OBAMA PLAN

The Way We Live Now
The Edge of the Mystery
By MATT BAI
In the days before he is inaugurated, a president-to-be is a projection of his aura and of our anticipation. But few things can diminish so quickly.



January 19, 2009
A Response to Comments on Samuelson on Hayek
The response is from Barkley Rosser:



Monday, January 19, 2009
Infrastructure Spending as Stimulus
From Nobel laureate Gary Becker:
... ... .... .... ...

Why the Conversion to Keynes? - Consider the Evidence




OP-ED COLUMNIST - January 26, 2009
Money for Nothing
By DAVE KRASNE
What’s been lost in the uproar over Wall Street bonuses is how completely the culture of executive compensation has permeated the financial industry.


OP-ED COLUMNIST - January 26, 2009
The Same Old Song
By BOB HERBERT
Republican policies have brought the country to a deplorable state. But the party is still at it, attacking President Obama’s stimulus plan and calling for ever more tax cuts.




23/01/2009 - 01h37
Reativando a economia dos Estados Unidos
Krishna Guha
As reduções de impostos e investimentos extras planejados pelo governo Obama são tidas como iniciativas válidas, mas há dúvidas quanto à duração dos efeitos e ao momento em que eles se farão presentes


January 19, 2009
"Economists, Ideology, and Stimulus"
Paul Krugman says what I've been trying to say:
... ... ....



Monday, January 19, 2009
Voodoo maths and dead banks
I am not afraid of the N word (nationalisation). Real capitalists nationalise – meaning if the taxpayer takes the risk the taxpayer gets (any) upside. However I want to take issue with Professor Krugman’s NYT editorial today. Krugman accuses members of the incoming administration of believing in voodoo rituals to keep banks alive. He takes a worthy shot at the person I most dislike amongst the continuing economic team (Sheila Bair). But I still think Paul has his maths wrong.
Here is the key part of the article – with Gotham being a thinly disguised moniker for Citigroup.
... .... .....




OP-ED COLUMNIST
Bad Faith Economics
By PAUL KRUGMANCheap shots don’t pose as much danger to the Obama administration’s efforts to get a stimulus plan through as fraudulent arguments that seem superficially plausible.
Published: January 25, 2009

27/01/2009 - 00h01
Krugman: economia da má-fé
Paul Krugman
Colunista do The New York Times
Enquanto avança o debate sobre o plano de estímulo econômico do presidente Barack Obama, uma coisa é certa: muitos adversários do plano não estão argumentando de boa-fé. Os conservadores realmente, realmente, não querem ver um segundo New Deal, e certamente não querem ver o ativismo do governo justificado. Por isso eles procuram qualquer coisa que possam encontrar para atacar as propostas de aumento de gastos do governo. ... ... .... ..... .....



Fala de Obama causa ansiedade
Paul Krugman - Folha, 24-01-09
Crítica incisiva ao discurso de Obama

Stuck in the Muddle
By PAUL KRUGMAN. Published: January 22, 2009. Like anyone who pays attention to business ... Fred R. Conrad/The New York Times.
Paul Krugman ...January 23, 2009 -
By PAUL KRUGMAN - Opinion


OP-ED COLUMNIST
Published: January 18, 2009
Wall Street Voodoo
By PAUL KRUGMAN
Many influential people in Washington seem to believe that by performing elaborate financial rituals we can keep dead banks walking.


January 17, 2009
Krugman: What Obama Must Do
Paul Krugman with What Obama Must Do, A Letter to the New President:
Dear Mr. President:


Op-Ed Columnist
Forgive and Forget?
By PAUL KRUGMAN
Published: January 15, 2009

The New York Times
17/01/2009 - 00h01
Krugman: perdoar e esquecer?


Op-Ed Columnist
Ideas for Obama
By PAUL KRUGMAN - comments (438)
Published: January 11, 2009


