Robert Reich on the Necessity of Obamanomics

For those of us who are "either not thinking hard enough or a Republican running for office," former Secretary of Labor, Robert B. Reich, has an economics lesson for us; see here.

I had a good chuckle over this:

You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging, the public sector has to borrow and spend to keep the economy moving forward.

You don't? Holy cow...this is essentially the defining characteristic of "orthodox" Keynesianism!

Look, maybe a case can be made for a deficit-financed government spending program. But surely, in making the case, we deserve better than this?

Do we not need to know first why the private sector seems reluctant to spend? If we have just lived through a period of "excess,'' might it not be prudent to cut back on spending? Or is it the role of government to replace private excess with public excess?

The collapse in private spending is primarily in investment. Why are businesses holding back? I have heard business people say that they are afraid to invest right now because they are so uncertain about the future course of government policy. Given this uncertainty, it is probably prudent to withhold investment, until it becomes clear where it may be most profitably allocated. And if this is a reason for depressed investment activity, this is an example of government failure, not market failure.

Or is it, as the "spend your way to prosperity" crowd would have us believe, simply a matter of "irrational" psychology? The private sector is evidently afraid to spend, for no good reason at all. This calls for bold government action. The government evidently knows that the fundamentals have not changed. Just charge forward and spend...and all will be well.

O.K., well here is a question: Spend where? If what we are experiencing is really just a psychologically driven "negative aggregate demand shock" -- the "demand side hole" suggested by Reich -- then how to explain the following data?

I presume that Reich would recommend targeting government money to plastics, motor vehicle parts, furniture, printing, and textile mills. The presumption must be that these sectors are declining for no good reason at all. I'm not sure how he would explain the expansion in semiconductors, communications equipment, computers, electricity, and oil and gas. How did these sectors miss being dumped into the great demand-side hole?

Nouriel Roubini (Doctor Doom)

According to CNBC (First in Business Worldwide):

Global markets have rallied "too much, too soon, too fast" this year but a
correction will not happen right away, as a cheap dollar will still encourage investors to seek higher-yielding assets for a few more months, leading economist Nouriel Roubini said Thursday. Roubini, one of the few economists who accurately predicted the
magnitude of the financial crisis, said the U.S. dollar will eventually recover some of its losses, but only in "six to 12 months from now, not any time soon."

I have nothing against Roubini; doomsayers are a dime a dozen (see my previous post). What I find incredible is how professional columnists at self-proclaimed "leading business networks" mindlessly genuflect at the alter of stopped clocks.

You've heard the old joke about how economists have successfully predicted 10 out of the last 2 recessions. Eric Tyson has a nice little piece claiming that Roubini is among these tireless prognosticators; see here. That's right, Roubini called the recession in 2004, 2005, 2006 and in 2007. As the old saying goes, even a stopped clock is correct twice a day. The puzzle is why there is such a large and persistent demand for stopped clocks.

A History of Hysteria

An interesting recurring fact of human history is the endless supply of doomsayers. One would think that this large supply would drive the price (wages) of these prophets of doom to zero. But from Isaiah to Al Gore, we see that this is not so. We are left to conclude one of two things: either economic theory is wrong; or there exists a large persistent demand for doom and gloom. Naturally, I prefer the latter interpretation. But if so, then evidently, we like having the shit scared out of us. I'm not sure why this is the case, but if so, the phenomenon deserves study.

Most of you are likely too young to remember the hysteria created by the Club of Rome in their 1972 report The Limits to Growth. Not sure what ever happened to these bozos.

I remember my grade 3 teacher announcing to my class that at current rates of air pollution, the world was destined to run out of oxygen in 10 years (1980). I spent the rest of that afternoon trying to design an oxygen tent that might save my family from this impending disaster. Today, I'm sure that students would be well-versed in the technique of sequestering government "stimulus money" to finance the endeavor.

But then my attention was turned to a more pressing issue: the coming ice age; see Newsweek 1975 The Cooling World. Back then, meterologists (aka the experts) were convinced that the globe was cooling; and that disaster loomed on the short horizon. While no one was sure of what was causing the cooling trend, there was a strong suspicion that industrialization (aka capitalism run amok) had something to do with it. All that pollution blocking the sun's rays; and so on.

Fortunately, we didn't have to worry about global cooling for long; it was soon supplanted by a much more pressing concern: Acid Rain. The culprit? You guessed it: industrialization. Never heard of acid rain? Don't worry about it.

The latest, of course, is global warming...oops, I mean "Climate Change." The climate changing...imagine that. The culprit? Do I even have to ask?

