Posts tagged ‘stimulus’

Question for Keynesians: What Are You Doing To Prepare for the Next Cycle?

When I was in school learning macro 101 from Baumol and Blinder, my memory is that the theory of Keynesian stimulus and managing the economic cycle was that deficits should be run in the bottom part of the economic cycle, paid for with surpluses in the top half.   So we are now almost certainly in the top half of the cycle.  But I don't hear any Keynesians seeking to run a surplus, or even to dial back on government deficits or spending.  In fact, our Keynesian-in-chief says he is done with "mindless austerity" and wants to start spending even harder in 2015.

Its enough to make one suspicious that all the stimulus talk is just a Trojan Horse for a desire to increase the size and power of government.

But for Keynesians who really believe what they are saying, that deficit spending somehow saved us from a depression in 2009 and 2010, then I ask you -- what are you going to do next time?  It appears that when we enter the next recession in this country, that US debt as a percentage of GDP is going to be almost twice what it was entering the last recession.  Don't you worry that this limits your flexibility and ability to ramp up deficit spending in the next recession?

The situation in the US is the same as it is worldwide.  While those evil private short-term-focused private actors have used the improving economy to de-leverage back below 2007 levels, governments have increased their debt as a percentage of GDP by just over 50% since just before the last recession.

20150205_debt1

 

Since 2007, according to my old friends at McKinsey, global government debt has risen by $25 trillion since 2007.  If you really care about Keynesian stimulus in recessions, and not just "mindlessly" (I can use that term too) increase government spending, wouldn't you want to be building up some reserves for next time?

Infrastructure Bait and Switch

President Obama wants to spend something like a half trillion incremental dollars on "infrastructure".  I have found that these initiatives to sell infrastructure tend to be great bait and switch programs.  Infrastructure is generally the one type of government spending that polls well across all parties and demographics.  So it is used by government officials to pass big spending increases, but in fact what really happens is that the government takes a wish-list of stuff that most of the public would not be OK with increasing spending on, then they put a few infrastructure projects on top like a cherry to sell the thing.  They call it an "infrastructure" program when in fact it is no such thing.

Obama would never do that, right?  Hope and change?  In fact, he already has.  The first time around he sold the stimulus bill as mainly an infrastructure spending bill -- remember all that talk of shovel-ready projects?   Only a trivial percentage of that bill was infrastructure.  At most 6% was infrastructure, and in practice a lot less since Obama admitted later there were no shovel-ready projects.   (also here).  The rest of it was mainly stuff like salary support for state government officials.  Do you think he would have as easily sold the "wage support for state government officials" bill in the depth of a recession?  No way, so he called it, falsely, an infrastructure bill.

The other bait and switch that occurs is within the infrastructure category.  We have seen this at the state level in AZ several times.  Politicians love light rail, for some reason I do not understand, perhaps because it increases their personal power in a way that individual driving does not.  Anyway, they always want money for light rail projects, but bills to fund light rail almost always fail.  So they tack on a few highway projects, that people really want, call it a highway bill and pass it that way.  But it turns out most of the money is for non-highway stuff.  That is the other bait and switch that occurs.

Expect to see both of these with the new infrastructure proposal.

By the way, Randal O'Toole has a nice summary of the drawbacks of light rail and trolley spending

For the past two decades or so, however, much of our transportation spending has focused on infrastructure that is slower, more expensive, less convenient, and often more dangerous than before. Too many cities have given up on trying to relieve congestion. Instead, they have allowed it to grow while they spend transportation dollars (nearly all paid by auto users) on other forms of travel such as rail transit. Such transportation is:

  • Slower: Where highway speeds even in congested cities average 35 miles per hour or more, the rail transit lines built with federal dollars mostly average 15 to 20 mph.
  • More expensive: In 2013, Americans auto users spent less than 45 cents per vehicle mile (which means, at average occupanies of 1.67 people per car, about 26 cents per passenger mile), and subsidies to roads average under a penny per passenger mile. By comparison, transit fares are also about 26 cents per passenger mile, but subsidies are 75 cents per passenger mile.
  • Less convenient: Autos can go door to door, while transit requires people to walk or use other forms of travel, often at both ends of the transit trip.
  • Less safe: For every billion passenger miles carried, urban auto accidents kill about 5 people, while light rail kills about 12 people and commuter trains kill 9. Only subways and elevateds are marginally safer than auto travel, at 4.5, but we haven’t built many of those lately.

Keynesian Moving Target on What Constitutes Austerity

The other day I said I was confused by what exactly creates Keynesian stimulus, and in reverse, what constitutes austerity.  I had thought that it was deficit spending that creates the stimulus, but then sometimes it seems to just be spending and in the case of the Kevin Drum post I was discussing, he says it is not the level of spending but only the first derivative of per capita real government spending (with no reference to whether it is debt or tax funded) that matters.

I figured that I was just confused because I had not formally studied economics past my undergrad years, but apparently practicing economists are also confused.  Here is Scott Sumner:

What is the proper measure of austerity?  The textbooks talk about deficits.  But most of the Keynesian bloggers focus on government purchases.  So which is it?  And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014?  And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?

As a postscript, I will add that every climate skeptic can totally empathize with this Sumner concern:

A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model.  Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints.

The Big Government Trap: Does Stimulus Require Government Spending to Continuously Rise?

