James Pethokoukis

Politics and policy from inside Washington

Zandi and Blinder make a weak case for Big Government

Jul 29, 2010 14:10 UTC

Mark Zandi and Alan Blinder have launched a maximum defense of all the government interventions in the economy since 2008. Without TARP, stimulus, various Fed actions  — the who kit and caboodle – their model estimates the following:

In the scenario that excludes all the extraordinary policies, the downturn con­tinues into 2011. Real GDP falls a stunning 7.4% in 2009 and another 3.7% in 2010 (see Table 3). The peak-to-trough decline in GDP is therefore close to 12%, compared to an actual decline of about 4%. By the time employment hits bottom, some 16.6 million jobs are lost in this scenario—about twice as many as actually were lost. The unemploy­ment rate peaks at 16.5%, and although not determined in this analysis, it would not be surprising if the underemployment rate approached one-fourth of the labor force. The federal budget deficit surges to over $2 trillion in fiscal year 2010, $2.6 trillion in fis­cal year 2011, and $2.25 trillion in FY 2012. Remember, this is with no policy response. With outright deflation in prices and wages in 2009-2011, this dark scenario constitutes a 1930s-like depression.

Here are few counterpoints. First, John Taylor of Stanford:

First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model.  … So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results.  … For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed

And bit from Arnold Kling:

The model assumes a Keynesian world, in which labor is a variable factor of production that responds to incremental increases in aggregate demand. That might be an excellent assumption for 1910, when 73 percent of the work force was blue-collar. By 2000, 73 percent of the work force was white-collar. See Wyatt and Hecker. In today’s Garett Jones economy, labor acts more like a fixed factor. Blinder and Zandi do not know this (they may know it, but I doubt that it is incorporated into the model). So they do not know about jobless recoveries, breakdowns in Okun’s Law, the high ratio of permanent job losses to temporary layoffs, etc. Instead, at best they are living in 1970, with some add factors thrown in to get the model to track recent data. … I know that they think this is for a good cause. They really believe that the stimulus and TARP were good policies that got a bad rap. But in my view that does not justify this unseemly exercise in propaganda dressed up as research.

Me:  And what about the opportunity cost? All those hundreds of billions which could have been “spent” on long-term cuts in corporate and capital gains taxes that would have made America more competitive and boost growth.  Even a tax holiday (as suggested by Art Laffer) would have been a more effective approach. Instead unemployment is headed back to 10 percent and GDP growth is sliding back toward 2 percent.

COMMENT

CDNRebel: Average American corporate tax levels stand at 38%, exceeded only by the Japanese, whose rates are 39% or higher. Canada’s corporate tax rates stand at 29% and are falling quickly. Irish tax rates are 15% (!). America taxes its corporations much too heavily and, believe it or not, America now has to compete with low-tax jurisdictions elsewhere. Chase away the big corporations and all their jobs with confiscatory taxation and you will never, EVER, replace all the jobs lost during the most recent recession. There is a lot going on outside America’s borders, more than just China. Try getting informed about it.

Posted by Gotthardbahn | Report as abusive

Why this may still be the American Century

Dec 29, 2009 18:31 UTC

The always fantastic Joel Kotkin lays out the argument:

Demographics

By 2030, all our major rivals, save India, will be declining, with ever-larger numbers of retirees and a shrinking labor force.  … By then, the U.S. will have 400 million people, which may be more than the entire EU and three times the population of our former archrival Russia.

Energy

In terms of energy resources, the U.S., combined with Canada, is the second richest region in the world after the Middle East. The country possesses vast resources of natural gas, about 90 years’ worth, as well as strong areas for wind power.

Food

America remains the world’s agricultural superpower, with the most arable land on the planet. With another 3 billion people expected on the planet by 2050, the U.S. should enjoy a continuing boom in food exports.

Military

The U.S. leads in military technology and, yes, our martial spirit remains a positive factor … Europe and Japan have taken themselves out of the military game, and it will be decades before China will be ready for a head-to-head challenge.

Innovation

There is no large country that comes close to the U.S. as an entrepreneurial hotbed (Taiwan, Israel and Hong Kong come close but are far smaller). The recent Legatum Prosperity Index showed the U.S. remains by far the largest generator of new ideas and companies on the planet.

