Obama’s So-Called Keynesian Stimulus Efforts Aren’t Very

The simple version of Keynesian economics suggests that if the economy is suffering from too little economic activity and high unemployment there are some policy options.  Specifically Keynes suggests there are three general kinds of policy options:

  1. The central bank (The Fed in the case of the U.S.) could lower interest rates and create money by buying bonds on the open market.  This is called stimulative monetary policy. It is supposed to work by making private sector borrowing more attractive and more profitable so that businesses in particular increase their spending on business investment goods like equipment and factories.
  2. The government could increase it’s budget deficit by borrowing more money and cutting taxes.  This is fiscal policy by tax cuts. It works by putting more cash in the hands of households and firms (increases their after-tax income) who then increase their spending.
  3. The government could increase it’s budget deficit by borrowing more money and directly spending the money itself, either by direct transfer payments to needy individuals, or by buying things like new dams or construction projects, or by hiring the unemployed itself. This is fiscal policy by spending.

There’s nothing to stop a country from pursuing all the above options simultaneously if it chose.  But not all of these options are equal in either effectiveness.

NOTE: This is old-style John Maynard Keynes style Keynesianism, not the  “New Keynesian” theories that have dominated some academic circles in the last couple decades. It’s also based on the real thing, not the caricature that it’s opponents paint which is usually without foundation. 

NOTE 2: It’s really not a good idea to try to simplify Keynes.  When you do, you’re likely to over-simplify and really miss powerful insights and nuances.  Nonetheless, I will plunge ahead with full knowledge of the risk.

The real richness of Keynesian theory though lies not just in these prescriptions, but the analysis of when to use which one, whether it is likely to work, and under what conditions.  The first option, monetary policy, is to be preferred in cases of  mild recessions when interest rates are “normal” and the slowdown is largely for mild, temporary factors such as an outside economic shock. Monetary policy is quick and easy to implement. It’s also relatively easy to reverse course when the time comes.

Keynes had two key insights about monetary policy though that are highly relevant to our present situation.  Monetary policy can be become impotent if interest rates drop to near zero and we get into a liquidity trap.  This is when people and firms become fearful of the future and come to expect continued weakness or even GDP declines and deflation.  In a liquidity trap, people just sit on money rather than spend or invest it.  Monetary policy is relatively ineffective in such cases. We have been in a liquidity trap since late 2008 and that’s why the record 3 years of a virtually zero Fed Funds interest rate and The Fed’s QE1 and QE2 programs haven’t worked. Liquidity traps aren’t common, but they do exist and they aren’t extinct.  We were in one in the 1930′s Great Depression and Japan has struggled with one for the last 15+ years.

Keynes also had insights about the two fiscal policy approaches, tax cuts vs. increased spending.   In particular, tax cuts will only be effective to the degree that households and firms actually spend the money.  If they use the money to pay down debts or to save, then it really won’t improve conditions.  Later research in the 1950′s and 1960′s strengthened these insights. Later research showed that it also makes a big difference who gets the tax cuts and whether they think the tax cut is permanent.  Temporary tax cuts are much less effective than permanent ones because people tend to save them more.  Also, high-income individuals tend to save more of the tax cut (proportionally) than more desperate lower-income folks. Finally, later research showed that when a recession comes about because private debt got too high, then tax cuts are least effective.  Notice a pattern here?

The fiscal policy “stimulus” efforts that we have pursued since the Great Recession began have been very, very heavily tax-cut oriented.  Bush’s original stimulus effort in early 2007 in an effort to “nip the recession in the bud” was all tax cuts.  The Feb. 2009 stimulus bill of Obama (the ARRA) was between 40% and 50% tax cuts.  The meager effort passed in Dec 2010 was all tax cuts. And now, the proposal is again very tax cut heavy.  Not only have the fiscal stimulus efforts been heavily tax cut-based, but the cuts have temporary cuts targeted at either high-income folks or only offering a meager amount to low-income folks.  Further, we still have a huge private sector debt overhand that people want to pay down before they spend more. In sum, the dominant response which many have labeled as “Keynesian” really hasn’t been what John Maynard Keynes suggested. Many have asserted that “Keynesian policies don’t work” and cite our weak economy despite several fiscal policy stimulus attempts as proof.  But that’s not really a valid test.  It’s like claiming some physician is a total quack because you took pills like he recommended but you didn’t take the exact same pills as he recommended. You took something else. Now you’re still sick.  It’s not the physician’s prescription that failed, it’s your refusal to follow the prescription and the diagnosis that failed.