January 11, 2009
Paul Krugman: Ideas for Obama
The surge needs to be sustained. That is,"Mr. Obama needs to make his plan bigger," and to ensure that the recovery effort persists beyond the initial large impulse called for in the proposal:
Ideas for Obama, by Paul Krugman, Commentary, NY Times: Last week President-elect Barack Obama was asked to respond to critics who say that his stimulus plan won’t do enough to help the economy. Mr. Obama answered that he wants to hear ideas about “how to spend money efficiently and effectively to jump-start the economy.”
O.K., I’ll bite — although as I’ll explain..., the “jump-start” metaphor is part of the problem.
First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.
Money not squandered on ineffective tax cuts could be used to provide ... enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies ... that will be essential if we’re going to achieve universal health care?
Mainly, though, Mr. Obama needs to make his plan bigger. To see why, consider a new report from his own economic team.
On Saturday, Christina Romer,... future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. ...
According to Ms. Romer and Mr. Bernstein, the Obama plan would have its maximum impact in the fourth quarter of 2010. Without the plan, they project, the unemployment rate in that quarter would be a disastrous 8.8 percent. Yet even with the plan, unemployment would be 7 percent — roughly as high as ... now.
After 2010, the report says, the effects of the economic plan would rapidly fade away. The job of promoting full recovery would, however, remain undone: the unemployment rate would still be a painful 6.3 percent in the last quarter of 2011.
Now,... I’m with Lawrence Summers ... who recently declared, “In this crisis, doing too little poses a greater threat than doing too much.” Unfortunately, that principle isn’t reflected in the current plan.
So how can Mr. Obama do more? By including a lot more public investment in his plan — which will be possible if he takes a longer view.
The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts.” It argues, however, that “there is a limit on how much government investment can be carried out efficiently in a short time frame.” But why does the time frame have to be short?
As far as I can tell, Mr. Obama’s planners have focused on investment projects that will deliver their main jobs boost over the next two years. But since unemployment is likely to remain high well beyond that two-year window, the plan should also include longer-term investment projects. ...
If Mr. Obama drops the “jump-start” metaphor, if he accepts the reality that we need a multi-year program rather than a short burst of activity, he can create a lot more jobs through government investment, even in the near term. ...
One more thing: even with the Obama plan, the Romer-Bernstein report predicts an average unemployment rate of 7.3 percent over the next three years. That’s a scary number, big enough to pose a real risk that the U.S. economy will get stuck in a Japan-type deflationary trap.
So my advice to the Obama team is to scrap the business tax cuts, and, more important, to deal with the threat of doing too little by doing more. And the way to do more is to stop talking about jump-starts and look more broadly at the possibilities for government investment.


Christina Romer on YouTube on the Stimulus Plan
Paul Krugman is pushing for more:
More on Romer/Bernstein: Still picking over the Romer/Bernstein official evaluation of the Obama economic plan. Again, kudos to the team for producing such a clear, honest assessment. But the more I look at the report, the more I wonder why anyone in the Obama team thinks the plan is adequate.
Here’s one way to look at it: R/B show the effects of the plan rapidly fading out during 2011. Yet at the end of 2011 the unemployment rate is still 6.3%. Meanwhile, the CBO estimates the natural rate, aka “full employment,” at just 4.8%. Why does the plan go away with the job undone?
Add: By my calculations, the Obama plan is supposed to reduce average unemployment over the next two years from 8.7% to 7.6%; over the next three years, it reduces average unemployment from 8.4% to 7.3%. So it closes around a third of the gap between actual unemployment and the natural rate. Plus, an average rate of unemployment 2.5 percentage points above the natural rate for 3 years, starting with a core inflation rate of 2.5, looks like deflation city to me — and remember, that’s the projection with the Obama plan.
I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level, but that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car -- the possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some. Essentially, I am arguing that there are crucial economic and psychological "tipping points" that must be reached in order for the economic recovery package to be effective (or at least, there's enough of a chance that they exist that they cannot be ignored when formulating robust policy). However, an email suggests looking at another perspective:
Obama's Price is Right Negotiating Strategy?, by Nate Silver: So it turns out that the Senate Democrats are not entirely happy about the Obama administration's proposal to spend "only" $800 billion or so on the economic stimulus package, about $300 billion of which would be devoted to tax cuts. Not just any Senate Democrats are angry, moreover, but a series of VIPs who ... command a great deal of respect on the Hill...My question is: can Obama really be entirely surprised that this is happening?Before you answer, consider who we haven't heard very much from the past couple of days. We haven't heard very much from Mitch McConnell. And we haven't heard very much from the Blue Dogs. Nobody seems (publicly) to be taking the position that the $800 billion is too much, at least provided that it comes with $300 billion of tax cuts.Now consider what Obama told CNBC the other day:
Obama also confirmed that he plans to lay out a roughly $775 billion economic stimulus plan on Thursday but indicated that the amount could grow once it gets taken up by Congress.
"We've seen ranges from $800 (billion) to $1.3 trillion," he said. "And our attitude was that given the legislative process, if we start towards the low end of that, we'll see how it develops."
Obama isn't picking these numbers out on accident. This range -- $800 billion to $1.3 trillion -- is most likely the range of outcomes that his administration considers acceptable. He says that "given the legislative process", he's deliberately chosen a number on the lower end of that range.What does this mean? It means he wants the Senate Democrats to do his dirty work for him. All of the sudden, the administration, which is about to spend at least $800 billion, gets to play the role of the fiscally prudent tightwads, negotiating against the Senate Democrats. This has at least two benefits. One, it requires less of the administration's political capital to sell the package. And two, it completely co-opts the conservative opposition. ... If you're Mitch McConnell or Mary Landireu or Bob Corker and you see that John Kerry thinks that $800 billion is too little -- well then, 'gal darn it, this Obama fella must be doing something right.Imagine instead that Obama had started out at $1.3 trillion, assuming that the conservatives in the Senate would negotiate him down. Then we have some big, old-fashioned brouhaha about economic philosophy, with Obama and the Senate Democrats lining up against the Blue Dogs and the Republicans. This strikes me as a considerably more dangerous negotiation... Public sentiment, moreover, which now favors the stimulus, might easily have turned against it...
I call this a Price is Right negotiating strategy. When bidding on an item on The Price is Right, you want to come as close as possible to the item's price without going over. But if you do go over, your bid is invalidated. Thus, it is worse to bid $1 too much than $100 too little. Here, analogously, the risks of overbidding seem to be considerably greater to Obama than the risks of underbidding.Some of you will object: but why even worry about this whole bipartisan song and dance? Don't Democrats have the votes to shove this thing through?Actually, that is not completely obvious. The Democrats have plenty enough votes in the House, but in the Senate, they'll need either one or two Republican crossovers to break a filibuster...
The median expectation a week ago seemed to be that we'd wind up with a stimulus of about $800 billion. Now the question seems to be whether we'll end up at $800 billion or somewhat above $800 billion.That doesn't mean that those of you who think we need more than $800 billion ought to shut up about it (in fact, Obama's whole strategy falls apart if you do). But for the time being, it would seem, that number has nowhere to go but up.
Posted by Mark Thoma on Sunday, January 11, 2009 at 11:25 AM in Economics, Fiscal Policy, Politics
Save to del.icio.us (1 save)