There has been a lot of back and forth over the last few years about "austerity".  I have wondered how government spending levels over the last few years that dwarf any peacetime levels in history could be called "austerity", but that is exactly what folks like Paul Krugman have been doing.   Apparently, the new theory is that the level of spending is irrelevant to stimulus, and only the first derivative matters.  In other words, high spending is not stimulative unless it is also increasing year by year.   Kevin Drum provides an explanation of this position:

Austerity is all about the trajectory of government spending, and this is what it looks like. You can argue about whether flat spending represents austerity, but a sustained decline counts in anyone's book. The story here is simple: for a little while, in 2009 and 2010, stimulus spending partially offset state and local cuts, but by the end of 2010 the stimulus had run its course. From then on, the drop in government expenditures was steady and significant. It was also unprecedented. If you run this chart back for 50 years you'll never see anything like it. In all previous recessions and their aftermaths, government spending rose.

blog_total_govt_expenditures_per_capita_inflation

So, by this theory of stimulus, the fact that we spent substantially more money in 2010-2014 than in pre-recession years (and are still spending more money) turns out not to be stimulative.  The only way government can stimulate the economy is to increase year-over-year per capital real spending every single year.

I will leave macro theory (of which I am increasingly skeptical) to the Phd's.  In this case however, Drum's narrative is undermined by his own chart he published a few weeks ago:

blog_private_employment_2001_vs_2010

In his recent austerity article quoted above, he describes a sluggish recovery with a step-change in 2014 only after "austerity" ends.  But his chart from a few weeks earlier shows a steady recovery from 2010-2014, right through his "austerity" period.  In fact, during the Bush recovery he derides, we actually did do exactly what he thinks is stimulative, ie increase government spending per capita steadily year by year.  How do we know this?  From another Drum chart, this one from last year.  I changed the colors (described in this article) and compared his two charts:

click to enlarge

 

By Drum's austerity theory, the Bush spending was stimulative but the Obama spending was austerity.  But the chart on the right sure makes it look like the Obama recovery is stronger than the Bush recovery.

 

A better explanation of the data is that a recession driven by the highly-leveraged mis-allocation of too much capital to home real estate was made worse in 2008-2009 by a massive increase in government spending, which is almost by definition a further mis-allocation of capital (government is taking money from where the private sector thinks it should be invested and moves it to where politicians think it should be spent).  The economy has recovered as that increase in government spending has been unwound.

Want to Make Your Reputation in Academia? Here is an Important Class of Problem For Which We Have No Solution Approach

Here is the problem:  There exists a highly dynamic, multi- multi- variable system.  One input is changed.  How much, and in what ways, did that change affect the system?

Here are two examples:

  • The government makes a trillion dollars in deficit spending to try to boost the economy.  Did it do so?  By how much? (This Reason article got me thinking about it)
  • Man's actions increase the amount of CO2 in the atmosphere.  We are fairly confident that this has some warming effect, but how how much?  There are big policy differences between the response to a lot and a little.

The difficulty, of course, is that there is no way to do a controlled study, and while one's studied variable is changing, so are thousands, even millions of others.  These two examples have a number of things in common:

  • We know feedbacks play a large role in the answer, but the system is so hard to pin down that we are not even sure of the sign, much less the magnitude, of the feedback.  Do positive feedbacks such as ice melting and cloud formation multiply CO2 warming many times, or is warming offset by negative feedback from things like cloud formation?  Similarly in the economy, does deficit spending get multiplied many times as the money gets respent over and over, or is it offset by declines in other categories of spending like business investment?
  • In both examples, we have recent cases where the system has not behaved as expected (at least by some).  The economy remained at best flat after the recent stimulus.  We have not seen global temperatures increase for 15-20 years despite a lot of CO2 prodcution.  Are these evidence that the hypothesized relationship between cause and effect does not exist (or is small), or simply evidence that other effects independently drove the system in the opposite direction such that, for example, the economy would have been even worse without the stimulus or the world would have cooled without CO2 additions.
  • In both examples, we use computer models not only to predict the future, but to explain the past.  When the government said that the stimulus had worked, they did so based on a computer model whose core assumptions were that stimulus works.  In both fields, we get this sort of circular proof, with the output of computer models that assume a causal relationship being used to prove the causal relationship

So, for those of you who may think that we are at the end of math (or science), here is a class of problem that is clearly, just from these two examples, enormously important.  And we cannot solve it -- we can't even come close, despite the hubris of Paul Krugman or Michael Mann who may argue differently.    We are explaining fire with Phlogiston.

I have no idea where the solution lies.  Perhaps all we can hope for is a Goedel to tell us the problem is impossible to solve so stop trying.  Perhaps the seeds of a solution exist but they are buried in another discipline (God knows the climate science field often lacks even the most basic connection to math and statistics knowledge).

Maybe I am missing something, but who is even working on this?  By "working on it" I do not mean trying to build incrementally "better" economics or climate models.  Plenty of folks doing that.  But who is working on new approaches to tease out relationships in complex multi-variable systems?

Windows 8 Even Worse Than I Thought

Up to this point, after some initial bad impressions trying Windows 8 briefly, I have avoided it like the plague.  However, my son needed a new laptop and the only ones that really met our requirements only came in Windows 8 flavors, so we bought one.