Critics will counter with a “yes, but there was still some spending stimulus in the Obama bills and our failure to fully recover is proof the fiscal spending as stimulus prescription is quackery.”  But have we really had an increase in government spending anywhere near large enough to fill the gap?   Let’s look at some trends (courtesy of Brad Delong):

We simply have not expanded government purchases as a share of potential GDP in this downturn:

FRED Graph  St Louis Fed 4

 

The graph shows the relative changes in share of GDP of four key portions of GDP: exports, business equipment investment, government purchases, and residential construction. (everything in the graph is scaled relative to 2005 -that’s why the lines all meet at o in 2005).  The whole Keynesian idea is that if exports, business equipment investment, or residential construction go down then government purchases should go up and vice versa.  That hasn’t happened at all.  Instead, government purchases has consistently declined since 1995!.  In other words, actual changes in government purchases have not only not been a stimulus, but they have been contractionary.  Government spending policy has been contractionary for over 15 years!  We didn’t notice it because strong increases in business equipment investment and housing were doing the stimulating prior to 2006. In the period 1995-2000, it was probably appropriate in a Keynesian sense to have declining government purchases and a contractionary policy – it was countercyclical to the dot-com boom and the housing boom.

But after 2007, residential construction collapsed. For awhile in 2009 both business equipment investment and exports declined sharply.  The only appropriate Keynesian response would have been a very, very large government purchases program.  But we didn’t do that.  Instead, the so-called 2009 stimulus bill was barely enough new spending at the federal level to offset the declines and cuts at the state and local levels. Overall, government spending did not increase. It went neutral for a couple years. But in late 2010, we resumed the march to contractionary policies.  The ARRA wound down.  State and local governments accelerated their budget cuts. And Washington became pre-occupied with imaginary threats of impossible debt crises at some point 10 years from now.

To continue the earlier physician and disease metaphor, we did try a little of the prescription but we took too little.  It’s as if we went to the doctor, the physician diagnosed a very severe infection and prescribed heavy doses of anti-biotics.  We went home took a lot of aspirin instead and only a couple of the anti-biotic tablets.  Now folks want to blame the doctor and his “failed prescriptions” when we didn’t take them.  None of this is what Keynes or 1960′s style Keynesians would have recommended. To conclude that Obama has tried Keynesian policies and they have failed is dead wrong.  The policies have largely failed to stimulate and re-ignite growth, but they weren’t Keynesian.

Where Are or Were The Jobs?

With the all the alleged concern in Washington now from both parties about job creation, there’s something that’s missing in much of the debate: facts.  So let’s take a look at some.  I really like graphics like the one below.  They’re complex and take quite some time to read and fully absorb what’s there, but they pack a lot of information into a small space.  They’re info-dense.

We hear from the left a lot of talk about “good” vs. “bad” jobs.  Often what they are referring to is the relative wage level of the jobs.  In general, manufacturing and government jobs are “good” because they tend to have slightly higher than average wages*.  Education and health services jobs are a mixed bag with a lot of variation.  Doctors, nurses, and admins do very well.  Home health aides and assisted living workers not so much.  Teachers are either good or bad depending on the state. Leisure and hospitality are generally panned as below-average.

From the right we hear claims that heavily unionized sectors like motor vehicles, parts and manufacturing are holding down growth and killing jobs.  We also hear political conservatives claiming that excessive growth of the government sector has somehow prevented the private sector from adding jobs.

We also hear from the left that it’s lack of demand that is keeping unemployment high.  The right like to claim the unemployment is structural – we have the wrong workforce with the wrong skills.

