Christina Romer Makes the Case for ARRA
Via Tim Fernholz, a speech by Council of Economic Advisors Chair Christina Romer in which she vigorously makes the case that the American Recovery and Reinvestment Act is having a positive impact on the economy. I think the clearest way of making the point is in this chart where she disaggregates the contributors to growth:
The role of the Recovery Act is clearest in state and local spending. Sharp falls in revenues and balanced budget requirements have been forcing state and local governments to tighten their belts significantly. But, state and local government spending actually rose at a healthy 2.4% annual rate in the second quarter of 2009. This followed two consecutive quarters of decline, and was the highest growth rate in two years. No one can doubt that the $33 billion of state fiscal relief that has already gone out thanks to the Recovery Act is a key source of this increase.
She also presents comparative international data showing that countries with larger stimuluses have done better relative to pre-existing forecasts. As Tim says, ARRA “is doing exactly what economists thought it would, even if the policy wound up being executed in an economic environment that was much worse than expected.”
44 Responses to “Christina Romer Makes the Case for ARRA”
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August 6th, 2009 at 1:11 pm
There’s no way you can say that increased government spending doesn’t increase GDP. I mean it’s one of inputs for the damn formula. All you can argue is that the government spending is preventing a greater increase in non-government spending, which in this situation is highly unlikely.
August 6th, 2009 at 1:21 pm
All you can argue is that the government spending is preventing a greater increase in non-government spending, which in this situation is highly unlikely.
Exactly right–if anything, other components are more likely getting “crowded in” than “crowded out”.
In fact, personal disposable income has been increasing despite rising unemployment, in large part because of ARRA. The problem is that, as many predicted, that portion of ARRA is much more going to savings than to consumption. That is unfortunate in the short term, but in the medium term that increased rate at which household balance sheets are being repaired should translate into more consumption as well.
August 6th, 2009 at 1:39 pm
And needless to say the bigmouth ultra lefties bashing Obama are silent on this.
It’s surprising to me that state and local government spending actually went up.
August 6th, 2009 at 1:49 pm
And needless to say the bigmouth ultra lefties bashing Obama are silent on this.
Of course it is fine to note that all indications so far are that a larger stimulus would have been a good idea. That said, that doesn’t mean a larger stimulus was politically possible, and more broadly I agree there is a species of lefty critic that simply refuses to admit that even if what Obama has accomplished so far isn’t ideal, it is at least proving helpful.
August 6th, 2009 at 1:58 pm
The issue isn’t whether or not stimulus helps (at least for non-wingnuts). It is whether or not the program is big enough and is confiqured properly.
Ctitics would say the program
-should be at least twice as big
-should focus more on aid to states
-should provide immediate “make-work” employment
-should include cramdown on mortgages
-should have rationalized 5 or 6 big banks
-should also provide for longer-term infrastructure/industrial investment
August 6th, 2009 at 2:02 pm
-should have rationalized 5 or 6 big banks
-should also provide for longer-term infrastructure/industrial investment
Regardless of their potential merits, those aren’t really stimulus measures.
August 6th, 2009 at 2:04 pm
http://millenniumindicators.un.org/unsd/snaama/resultsCountry.asp?Country=716
52 Trillion GDP!
August 6th, 2009 at 2:09 pm
“…state and local government spending actually rose at a healthy 2.4% annual rate…”
Yes, and federal spending was up a “healthy” 12%, while the private sector was down a “healthy” 1%
So, overall, the healthy economy works because fewer people have less private income with which to buy government services.
August 6th, 2009 at 2:21 pm
It terms of staving off a full-blown, 1929-style depression (the commencement of which was more likely than not in October 2008), monetary and fiscal policy have performed well enough. By which I mean, monetary policy has been superb but we are now in a liquidity trap. Fiscal policy, however, has been far less than superb. The size and distribution of ARRA was too small and too heavily tilted toward “tax cuts” given the magnitude of the great recession we now face.
August 6th, 2009 at 2:22 pm
Regardless of their potential merits, those aren’t really stimulus measures.
Rationalizing the banks would e.g., get Goldman-sachs and Morgan,Stanley out of the business of inflating the price of oil – which would be highly stimulative.
And if one takes a longer-term view of the problem, as I do, then what happens after the initial stimulus has to be considered.