Diversity

Over the past decade America has produced two African-American Secretaries of State and one President. America remains unique in its ability to absorb different races, religions and cultures, an increasingly critical factor in maintaining global preeminence.

COMMENT

The mantra that ethnic “diversity” is a factor in US global predominance has no basis in reality.

By 2050 at the latest, America will be majority non-white. Can anyone imagine Brazil as a superpower? Enough said.

Posted by Mega | Report as abusive

Paul Krugman and the New Normal

Dec 28, 2009 15:26 UTC

Paul Krugman makes his case for the New Normal:

1) Earlier recessions were preceded by sharp rises in interest rates, as the Fed tried to choke off inflation. This produced a housing slump, with a lot of pent-up demand; when the Fed decided that we had suffered enough, it relented, and both housing and the economy sprang back.

2) But later recessions took place in a low-inflation environment, in which booms died natural deaths from overextended credit and overbuilding. Getting the economy growing fast enough to bring unemployment down after these recessions was therefore much harder, since the usual channel of monetary policy — housing — lacked any pent-up demand.

3) So what about our current situation? It’s just like the two previous “postmodern” recessions, only more so, since the bubble before the slump was in housing itself. This suggests a long period of jobless growth; so does the international evidence on the aftermath of financial crises.

That said, there’s been a lot of optimism out there lately, reflected in the steepening yield curve. I’d like to think that’s right. But Ed McKelvey at Goldman (no link) has a new report titled “Recovery more Ho-Hum than Ho-ho-ho”, in which he acknowledges that growth will be good this quarter, but presents evidence that it’s all a temporary inventory bounce.

Goldman Sachs 2011 forecast would be an absolute disaster for Dems

Dec 3, 2009 00:32 UTC

This would be New Normal with extreme prejudice. Bad for Democratic incumbents in the 2010 congressional midterms, but it should make the White House political team nervous as well for 2012. If Goldman Sachs is right, of course. Here is the firm’s 2011 forecast:

The key features of our 2011 outlook: (1) a strengthening in growth from 2.1% on average in 2010 to 2.4% in 2011, with real GDP rising at an above-potential 3½% pace in late 2011; (2) a peaking in unemployment in mid-2011 at about 10¾%; (3) extremely low inflation – close to zero on a core basis during 2011; and (4) a continuation of the Fed’s (near) zero interest rate policy (ZIRP) throughout 2011.

That said we see risks that could upset these markets.  On the one hand, we might be underestimating the vigor of the economic recovery, and therefore the pressures for Fed tightening.  In addition, surging asset prices and worries about a “bubble” could prompt Fed officials to tighten before such a move seems warranted on real-economy grounds.  On the other hand, the economy (and the markets) could struggle under the weight of credit restraint for small businesses, weakness in commercial real estate markets, or fiscal tightening, especially by state and local governments.

The implications? I hardly know where to begin: a) with unemployment rising all next year, a GOP blowout in 2010; b) certainly more job creation packages; c) no capandtrade; d) increased anti-Wall Street/Fed sentiment; e) third party prez candidate in 2012; an Obama challenger in 2012 (Dean?). But who really knows. This would be like a technological singularity where seeing beyond the event is pretty much impossible. Such a Long Recession (essentially) would be so contrary to American expecatations — such a slow-mo, psychological shock — that it would be a full-out system perturbation equivalent to 9-11 or the Iraq War.

COMMENT

If GS Said they were Lying I wouldn’t Believe Them!

Posted by tmajor | Report as abusive

There are worries … and then there are worries

Nov 30, 2009 19:49 UTC

David Goldman sums it up:

Far more worrying [than Dubai] is the commercial real estate problem in the United
States, the continued high rate of homeowner deliquency, the huge
backlog of foreclosures–in short, the whole range of problems that stem
from an effective unemployment rate (including “discouraged” and
underemployed workers) of 17.5%. The cumulative effect of the popping
of innumerable mini-bubbles, none of which are large enough to take
down the system but all of whom together constitute a millstone around
the neck of the banking system, will keep lending weak and the economy
in very, very prolonged recession.

COMMENT

…but the stock market is still up…and housing prices are risingand if I click these ruby slippers together and chant “There’s no place like home. Nam Myoho Renge Kyo.” surely things will get better without actually having to institute appropriate and sensible public policy.