But what’s really happened?  How have the different policies of Bush and Obama (to the degree they’re different – they aren’t as different as some think) affected the employment picture?  Let’s look a this graph from David Altig, Senior VP at the Atlanta Federal Reserve Bank as posted at macroblog.  It helps to click and enlarge the graph in a new window/tab.

Click to Enlarge

First, let’s examine how the graph is structured.  As always, it’s important to make sure we understand a graph’s axes first.  Horizontally, we have the average monthly change in employment in percentage between Dec. 2001 and Oct. 2007.  This period covers all of the non-recession portion of the G.W. Bush administration.  Industries to the reader’s right grew strongly and thrived under the Bush administration’s policies.  Industries to the reader’s left shrunk. No growth is the zero or mid-line. Next, the vertical axis shows a similar measure, average monthly percent increase in employment, but it’s for the period of July 2009 through Aug. 2011.  This is the non-recessionary months of the Obama administration.  Industries located high up grew under the Obama recovery. Industries low on the scale shrunk and cut jobs during Obama’s recovery.  There’s no tricks here of cherry-picking time periods – both axes cover only the “recovery” portion of each president’s respective time in office.

So looking overall, we have the four quadrants.  The upper right shows industries that have added jobs under both presidents’ recoveries. The lower left are industries that have been cutting jobs under both presidents. Upper left would be winners under Obama but not Bush. Lower right are those sectors that have been cutting employment under Obama but were big growth sectors under Bush.  Finally, the size of each bubble indicates the relative importance of the industry in terms of jobs.

So what can we conclude?  First there are few items that aren’t so surprising.

  • Under Bush, a lot of the employment growth involved construction and financial activities.  Not surprising. This is the Wall Street driven housing and mortgage bubble. Frankly we don’t need that big of construction sector, at least not if it’s focused on housing as it was.  We have too much housing already.  We do have needs for more construction of infrastructure and to the degree that housing construction workers are either in the wrong location or don’t have the skills for infrastructure construction (I don’t know – it’s not my expertise), then the low employment growth under Obama here represents a  structural unemployment problem.  But notice that industry isn’t that big.  Also, we probably don’t want to have Financial Activities come back as big as they were before.
  • The big winners under Bush were Education and Health Services and Professional/Business Services.  In education and health, health dominated.  Not surprising, health care spending has been growing and the population is becoming older and/or sicker.   The growth in professional/business services is probably not really very productive stuff.  A very, very large part of the increase in that area was the huge increase in security personnel and related-security contracting that has arisen from an increasing paranoid insecure society since 9/11.
But there are some items here which are surprising, or at least surprising if you’re believe the normal political rhetoric.
  • First, it was Bush who grew government employment.  Under Obama, government employment has been negative since the recession ended. Shrinking government employment is clearly the single largest drag on the economy. That’s not ideology or belief talking. It’s facts and data.
  • Second, the big reason why the Bush recovery was such a slow recovery for employment, considering the 2001 recession was mild, is that throughout the Bush administration manufacturing shrunk dramatically.  This was the result of globalization policies that provided incentives for U.S. manufacturing firms to locate production overseas or to buy from overseas manufacturers instead of making their own.  Fast growing companies like Apple and other computer companies prefer to design it themselves but to contract with foreign firms for manufacture. Obama has not turned the corner on manufacturing employment, but he has stopped the bleeding. For the U.S. to recover, this sector needs to have positive growth.  Given it’s size, it’s not necessary to rise to the top in percentage terms, but it needs to be positive which it isn’t now.
  • “Manufacturing” does not mean “autos”.  Manufacturing is much worse than Motor Vehicles and Parts.  Too often when politicians talk “manufacturing” they conjure a stereotypical image of auto manufacturing.  In reality, motor vehicles and parts, while not being a source of growth under either, has essentially held it’s own as neutral.
  • The Information industry is the one industry that has shrunk under both recoveries, although it’s not that large.  This largely represents true sectoral, innovation-driven change as the World Wide Web changes information technology.
Finally, let’s see what this graph says about the controversy over is unemployment structural (in which case we need training and incentives to work) or is it a lack of aggregate demand (in which case we need more stimulus spending).  I think the graph is relatively clear in this regard.  We have three very, very large sectors where there is no increase in employment under the current recovery: Manufacturing, Retail Trade, and Wholesale Trade.  These are the three that represent basic total spending.  Retail and wholesale trade are driven by total consumer spending. Period. Retail and wholesale also are very flexible without widespread specialized skills requirements.  When demand exists, they hire. When demand doesn’t exist they don’t hire and may layoff.  To me, the data indicates it’s clearly a lack of demand story that is hurting jobs in this so-called recovery. Reducing government employment right now, like this graph shows is being done, has repercussions in stopping employment growth in retail, wholesale, and manufacturing.