August 6th, 2009 at 2:24 pm
So, overall, the healthy economy works because fewer people have less private income with which to buy government services.
I’m not sure I can untangle this linguistic knot, but I would note that personal disposible income was up, not down, in the second quarter. The problem is that personal consumption was down because increased savings ate up all the extra disposable income and more.
In any event, no one is claiming the current situation is ideal by absolute standards, just that it is relatively better than it would have been if not for ARRA.
August 6th, 2009 at 2:27 pm
And these individuals would be who exactly?
August 6th, 2009 at 2:28 pm
It’s an onion, so I wouldn’t bother trying to peel away any layer.
August 6th, 2009 at 2:29 pm
There is indeed an odd aspect to this argument as people at #1 and #8 have noted. Government spending went up–causing government spending to go up! Yes! It’s as if the stimulus argument was really about whether the government was really going to spend more money or not. It did.
I think propping up GDP with what are essentially stabilization measures on borrowed money is a good thing, especially in this situation. But others think it’s a bad thing (crowding out, too much debt in general, etc.). They’re not disagreeing that it’s actually happening or about whether government spending is a part of GDP.
The other dispute is about whether the increased government spending is having some multiplier effect that spills into the rest of the economy (that’s what “stimulus” means), and I haven’t seen much good evidence that that’s happening yet.
August 6th, 2009 at 2:30 pm
Rationalizing the banks would e.g., get Goldman-sachs and Morgan,Stanley out of the business of inflating the price of oil – which would be highly stimulative.
I’m now not sure what you mean by “rationaliz[ing] 5 or 6 big banks”, since this sounds like a regulatory measure. In any event, such a regulation would presumably have to apply to more than just five or six banks: any capital wanting to play that game will find a way to play it, if anyone is allowed to play it at all. So they will do it through a bunch of smaller firms if necessary.
And if one takes a longer-term view of the problem, as I do, then what happens after the initial stimulus has to be considered.
Sure. But now you are talking about general economic policy, not just the stimulus.
August 6th, 2009 at 2:34 pm
But others think it’s a bad thing (crowding out, too much debt in general, etc.). They’re not disagreeing that it’s actually happening or about whether government spending is a part of GDP.
You are describing the relatively smart and informed critics of the stimulus. Then there is the rest of them.
The other dispute is about whether the increased government spending is having some multiplier effect that spills into the rest of the economy (that’s what “stimulus” means) . . . .
That’s incorrect. Most fundamentally, a stimulus is about increasing aggregate demand during the down portion of the economic cycle. You don’t need multipliers greater than one for that to work (although certainly it is nice if that happens).
August 6th, 2009 at 2:37 pm
I would also note that, at a superficial level, Romer is a far better spokesperson for Obama than Summers on this topic. A higher-valued use of Summers is hurling expletives at regulators more interested in protecting turf than in bringing forward reform to mitigate the possibility of another financial meltdown.
August 6th, 2009 at 2:41 pm
You don’t need multipliers greater than one for that to work (although certainly it is nice if that happens).
What would be the point of any private spending with a government multiplier greater than one?
August 6th, 2009 at 2:43 pm
Someone less polite than I should ask Cogan, Fama, Mankiw, Murphy, Mulligan, et al., how much private investment was crowded out by deficit spending on the Iraq War.
August 6th, 2009 at 2:48 pm
What would be the point of writing if we can remember things?
August 6th, 2009 at 2:48 pm
DTM misses the point. If the stimulus has a multiplier less than one than it is not stimulus, I think by definition, as Cris Romer puts it; she did define this game.
Personal income rose in and around the Washington DC corridor based on expanded federal spending. There was some spill off from the social insurance programs.
But engaging as the insurer or bankruptcy judge of last resort is not stimulus. That counter cyclical process is the government paying off insurance claims.
Cris set off the claim that stimulus moves us toward equilibrium, that is a multiplier greater than one. If the stimulus was too small, then it would have a multiplier close to 1.2 rather than 2.3, for example.
The only way DTM can claim this is a stimulus and not a bankruptcy process is if DTM thinks our dis-equilibrium is because of government too small, which many on this blog believe. But, even then if government needed to grow to fix the economy, then government itself would be moving closer to a balanced budget as it moved toward equilibrium.
I other words, there is a precise definition of stimulus as put forward by Romer. She changes the definition to make her boss look good, ex poste.
