Q2 Contraction and the Recovery Act
Josh Bivens has an enlightening item up on the EPI website illustrating the bleak state of the economy and the helpful role being played by the American Recovery and Reinvestment Act:
Despite the overall contraction, the fingerprints of the American Recovery and Reinvestment Act could be seen in some aspect of today’s report. Federal government spending grew at an 11% rate in the quarter, adding roughly 0.8% to overall GDP. State and local government spending grew at a 2.4% annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible. [...]
The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter. This means that absent its effects, economic performance would have resembled that of the previous three quarters, when the economy contracted at an average annual rate of 4.9%. In short, the recovery act turned this quarter’s economic performance from disastrous to merely bad. This is no small achievement, but with even more public relief and investments, the U.S. economy could do much better.
In Q3 and Q4 we should start seeing more of the impact of the infrastructure investment money. It also appears to be the case that the balance of trade is moving in the kind of direction that will be necessary to create an internationally sustainable environment. But given the increase in the personal savings rate, the fall in incomes, and the need to readjust trade flows it will probably be a good long time before consumption levels regain their peak 2007 value.
22 Responses to “Q2 Contraction and the Recovery Act”
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July 31st, 2009 at 3:18 pm
“The consensus of macroeconomic forecasters is that ARRA contributed roughly 3% to annualized growth rates in the second quarter.”
Why am I certain I will never hear a variant on this statement on any major news program discussing the overall economic picture?
July 31st, 2009 at 3:25 pm
i think there are some nice multiplier effects waiting out there for the construction aspects of the stimulus program to hit in coming months: based on my modest window into that field, the good companies are scrambling to hold onto good people in the expectation that there will be turnup in construction projects later this year, and that feeds a very nice supply chain.
btw, the success of the cash for clunkers project reminds me that my favorite next stimulus program is for the federal government to fund a 1-year state sales tax holiday (rough cost, $250B). to make a long story short, this would help accomodate considerably increased savings without reducing consumption.
July 31st, 2009 at 3:26 pm
Meanwhile, the dreaded Hugo Chavez, runner-up to the Axis of Evil, managed to achieve a positive economic growth rate in the last quarter. Barely positive, but still. Looks like he knows a thing or two that President Hope & Change doesn’t.
July 31st, 2009 at 3:28 pm
For example, “Be poor enough not to have much of a financial sector.”
July 31st, 2009 at 3:29 pm
What does that say about when the recession ended?
July 31st, 2009 at 3:38 pm
Hector – or “have a large oil export industry.”
In any case, it’s a good sign, makes me hopeful that things will get better once the bulk of the ARRA starts to hit the streets as it were. But we can’t take our eye of the long-term structural ball.
July 31st, 2009 at 3:52 pm
I have never seen such crappy analysis.
I have to trace down every progressive blog and explain that the federal expenses alone added 2.2% growth, and the over all GDP was a .8% growth. (Federal is 20 shares it grew by 11%)
So, in essence, the stimulus worked as long as we actually wanted the private sector to shrink, which it did by a substantial margin. Those of you who worry about working in the private sector can forget that idea for another two years.
July 31st, 2009 at 3:53 pm
But given the increase in the personal savings rate, the fall in incomes, and the need to readjust trade flows it will probably be a good long time before consumption levels regain their peak 2007 value.
Actually, personal incomes were up this quarter. Personal consumption was still down, however, due to increased savings.
And that does suggest the possibility of a bit of a personal consumption recovery down the road, once household balance sheets are in better shape. For that to be sustainable, however, income increases will need to be distributed broadly.
July 31st, 2009 at 3:57 pm
So, in essence, the stimulus worked as long as we actually wanted the private sector to shrink, which it did by a substantial margin.
Talk about crappy analysis! Of course we don’t WANT the private sector to shrink. But we’re trying to limit the damage as the private sector goes through its cycle–that is the whole point of a counter-cyclical stimulus.
July 31st, 2009 at 4:12 pm
DTM, the whole point of the Keynesian stimulus is that it works as long as the multiplier is greater than one. Meaning, if the multiplier is less than one, we are probably making things worse.
It is based on equilibrium analysis. Any policy change should move us toward equilibrium or stability. So you are making the claim that we first have to go through a shrinking private sector, then we get a growing private sector. That is not stimulus, that is simply paying off the bankruptcy fees using government funds.
July 31st, 2009 at 4:14 pm
in addition, DTM, the question is how much would the private sector have shrunk sans government stimulus?
as a very, very, very tiny example of what the private sector on its own would have done, i fly into LAX, for crissake, almost every week for business and i have never had a problem renting a car at the airport at the last minute for anything other than the oscars or the grammies.
but not this summer: every rental car company was slashing its fleet size in the expectation of demand collapse. had the federal government not stepped up with counter-cyclical demand support, the self-fulfilling tendency would have continued apace, and the stock market drop to its march low, rooted in the notion that everything was going to zero, would have continued.
meanwhile, DTM: personal incomes were up? how can that be? there must be some special factor, i can’t imagine how incomes could be up in general? or do you mean “up this quarter but still down from a year ago?” i actually haven’t been following the stats on this.
July 31st, 2009 at 4:24 pm
Real personal incomes are up, meaning more surplus goods around that people can buy at a discount. If you want nominal incomes to rise, then you will likely need a private sector for that.
The basic problem remains, if the private sector is still shrinking, then the private sector is still constrained by something. Unless government spending tends to relieve the constraint the private sector will shrink; and that is not called a stimulus in the sense of Keynes.
