Blunt opinions, supported elsewhere but not here

I'd like to get a few opinions on record or simply recap some previous points.

The current downturn is a mix of AD and real shocks, in uncertain proportions, and in a manner which is hard to separate empirically.  It is now obvious there is a lot of structural unemployment and there is a quick and probably unjustified rush to define it all as AD-influenced unemployment turned sour.  The structural theories have their problems, but they can better explain why corporate profits are high and can better explain the distribution of unemployment across income and educational classes.  The regional distribution of unemployment is persisting because of labor immobility, which involves both AD and structural issues.  The sectoral shift view is more about shifting out of optimism-linked activities, within any particular sector, rather than about shifting out of construction and finance per se.

The mix of structural and AD factors does not, in any case, support liquidationist policies.  It supports AD-stabilizing policies, though it suggests that in absolute terms those policies will do less well than expected.  The failure of the fiscal stimulus is consistent with a number of different views, not just the claim that it should have been bigger.  We've yet to see a good theory of how stimulus scales up to produce a bigger and better multiplier at higher levels.

I don't trust stimulus analyses which fail to assign a central role to confidence and confidence is hard to model.

Current experience is also consistent with (but not unambiguously favoring) an Austrian-like view that the stimulus boosts some activity and then shortly thereafter pulls away the rug, leaving us more or less back where we started, albeit with some smoothing gains in the short run and some adjustment costs in the longer run.  The persistence and scale-up from the initial fiscal boost is hardly guaranteed.  The empirical papers on multipliers are not to be trusted and the results are in any case hard to generalize from one period to another.

Harald Uhlig's paper is one statement of the case against stimulus.  There is nothing measured by the Alan Blinder study which rules out the central result of this paper, namely transitory gains in the short run and high costs in the longer run.

Macroeconomics is rarely simple.  

Elizabeth Warren is unlikely to prove an effective agency head, and the two sides to this debate ought to switch positions.  Yet…politics very often isn't about policy.

On the AD front, Scott Sumner has been vindicated more than any other writer.  His best critic is Arnold Kling, especially with regard to whether there are only two kinds of inflation regimes, low or high and variable.  A related question is what a looser monetary policy would have done to financing the long-run debt burden and the use of the interest rate spread to recapitalize banks.  

We still don't know what we are doing.


Did we ever knew what we were doing? Or did we just get lucky?

I'd like to see where the general comment about Warren is supported. She'll probably be a more effective head than Chris Cox, though that is a low bar.

I would like to offer my own summary. We had a version of the Chicago Plan of 1933, meaning QE and a Reinforcing Stimulus, and it has worked in stopping a Debt-Deflationary Spiral. But, now that we've avoided the Worst Case Scenario, we're still dealing with the effects of DD. Because of High Unemployment, and my view that we are still suffering from DD, I think more QE and a RS are called for.

I also agree that there are at least 2 possible problems with this Reflation idea:
1) Inflation will get out of hand going forward.
2) Budget & Debt Problems won't be capable of being solved politically.

So, even though I see a clear program for dealing with our situation, I can easily understand why some people are worried about these actions. Given the performance of many models and theories and explanations in this crisis, it's wise to be skeptical. But the Unemployment Problem is worth rolling the dice.

Our crazy politics has locked us into a position where we will not be doing any more Federal fiscal stimulus this session, and more unlikely next, meaning states will not be receiving any assistance (balancing their budgets) and will be laying off people and not buying goods from the private sector either.

Monetary policy with rates at 0 percent and a liquidity trap will not stimulate the private sector operating at 70% plus capacity, QE notwithstanding.

Welcome to Japan.

Countdown started for the next hissy fit from Paulie "Golden Boy" Krugman. You cannot tell a Nobel Prize winner he doesn't know what he is talking about!

"One-handed economists might just want to scream."

Well, I only do economics with one hand, because the other is on my rod.

What is the definition of "failed" stimulus? I'm interested, because I've seen it described as both a success and a failure. I suppose it depends on whether you think the target was GDP or unemployment/sustained recovery?

I think businesses, especially small businesses, don't want to invest. There is so much uncertaintly and additional regulatory burdens on the horizon--health care, taxes, cap-and-trade, card check, financial regulation, etc. If these get resolved in the right way, I would expect an immediate pick-up in business optimism.

Although you blog the big issues, there are lot's of small things that could be done do alleviate things at the margin: passing the Korean and Columbian Free Trade treaties (as well quit fighting the WTO rulings), easing the Davis-Bacon wage requirements, easing the regulation of nuclear power, etc.

What's the title of this blog?

You're not going far enough or being bold enough.

The current downturn is a total and unambiguous vindication of Austrian theory. Cheap money (this time largely foreign) -> malinvestment boom centered on the entry point of new money -> sectoral bust -> painful readjustment which states attempt to prevent.

AD does not exist. It's counterintuitive, but you must disaggregate to understand "the macroeconomy". Sumner has valuable insights into thinking about monetary policy but his claims regarding what would happen if we targeted NGDP are lunacy.