January 11, 2009, 5:18 pm — Updated: 5:18 pm -->
A scary analogy
Mark Thoma:
I think the stimulus package is like driving up an icy hill. If you don’t have enough momentum from the start and fail to provide enough “stimulus” to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don’t make it to the top, and then start again from the higher level, but that’s not a chance I want to take when I’m sitting at the bottom wondering if I can make it to the top without wrecking my car — the possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some. Essentially, I am arguing that there are crucial economic and psychological “tipping points” that must be reached in order for the economic recovery package to be effective (or at least, there’s enough of a chance that they exist that they cannot be ignored when formulating robust policy).
I’d add that there may also be a political tipping point: if the stimulus package is too weak, conservatives will pile on after it fails to deliver, claiming that the whole concept has been discredited.


January 11, 2009, 4:25 pm — Updated: 4:25 pm -->
Specifics
As some of us worry that the Obama team isn’t showing the audacity we hoped for, and try to chivvy BHO into doing more for the economy, one demand that I’ve been getting is for specifics — what, exactly, should they do differently?
Up to a point, this is a fair demand. But there are two things the critics of the critics should bear in mind.
First is that we don’t have many specifics from the Obama people themselves. We don’t, for example, have a dollar figure for their planned public investment spending, let alone a breakdown of where the money would go. So it’s kind of hard to specify what should be done differently when we don’t know what they’re proposing to do in the first place.
Second is that individuals or even organizations outside the government simply don’t have the resources to draw up detailed economic plans. I’m not going to specify a list of infrastructure projects, because I and my one-eighth of an assistant can’t sit down with state and local officials across the country to assess their proposals.
The most independent outsiders can do is lay out general principles — such as the principle that, given the likelihood of sustained high unemployment, the search for public investment projects should go beyond the “shovel-ready” stuff that’s getting most of the focus now. And that’s what I and others will do as we try to push the incoming economic team along.