How are we to understand all of this? H.L. Menken had this to say:"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

One of my colleagues (Charles Crawford) had this to say: "Why is there such zeal for belief in global warming? I think that it taps into many different sources of the desire for power. Some think it will allow regulation of the evil capitalist system. Others see opportunities for new capitalist opportunities. Some feel it will put a crimp in the style of rising economics, such as China. Others with Puritan sentiments find it satisfying. It would be interesting to explore the desires for power that encourage belief in global warming."

Another one of my colleagues (John Heaney) offers this: "Guilt, as a feeling merited or unmerited, reduces a natural inclination to oppose bogus authority. It is amazing that more or less random unwarranted associations suffices to produce this feeling with effect.Climate justice, climate debt, climate reparations, climate colonialism.Almost certainly, these slogans, will be the permanent legacy of Copenhagen. So why worry about the science?"

I like this letter to the editor of the Economist Magazine, Dec 12, 2009 by Paul Reiter: "Sir-- Passion is the root problem in what you term 'the modern argument over climate change'. ('A heated debate', November 28th). You state for instance, that the 'majority of the world's scientists have convinced themselves' that human activity is the cause of climate change. I know of no poll that confirms this, but your choice of words is telling. In science, our interpretations of nature are based on observation, experiment and evidence, not self-conviction. Those of us who are dismissed, often derided, as sceptics have waited a long time for the chicanery behind the global-warming movement to come to light. But we should not blame scientists --however unprincipled--nor UN organizations, nor national governments. The true culprits are latter-day Nostradamuses, who, under their icons of cuddly pandas and polar bears, have misused science to stoke fear, guilt and a craving for atonement in the minds of the public. Governments have been browbeaten to respond to these catastophists, and some scientists, dependent on public money, have fashioned their behaviour accordingly. Nikolay Semyonov, a Soviet scientist and Nobel prize winner in chemistry, wrote that: 'There is nothing more dangerous than blind passion in science. This is a direct path to unjustified self-confidence, to loss of self-cricalness, to scientific fanatacism, to false science. Given support from someone in power, it can lead to suppression of true science, and since science is now a matter of state importance, to inflicting great injury on the country.' Semyonov was referring to the ruthless manipulation of Soviet science by Trofim Lysenko and other opportunists. In a similar vein, it is time we recognize that we are becoming prey to a new fanaticism, a religious fervour that runs contrary to rational society."

Leigh Palmer notes that "It should be noted that Paul Reiter (of the Pasteur Institute in Paris) is a respected scientist and a former lead author for the IPCC assessments. He left the process and had his name removed as an author because the IPCC had published scientific misinformation regarding malaria in the second and third assessment reports. He had quite a battle with the officials of the IPCC over this and his story bears listening to. You can hear him tell this story in his own words here. His story is not entirely unique, as other lead authors and lead reviewers* have resigned from the IPCC process for very similar reasons.The IPCC has a mission. It was formed by the UN pursuant to the United Nations Framework Convention on Climate Change to gather evidence linking anthropogenic atmospheric carbon dioxide to harmful effects on the world's human population. In effect the IPCC is a prosecutor in a criminal proceeding with copious resources at its command to prove carbon dioxide guilty. The prosecutorial metaphor fails, however, because there is no institutional defense. Carbon dioxide is being tried by a modern Inquisition."

I am inclined to agree with these assessments. Not that this makes me feel any better. I think we can all agree that we would prefer to live in a cleaner world; and that it is desirable that society takes steps toward meeting this worthy goal. Why do many influential people feel the need to resort to scare tactics and bullying to achieve this goal (assuming that this is their goal)? And why do so many of us fall for it, time and time again?

PS. Just came across this fun read: History's Hysteria

Climate Science Hanky Panky

The scientific community is buzzing over thousands of emails and documents -- posted on the Internet last week after being hacked from a prominent climate-change research center -- that some say raise ethical questions about a group of scientists who contend humans are responsible for global warming. Read more here: WSJ

Interesting development: Phil Jones, Director of the Climate Research Unit at University of East Anglia, is stepping down pending an investigation into the ethical conduct of his and perhaps other climate scientists' work on historical global temperature research; see here.

And now for something truly appalling (I sincerely hope that this is not true): Uh Oh -- Raw Data in New Zealand Tells a Different Story than the Official One.

An interesting piece in today's WSJ: The Climate Science Isn't Settled (by Richard S. Lindzen, professor of meteorology at MIT). See also: Climategate.

Thank goodness that the science of macroeconomics is settled and free of any politically-motivated hanky panky!