Posted by bryan | Report as abusive

Dobbs, 2012 and the ghost of Perot

Nov 27, 2009 15:45 UTC

If former CNN anchorman Lou Dobbs decides to make an independent bid for president in 2012, he will probably find the political climate as hospitable for an insurgent run — if not more so — as it was in 1992, when Ross Perot captured a fifth of the popular vote. (It was the best showing by a third-party candidate since Bull Moose Teddy Roosevelt finished second with 27.4 percent of the vote in 1912.)

The dreary economic New Normal that is the aftermath of the Great Recession has created a huge political opening for Dobbs or Michael Bloomberg or Sarah Palin, or some other American with high visibility or deep pockets or both.

It was a slow-recovering economy and concern about big deficits that drove the Perot phenomenon. There’s a high probability both factors will be at play three years from now. The Center on Budget and Policy Priorities forecasts annual budget deficits to average $1.2 trillion over the next three years. And the Federal Reserve is forecasting a so-so economic expansion that will leave unemployment over 7 percent in 2012. Overall, the nation’s economic mood might be a lot worse than it was in 1992.

Then you have a populist, anti-Wall Street sentiment that neither Democrats nor Republicans have been able to capture successfully. The result is that party loyalties are frayed, with the tea party movement one manifestation. According to the Pew Research Center, 36 percent of Americans identify themselves as independents, the highest number since 1992. And they seem to be up for grabs. Barack Obama won 52 percent of the independent vote in 2008. But a recent poll by Rasmussen Reports shows Obama with a 61 percent disapproval rating among the group.

None of this means an independent would actually win. Rasmussen has Dobbs at 14 percent in a race with President Obama (42 percent) and Mitt Romney (34 percent.) With the more populist Palin replacing Romney, Dobbs gets 12 percent versus 44 percent for Obama and 37 percent for Palin.  Yet without Dobbs in the race, Romney is tied with Obama and Palin trails by just three. So an independent could, at the very least, radically alter the political landscape.

And not just for the GOP. Unhappiness about an escalation in the Afghanistan war and muddled healthcare reform could create a more liberal independent challenger. Take Howard Dean, for instance. The former Vermont governor and chairman of the Democratic National Committee has been ripping ObamaCare lately and says he would vote with Sen. Bernie Sanders of Vermont, an independent socialist, against it if he were a senator. And Dean sure knows how to use the Internet to raise money, as he showed in his 2004 run for the Democratic nomination.

But here is the bottom line: If the New Normal turns out to be worse than expected, with the GOP blamed for the original collapse and Democrats for a bungled remedy, an independent might accomplish much more than just being a spoiler.

COMMENT

Jim Gilchrist,who is a leader of more than a million Minuteman, Viet Nam vet with Purple Heart and other medals, charisma, well spoken, well known, been on turncoat Lou Dobbs Show, idiot Larry King Live Show and Fox News etc. retired accountant and nice guy. The fact that he is not a corrupt politician is gold. He will have the Minutemen,people who think like the Minutemen like us and the Vets behind him. He is a lot better than obama and the ones on the right by far for president.Lou Dobbs is a con artist with a hidden agenda for Money and Fame. Anyone who is really against amnesty and illegal has it in them like an arm or a leg. So he was never against amnesty and illegal from the beginning. Just the only way he could get Money and Fame. Schemer with illusions of Grandeur. Opportunist. Who is going to vote for him now other than his own family? That turncoat is a joke. The stunt he pulled would be like Rush coming out and saying he was really a Democrat. Dobbs stabbed his listeners in the back with really being for amnesty all these years for the money. But telling his audience he was against amnesty, illegal like them. Should be some kind of law against it.Palin is another one who is a schemer with illusions of grandeur. Opportunist. United the Republican base with religion and morals. She is copying bush’s strategy of using the fundies to be elected. After the fundies left the oval office bush and the Republicans made fun of them. How can these fundies be duped twice? But then the liberal left fundiea and left are duped by obama. Separation of Church and State. What is she going to do rule the country with the Bible instead of the Constitution? Well seeing as how she didn’t know what NAFTA was she doesn’t know the Constitution either. She left being governor of Alaska with how many? 50 ethic violations? She was against the poor polar bears etc when she was governor. Hypocrite hunts for the thrill of the kill. She is a big joke too.4th generation Democrat no longer and never again. There is no such thing as a Democrat today. My father’s Democratic Party when men were men and took care of their own, would never have been for illegal, foreign workers, amnesty, CAFTA, NAFTA, outsourcing, North American Unoin, NWO etc. like these so called Democrats today. The Democrats of today are just the opposite of my father’S Democratic Party, who were all for the Americans and US Made.