Excellent post. The structural component is huge.

If you don't believe it, go to a city like Miami and take a good look at all of the brand new 1000+ unit condo buildings. Make sure to take a look during the evening because you will notice that many of them are entirely vacant. They stand there empty - a monument to the bubble and a drain on resources rather than productive capital.

Now imagine the resources that were employed to complete these projects. They were being built simultaneously! Not just the labor, but also the capital. And not just the physical capital, but also the human capital. Now take a moment to scale this up for all of the other cities in which the same scenario played out at the same time (Las Vegas, Phoenix, etc) and then ask yourself, what are all of these people and resources doing now?

There's no quick fix for a decade of malinvestment. Sustainable improvement can only result from the (apparently slow) process of discovering where and learning how to create value.

Could stimulus be useful for preventing the economy from falling farther than it might otherwise have in the early stages of a recession?

I could see an argument that a general panic is the worst possible time for a stimulus, because all available cash will be tied up in margin calls or other capital infusions. If you ever read Harpo Marx's autobiography, he talks about how desperate everybody was to borrow money after Black Tuesday, to avoid selling at fire sale prices.

It's not out of the question that in a large enough panic, you could have a multiplier of zero.

curious if this works

Yes, it worked, thanks Dan. Tyler, it's unconscionable that your comment server was unable to detect an open tag like that. Time to upgrade.

Why is Elizabeth Warren unlikely to prove effective as an agency head?

Is there a way to test the hypothesis that unwillingness to invest is connected to regulatory (or other) uncertainty? Is there more willingness to invest, overall, during long periods of time with the same party in control of the white house and congress, for example?

How does the aftermath of years of bubble-driven malinvestment affect this? If I'm running a business, how can I figure out what "normal" is, where I can expect my business to return to once the recession ends? This seems like it is approximately the problem facing a central planner trying to run an economy--now that the central committee has decided that we shall stop building so many houses and shall instead focus on non-fossil-fuel power sources, how should I adjust investments in steel mills or plastics factories to adjust to this?

1. "Macroeconomics is rarely simple." Nay! 'tis far worse! It is impossible to use macro to understand macro. All macro phenomena have micro causes. To assert that an economic event has a particular macro cause is merely to identify with precision the exact point at which one gave up trying to truly understand why the event occurred.

2. "Something something something multiplier something something." There will come a day when our children look back with pity at how we were as yet primitive economists, dogmatically holding fast to superstitious beliefs in mythical concepts, such as the magical "multiplier" that our economic elders conjured up to explain the mysteries of the world around them.

Krugman's left eye is in danger.

More than 40% of unemployment in California is in construction.

I've sort of come to the conclusion macroeconomics is simple and we actually know more than we think we do. We just continually try to convince ourselves we can get away with things we know we can't get away with.

1. Gary Gorton's description of the initial financial crises as a banking panic is little different than the standard account of banking panics in any macro class. It makes good sense to me as the prime (though not sole) "cause" of the recession. The particulars of the housing and finance market failures are basic public choice problems.
2. Likewise, a good undergrad should be able to point out after a semester of macro that cyclical unemployment generally hurts replaceable, low-skill workers hardest, that raising the minimum wage going into the mouth of a recession will worsen unemployment, and that extending unemployment benefits for longer periods will keep these folks out of the job market longer.
3. It's generally not emphasized, but should be apparent from basic macro that the biggest stimulus programs that aggregate demand are social security and medicare. While folks talk about the counter-cyclical properties of taxation, unemployment and welfare benefits with some truth, the big transfer programs are much larger in absolute terms and thus probably constitute a much bigger floor under which AD can't fall. And hence, why we've got 10% unemployment vs. the 24% unemployment of 1932.

Throw in the fact that no one has a clue how the health and financial "reform" bills are going to shake out (I teach my intro macro kids about uncertainty, but I grant it's not usually emphasized), and the essential characteristics of this recession look as obvious as any other. The problems are right there, we just keep thinking up newer, and more innovative ways to ignore them and talk about something else.

As economists like to say: "We Never Let Good Theory Get In the Way of Reality"

But, I did like the last line of Tyler's post: "We still don't know what we are doing."

You should copyright it.

WRT Regulator uncertainty:

This is not as stark as it could be, but it's the one I've been following. For profit education stocks should rise in a recession, and they had been, but the geniuses in government are taking exception to the gov't guaranteed loans that have bolstered the profits. There have been rules formulating proposing requirements for "gainful employment" basically putting for profits to a standard that I don't think traditional colleges have had. Recently, the rule proposal came in as less stringent that what was rumored prompting a rebound in the stocks of the companies. Did anything change intrinsically to the business over the course of this rules formulation process? No. The government was simply deciding what the future profitability of the companies could be.