What an awful mess.  The system boots up into a tiled mess that looks like some cheesy website covered in moving gifs and viagra ads.  To make matters worse, nothing on this tablet-based interface is organized at all logically.  The interface is like the room of an ADD child that dropped all of his toys and books in random spots.  I am sure these tiles have some sort of navigation paradigm, but it is completely different from any used in past windows versions.  I could not, for example, figure out how to easily exit the store except to alt-tab out (there is no exit or quit option and right-click context menus which are one of the great advantages of windows over mac don't seem to work a lot of the time).  Again, I am sure there is some way to do it, but I have no idea what it is and no desire to learn new navigation commands.  Perhaps Microsoft intends that one use a gamepad instead of a mouse -- I would not be surprised at this point.

Unlike older versions of windows, windows update did not run automatically at first bootup.  I knew from past experience there were likely dozens of security patches I needed to install right away.  I hunted for quite a while just to find the windows control panel (so I could run windows update).  It was buried in a sub-menu of a toolbar on the right side of the screen that only pops up if you find a tiny (unmarked) spot in the corner of the screen with your mouse.   It amazes me that anyone thought replacing the start button with an unmarked spot on the screen was a good idea.

Of course, the control panel is called something entirely different now, but I did eventually find windows update and there were, as expected, over 70 security patches that needed to be installed.  But for some reason they would not download immediately, but kept giving me a message that they would be downloaded at some future indeterminate date.  I finally found a way to force them to download.

My next step was to get rid of the stupid application tile interface and get the computer to boot directly to desktop and get the old start button back.  This requires a free upgrade to windows 8.1, but there is no obvious way to do this, even through windows update.  I finally had to search the internet to find the link.  This sent me into the windows 8 app store.  What a total mess that is!  If anything, it is more poorly organized than the Apple app store.  Like the Apple store, it seems aimed at people who want to browse applications virtually at random rather than find something specific.  Incredibly, there is no search function.  Yes, I know, I have to be wrong about that, but I scrolled all over that damn storefront and cannot find a search box.

So I cannot actually find the Windows 8.1 upgrade.  The web site tells me that I should be presented with a prominent option to download it in the store, but I am not.  It is nowhere to be found.  I found an FAQ somewhere that suggested that I would not be offered the 8.1 upgrade if my 8.0 installation is missing certain patches, so I am going back to windows update to see if there is something I am still missing.

I was wrong about windows 8 -- I once wrote it was bad but perhaps not as bad as Vista or ME.  But it is.  This is the worst thing I have ever seen come out of Microsoft.  It is inexplicable that this company with such a strong market share in the business world could saddle its flagship OS with an interface more appropriate to an XBOX.

In the past, I have said that I would not want a desktop with a tablet interface.  But at the end of the day, I would not want a tablet with this interface.  Perhaps with hours of work, I will make this computer usable.  Who would have ever thought I would have longed for the day when I had to spend an hour with a new computer removing bloatware.  Now I have to spend a day trying to emulate the windows 7 experience on windows 8.

People have developed many hypotheses for the lingering recession.  Some say it was too small a stimulus.  Some blame the sequester.  I blame the Windows 8 launch, which I think has a lot to do with suppressing PC sales and thus much of the electronics and retailing sector.

Trading $1 in Debt for 85 cents of Economic Activity

UPDATE:  Mea culpa.  One point in the original post was dead wrong.  It is possible, contrary to what I wrote below, to get something like a 0.7%  difference in annual growth rates with the assumptions he has in the chart below (Drum still exaggerated when he called it 1%).  I don't know if the model is valid (I have little faith in any macro models) but I was wrong on this claim.  Using the 0.7% and working more carefully by quarter we get a cumulative GDP addition a bit lower than the cumulative debt addition.  There is still obviously a reasonable question even at a multiplier near 1 whether $1 of economic activity today is worth $1 of debt repayment plus interest in the future.  

I am not a believer, obviously, in cyclical tweaking of the economy by the Feds.  To my thinking, the last recession was caused by a massive government-driven mis-allocation of capital so further heavy-handed government allocation of capital seems like a poor solution.  But what really drives me crazy is that most folks on the Left will seductively argue that now is not the time to reduce debt levels, implying sometime in the future when the economy is better will be the appropriate time.  But when, in any expansion, have you heard anyone on the Left say, "hey, its time to reduce spending and cut debt because we need the fiscal flexibility next time the economy goes wrong."

I will leave the stuff in error below in the post because I don't think it is right to disappear mistakes.  For transparency, my spreadsheet reconstruction both confirming the 0.7% and with the updated numbers below is here:   reconstruction.xls.

 

Kevin Drum is flogging the austerity horse again

I see that Macroecomic Advisors has produced a comprehensive estimate of the total effect of bad fiscal policies. Their conclusion: austerity policies since the start of 2011 have cut GDP growth by about 1 percentage point per year.

Something seemed odd to me -- when I opened up the linked study, it said the "lost" government discretionary spending is about 2% of GDP.  Is Drum really arguing that we should be spending 2% of GDP to increase GDP by 1%?

Of course, the math does not work quite this way given compounding and such, but it did cause me to check things out.  The first thing I learned is that Drum partook of some creative rounding.  The study actually said reductions in discretionary spending as a percent of GDP reduced GDP growth rates since the beginning of 2011 by 0.7% a year, not 1% (the study does mention a 1% number but this includes other effects as well).

But it is weirder than that, because here is the chart in the study that is supposed to support the 0.7% number:

click to enlarge

Note that in the quarterly data, only 2 quarters appear to show a 0.7% difference and all the others are less.  I understand that compounding can do weird things, but how can the string of numbers represented by the green bars net to 0.7%?  What it looks like they did is just read off the last bar, which would be appropriate if they were doing some sort of cumulative model, but that is not how the chart is built.  If we interpolate actual values and are relatively careful about getting the compounding right, the difference is actually about 0.45%.  So now we are down to less than half the number Drum quoted see update above (I sent an email to the study author for clarification but have not heard back.  Update:  he was nice enough to send me a quick email).