August 6th, 2009 at 2:49 pm
[...] >> Christina Romer Makes the Case for ARRA [...]
August 6th, 2009 at 2:54 pm
So they will do it through a bunch of smaller firms if necessary.
G-S and M,S founded the Intercontinental Commodities Exchange and used it to dump billions into oil futures. Oil prices have doubled since January. The rules in place before deregulation didn’t allow that. Oil prices at January levels would pump a lot of money into the economy.
Sure. But now you are talking about general economic policy, not just the stimulus.
In my view the situation requires a response comparable to the 30s and avoiding the 1937 relapse. That would mean a 10 year program.
August 6th, 2009 at 2:56 pm
Someone less polite than I should ask Cogan, Fama, Mankiw, Murphy, Mulligan, et al., how much private investment was crowded out by deficit spending on the Iraq War.
Along with how much is currently being crowded out with the continuation of the war that was promised to end.
August 6th, 2009 at 2:59 pm
How much of that 787 billion was for stabilization over the last five months, or will be for that purpose over the next seven?
In any case, it appears as if the Congress and the Administration are now saying that the best purpose of a Treasury Auction is now to give people money for destroying their productive assets. Let’s go whole hog: a mortgage payoff and 100k to anyone who will burn down their house! O.K., O.K., if that is too ambitious, let’s just auction some Treasuries in order to give $4500 to anyone who will break the windows in their abode….
August 6th, 2009 at 3:01 pm
What would be the point of any private spending with a government multiplier greater than one?
Again, I’m not entirely sure I can tease meaning out of this little nugget. But I would note that what causes a multiplier is precisely additional private spending on top of the original round of government spending.
If the stimulus has a multiplier less than one than it is not stimulus, I think by definition, as Cris Romer puts it; she did define this game.
Link me to an actual quote from Romer in context and I will respond.
The only way DTM can claim this is a stimulus and not a bankruptcy process is if DTM thinks our dis-equilibrium is because of government too small, which many on this blog believe. But, even then if government needed to grow to fix the economy, then government itself would be moving closer to a balanced budget as it moved toward equilibrium.
Again it is difficult for me to unravel all this into something which is comprehensible. But I would note that it appears to be ignoring the rather crucial dimension of time. The idea behind a fiscal stimulus is to use government transfers and direct spending to temporarily boost aggregate demand. Later on, the plan is to phase out this additional government spending. Finally, you should raise taxes temporarily to pay off the resulting cyclical debt.
Again, I’m not entirely sure what is going on in this person’s head, but he seems to think that all this has to happen at the same time, as opposed to being spread out in time. But spreading it out in time is precisely the point.
August 6th, 2009 at 3:05 pm
The rules in place before deregulation didn’t allow that.
Please understand that I’m not saying reregulation of commodities trading is a bad idea. I’m saying you better apply those regulations to everyone, not just a couple big firms.
In my view the situation requires a response comparable to the 30s and avoiding the 1937 relapse. That would mean a 10 year program.
I’d hope most of the major legislation can be accomplished in the next six years or so, but I agree the actual efforts will take at least ten years, probably more.
August 6th, 2009 at 3:12 pm
As Obama said, that’s a debate I’d like to have. Care to start it?
August 6th, 2009 at 3:26 pm
Surely, stopping the shrieking death-spiral is worth something.
August 6th, 2009 at 3:29 pm
Actually, the current crisis was caused by the private financial sector’s destruction of productive assets (precipitated by a misallocation of capital due to the real estate bubble).
We could, of course, simply rely on the self-correcting economy, in which private investment will return (someday) due to obsolescence and disuse (to borrow from Keynes), as will private consumption (as balance sheets are repaired). When that day comes many years from now, we will, in aggregate, be worse off.
Alternatively, as we did in the 1930’s, we can jumpstart the process by borrowing publicly during a time when deficits crowd in not crowd out investment. Therefore, current Treasury auctions are occurring to raised public debt from private surplus in order to support public and private consumption (and therefore output) during a period of private deleveraging. When that process is done, we can focus on public deleveraging, as we did in the 1990’s under Bill Clinton.
Because I don’t rely on faith-based economics, I know which is the superior path.