The Obama Jobs Proposal Is Less Than Stimulating

After over a year of Presidential and Congressional debate and sparring about how to reduce spending, cut deficits, and limit debts, the politicians in Washington have finally taken notice that we have a “jobs crisis”.  Specifically, we simply aren’t creating new employment fast enough to reduce our high levels of unemployment.

Timidity wrapped in strong words does not make boldness. The words on the teleprompter were bold and the President almost sounded passionate and concerned about jobs.  Unfortunately, in my opinion, this proposal is too timid. I see repeats of the errors of 2009 and the first stimulus bill, the ARRA.

First, let’s go over the details of the proposal.  The White House Fact Sheet is here. I’ll let Calculated Risk summarize the key parts for me:

1) Payroll tax cuts (approx $240 billion):

• Cutting payroll taxes in half for 160 million workers next year: The President’s plan will expand the payroll tax cut passed last year to cut workers payroll taxes in half in 2012 …
• Cutting the payroll tax in half for 98 percent of businesses: The President’s plan will cut in half the taxes paid by businesses on their first $5 million in payroll …

2) Schools and teachers / aid to states (approx $60 billion):

• Preventing up to 280,000 teacher layoffs, while keeping cops and firefighters on the job.
• Modernizing at least 35,000 public schools across the country,supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.

3) Other infrastructure ($75 billion)

4) Extend unemployment insurance benefits ($49 billion).

5) Helping More Americans Refinance Mortgages (there are no details yet). “The President has instructed his economic team to work with Fannie Mae and Freddie Mac, their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancing program (HARP) to help more borrowers benefit from today’s historically low interest rates.”

In total the whole package is estimated as a near $447 billion package of tax cuts and spending.  That sounds like a lot. And at first comparison it seems like a lot. The 2009 ARRA “stimulus” bill was approx. $780 billion spread out over 2.5 years. This “American Jobs Act” is supposed to be only a one year deal (part of the problem, by the way), so it sounds like it’s more in one year than the 2009 stimulus bill was.  But it’s not really.

For any government action, be it increased spending, tax cuts, or regulatory reform, to be a stimulus effect, it must provide a net change beyond what is currently happening.  That’s a major reason why this proposal fails as a stimulus.  Over half of the proposal, the $240 billion in payroll tax cuts provides no new stimulus beyond what’s happening this year already.  These payroll tax cuts, which should be called  cuts in funding for Social Security and Medicare, aren’t really a tax cut from what’s happening now.  It’s a proposal to delay the return to higher rates.  Payroll taxes were already cut temporarily for one year at the beginning of this year as part of the deal with Congress to extend income tax cuts for the highest-income bracket folks.  But that was only supposed to be a one-year cut.  This proposal basically extends that cut for another year and postpones the return to normal tax rate for another 12 months.  If these payroll tax reductions were enough to put people back to work in large numbers we would have seen it happen already.  We haven’t.  Deciding to delay applying the brakes as you had planned is a good thing, but it hardly qualifies in my book as hitting the accelerator.

