Robert Samuelson Fudges More Numbers

Robert Samuelson is expressing skepticism about the success of the stimulus:

There’s the puzzle: monster stimulus, midget recovery.

How to explain the contrasting stories?

If Samuelson, an economics commentator, actually followed his subject, he would be aware that the stimulus was not so big in relation to the gap it needed to cover. Dean Baker has been addressing this issue for years.

The arithmetic on this is straightforward. With the collapse of the bubble, we suddenly had a huge glut of unsold homes. As a result, housing construction plunged from record highs to 50-year lows. The loss in annual construction demand was more than $600 billion. Similarly, the loss of $8 trillion in housing equity sent consumption plunging. People no longer had equity in their homes against which to borrow, and even the people who did would face considerably tougher lending conditions. The drop in annual consumption was on the order of $500 billion.

The collapse of the bubble in nonresidential real estate cost the economy another $150 billion in annual demand, as did the cutbacks in state and local government spending as a result of lost tax revenue. This brings the loss in annual demand as a result of the collapse of the bubble to $1.4 trillion.

Compared with this loss of private sector demand, the stimulus was about $700 billion, excluding some technical tax fixes that are done every year and have nothing to do with stimulus. Roughly $300 billion of this was for 2009 and another $300 billion for 2010, with the rest of the spending spread over later years.

In other words, we were trying offset a loss of $1.4 trillion in annual demand with a stimulus package of $300 billion a year. Surprise! This was not enough.

It's not as if Dean Baker is alone in his opinion. Paul Krugman seems prescient in describing Samuelson's form of analysis:

So why does everyone — or, to be more accurate, everyone except those who have seriously studied the issue — believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.

There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

This is not, by the way, a case of making excuses after the fact. Regular readers know that I was more or less tearing my hair out in early 2009, warning that the Recovery Act was inadequate — and that by falling short, the act would end up discrediting the very idea of stimulus. And so it proved.

But, you know, Samuelson found an economist you've probably never heard of before, and the guy has a position at a brand name university and a blog, so why research any more deeply into the subject? Samuelson's primary argument is that we should live in fear of dire consequences that never materialized, and thus that the government should do nothing more to stimulate the economy. Fortunately for him, the Republican Party is on his side so we're apt to see the painfully slow recovery continue to inch along. If another recession hits soon, Samuelson may discover out that the phrase, "an economy in eclipse," has more significance than as a parting shot taken at those who actually understand the subject.

Unemployment at a Glance

For those who don't already know, Calculated Risk routinely posts updated graphs showing the impact of the financial industry meltdown and slow recovery on the unemployment rate, and comparing job losses from the present recession to those of past recessions. The latest update is here.

Republicans Are Serious About the Deficit

Hey, Republicans, how about we extend unemployment benefits to help people out in this horrible job economy?¹

Not unless you cut spending elsewhere - we can't increase the deficit.

Well, we could more than pay for extended unemployment by allowing the Bush tax increases to come into effect for the nation's highest wage earners.

Out of the question.

But won't the extension of tax cuts run up the deficit to the tune of about $70 billion per year? Are you going to propose spending cuts to make up the difference?

Spending cuts, wha...? No. This is completely different.

How?

It just is.

Well, perhaps we can reach a reasonable compromise?

How about we extend tax cuts for everybody, and extend unemployment benefits as well?

You mean, blow an even bigger hole in the budget?

No, it is simply the avoidance of raising taxes in a difficult time, and by cutting taxes and increasing the deficit we're actually demonstrating fiscal responsibility. Hm. I'll come up with a euphemism if you give me a moment, then you'll see how it all makes sense.

You have to love (real) statements like this:

"I think it's pretty clear now that taxes are not going up on anybody in the middle of this recession," McConnell said in an interview on NBC's "Meet the Press" program. "We're discussing how long we should maintain current tax rates."

One would think that Sen. McConnell would be aware that the recession officially ended in June, 2009. That the current problem is a jobless recovery. That the wealthy are doing better than ever, but aren't "creating jobs".

In fairness, my guess is that he knows all of that - but will happily blow smoke up the skirts of our credulous mainstream media - after all, odds are nobody will call him on his mendacity.
---------------
1. I single out the Republicans not because I believe the Democrats are markedly better on these issues - I believe the reason the Dems painted themselves into this corner is because between 1/3 and 2/3 of them would just as soon join hands with the Republicans and implement policies that work overwhelmingly to the favor of the wealthy, and they thus couldn't get their act together before the election to pass a tax bill that would have caused pain, even at the level of a pinprick, to the nation's top business executives, bankers and hedge fund managers. I single them out because their hypocrisy is so over-the-top, and yet seems to elude mainstream media analysis. (But then, same paymasters.)