So let's accept this 0.45% 0.7% number for a moment.  If GDP started somewhere around 16 trillion in 2010, if we apply a 0.45% the quarterly growth numbers from his chart, we get an incremental economic activity from 2011 through 2013:Q2 of about $333 billion.

So now look at the spending side.  The source says that discretionary spending fell by about 2% of GDP over this period.  From the graph above, it seems to bite pretty early, but we will assume it fell 1/12 of this 2% figure each quarter, so that by the end of 2013 or beginning of 2014 we get a fall in spending by 2% of GDP.  Cumulatively, this would be a reduction in spending over the 2.5 years vs. some "non-austere" benchmark of $388 billion.

Thus, in exchange for running up $677 billion $388 billion in additional debt, we would have had $445 billion $333 billion in incremental economic activity.  A couple of reactions:

  1. Having the government borrow money and spend it definitely increases near-term GDP.  No one disputes that.  It is not even in question.  Those of us who favor reigning in government spending acknowledge this.  The question is, at what cost in terms of future obligations.  In fact, this very study Drum is quoting says

    Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, “crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nation’s overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

    High deficits and debt also undermine the efficacy of macroeconomic policies and reduce policymakers’ flexibility to respond to unexpected events. For example, in a recession, it would be harder to provide fiscal stimulus if deficits and debt already were high. Furthermore, fiscal stimulus might be less effective then. Additional deficit spending could be seen as pushing the nation closer to crisis, thereby forcing up interest rates and undercutting the effects of the stimulus. With fiscal policy hamstrung, the burden of counter-cyclical policy is thrust on the Federal Open Market Committee (FOMC) but, particularly in a low interest-rate environment, the FOMC may be unable (or unwilling) to provide additional monetary
    stimulus.

  2. I guess we have pretty much given up on the >1 multiplier, huh?  Beggaring our children for incremental economic growth today is a risky enough strategy, but particularly so with the implied .66 .85 multiplier here.

This is not the first time Drum has taken, uh, creative data approaches to cry "austerity" during a mad spending spree. 

Keynesian Multiplier of 0.05

So much for that Keynesian stimulus notion (emphasis in the original)

With everyone focused on the 5th anniversary of the Lehman failure, we are taking a quick look at how the world's developed (G7) nations have fared since 2008, and just what the cost to restore "stability" has been. In a nutshell: the G7 have added around $18tn of consolidated debt to a record $140 trillion, relative to only $1tn of nominal GDP activity and nearly $5tn of G7 central bank balance sheet expansion (Fed+BoJ+BoE+ECB). In other words, over the past five years in the developed world, it took $18 dollars of debt (of which 28% was provided by central banks) to generate $1 of growth. For all talk of "deleveraging" G7 consolidated debt has been at a record high 440% for the past four years.

The theory of stimulus -- taking money out of the productive economy, where it is spent based on the information of hundreds of millions of people as to the relative value of millions of potential investments, and handing it to the government to spend based on political calculus -- never made a lick of sense to me.  I guess I would have assumed the multiplier in the short term was fractional but at least close to one, indicating in the short run that if we borrow and dump the money into the economy we would get some short-term growth, only to have to pay the piper later.  But we are not even seeing this.

European Auster-Yeti

There are people who will swear to this day that, despite all evidence to the contrary, Bigfoot exists and they have seen it.  Paul Krugman similarly is just sure he has seen European austerity.  The rest of us are left scratching our heads for the evidence -- he doesn't even have a blurry photo or footprint.  Just tales from a friend of a friend, who is not only sure there has been austerity, but that it caused an old lady to dry her cat in a microwave and that if you swim 20 minutes after eating you will get cramps.

The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread.  In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.

Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau.  Eurostat’sprojections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As  Erber wryly notes: “Austerity is everywhere but in the statistics.”

Where Did the Last Batch Go?

Obama and the Left want a big new infrastructure spending bill, based on twin theories that it would be a) stimulative and b) a bargain, as needed infrastructure could be built more cheaply with construction industry over-capacity.

Since this is exactly the same theory of the stimulus four years ago, it seems a reasonable question to ask:  What happened to the damn money we spent last time?  We were sold a 3/4 of a trillion dollar stimulus on it being mostly infrastructure.  So where is it?  Show us pictures, success stories.  Show us how the cost of construction of these projects were so much lower than expected because of construction industry over-capacity.  Show us the projects selected, to demonstrate how well thought-out the investment prioritization was.  If their arguments today have merit, all these things must be demonstrable from the last infrastructure bill.  So where is the evidence?

Of course, absolutely no one who wants to sell stimulus 2 (or 3?) wants to go down the path of investigating how well stimulus 1 was spent.  Instead, here is the argument presented:

Much of the Republican opposition to infrastructure spending has been rooted in a conviction that all government spending is a boondoggle, taxing hard-working Americans to give benefits to a favored few, and exceeding any reasonable cost estimate in the process. That's always a risk with new spending on infrastructure: that instead of the Hoover Dam and the interstate highway system, you end up with the Bridge to Nowhere and the Big Dig.