January 11, 2009, 12:54 pm — Updated: 1:25 pm -->
More on Romer/Bernstein
Still picking over the Romer/Bernstein official evaluation of the Obama economic plan. Again, kudos to the team for producing such a clear, honest assessment. But the more I look at the report, the more I wonder why anyone in the Obama team thinks the plan is adequate.
Here’s one way to look at it: R/B show the effects of the plan rapidly fading out during 2011. Yet at the end of 2011 the unemployment rate is still 6.3%. Meanwhile, the CBO estimates the natural rate, aka “full employment,” at just 4.8%. Why does the plan go away with the job undone?
Add: By my calculations, the Obama plan is supposed to reduce average unemployment over the next two years from 8.7% to 7.6%; over the next three years, it reduces average unemployment from 8.4% to 7.3%. So it closes around a third of the gap between actual unemployment and the natural rate. Plus, an average rate of unemployment 2.5 percentage points above the natural rate for 3 years, starting with a core inflation rate of 2.5, looks like deflation city to me — and remember, that’s the projection with the Obama plan.


January 10, 2009, 7:25 am — Updated: 7:25 am -->
Romer and Bernstein on stimulus


January 6, 2009, 4:44 pm — Updated: 6:51 pm -->
The trouble with Sanjay Gupta
So apparently Obama plans to appoint CNN’s Sanjay Gupta as Surgeon General. I don’t have a problem with Gupta’s qualifications. But I do remember his mugging of Michael Moore over Sicko. You don’t have to like Moore or his film; but Gupta specifically claimed that Moore “fudged his facts”, when the truth was that on every one of the allegedly fudged facts, Moore was actually right and CNN was wrong.
What bothered me about the incident was that it was what Digby would call Village behavior: Moore is an outsider, he’s uncouth, so he gets smeared as unreliable even though he actually got it right. It’s sort of a minor-league version of the way people who pointed out in real time that Bush was misleading us into war are to this day considered less “serious” than people who waited until it was fashionable to reach that conclusion. And appointing Gupta now, although it’s a small thing, is just another example of the lack of accountability that always seems to be the rule when you get things wrong in a socially acceptable way.
Update: Many commenters don’t seem to get the point. Gupta didn’t say “Michael Moore is an annoying blowhard”; he didn’t say “We question his interpretation of the evidence”; he said he “fudged the facts”. In other words, he accused Moore of lying. That’s a very strong accusation, which had better be backed by solid evidence. Instead, we had CNN misreading a number from Moore; CNN objecting to Moore using a projected health care spending number for 2007 instead of an actual number for 2005 (and the projection was right, by the way); CNN accusing Moore of not showing a number that was in fact right there in the movie. And Gupta did not apologize, except for the misread number.
Comments (299)




Monday, January 12, 2009
More Spending Stimulus Skeptics
Gary Becker:
Perhaps their [Romer and Bernstein's] estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive. For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.Kevin Hassett:
We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.


Did Gary Becker Really Argue Complete Crowding-Out? - pgl



Sunday, January 11, 2009
The Importance of Being Exogenous
I usually don't respond to blogosphere commentary on my work because, after all, time is scarce. But this critique by Nate Silver is noteworthy because the error it makes is so fundamental. It offers a teachable moment.Silver questions my citation of the Romer tax study in my recent NY Times piece. He writes:
The paper (.pdf) Mankiw refers to, written by Berkley Economists Christina and David Romer, is the sort of thing that will make your head spin. But the gist of it is that (i) It is very important to differentiate the motivation for different types of tax cuts or tax increases, and (ii) a certain type of tax cut or tax increase may have a much larger effect on growth than is generally acknowledged. The type of tax cut that Romer and Romer think falls into this category is what they call an "exogenous" tax cut -- one designed not to counter business cycles, but rather a "spontaneous" tax cut under relatively healthy economic circumstances. This is very much not the type of tax cut that we are contemplating right now.Essentially, Silver says that the Romers study exogenous tax changes, the tax changes now being contemplated in DC are not exogenous, and therefore the multipliers estimated by the Romers do not apply to thinking about current policy.This argument raises the question: Why did the Romers focus on exogenous policy changes? The reason is that these are the only changes that can be used to reliability identify the effects of tax policy. If a tax change is made in response to some event, call it X, that influences the economy, it is hard to disentangle the effects of the tax change from the the direct effects of X. The Romers focus on exogenous tax changes for the same reason doctors conduct randomized drugs trials--not because they are interested in randomization as a prescriptive tool, but because randomization solves a statistical identification problem.Imagine if a clinical doctor reasoned the same way as Silver did. He would say, "All the evidence on the effects of this drug are from randomized drug tests. In my practice, I never randomize treatment of my patients. Therefore, I can safely ignore the results from the randomized experiments."That is, of course, fallacious. We need the randomized experiments to inform us about the effects of medical interventions, even though interventions in practice are rarely randomized. Similarly, we need to consider the effects of exogenous tax changes, even though many actual tax changes are not at all exogenous.
permanent link