August 6th, 2009 at 4:41 pm
DTM:
That said, that doesn’t mean a larger stimulus was politically possible, and more broadly I agree there is a species of lefty critic that simply refuses to admit that even if what Obama has accomplished so far isn’t ideal, it is at least proving helpful.
Well put. I’d add there’s a species of leftie who argue via ad hominem. In their words Obama is a sell-out so he’s giving away the store on health care reform. But what Obama and Larry Summers and Geithner and Romer etc accomplished with the stimulus was pretty good.
Imagine if McCain had won.
August 6th, 2009 at 4:45 pm
I’d rather not. I don’t scare easily, but the thought of McCain winning was terrifying to me.
August 6th, 2009 at 5:10 pm
Yes, DTM, destroying well functioning automobiles is a form of consumption. I take it back; we really should pay off the mortgage, and give 100 thousand, to anyone who will burn down their house! Consume away!
Regarding the misallocation of capital into real estate, hmmmmm, it really is a shame that Congress and various Presidents stood by and did nothing, staying completely neutral, about capital flows into the real estate sector. Really.
August 6th, 2009 at 5:14 pm
When combined with the Fed’s aggressive monetary policy, it was sufficient to stave off a full-scale depression, which seems to me not to be a high bar. From a positive view, ARRA was too small and too focused on short-term tax cuts (through altered withholdings).
Mere speculation, but here goes.
Fed policy would have been no different.
Under McCain, we likely would have had some type of stimulus focused much more heavily on tax cuts, perhaps even an extention of the Bush tax cuts. But, as commenters here point out, there are institutional effects from the Senate, and the “McCain stimulus” would have included some amount of public spending to assist state budgets for Medicare/Medicaid and unemployment insurance (assuming no difference in the Senate structure). In other words, it would have had a smaller bang for the buck and would have really blown a hole in long-term public deficits.
But, as I’ve said, that’s the debate we ought to be having.
August 6th, 2009 at 5:35 pm
Actually, the proximate effect of the real estate bubble was a Fed chairman more interested in the re-election of Bush II than in his duties as Fed chairman. (But then he’ll go down in history as another Arthur Burns, to the extent that anyone knows or cares who that is.)
In addition, elected politicians of both parties have since the early 1980’s actively created a financial system in which shadow banks had no form of regulation and could excessively leverage themselves. When Greenspan’s real estate bubble popped, the shadow bank runs began with devasting effects as everyone sought to deleverage at once.
I consider, in light of what we collectively know about leverage and bubbles, both here and abroad, to be quite shameful.
August 6th, 2009 at 5:49 pm
Actually, the proximate effect of the real estate bubble was a Fed chairman more interested in the re-election of Bush II than in his duties as Fed chairman. (But then he’ll go down in history as another Arthur Burns, to the extent that anyone knows or cares who that is.)
In addition, elected politicians of both parties have since the early 1980’s actively created a financial system in which shadow banks had no form of regulation and could excessively leverage themselves. When Greenspan’s real estate bubble popped, the shadow bank runs began with devasting effects as everyone sought to deleverage at once.
I consider, in light of what we collectively know about leverage and bubbles, both here and abroad, to be quite shameful.
Shadow banks? I think you and Ron Paul have been hanging out in loonieville too much.
August 6th, 2009 at 6:25 pm
For decades, Congress and various Presidents actively encouraged speculation in residential real estate, with ever increasing aggresiveness, year after year after year. In a wildly surprising developent, people and institutions sought to use ever increasing amounts of leverage in pursuit of said speculation. Greenspan screwed up. Central planners always do, eventually, and a central banker is just a dangerous kind of central planner (this isn’t an endorsement of a gold standard, which is just another kind of central planning which inevitably fails).
Speculation inevitably leads to bubbles popping, with painful results, and people are prone, all by themselves, to engaging in speculation. Which is a good reason to not have the state encouraging the behavior.
August 6th, 2009 at 8:59 pm
I’m sorry you don’t understand a concept that has been much discussed in finance and economics for about five years. My gain is that I now know what discount rate to apply to your comments.
August 6th, 2009 at 9:02 pm
I’ve gain twice in two postings on my understanding of the discount rate to apply to comments.
I hate to admit it, but this is actually getting fun.
August 6th, 2009 at 9:10 pm
I guess I was a little flip in post 38.