Posted by Darraugh | Report as abusive

Goldman Sachs forecasts nightmare 2010 economic scenario for Dems

Nov 21, 2009 03:10 UTC

Trust me, these are not the kind of numbers that the White House and congressional Democrats want to see. Goldman Sachs is now forecasting unemployment to rise all next year, peaking at 10.5 percent. The firm expects the economy to grow at just 2.1 percent. Also, the budget deficit will be a few billion bigger at $1.6 trillion. If correct, these stats absolutely confirm the collective freakout happening right now among Ds on Capitol Hill, such as calling for Geithner to resign. Economist Jan Hatzius:

Until hiring resumes in earnest, the jobless rate is apt to keep drifting up. This is less tautological than it sounds, as net changes in unemployment mask significant flows into and out of the pool of unemployed workers. However, most research finds that stronger hiring rather than reduced layoffs is the key driver of changes in unemployment early in a recovery. Unfortunately, none of the indicators of labor demand—job vacancies, help-wanted indexes, and consumers’ perceptions of job availability— shows any significant sign of life. The best that we can find is that respondents to the Michigan confidence survey, who have a decent track record for forecasting one-year changes in unemployment, are looking tentatively for stabilization.

COMMENT

Their only argument will be that things would have been worse if they hadn’t been in charge. How well will that go over?

The Fed’s ‘crystal meth’ monetary policy

Nov 20, 2009 18:50 UTC

A classic from David Goldman:

The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in. … It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.

COMMENT

Monetary policy is one of the tools that a national Government uses to influence its economy. It is mainly used to low unemployment, low inflation, economic growth, and a balance of external payments.
http://www.mikeastrachan.com/

Posted by Nikkilarsson | Report as abusive

Here’s what happened to cap-and-trade, and why it’s in deep trouble

Nov 17, 2009 14:03 UTC

I am writing a column on this for later today, but I wanted to toss out a few quick thoughts on the state of cap-and-trade. Other than the die-hard greenies, Dems don’t want this bill anymore than Republicans. It is too easy to frame cap-and-trade as both a jobs killer and a distraction from job creation. Actually, some Rs would love for Dems to push this bill since it makes such a great election issue.

But it’s not happening in 2010, which means it not happening during Obama’s term since even under the most optimistic scenario, the Ds will have less control of Congress in 2011 and 2012 than they do now. And under more dire scenarios for the Dems, they lose maybe 4 Senate seats. Do not underestimate the extent to which the Great Recession has affected the issues agenda and political situation in Washington. And an extended period of high unemployment will only exacerbate that. (Bernanke’s speech yesterday was another indication how this is now the new Washington consensus.) The New Normal in economics means a New Normal in politics, too.

COMMENT

Well Obama also sees the writing on the wall in 2012 and will move to use Executive Orders and Agency regulations to circumvent congress on Many issues including Cap and Trade.. The EPA will be used in controlling Carbon without Congressional oversite or approval. Like Muslims, don’t believe a word that comes out of their mouths, watch what they do.. Like Muslims their playbook also tells them to lie to unbelievers

Posted by Ballistic45 | Report as abusive

Obama, trade and the echoes of 1929

Nov 13, 2009 14:04 UTC

This is the most disturbing thing I have read in a while (via AP):

Trade agreements with South Korea, Colombia and Panama won’t be put before Congress until it grapples first with President Barack Obama’s pressing legislative goals, the U.S. commerce secretary said Friday. Commerce Secretary Gary Locke said Obama has an ambitious high-priority legislative agenda focusing on health care, financial regulation and alternative energy. “Trade agreements are going to have to wait,” he said at a luncheon hosted by the American Chamber of Commerce in Singapore. “Right now, the administration is focused on a very aggressive and very tight legislative agenda.”

Me: This sounds like Hillary’s “time out” from free trade during the campaign.

COMMENT

Time for a reality check here. In 1929 the US raised tariffs on over 20,000 imported items, sparking retaliations by all its major trading partners. Can you explain how putting a few minor bilateral free trade agreements on hold equates to that disastrous situation? The situation today is nowhere near as disturbing as you make out.

Posted by Kramer | Report as abusive
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