In a similar fashion, the $60 billion in aid to states & local governments to help prevent teacher, police, and firefighter layoffs is a good and positive measure.  But it’s not really stimulus.  It’s a step that keeps the states and local governments from harming us further through their budget cuts.  I am concerned this only kicks the can down the road a little further, perhaps another 12-15 months, when state and local governments will repeat the layoff drive. Of course, if I were cynical, I’d observe that 12-15 months doesn’t really change the long-run growth picture for the U.S. but it’s enough to delay any second dip into recession until after the next presidential election.

We see the same dynamic in the extension of unemployment benefits.  Make no mistake, this is a seriously needed action for both economic and moral reasons.  But it won’t have a lot of stimulus bang – certainly less than the $49 billion sounds like.  That’s because it’s basically restoring the existing unemployment benefits that are expiring for the long-term unemployed.  Thus it will help prop up existing aggregate demand, but it’s not likely to deliver much new stimulus punch.

Part of the $60 billion  for schools and teachers (the White House doesn’t split it out) is aimed at infrastructure re-building for schools.  My estimate is that maybe it’s half of the $60 billion, or $30 billion.  That portion, along with the $75 billion in other infrastructure spending constitutes real stimulus.  It’s additional spending that will translate directly into new jobs. Those new jobs will then have a multiplier effect as these workers spend their money.  Unfortunately, both of these items together total maybe a little over $100 billion.  Even with estimates of spending multipliers on the high side at 2 or 3, it means a boost of maybe $200-300 billion in GDP.  But we’re in a more than trillion dollar hole of lost GDP potential.  So, yes, there’s some stimulus here, but it’s far too little.  Just like the 2009 stimulus bill was too small and too slow.

There are of course, some other items in the proposal.  I don’t see them having any effect.  There are proposals for some tax credits for small businesses to hire some businesses.  I don’t see that working.  Businesses hire because they are selling things, not because they can get a $5,000 tax credit.  There’s simply not enough aggregate demand for businesses to hire.  There’s also a pitch about helping Americans “refinance mortages”.  They tried this in 2009 and the program has been a miserable failure with very few refinancings done.  The incentives simply are wrong for the banks.  The proposal lacks specifics other than the President will “urge” agencies to do more.  I am skeptical.

So overall, I am disappointed.  Much of this stimulus proposal amounts to agreeing to delay the current contractionary policies.  That’s not the same as stimulus.   Too little. Too late.  And let’s remember, there’s not much chance that this Republican House of Representatives will pass much, if any, of this proposal.

President Obama’s Jobs Advisor Ships Jobs Overseas.

No wonder jobs aren’t being created.  The President listens closely to Jeffrey Immelt, the CEO of corporate welfare recipient large multinational General Electric about jobs policy.  So what’s GE doing about jobs?  Bloomberg reports:

General Electric Co.’s health-care unit, the world’s biggest maker of medical-imaging machines, is moving the headquarters of its 115-year-old X-ray business to Beijing to tap growth in China.

“A handful” of top managers will move to the Chinese capital and there won’t be any job cuts, Anne LeGrand, vice president and general manager of X-ray for GE Healthcare, said in an interview. The headquarters will move from Waukesha, Wisconsin, amid a broader parent-company plan to invest about $2 billion across China, including opening six “customer innovation” and development centers.

The move follows the introduction earlier this year of GE Healthcare’s “Spring Wind” initiative to develop and distribute medical products and services in China, GE said in a statement today. More than 20 percent of the X-ray unit’s new products will be developed in China, LeGrand said.

Read more: http://www.bloomberg.com/news/2011-07-25/ge-healthcare-moves-x-ray-base-to-china-no-job-cuts-planned.html#ixzz1UjwUi6Yu

What Is Obama Waiting For?

I’m with Brad Delong and a host of others in wondering just why President Obama doesn’t simply do away with this whole silly, unnecessary debate about the debt ceiling.  Too much is at risk to continue this charade and silly theatrics.  Brad summarizes for us:

Does anybody have any doubt that any Republican President–Bush II or Bush I or Reagan or Ford or Nixon or Eisenhower or Hoover or Coolidge or Harding or Taft of Roosevelt–in Obama’s current situation would not hesitate but would use one of the many, many technical fixes to the debt ceiling problem, just as Clinton used a technical fix when he faced the same problem in 1995-1996?