In that sense, this is a great test of whether divided democracy can work, and whether Republicans can come to the table to govern. One can easily imagine a deal: Democrats get their new infrastructure spending, and Republicans insist on a structure that requires private sector lenders to be co-investors in any projects, deploying money based on its potential return rather than where the political winds are tilting.

This is bizarre for a number of reasons.  First, he implies the problem is that Republicans are not "coming to the table to govern"  In essence  then, it is up to those who criticize government incremental infrastructure spending (with a lot of good evidence for believing so) as wasteful to come up with a solution.  Huh?

Second, he talks about requiring private lenders to be co-investors in the project.  This is a Trojan horse.   Absurd projects like California High Speed Rail are sold based on the myth that private investors will step in along side the government.  When they don't, because the project is stupid, the government claims to be in too deep already and that it must complete it with all public funds.

Third, to the extent that the government can sweeten the deal sufficiently to make private investors happy, the danger of Cronyism looms large.  You get the government pouring money into windmills, for example, that benefits private investors with a sliver of equity and large manufacturers like GE, who practically have a hotline to the folks who run programs like this.

Fourth, almost all of these projects are sure to be local in impact - ie a bridge that helps New Orleans or a street paving project that aids Los Angeles.  So why are the Feds doing this at all?  If the prices are so cheap out there, and the need for these improvements so pressing, then surely it makes more sense to do them locally.  After all, the need for them, the cost they impose, and the condition of the local construction market are all more obvious locally than back in DC.  Further, the accountability for money spent at the Federal level is terrible.  There are probably countless projects I should be pissed off about having my tax money fund, but since I don't see them every day, I don't scream.  The most accountability exists for local money spent on local projects.

Bizarre Alternate Reality

Kevin Drum is claiming that the government has already done much fine work on deficit reduction, reducing spending by $1.8 trillion and increasing taxes by $600 billion.

This is fantasy, pure and simple, and perhaps why the term "reality-based community" has fallen out of favor among Progressives.   There has been and will likely be no reduction in spending -- these "spending cuts" are merely reductions in spending growth rates from the Administration's initial wet dream spending proposals. I am sure the tax increases are probably real, but Obama and the Congress were already proposing to spend most of those in new stimulus and other boondoggles right in the end of year tax legislation.

The tax numbers are characteristic of the stupid budget games played by both parties.   For example, the recent tax law represents a tax increase over law in place on 12/31/2012, but represents a massive tax cut vs. law set to be in place on 1/1/2013.  This gives the administration cover to call it both!  When it wants to portray itself as a deficit hawk, as in this case, it was a tax increase.  When it wants to portray itself as being populist, it was a tax cut.

Charts like this are absolutely worthless.  We will likely get deficit reduction over the next few years, but it will be entirely due to rising tax revenues from an improving economy.

And here we are back to my constant theme -- if you want to posit a trend, then show the trend.

The Perfect Keynesian Stimulus

Hardcore Keynesian theory says that even paying someone to dig a hole one day and fill it in the next is stimulative.  This has always seemed insane to me -- how could it possibly be a net gain in growth and wealth to shift resources from productive activities to unproductive ones?  But in line with this theory, the Keynesians in the Obama Administration have hit on the perfect stimulus:

A cargo train filled with biofuels crossed the border between the US and Canada 24 times between the 15th of June and the 28th of June 2010; not once did it unload its cargo, yet it still earned millions of dollars... The companies “made several million dollars importing and exporting the fuel to exploit a loophole in a U.S. green energy program.” Each time the loaded train crossed the border the cargo earned its owner a certain amount of Renewable Identification Numbers (RINs), which were awarded by the US EPA to “promote and track production and importation of renewable fuels such as ethanol and biodiesel.”

Whole thing here

Words That Have Been Stripped of Any Meaning: "Spending Cuts" and "Austerity"

I have already written that the supposed European austerity (e.g. in the UK) is no such thing, and "austerity" in these cases is being used to describe what is merely a slowing in spending growth.

Apparently the same Newspeak is being applied to spending cuts in the US.  How else  can one match this data:

With these words from President Obama (my emphasis added)

"If we're going to raise revenues that are sufficient to balance with the very tough cuts that we've already made and the further reforms in entitlements that I’m prepared to make, then we’re going to have to see the rates on the top two percent go up"

Seriously?  The only small reductions in the budget were because some supposedly one-time expenses (like TARP bailouts, war costs, and stimulus spending) were not repeated.  Allowing one-time costs to be, uh, one-time does not constitute "tough cuts."

Tough cuts are when we knock government spending back down to 19-20 percent of GDP.  Clinton level spending in exchange for Clinton tax rates.   That's my proposed deal.

On Private Job Creation, Obama and Reagan are Tied

Obama claims to have created more jobs than Reagan.  Republicans fire back with charts that say otherwise.

Here are the true numbers for private jobs created by these Presidents in office:

  • Reagan:    zero
  • Obama:     zero

Just once I would like to see a Presidential candidate answer:

"Why, I didn't create a single private job in office.  Anyone I hire is by definition a public employee.  The best I can do is to keep government out of the way, as much as possible, of the private individuals who do create new businesses and new products and new technologies that tend to lead to more private employment.  The worst thing I can do is to try to be investment-banker-in-chief.  Every dollar I hand to some company I like is money taken out of the hands of 300 million private individuals, who collectively know a hell of a lot more than I as to what makes for a better business investment  (and by the way they have far better incentives that I as well, since they are investing their own hard-earned money, and should I develop the hubris to play the stimulus game, I would be investing your hard-earned money."

