that has led into the current Recession.
Economists may not be ready to declare this Recession (I recall one economist explaining that the best they could do because of data collection lags was "predict" where the economy had been six months earlier, and even that is subject to a lot of revision) but the Finance people are already declaring this one. Merrill Lynch declared (to BBC - you may note that they didn't get an American organization to report it) that the Recession started in December, just before they informed the New York Times that they needed $15 billion in new financing because of their unexpected losses.
I wouldn't count on this recession being a short one. Only artificially-induced consumption kept the economy from a much deeper recession when the dot com boom collapsed, and now the housing bubble has similarly collapsed. Exports can't keep up with the price of oil, so they won't save the economy, and there is nothing internally within the U.S. economy left to build on.
Stimulus? First, the conservative chimera of tax cuts just give the wealthy more money to invest overseas where the returns are better, and any effective government stimulus programs aimed at consumption is going to be slow to get into place, and such fiscal policy is all that's left. Monetary policy to improve the economy will lead to additional inflation, something we are already going to see a lot of anyway.
Don't bet on this Recession being a short one. Politicians and their tame government economists are going to keep up the pollyanna talk as long as possible, but because of the restructured American economy there simply is no likelihood of a fast recovery this time. All the quick patches have been used up.
Any international efforts to keep the U.S. from going economically bad are, at best, unpredictable, but if our economy goes off the table, it depends on whether the rest of the global economy has "delinked" from the American economy enough for them to let us sink. I don't know much about that, but we may all learn soon.
January 14, 2008 8:54 AM | Reply | Permalink
Ellen,
don't worry, this recession will not be short and sweet. Losing $4 to $8 trillion in housing wealth hurts.
January 14, 2008 7:43 AM | Reply | Permalink
I understand that a stimulus package should be timely, targeted and temporary.
Is that correct?
January 14, 2008 10:41 AM | Reply | Permalink