Obama's Multipliers
Team Obama has released its analysis of fiscal stimulus, coauthored by CEA Chair-designate Christina Romer and Vice President-elect adviser Jared Bernstein. If you go to the penultimate page, you can find the fiscal policy mutlipliers they assume. For government purchases, their multiplier is 1.57; for taxes, 0.99.These are reasonable figures in light of mainstream models. But, as I pointed out in an earlier post, these models might well have things backward. Apparently, Team Obama is not convinced by the recent research of Christina and David Romer, who conclude:
tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still well over two percent.That is, Team Obama assumes that tax changes are less than half as potent in influencing the economy as the new CEA Chair estimated them to be in her own research.Of course, it is prudent to take any research, including that of the very careful, very sensible Romers, with a grain or two of salt. The same can be said of the mainstream models on which Team Obama is relying.
permanent link


Wednesday, January 07, 2009
Varian on Stimulus
Hal weighs in.
permanent link



January 12, 2009
The Romer View of Tax and Spending Multipliers Revisited
My statement:
There appears to be an error in N. Gregory Mankiw's "Economic View" column of January 11, 2009. The error is the association of Christina Romer with the proposition that the tax multiplier--the effect on GDP of a tax cut--is twice the spending multiplier. The Romers' article does not distinguish between the two, referring only to the "substantial multiplier... due to the procyclical behavior of investment" (p. 37 of the working paper version, at http://tinyurl.com/dl20090111). David Romer in conversation two years ago characterized the paper to me as "hyper-Keynesian... suggesting very large multipliers..." The Romers believe in a tax multiplier no larger than the spending multiplier, and they certainly do not believe that a balanced-budget equivalent reduction in taxes and spending provide any Keynesian stimulus at all.
Mankiw's comparison of the 1.4 estimated spending multiplier from Valerie Ramey's study with the 3.0 estimated tax multiplier from the Romers' study is inappropriate. The two studies use very different methodologies. They are not comparable. For example, the Ramey study on the effects of government spending--while a superb contribution to the literature, and one that I have assigned to my graduate students--does not fully control for the tax increases that often accompany spending increases. Thus it is very likely to understate the effects of spending increases alone: her study assesses the impact of the Korean-War military spending increase without taking account of the fact that it was accompanied by a large tax increase.
What Romer and Romer's study (and their earlier work on monetary policy) shows is not that tax cuts are uniquely effective, but rather that failing to consider the reasons for policy changes leads to underestimates of the effects of all types of stimulus. Because these issues of omitted variable bias are likely to be as strong for spending as for tax changes, the most reasonable interpretation of their paper is that all types of fiscal stimulus are more potent than conventional estimates would lead us to believe.
It is somewhat puzzling that Mankiw appears to believe that the Romers do think that tax multipliers are larger than spending multipliers, as they do not, and this is something that he could have very easily checked.
Posted at 01:33 PM in Economics, Economics: Economists, Economics: Fiscal Policy, Sorting: Front Page, Sorting: Pieces of the Occasion Permalink Comments (1)



POLITICAL MEMO; Obama Looks to History for Economic Message
By ADAM NAGOURNEY and JIM RUTENBERG
January 12, 2009 - By ADAM NAGOURNEY and JIM RUTENBERG


OP-ED COLUMNIST; Where the Money Is
By BOB HERBERT
January 13, 2009 - By BOB HERBERT



January 13, 2009
"Dynamic Scoring"
I was thinking about thinking about this:
Dynamic Scoring, by Andy Harless: Suppose that, at the beginning of the fiscal year, Congress appropriates $100 billion extra for infrastructure projects. At the end of the fiscal year, how much higher will the deficit turn out to be, compared to what it otherwise would have been?
The obvious answer, and the one that usually seems to be implicitly assumed by the media and the pundits, is $100 billion. But if you think about it carefully, it should become obvious that the obvious answer is the wrong answer. ... ... ... ... .....



Audacity itself as economic experiment - Los Angeles Times
By Peter G. Gosselin
January 11, 2009
President-elect Obama proposes an unparalleled test of Keynes' decades-old idea: that deficit spending on a grand-enough scale can inspire the confidence to right a sinking economy
... .... .... ... ....