No.

What Obama is thinking remains incomprehensible: a riddle inside a mystery inside of an enigma. But Michael Tomasky attempts to read the tea leaves:

President Obama Should But Won’t Raise the Debt Ceiling Unilaterally: Barack Obama surely has to be thinking hard about invoking Section 4 of the 14th Amendment, unilaterally raising the debt ceiling, and getting on with it. With the House Republicans now rejecting a proposal (Harry Reid’s) that is 100 percent cuts and no revenues, there can be little question in the minds of most non-Kool-Aid-swilling Americans about the identity of the unreasonable party. Indeed it could be argued that acting unilaterally now is the only responsible move. Bill Clinton… would pursue this course. And yet one senses the president is highly reluctant to do it. Why?

Three explanations strike me as plausible….

The first reason would be the straightforward and obvious one that he and his handlers fear the political repercussions. Some Republicans, and certainly the right-wing noise machine, will crow for impeachment. Obama and his White House are not exactly a group that itches for a fight. They would be dragged perforce into a partisan mud-wrestling match, which Obama has proved time and again he doesn’t want. And there are some legitimate legal questions surrounding the use of the 14th Amendment…. But in fact, this would in many ways be a gift to Obama. Calls for impeachment would likely perform the nifty trick of getting both left and center on his side….

The second reason Obama… really believes—still!—in civic-republican notions of government as an arena for reasoned deliberation. That he could still think this is akin to a child believing in Santa Claus until he’s 15—but apparently he does…. From this perspective a unilateral action would be almost impious…. Obama’s position has declined from admirable principle to indefensible fetish. Politics simply isn’t going to get better and more deliberative any time soon.

The third reason… is… Unilateral action would be at odds with Obama’s image of himself…. But Obama badly overestimated his abilities here. The contemporary American right ain’t the Harvard Law Review, where he was once able to get conservatives and critical race theorists to sit in the same room and reason together. Does he still really believe he can do this with today’s Republican Party? He apparently does. It’s hard to figure out why else he would have used Monday night’s speech to continue to argue for a “balanced” approach that was already off the table. He really must have thought Republicans would be inundated by constituent phone calls, come to their senses, and realize that, by golly, they’d better sit down and reason with Mr. Reasonable. If Obama thinks that, then he is caught up in mere egoism, and he is paradoxically harming the republic he believes he is….

[I]f Obama moved forcefully and said. “I am the president, and I met them here and here and here, and they wouldn’t budge, and I’m finished with them, and now is the time to act,” I have little doubt that the markets—and the people—would react positively. That would prove that he’s a leader, and it would force him to choose sides. It’s high time he did both.

Where’s Obama?

The President is missing. Could we get the candidate back?

The concerted effort to eliminate collective bargaining rights has spread well beyond Wisconsin.  So have the protests. Reports have protests in 38 state capitols this week, including even Montana. Heck, even the protesters in Cairo are expressing support and solidarity with the workers in Wisconsin. But there’s a giant gap in the protester lines.  President Obama is staying out of it. Apparently President Obama doesn’t have a strong opinion on workers’ bargaining rights.  Interesting because candidate Obama had a strong opinion and made a strong promise:

 

Leadership FAIL: Again

This time I’ll outsource the job to Paul Krugman at the New York Times.  I don’t always agree with Paul, but he’s spot on with this. The Obama administration never misses an opportunity to miss an opportunity, especially if it involves banks.

Epitaph For An Administration

In today’s report on the foreclosure mess, a revealing sentence:

As the foreclosure abuses have come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Surely this can serve as a generic statement:

As NAME ISSUE HERE has come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Stimulus, bank rescue, China, foreclosure; it applies all along. At each point there were arguments for not acting; but the cumulative effect has been drift, and a looming catastrophe in the midterms.

Or to put it another way, the administration has never missed an opportunity to miss an opportunity. And soon there won’t be any more opportunities to miss.