 

"Abnormal" Events -- Droughts and Perfect Games

Most folks, and I would include myself in this, have terrible intuitions about probabilities and in particular the frequency and patterns of occurance in the tail ends of the normal distribution, what we might call "abnormal" events.  This strikes me as a particularly relevant topic as the severity of the current drought and high temperatures in the US is being used as absolute evidence of catastrophic global warming.

I am not going to get into the global warming bits in this post (though a longer post is coming).  Suffice it to say that if it is hard to accurately directly measure shifts in the mean of climate patterns given all the natural variability and noise in the weather system, it is virtually impossible to infer shifts in the mean from individual occurances of unusual events.  Events in the tails of the normal distribution are infrequent, but not impossible or even unexpected over enough samples.

What got me to thinking about this was the third perfect game pitched this year in the MLB.  Until this year, only 20 perfect games had been pitched in over 130 years of history, meaning that one is expected every 7 years or so  (we would actually expect them more frequently today given that there are more teams and more games, but even correcting for this we might have an expected value of one every 3-4 years).  Yet three perfect games happened, without any evidence or even any theoretical basis for arguing that the mean is somehow shifting.  In rigorous statistical parlance, sometimes shit happens.  Were baseball more of a political issue, I have no doubt that writers from Paul Krugman on down would be writing about how three perfect games this year is such an unlikely statistical fluke that it can't be natural, and must have been caused by [fill in behavior of which author disapproves].  If only the Republican Congress had passed the second stimulus, we wouldn't be faced with all these perfect games....

Postscript:  We like to think that perfect games are the ultimate measure of a great pitcher.  This is half right.  In fact, we should expect entirely average pitchers to get perfect games every so often.  A perfect game is when the pitcher faces 27 hitters and none of them get on base.  So let's take the average hitter facing the average pitcher.  The league average on base percentage this year is about .320 or 32%.  This means that for each average batter, there is a 68% chance for the average pitcher in any given at bat to keep the batter off the base.  All the average pitcher has to do is roll these dice correctly 27 times in a row.

The odds against that are .68^27 or about one in 33,000.  But this means that once in every 33,000 pitcher starts  (there are two pitcher starts per game played in the MLB), the average pitcher should get a perfect game.  Since there are about 4,860 regular season starts per year (30 teams x 162 games) then average pitcher should get a perfect game every 7 years or so.  Through history, there have been about 364,000 starts in the MLB, so this would point to about 11 perfect games by average pitchers.  About half the actual total.

Now, there is a powerful statistical argument for demonstrating that great pitchers should be over-weighted in perfect games stats:  the probabilities are VERY sensitive to small changes in on-base percentage.  Let's assume a really good pitcher has an on-base percentage against him that is 30 points less than the league average, and a bad pitcher has one 30 points worse.   The better pitcher would then expect a perfect game every 10,000 starts, while the worse pitcher would expect a perfect game every 113,000 starts.  I can't find the stats on individual pitchers, but my guess is the spread between best and worst pitchers on on-base percentage against has more than a 60 point spread, since the team batting average against stats (not individual but team averages, which should be less variable) have a 60 point spread from best to worst. [update:  a reader points to this, which says there is actually a 125-point spread from best to worst.  That is a different in expected perfect games from one in 2,000 for Jared Weaver to one in 300,000 for Derek Lowe.  Thanks Jonathan]

Update:  There have been 278 no-hitters in MLB history, or 12 times the number of perfect games.  The odds of getting through 27 batters based on a .320 on-base percentage is one in 33,000.  The odds of getting through the same batters based on a .255 batting average (which is hits but not other ways on base, exactly parallel with the definition of no-hitter) the odds are just one in 2,830.  The difference between these odds is a ratio of 11.7 to one, nearly perfectly explaining the ratio of no-hitters to perfect games on pure stochastics.

My Favorite Line of the Day

In a report from the DOE Inspector General, which said that $500,000 of equipment bought with stimulus money was missing at a battery company:

 “It would not be appropriate to release the name of stimulus-money recipient where the $500,000 worth of equipment could not be located.”

But it is A-OK to excoriate by name any number of corporations that create value legally if doing so advances this Administration's re-election prospects.

If You Disagree With My Economic Policies, It Must Be Because You Are Trying to Wreck the Economy

Kevin Drum is back on his "because Republicans won't agree to more massive deficit spending, they must be purposefully trying to destroy the economy."   Literally.  He translates Republican opposition to Obama's proposed stimulus packages as being explained by this strategy:

Basically, the Republican strategy for the past three years has been this:

  1. Do everything humanly possible to prevent the economy from recovering.
  2. Wait for 2012.
  3. Run a campaign focused on the fact that the economy is lousy.

This is such a shabby bit of false logic it is amazing anyone even attempts this any more, or more accurately, it's amazing that folks continue to buy it.  Is it really so impossible to believe that there are actually people of goodwill who wish to see the economy improve but disagree with Drum and Obama as to the correct course to achieve that?  Apparently not  (I suppose the last stimulus was so wildly succesful that it is impossible to doubt the success of another trillion or so of deficit spending?)

The irony is that for some reason I simply cannot fathom, from a political tactics point of view, he points to this chart when talking about Truman and his "do-nothing" Congress:

 

He's is trying to make some political tactical point, but he is so blinded by his own assumptions that he misses the real point -- that the American economy grew at records rates through a "do-nothing" Congress.  Now, I suppose Drum might argue that this was an accident of timing, but in fact Truman inherited what should have been, by Drum's Keynesian thinking, the worst economic situation ever since an enormous amount of government spending was going away after the war and new workers were simultaneously flooding back into the job market.  If any time in recent history should have demanded Keynesian stimulus, this was it, and yet a do-nothing Congress led to a massive expansion.  Hmmmm.