Monday, January 12, 2009
Hassett and the Paradox of Thrift
I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:



New Monetary Policy and the Economic Outlook - Dennis Lockhart.



A new monetary policy for the 21st century - Roger Farmer
January 12, 2009
by FT




Exogenous policy, endogenous policy......and improving policy - Nick Rowe
On Saturday I posted my views on why it is difficult to get good estimates of the effects of fiscal and monetary policy. On Sunday Greg Mankiw responded to (less than civil) criticism from Nate Silver. .. ... ... ... => Why there's so little good evidence that fiscal (or monetary) policy works



14:40 GMT +00:00
Identify the problem
Posted by:
Economist.com WASHINGTON
Categories:
Fiscal policy
NATE SILVER, to whose name we're now obligated to add "statistical wunderkind", has issues with Greg Mankiw's use of the Christina and David Romer paper on the effect of tax changes. He writes:
The type of tax cut that Romer and Romer think falls into this category is what they call an "exogenous" tax cut -- one designed not to counter business cycles, but rather a "spontaneous" tax cut under relatively healthy economic circumstances.
This is very much not the type of tax cut that we are contemplating right now. Instead, what is being contemplated is a countercyclical action in an unhealthy economy designed to return the economy to normal growth. Romer and Romer are not all that keen on this type of tax cut; in fact, they argue that such "countercyclical fiscal policy is not achieving its intended purpose"...
Mr Mankiw responds at his blog, saying:
Why did the Romers focus on exogenous policy changes? The reason is that these are the only changes that can be used to reliably identify the effects of tax policy. . . . The Romers focus on exogenous tax changes for the same reason doctors conduct randomized drugs trials--not because they are interested in randomization as a prescriptive tool, but because randomization solves a statistical identification problem.
He's talking about simultaneity bias—in short, so much is going on during periods when counter-cyclical tax changes are enacted that it's difficult to isolate out the effects of the tax cut. To properly understand the effects of tax cuts, then, you have to focus on exogenous changes in the tax code.
But there's a problem with this, which we can understand by thinking about Mr Mankiw's metaphor. If the focus on exogenous tax changes is like running a randomised drug trial, then a recession is like a patient with pneumonia. One wouldn't want to run cancer drug trials on a patient with pneumonia, because of simultaneity bias. But it's also quite possible, probable even, that the cancer drug will simply work differently in a patient with other ailments. As Andrew Gelman says in his discussion of the issue:
Greg is talking about identifiability and Nate is talking about generalizability.
One has way too much confidence in experimental methods as applied to macroeconomics if one is willing to blithely assume that exogenous tax changes will have roughly their predicted effects in totally different circumstances—like in the midst of a deep recession. Indeed, we wouldn't be considering massive fiscal stimulus in the first place if normal macroeconomic tools were working as they normally do.



January 12, 2009
Honest Brokers
There's been a lot written recently about what a paper by David and Christina Romer's says about spending versus tax multipliers, and whether Christina Romer's public views on behalf of the Obama administration are consistent with the results of this paper. Since this all started with Greg Mankiw saying that Christina Romer is supporting policies in public that she actually disagrees with, or at least should disagree with if she believes (Greg's version of) her own research, i.e. this is a way to say that she is not being an honest broker, let's give the microphone to her colleague Brad DeLong for a response. First, Mankiw:
... .... .... .... .... ....


Tuesday, January 13, 2009
Triangles vs Gaps - mankiw
A smart reader (who, because of his current job, prefers anonymity) offers this input about the recent debate over fiscal stimulus: ... ... ... ...


Fresh Air
Terry Gross interviews one of my favorite economists.


Unconventional Monetary Policy
A nice overview from Glenn Rudebusch.


U.S. Government Default?
Greg Ip reports:




January 14, 2009
Don't Throw in the Towel
Someone from the Cato Institute sent me this with the message "I’ve been reading your blog posts on the Obama stimulus plan, and I wanted to bring this to your attention, something I think you’ll find interesting." I interpret "interesting" to mean "you are mistaken to think fiscal policy can benefit the economy": ... .... ..... ....

"Expanding Balance Sheets and Inflationary Policy"
Has Fed policy been overly expansionary, so much so that inflation is inevitable?: ... ... ....