Fiscal Multipliers in War and in Peace

It truly is breathtaking how certain some people are of what they know to be true about the way a macroeconomy operates. The Krugmans and DeLongs of this world really make it sound like everything we really need to know has been settled long ago. Yes, the science is "settled" (where have we heard this before?).

I recently came across this piece by Brad DeLong: A Guide for the Perplexed. Consider the following quote:

But when fiscal boost was tried on a large enough scale, it certainly did the job. And it is reasonable to infer (with all the caveats provided by the CBO) that what is true in the very large will be true in the merely large as well. Eugene Fama says that it is theoretically impossible for fiscal stimulus to boost output: World War II proves him wrong. Robert Barro says that the multiplier is zero: World War II proves him wrong. Benn Steil says that Jacques Rueff in 1947 conclusively proved that fiscal policy could not boost employment: World War II proves him wrong.

Implication: a WWII style fiscal stimulus will "do the job" in a peacetime recession. WWII "proves" it. Egad...how does he know this? Why do I not feel as confident that this is the case? Am I truly that dense? (an invite to some rather rude comments, I'm sure!)

In any case, I decided to gather my thoughts on the subject and post them here for public review and criticism. The piece is a bit too long for a blog posting; so if you're interested, please click here. Looking forward to any comments.

I Don't Mean to Nitpick, But...

You have no doubt read the news. The WSJ headline reads: Economy Snaps Long Slump, GDP's 3.5% Rise May Mark End of Recession; Recovery Weak, Reliant on Stimulus. See here. I reproduce their figure at the right.

Evidently, consumer spending "led" third-quarter growth (note the implicit use of the theory that consumer spending "drives" growth -- it is hard to get reporters to think outside the Econ 101 box). The 1% figure is, I think, rightly attributed in part to the "cash for clunkers" program.

My nitpick is the following observation. Almost all of these expenditure components (save exports) consists of spending on both domestically produced goods and imports. What fraction of this 1% is accounted for by spending on imported motor vehicles and parts?

It would be more informative, I think, if all these expenditure components had imports subtracted off individually; rather that summing them all up and then subtracting off total imports (the -2% figure in red).

Given the way the numbers are presented here, we have no idea to what extent the government subsidy stimulated domestic production (which is what goes into the calculation of GDP), as opposed to total expenditure. In short, did the "cash for clunkers" program simply encourage Americans to purchase foreign vehicles; and, if so, to what extent might one argue that this program encouraged the domestic production of vehicles (as opposed to foreign production)?

Averting the Worst

According to Paul Krugman, we recently avoided a Great Depression because of Big Government; see here.

By any "reasonable" estimate, he says that the current stimulus program has saved up to 1 million jobs. Let's imagine that this is true. According to the government's own figures (see here), roughly 100 billion of the stimulus plan has been spent to date (the vast majority in the form of transfers; rather than purchases). So, if my arithmetic is correct, this translates into only $100,000 per job. Well done, government.

The thing that caught my eye in Krugman's piece was this statement:

All of this [Big Government not slashing spending the way the private sector does during recession] has helped support the economy in its time of need, in a way that didn't happen back in 1930, when federal spending was a much smaller percentage of GDP.

He is, of course correct in stating that the U.S. federal government was much smaller in 1930. And while he does not say so explicitly, I think he may leave the reader with the additional impression that, in addition to being small, the Hoover government actually chose to become smaller (mimicking the private sector in tightening its belt through hard times). The facts, as far as I can gather, seem to suggest something quite different.

According to this data, government outlays from 1930-33 increased by 9.0%, 19.4% and 46.5%, respectively. The latter two years in particular constituted classic deficit-financed expansionary policy (a policy, one might add, came under scathing criticism for recklessness by the Democratics in Congress, led by Roosevelt himself).

I'm not sure what to make of such data; but it does seem to dispell the myth of Hoover as a "do nothing" president.

It is of some interest, I think, to record how the economy recovered from recession prior to the era of Big Government. I seem to recall a fairly significant recession occurring in the early 1920s. Here is the data.
According to this data, the economy contracted by 3.3% and 4.3% in 1920 and 1921, respectively. The economy expanded by 4.5% and 11.4% in 1922 and 1923, respectively.

How did it manage this recovery after 2 years in the absence of Big Government? Why did a Great Depression not occur?

In fact, fiscal policy throughout this entire episode was significantly contractionary. How are we to make sense of this? Or, more precisely, I wonder how Krugman would make sense of this?

[Thanks to Doug Smith, for gathering this data]