Thinking About Greece

Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

  1. Taxes today.
  2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
  3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always - always - this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

OMG, Austerity!

via here

The UK line is particularly interesting, since that is the country that Krugman has declared is austerity-izing itself into a depression. As I have pointed out before, real government spending in UK has been and is still rising.  The percent of GDP of this spending has fallen a bit, but there is nothing about Keynesian stimulus theory that says changes in the percentage of government spending is stimulative, only its absolute value.

Here is one thing I would love to here Krugman et. al. opine on -- at what percentage of government debt to GDP does additional deficit spending become counter-stimulative.   I imagine there is an inverse relationship for deficit-funded stimulus, such that it has a larger effect at lower debt levels with a zero to negative effect at higher interest levels.

Update:  From another source, here is the UK in real $

Can I Have Some of Those Drugs?

Kevin Drum apparently believes the reason Republicans are not passing further stimulus spending is because such a stimulus would be too likely to have immediate results improving the economy and thus will help Democrats in the next election.

This is the kind of politcal bullshit that drives me right out of the system.  I am perfectly capable of believing Drum honestly thinks that further deficit spending will improve the economy this year.  I think he's nuts, and working against all historic evidence, but never-the-less I believe he is sincere, and not merely pushing the idea as part of some dark donkey-team conspiracy.  Why is it that he and his ilk, from both sides of the aisle, find it impossible to believe that their opponents have similarly honest intentions?

I mean, is it really so hard to believe -- after spending a trillion dollars to no visible effect, after seeing Europe bankrupt itself, and after seeing the American economy begin to recover only after crazy stimulus programs have mostly stopped -- that some folks have an honest desire to see economic improvement and think further stimulus programs are a bad idea?

Science and Politics

Matt Welch's description of science and politics strikes a chord

Even more interesting than the soft consensus in favor of government intervention was a strong undercurrent that those who disagreed with it were guilty of denying basic truths. One of the questions from an audience full of Senate staffers, policy wonks, and journalists was how can we even have a rational policy discussion with all these denialist Republicans who disregarded Daniel Patrick Moynihan’s famous maxim that “Everyone is entitled to his own opinion, but not his own facts”? Jared Bernstein couldn’t have been more pleased.

“I feel like we’re in a climate in which facts just aren’t welcome,” he said. “I think the facts of the case are that we know what we can do to nudge the unemployment rate down.…I think the consensus among economists is that this is a good time to implement fiscal stimulus that would help create jobs and make the unemployment rate go down. I consider that a fact.”

In science, you insist most loudly on a fact based on how much it has withstood independent peer review. In politics, it’s closer to the opposite—the more debatable a point is, the more it becomes necessary to insist (often in the face of contrary evidence) that the conclusion is backed by scientific consensus

Stimulus Accounting Still Meaningless

Via Hit and Run, this can't be said too many times

according to the CBO’s top official, the figures in this report and previous mandatory stimulus don’t actually tell us whether or not the stimulus created jobs. That’s because, as  I’venotedsomanytimesbefore, the reports rerun slightly updated versions of the same models of that were used to estimate that the stimulus would create jobs prior to the law’s passage. And lo and behold, if you create a model that predicts the law will create jobs, and then you rerun a mild variation of that model a few years later using updated figures about what money was actually spent, it still reports that the stimulus created jobs. But there’s no counting here, no real-world attempt to assess the reality of the stimulus—just a model that assumes that stimulus spending will create jobs and therefore reports that stimulus spending has in fact created jobs. As CBO director Douglas Elmendorf confirmed on the record last year in response to a question, “if the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.”

Further, the fact that we can count individual jobs in stimulus programs (of which there are all too few, which is why the Administration doesn't do this), we still have to take into account an offset effect.  The trillion dollars came from somewhere, and in effect were diverted from private to public hands.  To justify the stimulus, one needs to be able to argue that the public use of these funds created more jobs than the private use of these funds.  Good luck with that.

Wow

Holly Fretwell of PERC discusses the huge leap in agricultural yields since WWII

Not only does this mean that we have have billions of people on Earth and not starve, but it also has freed up labor for more productive and value-enhancing activities.

As an aside, remember this chart when global warming alarmists argue the the warming trend of the last 50 years is reducing crop yields.  (If the linked article seems simply bizarre given the chart above, realize the NYT is saying that crop yields are down from what they might have been.  This is the same kind of faulty logic that was used by Obama to credit his stimulus with job gains when in fact the economy was losing jobs.  They posit some unproveable hypothetical, and then say reality diverged from that hypothetical because of whatever factor they are trying to push, whether it be CO2 or stimulus).

The problem with food prices is not production, its the fact that we take such a huge percentage of our food grains and, by government dictat, convert them to automotive fuel.

Mind of the Statist

David Roberts (via Kevin Drum) gives us a simply outstanding view of the mind of a statist:

In these grim economic times, one U.S. industry has defied gravity. Not only is it growing, it's thefastest growing industry in the country. It now employs 100,000 Americans at 5,000 mostly small businesses spread across all 50 states. Unlike in so many others, in this industry the U.S. has a positive trade balance with China; it is a net exporter of high-tech manufactured products....