Wednesday, January 14, 2009

Wolf Versus Pettis on US Stimulus, Fiscal Deficit (Not for the Fainthearted)
Martin Wolf has a very good comment in the Financial Times, "Why Obama’s plan is still inadequate and incomplete," which readers might tempted to ignore, since the headline suggests the piece reaches a conventional conclusion: the Obama stimulus plan is too small.That would be a mistake.The Wolf article (as others have done) does indeed conform with the conventional view that an US stimulus program needs be bigger to get the economy at least somewhat back on track (we'll put aside for now the question of whether this is the best way of going about things, or whether less stimulus and more microeconomic reform particularly cleaning up the banking system and improving regulations, might lead to a better trade off of short-term pain for longer term gain). Wolf reaches two conclusions not widely presented in the US media:



January 15, 2009
"A Line in the Sand"
If you look on the sidebar, you will see a link to "Bailouts and Stimulus Plans - Fama/French Forum," at least until it rolls off the list. It's a link to a post at a new blog by financial economists Eugene Fama and Kenneth French. However, if you look at today's daily links, you will see that the link to this post is not there. That's because I took it out, I didn't want to send people to read the post without explaining what was wrong with it first, and I didn't have time to explain.
Here's why I removed the link, and something that's worth taking a few moments to understand:
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January 14, 2009
Don't Throw in the Towel
Someone from the Cato Institute sent me this with the message "I’ve been reading your blog posts on the Obama stimulus plan, and I wanted to bring this to your attention, something I think you’ll find interesting." I interpret "interesting" to mean "you are mistaken to think fiscal policy can benefit the economy":
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January 15, 2009
Stiglitz: Just Say No to Tax Cuts
Joseph Stiglitz on the tax cuts versus spending question:
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Sweatshops
Nicholas Kristof defends sweatshops:
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"A Line in the Sand"
If you look on the sidebar, you will see a link to "Bailouts and Stimulus Plans - Fama/French Forum," at least until it rolls off the list. It's a link to a post at a new blog by financial economists Eugene Fama and Kenneth French. However, if you look at today's daily links, you will see that the link to this post is not there. That's because I took it out, I didn't want to send people to read the post without explaining what was wrong with it first, and I didn't have time to explain.
Here's why I removed the link, and something that's worth taking a few moments to understand:



Stimulus Could Pay for 40% of Itself - Real Time Economics




January 16, 2009
"Recession Insurance"
Robert Shiller:
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Non-arguments Against the Fiscal Stimulus - pgl
Greg Mankiw has another post where the reader might think there is some argument against the Obama fiscal stimulus proposal – but once again, the reader finds nothing:
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Friday, January 16, 2009
Is He Serious?
Eugene Fama, a giant in the world of financial economics, argues against a stimulus (hat tip: Greg Mankiw) for reasons that...to put it politely, I don’t understand. Maybe he is trying to satirize the way Keynesians often ignore or dismiss alternative theories – giving the Keynesians a taste of their own medicine. Or maybe he is deliberately making a wrong argument, as a pedagogical technique, to see if we spot his error. Or maybe (as Greg suggests) he is actually arguing something different from what he is literally saying, but he thinks that the rigorous argument is too complicated to discuss in a short article. Or maybe he just hasn’t thought through the issue. Or...your guess is as good as mine, but, as far as I can tell, if you take his words in their plain sense, they don’t make any. In a nutshell:
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More about Stimulus and Eugene Fama
Continuing from my previous post to address subsequent arguments...Eugene Fama acknowledges a point that Brad DeLong made about inventories (that much or all of the reduced investment from a fiscal stimulus is unintended inventory investment, which is technically counted as investment but which is not useful). Professor Fama argues that the amount of unintended inventory investment is not very large.
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CRITICISMS OF HOUSE RECOVERY PACKAGE ARE MISPLACED




January 16, 2009, 1:02 pm
Guest Post: Don’t Let Crisis Kill Long-Term Growth
Amid new details for the government stimulus plan and a new bailout for Bank of America, MIT economist Daron Acemoglu warns that popular opinion is turning against free markets and that is dangerous for the American economy in the long term.




Notations
A Republican Strategy For Stimulus
Bruce Bartlett, 01.16.09, 12:01 AM EST
The GOP should abandon Bush tax policies altogether.