A bank is anything that borrows liquid and lends illiquid. A bank is anything that borrows short and lends long.
A “shadow” bank is anything that does either or both of the above but does not face relative reserve requirements, does not have deposit insurance, and/or does not have access to an established discount window. (We can throw out that last point as of September 2008.)
Bear disappearing over a weekend is the same thing as a 19th Century bank run.
August 6th, 2009 at 10:01 pm
Yes, DTM, destroying well functioning automobiles is a form of consumption.
I don’t have a clue why you are singling out me to discuss Cash for Clunkers. But since you ask . . .
First, part of the point is that these automobiles aren’t actually “well functioning”–specifically, they use a lot more fuel than necessary given the owner’s purposes.
Second, the entire automobile isn’t being destroyed: the only part that has to be rendered inoperable is the engine, but you can part out everything else, and even the engine can be recycled as scrap.
Third, this is more a timing thing: these cars are going to get replaced eventually, and we are trying to move that point forward (while also encouraging a fuel-efficient replacement, but apparently people are voluntarily going much more fuel-efficient than the program requires).
So, the equation ends up being something like the economic and environmental benefits of moving the replacement point forward minus the implied cost of parting out/scrapping the vehicle instead of keeping it as a functioning vehicle for a while longer.
I see no reason to believe that equation ends up being negative. Whether it is positive enough to justify the subsidy amount is harder to answer, although given the apparent real world difference in fuel efficiency, my guess is that it probably is in fact justified.
August 7th, 2009 at 2:06 am
Yes, DTM, productive assets (your belief in the utility of bureaucratic rule making is touching, by the way) eventually wear out. Thanks for that penetrating insight.
ISLM, yes it is a lot of fun to read a person who thinks he is being insightful by noting that a central banker made a large error. Whatta’ surprise!
August 7th, 2009 at 7:54 am
Yes, DTM, productive assets (your belief in the utility of bureaucratic rule making is touching, by the way) eventually wear out. Thanks for that penetrating insight.
I agree it does not take much sophistication to understand the basic cost-benefit analysis required in the Cash for Clunkers case, and yet you managed to fall fall short of the necessary level of sophistication nonetheless. I find it interesting that you think it is my fault that I had to explain these basic concepts in order to correct your apparent misunderstandings of the nature of the program.
Meanwhile, sometimes government programs like this are useful, and sometimes they are not, so you have to evaluate them on their individual merits. That is also not a particularly penetrating insight, but amazingly enough it appears to be yet another basic concept that you have not managed to grasp.
ISLM, yes it is a lot of fun to read a person who thinks he is being insightful by noting that a central banker made a large error. Whatta’ surprise!
This is another good example of you dumbing down the conversation (quite a pattern, that). Yes, we all know that Greenspan screwed up, but that leaves the question of exactly what led Greenspan to screw up. You apparently have nothing to contribute to that discussion other than, “Er, um, sometimes central bankers screw up.” So is that your idea of being insightful?
Meanwhile, what ISLM suggested is that the reason Greenspan screwed up is that he placed partisan political interests, namely the re-election of Dubya, over his duties as Fed Chairman. Now you may not agree with that hypothesis, but it has a lot more content than your contribution (”Er, um, Greenspan screwed up because sometimes central bankers screw up”).
In short, I think before you continue to criticize others for a lack of sophistication and insight, you might want to demonstrate that you are capable of such yourself. Because right now, your own inanities are by far doing the most to dumb down this conversation.
August 7th, 2009 at 8:22 am
Attacking Cash for Clunkers is just bizarre. I mean, Ford has now GROWN year-over-year; without the stimulus, that’s unthinkable.
What’s more, it’s an ideal form of stimulus: the government is incentivizing the replacement of equipment at a time when income insecurity and capital losses have disincentivized replacement.
Since income insecurity and capital loss will go away at some point in the future, replacing that shortfall with government subsidies will (as just happened) effectively support an entire sector of the economy.
If you were pissed at the dealership closings AND are pissed about Cash for Clunkers, you are a T-R-O-L-L. You ain’t got no alibi.
I think the past year has also shown that direct subsidies are a far more efficient replacement than tax cuts. I’ll buy a new air conditioner for a $1500 discount that expires in a year; a $1500 overall general deduction to my taxes doesn’t factor into the a/c equation, so it doesn’t spur me to spend.