You Can Have Your Spending Cuts and Eat Them Too

Following the recent election in the U.K., the governing coalition has set about trying to address the U.K.'s structural deficit. In association with that, they've proposed massive cuts in government spending and massive reductions in the government payroll. Cynics suggest that the government is grabbing onto the current economic crisis as an excuse to continue the policies of the Thatcher Administration and to undermine public programs that the Conservative Party has long hoped to scale back or privatize. But you don't have to be cynical to recognize that a structural deficit is not a good thing - even when granting that a government's budget deficits are not the same thing as a household's spending more money than it earns, year after year, a government should strive for a budget that can be balanced.

The fact that the government is able to create a relatively short-term, albeit painful, path out of its "structural" deficits suggests that the problem is not as "structural" as they would have the public believe. Fundamentally, the issue is whether it would be better public policy on the whole to raise taxes or to cut spending, and to recognize that the two aren't mutually exclusive. By claiming a structural problem and a necessity of action, the ruling coalition avoids having to engage in debate over public policy.

But there's another question, specifically whether the timing is right for budget austerity. Paul Krugman argues that it's not:

There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

If the cynics are correct, the government won't admit that it was wrong because they're exploiting the crisis as a reason to implement unpopular policies, perhaps while silently accepting that the cuts could make things worse. But at the same time, as Krugman acknowledges, "there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases."

So here's the thing: It is possible to debate public policy and engage in long-term planning, even when the economy is weak. It is possible to start to implement a restructuring or budget cutting process in certain areas of the economy, even when the economy is weak. And it's possible to do all of that while continuing a deficit and engaging in stimulus spending out of recognition that it could help the nation emerge from its economic difficulties. If you do all three, the public will understand your budget cuts and priorities, you should eliminate some inefficiencies and make it easier to balance the budget when the crisis passes, but you can still use government spending to help stimulate the economy.

As Krugman notes, the actual economic picture in the U.K. along with the government's rhetoric lends considerable support to the views of the cynics. If that interpretation is correct, I doubt that the government will embrace a program of spending that suggests that the U.K. can continue to afford significant short-term deficits, even if that's what's best for the country, because then they would have to engage in a public policy debate about the budget items they're cutting, explain their priorities, and explain why cuts can't be smaller or can't be deferred. But a responsible government can simultaneously tackle a structural deficit and make cuts in a variety of public spending programs while running larger-than-usual deficits and engaging in stimulus spending.

Money is Money is Money

It's interesting that we hear people talk about bank, investor and corporate money sitting on the sidelines, waiting to be poured into a revitalized economy,¹ or that the economy will come around as soon as consumers stop saving too much money.²

The recession has wiped out about $14 trillion in wealth and, contrary to the suggestion that driving the savings rate down to a near-zero level will bring the good times back, the period before the recession was an era of negative savings. Many people were spending more than they earned, spending every cent of equity they could pull out of their house, or both. Ah, but if only consumer spending were once again that high the good times would roll, right?

Along comes John Boehner, implicating an age-old question by yammering,

As the American people, facing near double-digit unemployment, mark Labor Day by asking, where are the jobs, the White House has chosen to double-down on more of the same failed 'stimulus' spending. Eighteen months ago, the Administration promised that if we passed their trillion-dollar 'stimulus' it would create jobs 'immediately' and keep unemployment below eight percent. Instead, millions of Americans have lost their jobs, and unemployment is approaching 10 percent. If we've learned anything from the past 18 months, it's that we can't spend our way to prosperity. We don't need more government 'stimulus' spending - we need to end Washington Democrats' out-of-control spending spree, stop their tax hikes, and create jobs by eliminating the job-killing uncertainty that is hampering our small businesses.

Seriously. The best evidence we have indicates that the stimulus has succeeded to the extent that it could, but that it was too small to do more. But more to the point, how do you pull out of a recession if nobody is spending? Boehner has never given a rat's patootie about facts, so don't expect to hear any answers from him except, perhaps, why we must give huge tax cuts to the wealthy.

It appears that when he's not mindlessly railing against the President, Boehner is happy to take credit for bringing stimulus funds to his district and that those funds create jobs.

----------
1. Reality or myth?

2. It is fascinating to me that Robert Samuelson, a man who wants to slash and burn Social Security, believes a 6% consumer savings rate is harmful to the economy. If his dream comes true, how does he expect people to support themselves, post-retirement, if they aren't saving substantially more than that?

It's also fair to observe that money doesn't disappear merely because it is saved - it goes into the financial institutions, which are free to invest or lend the money.

Paul Krugman's Optimism

Via eschaton, Why Paul Krugman Is Perhaps The Biggest Economic Optimist There Is.

If his premise is correct -- that basically we're suffering from a demand slump, but that there's no fundamental, structural economic flaw -- then, folks, we have a very solvable problem on our hands. The bond market certainly isn't an imminent impediment to our spending, and the Fed will scarf up whatever it needs to on the debt side.

Bottom line: Paul Krugman thinks the solution to the economic malaise is fairly simple, and thus he can't think the slump is fundamentally that bad. He's an optimist.

But that optimism raises a few questions:

1. Is it desirable to go back to the status quo ante? Is our future really best served by relying upon the nation's wage earners spending every cent that they earn, and then some, in order to consume goods increasingly produced overseas? Shouldn't we consider laying a more reliable foundation for the nation's economic future?