The startling counter-cyclical growth of this industry had been unleashed by a modest bit of economic stimulus: a cash grant program that helps project developers compensate for the crippling credit crunch. In contrast to the familiar tax credits -- which tend to go to large, mature companies that have enough profit to benefit from them -- cash grants help small, innovative, growing businesses that are plowing revenue into growth. In fact, a recent study found that they work twice as well as tax credits. In 2009, this cash grant program pulled in $4.50 of private capital for every public dollar it invested.

The cash grant program expires at the end of the year. Extending it for a single year could support 37,000 additional jobs over and above the industry's baseline. And here's the capper: Since the cash grant program is simply repurposing money that's already devoted to a tax credit program, it requires no new federal revenue.

So you'd think this would be a home run, right? At a time when jobs are at the top of every politician's mind, surely a bit of low-cost economic stimulus that doesn't increase the deficit and leverages tons of private capital and creates tens of thousands of jobs can serve as the rare locus of bipartisan cooperation. Right?

Except the industry in question is the solar industry. And because this industry involves clean energy rather than, I dunno, tractor parts, it has been sucked into conservatives' endless culture war. Rather than lining up to support the recession's rare economic success story, Republicans are trying to use the failure of a single company -- Solyndra -- as a wedge to crush support for the whole industry. Odds are they're going to succeed and the cash grant program (Sec. 1603) won't be renewed next year.

Do you see the basic assumption -- if we don't take money from taxpayers and give it to businesses in a certain industry, that means we don't like that business.  Really?  That means that there is not a single industry in this country that I like, since I don't support subsidies for any of them.   Unless you believe the state is mother and father to us all, the fact that I don't support state subsidies does not mean that I don't like the industry somehow.  Kevin Drum even goes so far as to say that opposition to solar power subsidies is an aspect of the culture wars.  Huh?   Oh and by the way, the politicization of this loan process is just amazing to me.  More and more people at Solyndra seem to be fund raisers for Obama, and here is a story of how a cleaning products company turned donations to Democratic candidates into taxpayers subsidies for themselves.

It is interesting that he would mention tractor parts.  Guess what, folks who don't like the solar subsidies probably don't support subsidies for tractor parts either.  I was going to say something like, "guess what, we don't subsidize tractor parts" but in our screwed up corporate state, we probably do at some level, like with some special export program snagged by a John Deere lobbyist.  But I can pretty much guarantee that we don't subsidize anywhere near the total value of the tractor parts industry like we do the solar industry.

In one silly passage, he says

"In addition to being successful, this industry is wildly popular with the American public, across regions, demographics, and political parties. It has been embraced by mainstream institutions from Walmart to the U.S. military"

I could say the same thing for iPods too, but no one is rushing to provide grant programs for their manufacture.  If it is so wildly popular, why does its use require so many government incentives and subsidies.  Because the author pulls the trick of looking at one narrow solar program, and attributing the entire solar industry growth to that one program.  And then he says, see, look how much benefit we get from this tiny sensible expenditure.

But solar's growth (I don't have the data, but I am willing to be real money that his "fastest growing industry" claim is BS) is due not to just this tiny programs but to a plethora of federal, state, and local subsidies and mandates.  The government gives money to capitalize companies, and then then provides tax credits for up to 30-50% of their customer's purchase, and then through public utility commissions enforce above-market feed-in tariff rates for solar power.  One reason we export so much (the export market for US solar is nearly entirely to Europe) is that European governments have feed-in tariffs for solar power more than 5 times higher than the market rate for electricity.   They are paying something like 70 cents a kilowatt for solar electricity.

So of course solar is growing.  If the government were to buy small cars for $150,000 each, there would be big growth in car manufacturing. This does not mean the product makes sense -- in fact, the necessity for so many government supports at every step of the process means almost by definition that it does not make sense economically.  Look at corn ethanol.  Corn ethanol is the stupidest product ever, but it has grown like crazy due to the same combination of government subsidies, price floors, and mandates.

By the way, I am a huge fan of solar, in theory.  I honestly think that solar will some day be the power system of choice in this country, as companies figure out how to roll solar sheets out of the factory as cheaply and quickly as carpet comes out of Dalton, Georgia.  We are not there yet, and I am not at all convinced that the current approaches are anything but dead end technologies.  Beyond wasting a lot of money, there is a real risk the government actually slow ultimate implementation of sensible and economic solar, just as I would argue they did by forcing manned space flight and the transcontinental railroad ahead of their time.

Shopping with Maxed Out Credit Cards

My Forbes column is up this week and it presents some quick reactions to the Obama jobs speech last night.  A brief excerpt:

Overall, I found the package to be an incredible mish-mash of already tried and failed steps to rejuvenate the economy.   Even if I were to buy into the Keynesian stimulus logic, everything in this package is so under-scale as to be rounding errors on the larger economy.  This is basically a smaller version of the last failed stimulus repeated.

This plan is absolutely in the Obama style, offering goodies to many constituencies without a hint of how they will be paid for.  Presidents often offer a chicken in every pot when they are campaigning, but usually are forced into reality once they enter office.  Not Barack Obama.  Time and again, from health care to the most recent budget fight and last night’s speech, Obama wants to be loved for offering perks, and then wants someone else to take the fall for the unpopular steps required to pay for them.  He is like grandma endearing herself to the grandkids by buying them Christmas presents on dad’s maxxed out credit cards, leaving dad to later figure out later how to pay for them or face the ire of the kids by returning the gifts.