Economic Report of the President
Transmitted to the Congress January 2009



January 18, 2009
Shiller: A Stimulus for Financial Advice?
Robert Shiller says we need to provide subsidized financial advice:



A few remembrances of Friedrich von Hayek (1899–1992) - Paul Smuelson


Mankiw's Paper on Multipliers - Econbrowser

The latest from Mankiw - Richard H. Serlin




The Bush Administration: An Oral History of the Bush White House. The threat of 9/11 ignored. The threat of Iraq hyped and manipulated. Guantánamo and Abu Ghraib. Hurricane Katrina. The shredding of civil liberties. The rise of Iran. Global warming
An excerpt:
Cullen Murphy and Todd Purdum: this Sarah Palin–like president—because, let’s face it, that’s what he was. . . .



A Smarter Stimulus
by James Surowiecki
January 26, 2009



January 20, 2009
"Obama's First Choice"
I'm not sure I agree with this:
Obama's First Choice, by Robert Reich: ... ... .... ..... ....



Spend Green Today, Tax Green in the Future - Jeff Frankel

US Tax Policy Will Be in Intensive Care This Year - Jeff Frankel





Why Obama must mend a sick world economy - Martin Wolf

Wolf: por que o presidente Obama precisa curar a economia mu ...

Mundo espera que Obama conserte economia ...




Barro on Keynes Barro and Grossman - Robert Waldmann

CBO's Non-Estimates of Stimulus Spending Rates - Beat the Press




Op-Ed Contributor
Homegrown Aid
By JEFFREY D. SACHS
Published: April 8, 2009
PRESIDENT OBAMA has embarked on a promising new course to fight hunger and promote economic growth and political stability in countries like Cambodia, Honduras and Malawi. These countries, and many more, have large populations of impoverished farm families. Tough climates, environmental degradation and a lack of modern farm technology often limit food production to one-third or less of its potential. President Obama recently called upon Congress to double financial support for agricultural growth in developing countries to more than $1 billion in 2010. His program aims to help smallholder farmers get things like better seeds, fertilizer, small-scale irrigation and access to markets so they can overcome hunger and break out of extreme poverty. This new program could have amazing results — if it is properly carried out.
A crucial factor in determining the program’s success will be how Washington delivers aid to the farmers. The traditional approach, and the wrong one in this case, would be for Washington to try to decide what’s best for each country, and then spend considerable time and money on report-writing, site visits and professional advice. When aid programs are operated this way, they can end up spending half or more of their funds on United States-based travel, personnel and administration, and take years to get off the ground. The benefits for poor countries are then much too little and too late.
Rather than have Washington decide the kind of aid each country will receive, the recipient countries should be invited to prepare plans and budgets that would be reviewed by independent experts. These plans would describe the inputs needed by the farmers, the expected increase in production, how the strategy would be put into place and how much money would be required. Such plans, if described with care, could then be closely monitored by the United States and other donors to gauge results and avoid corruption.
Two international programs during the last decade, championed jointly by the United States, other governments and the Gates Foundation, have demonstrated the benefits of such a scientific, results-based aid approach: the Global Alliance for Vaccines and Immunization, and the Global Fund to Fight AIDS, Tuberculosis and Malaria. These programs have saved millions of lives and protected hundreds of millions more from disease and infection. Here’s how they work: Low-income countries submit national action plans to the two programs, which then scrutinize the plans on their scientific, financial and management merits. If the plans are properly put into effect, recipients get more financing.
It’s time to adopt these strategies to fight hunger. The good news is that many poor and hungry countries already have elaborate and sophisticated plans for their smallholder farmers, but until now they’ve lacked the financial means and donor support to put those plans into action.
This is not to say that these countries must do all the planning on their own. They can also draw upon the expertise of international farm experts from respected global agencies like the United Nations International Fund for Agricultural Development in Rome, and food research centers in the United States and abroad. They can also seek guidance from America’s land-grant universities, as the Obama plan envisions, and leading agricultural companies.
For maximum effect, the United States should also pool its efforts with other donor countries and the United Nations. America’s $1 billion per year could be at least doubled by the contributions of others, including Spain and the European Commission. The overall program — pooled financing, country proposals with independent scientific review, and technical assistance for recipient countries — could be based at the United Nations International Fund for Agricultural Development.
The Obama administration recognizes that many volatile regions — the Horn of Africa, parts of the Middle East like Yemen and areas of South and Central Asia — are unstable in large part because they are hungry and poor. The next step is to empower recipient governments to map their own path to development. Mr. Obama’s new initiative could be a major pillar of a strategy that is based on generosity, good science and rigorous management.
Jeffrey D. Sachs, the director of the Earth Institute at Columbia, is the author of “Common Wealth: Economics for a Crowded Planet” and a special advisor to the United Nations secretary general, Ban Ki-moon.
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