For Profit Ed Businesses

UPDATE 1-US educ. stocks up on softer-than-expected regs

For bonus points, what are some reasons that the stocks actually started rebounding a couple weeks before the rules came in 'softer' than they were rumored to be?

@Andrew, The fact that you worked in an industry with overcapacity should give you the insight that the company did not expand capacity during a recession.

You might want to go to Nagle's book: The Strategy and Tactics of Pricing and read chapter 8 on cost accounting and also look at the formulae you use in deciding whether added fix costs make sense, the effect on marginal costs, contribution margins and recovery periods for investments.

Just remember: Regulatory uncertainty broke out in 2007. Regulatory uncertainty was exeperienced by Japan for 10 years, is currently being experienced in Europe and Japan, and is expected to be over when the NBER announces it.

The Regulatory Uncertainty Fairy also touched the United States, beginning in late 2007.

It occurred to me a little while back that "all the cool kids hate Elizabeth Warren." I don't get totally why, but I'm pretty sure it is an in-group social phenomenon. Part signaling?

@Andrew, Your example of how "regulatory uncertainty" is shown in the stock prices of for profit educational companies is interesting. All it shows is that a stock price will decline when the government ceases being a sucker in subsidizing through student loan guarantees some products that would otherwise fail in the market without support.

That is not regulatory uncertainty. That is regulatory certainty. The government will not be subsidizing certain institutions whose students do not get jobs based on a formula that most public and established non-public institutions could easily achieve.

The same goes to "regulatory uncertainty" in the financial field, by the way. You can't call the international Basel III accords regulatory uncertainty--the effects come from raising the capital standards to reduce financial system risk.

If you call every regulation or change "regulatory uncertainty" -- well, that's interesting -- when you don't offset it with a gain, or recognize the regulation itself might be reducing risks or costs in the system. True, a stock will decline, but not total welfare.

Mulp and john personna:

Warren is not highly thought of because every major she has published has been debunked within 72 hrs.

And while her mistakes are obvious to 90% of the population, she will double down on her poor tactics for the next paper, producing an even sillier result.

Seems to be the exact right person to be hired by the Obama administration.

Why must regulatory uncertainty pretty obviously be a reason in Japan and Europe? In 2010 it's quite possible that the uncertainty is giving way to a new certainty that we live in an increasingly restrictive regulatory structure. We've combined a recession with a move to a new "baseline" wherein there are less incentives to participate in markets. Cyclical unemployment is giving way to structural unemployment.

No one even mentions the greatest uncertainty out there, the Fed. They have failed in their job and resignations should be requested. Banning bankers from it would be the best thing we could do to help the economy.

Tom, can you point to a criticism of Warren not in the McArdle "ideological fisking" mold? Nor the Planet Money "bizarre attack" mode?

I'd have more confidence in criticism of Warren if they weren't so strangely emotional (or in the case of Cowen cryptic).

I think one problem macroeconomics at the moment has is its fixation on Aggregated Demand, which (following the formula) is nothing other than a certain growth and an attempt to show where it comes from (without much certainty about the coefficients).
The problem I have with aggregated demand (and growth for that matter) is that it doesn't deliver much on the side of distinguishing between sustainable and unsustainable growth, because it is too simplistic.

The idea that we can lump together all production and thus come to a growth of the economy, while at the same time trying to draw conclusions from this simplistic number is, imo, wrong. It confuses the picture more than it helps, because one sector of the economy is not like the other and government is not like any kind of sector in the private economy. By mixing all these sectors with different states, different incentives and with different levels of production, might show a glimpse of what happens but doesn't give you much data on what will happen or what the cause of this is.

Though I have no clear solution for this problem, I think one should stop emphasizing and thinking about AD so much and start building from the bottom up rather than from top down. I know this might be difficult and would result in the recognition of a lot of wasted effort, but I think the generalizing and simplifying has brought the macro-economics to a level where no certain argument can be made any more.

But these are only my 2-cents.

Has anyone calculated the "multiplier" for selling Treasury bonds? Keynesian "stimulus" is not just "spending", it is "borrowing and spending". Before the government can write checks for "stimulus", it must first sell bonds to get the money. Accordingly, the total "multiplier" for "stimulus" must equal the sum of the (hopefully positive) spending multiplier and the (assuredly negative) borrowing multiplier. These sum to zero at best, as we have seen every time "stimulus" has been tried (2001, 2008, 2009-2010). While having either a zero or negative impact upon AD, we can expect "stimulus" to have a large negative affect upon future supply, by transferring capital from private business investment to government spending. How bad do things have to get before economists see the obvious?


Please be nice to me.

The links were to Warren's articles, I read the first and skimmed the second.

These were not criticims of Warren's articles; they were Warren's articles.

Give me a hint: tell me what specifically were the errors.

Are there any citations to the critical reviews you mentioned earlier.


Here are a couple of short critiques of Warren's work.

Todd Zywicki also had a critique of her "Two Income Tax Trap" book in the WSJ on page A17 on August 14, 2007.


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