Alan Reynolds on the Stimulus Package

Reynolds is a supply-side economist who has been commenting on macroeconomics in The Wall Street Journal since the 1980s.

His piece from January 28 entitled "$646,214 Per Government Job". Given his background, he's obviously going to be against the stimulus package, but even so he raises some interesting points.

I liked this one:

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.

World Trade Is Down

Most recessions are local not global. So trade doesn't decline worldwide.

This recession is broad, and the result is that world trade may drop for the first time in a generation.

There is a little bit of a chicken-and-egg problem here though: it isn't clear if trade is down because people aren't buying, or because shippers can't credit to finance their trips.

GDP Announcement

The first draft (called the advance announcement) of real GDP for the 4th quarter of 2008 came out this morning.

The schedule for this is that announcements are made on the morning of the 4th Friday of the month. One month after the quarter ends we get the advance announcment, 2 months after the revision, and 3 months after the final announcement.

Kling Fleshes Out Murphy's Powerpoints

Kevin Murphy's powerpoint are fairly sparse. The discussion is fattened up a bit in this piece from The Atlantic.

Basically, the effects of the stimulus package can be broken down into 4 parts:

• Keynes Effect - by how much government spending can be expected to push output
• Housework Effect - to what extent do we have to subtract out output that might be counted differently after a stimulus.
• Galbraith Effect - does the value of output depend on who makes the spending decision
• Feldstein Effect - how much do we need to subtract out for financing costs.

The author - Arnold Kling got his Ph.D. from MIT in the same class with Paul Krugman and John Huizinga. He blogs at EconLog.

Kevin Murphy's Take On Stimulus

Kevin Murphy, a University of Chicago professor (faculty website) is another guy with a lock on a Nobel Prize.

His short Powerpoint presentation about the stimulus package has been making the rounds on the internet, and is worth reading.

This is from an excellent panel discussion on the stimulus package held at the University of Chicago, and featuring professors Murphy, Huizinga (another potential Nobel Prize winner), and Robert Lucas (the 1995 Nobel Prize winner). Click here for the video.

Barro On Stimulus and Multipliers

Robert Barro, a Harvard professor (faculty website), has a lock on a Nobel Prize in economics for his work in macroeconomics over the last 40 years.

In the January 22 issue of The Wall Street Journal he had an op-ed piece entitled "Government Spending Is No Free Lunch". It focuses on the value of the multiplier that Keynesian theory suggests enhances government spending.

... Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society.

If the multiplier is greater than 1.0 ... the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.

FWIW: There has been considerable scuttlebutt in the economics blogs this past week about this article: there have been a lot of personal insults of Barro without refutations of his basic point.

This Recession's Coordination Failures

I've mentioned in class that recessions are largely about coordination failures: for a variety of reason, transactions aren't made that should make both parties better off.

Historically, these coordination failures have generally been between workers and employers: unemployed workers won't accept offers that come with lower wages, while employers can't offer higher wages until someone starts buying their products, which they aren't doing because they're worried about their wage falling.

Keynes' prescription for this problem is to pay workers something so they'll start buying (and then to get out of the way).

Alberto Alesina and Luigi Zingales point out in a January 21st piece in The Wall Street Journal entitled "Let's Stimulate Private Risk Taking" that we have a similar but different problem this time around:

But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors' fear. Thus, the problem is how to increase investors' willingness to take risk. ...

The bottom line is that we have to get lenders out of their investments in treasury bills (loans to the government) and back into commercial paper and corporate bonds (loans to firms).

There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years.