July 31st, 2009 at 4:41 pm
I think someone bright once wrote something about C + G + I + X – M. They also said that because of changes in liquidity preferences (due to unanticipated shocks) could result in a decline in C. To offset the decline in C, one could increase G, especially when in a liquitidy trap, as there is no crowding out of I.
I think . . .
July 31st, 2009 at 4:42 pm
I think that this is that liquidity preference thingy someone bright once wrote about.
I think . . .
July 31st, 2009 at 4:50 pm
Tax offsets as part of the stimulus. Nonetheless, personal savings rates are up, which long term is a good thing, but short term isn’t (cf., Thrift, Paradox of). That’s why we needed to increase G. We probably needed to increase it more than we did, but that didn’t happen because the incremental votes in the Senate are controlled by people who represent cows and lobsters rather than people.
July 31st, 2009 at 5:02 pm
Yes, I saw the “identity”: C + G + I + X – M.
The issue here is did the expanding of G crowd out I? We know that I is continuing to decline in the face of rising G, because Yglesias just celebrated the fact. But is the rising G now crowding out?
That depends on what kind of G the economy wants. According to Krugman and Yglesias we are in a recession because we do not have enough G, outside of any other constraints, that is the problem, too little G.
Another theory holds that we are in a depression because oil soared to $150/barrel. I that case, G will crowd out I if G does not use gasoline much more efficiently, or G otherwise does not induce greater oil efficiency.
Crowding out occurs in the particular constraint, whether the constraint is not enough government medicare, not enough shoelaces, or not enough oil. It is in the constraint, not the general level of spending.
July 31st, 2009 at 5:28 pm
I don’t know what Yglesias has said about this, if anything. If you listen to Krugman’s recent Robbins Lectures at the LSE, you will find that he believes:
1. We are in a liquidity trap which limits the Fed’s ability to increase I (liquidity preferences and a zero lower bound on real interest rates). Indeed, why invest if there’s no demand?
2. As a result, increasing G crowds in I not crowds it out (AD curve currently slopes up not down because of 1).
3. The increase in G has been insufficient given the decrease in C, but that the Obama stimulus will do a great deal to lessen the pain. In other words, it is not a lack of G that has caused the recession; merely that the increase is insufficient given the recession’s magnitude.
4. Most of the last 30 years of macroeconomics has simply been a wasted effort, and we have entered the dark ages of macroeconomics.
I’m sure it won’t surprise you to learn that I agree with 1 through 4 above. Do you?
July 31st, 2009 at 5:54 pm
ISLM has a Krugman explanation that implies C is still falling, that G did not anticipate the deeper fall in C, and thus G had too small a rise in it. So, his explanation is that C would have fallen faster if not for what little rise in G we had.
In nominal terms, what happened to C. Well, the price of gas rose some 50%. Gasoline was not in a liquidity trap, the futures pricing for gasoline and commodities is still working. So you have to ask the question, which part of consumption is liquidity constrained? If the constraint is gasoline, and not much else, then one can see that maybe we should scrap 20 years of lousy theory and start looking at the vector of constrained goods.
The proper stimulus targets the actual constrained good.
July 31st, 2009 at 7:06 pm
DTM, the whole point of the Keynesian stimulus is that it works as long as the multiplier is greater than one. Meaning, if the multiplier is less than one, we are probably making things worse.
First, that is incorrect: counter-cyclical fiscal policies can mitigate economic harm even if the multiplier is less than one. That is because taxation to reduce deficits has little if any demonstrable drag on production.
Second, in any event just because the private economy is still shrinking doesn’t mean the multiplier was merely one (since we were talking about direct spending, it was at least one).
or do you mean “up this quarter but still down from a year ago?”
Sorry, yes, they were up this quarter over last quarter.
If you want nominal incomes to rise, then you will likely need a private sector for that.
Nope, both nominal personal income and especially nominal disposable personal income were up this quarter. That was largely thanks to the transfer portions of the stimulus, although now we are in fact talking about multiples of less than one thanks to increased savings. But basically, every little bit of demand you can move forward in time from the future is helpful at this point.
Another theory holds that we are in a depression because oil soared to $150/barrel. I that case, G will crowd out I if G does not use gasoline much more efficiently, or G otherwise does not induce greater oil efficiency.
The spike in gasoline prices may have helped trigger the recession, but it certainly wasn’t the only fundamental cause, and oil is not acting as a major constraint at this point. In any event, further insulating our economy from oil shocks is not a short term project, but we have begun to take measures to that effect, including in the stimulus.
July 31st, 2009 at 8:27 pm
Gee.
All of those precipitous drops occurred during or just after (2009-I & II) Republican administrations. What are the odds….
August 1st, 2009 at 1:05 am
DTM has addressed this point. This is not a supply-side recession. It’s demand side, which is why one cranks up G, in particular since it will in the near term (2 years) crowd in investment. Once the private sector has repaired its collective balance sheet, we can turn to the federal government’s balance sheet. Happily, this has begun with health care reform.
August 1st, 2009 at 1:57 am
ISLM and DTM have done sterling work. Only a few points to add.
1. Given that the spike in oil prices now seems conclusively the result of speculation (supply was way up over demand, not down), pointing to oil as a constraint on business hardly makes a good case for allowing capitalism to reign freely.
2. Regarding crowding out, I find it highly unlikely that this is happening. When you consider that the Federal government has plunged trillions of dollars of new liquidity into the capital markets, from the bailouts to the buyouts to the asset programs, to the Fed lowering the interest rate to zero, doing qualitative easing, and lending out yet more trillions, it is simply not credible to say that the government is sucking out investment. Rather, what we have seen is the larger financial institutions crowding out other potential consumers of credit (homeowners for example).