2. Is it sustainable to return to the status quo ante? Aren't we simply setting ourselves up for another crash, once the world's economic machine turns back to sating the American consumer, demand for oil spikes, oil futures skyrocket, and gas goes back to $4+/gallon? Even if we assume that we can go back to the way things were for a few years or decades, what then?

3. Is it possible to go back to the status quo ante? With due respect to people like Robert Samuelson who seem to believe that the nation's only problem is a lack of consumer confidence ("What, me worry?"), and we can "fix" the world's problems by dropping the typical consumer's savings rate back to about 0%, where will consumers get the kind of money they were spending before the crash? Are lenders again going to be profligate? Are we going to reinflate the housing bubble? Will the significant population of displaced workers with marginal job skills to be absorbed back into the job market by a revitalized economy, or should their continued plight be viewed as irrelevant to recovery?

It may be that in the short term, going back to "the way things were" is the best way to get the economy moving, but we had better start developing and implementing a long-term strategy. (Yes, I expect to be saying that right up to the point something unpleasant hits the fan and we have to act.)

It's More Than a Feeling

Robert Samuelson appears to believe that the biggest economic problem that our nation faces is that we're being too economically cautious, feeding a negative psychology that extends the recession. I think he's misinterpreting the data.

Not surprisingly, [a Pew survey and evaluation of economic data] confirms that Americans have become more frugal; 71 percent say they're buying less expensive brands, 57 percent say they've trimmed or eliminated vacations. Life plans have changed; 11 percent say they've postponed marriage or children, while 9 percent have moved back with parents.

Frugality is about avoiding unnecessary expenditure - it's volitional. The phenomenon at issue is better described as economic distress. People are delaying purchases and canceling vacations because they can't afford them. Adult children are moving in with their parents because they either can't find jobs or the jobs they find don't pay sufficient salaries to allow them to support independent households. People are postponing marriage and children for the same reason - economic stress. Samuelson writes:

Almost one-fifth of workers 16 to 24 were unemployed at the end of 2009, a near doubling since late 2007. Among those without a high school diploma, joblessness was 50 percent higher than the average....

First, the huge job loss: By most measures (length of unemployment, permanent firings vs. temporary layoffs), joblessness is the worst since World War II. Unemployment among college graduates roughly doubled, to about 5 percent....

Second, pay cuts: These have affected almost a quarter of workers, including nearly a fifth of those with family incomes exceeding $75,000. Some workers also have had to take unpaid leave or part-time work.

So he has data right in front of him indicating that economic choices are driven largely by circumstance. Nonetheless he suggests that "it's all in your head" - stating that as a result of reductions in house values and stock market wealth:

A reverse wealth effect has gripped the upper middle class. Feeling poorer, people have saved more and spent less.

It doesn't occur to him that the people who can't find jobs, who've taken involuntary leave, been reduced to part time hours, have taken pay cuts, who are borrowing money from friends and family just to get by, actually are poorer?

Samuelson should also take note that the one group he singles out as isolated from all of this pessimism is the group that is best protected by the social safety net:

One interesting finding is that the elderly have been relatively sheltered. Adults 65 and older, according to Pew, "are much less likely than younger age groups to have cut back on spending, loaned or borrowed money, had trouble paying for medical bills or housing, or had to increase their credit card debt." For example, 28 percent of Americans under 65 borrowed money from family or friends; only 5 percent of those 65 and older did. Confidence in retirement savings dropped most sharply for younger Americans (including those 50 to 64), not those 65 and over.

Somebody who is paying attention might infer that Social Security and Medicare are doing what they were designed to do - helping their beneficiaries weather tough economic times. Robert "How Fast Can We Cut Social Security and Medicare to Pay for Wars I Favor" Samuelson? He's surprised.

The Pew survey shows that the effects of the recession get smaller as income rises - no surprise there. Unfortunately the highest annual family income they examine is "$75,000+", but for people who self-describe as "upper class" the impact of the recession seems pretty modest with a third reporting an improvement in their financial circumstances and almost a third reporting no change.

My guess is that when you move into the rarified atmosphere of Samuelson's Bethesda neighborhood, for the well-established doctors, lawyers, bankers and media figures living there, the worst is over. Sure, a few people suffered serious setbacks and had to move - and apparently for somebody like Samuelson, "out of sight, out of mind". Life's pretty much back to normal, save perhaps for "losses on paper" resulting from the weakened housing market or reduced retirement savings.

There's nothing wrong with doing well in difficult financial times but, even if you don't have data that proves otherwise, there is a serious logical problem in assuming that everybody else is similarly situated. It seems that Samuelson believes that if he and his neighbors can go back to their prior affluent lifestyles, assuming their spending even slowed down, it's impossible that the "Great Recession" is more than a psychological phenomenon. But the optimism Samuelson sees as its cure is more likely to return not when "the Great Recession releases its stranglehold on the American psyche" but when it releases its stranglehold on the American pocketbook.