Saturday, February 7, 2009

Beyond talking points on the Great Meltdown (1)

I am heartily tired of the rampant war of words between the GOPer and Dem talking points on the stimulus and the current meltdown.

There is precious little serious dialogue going on between the two camps that makes any sense, and a complete unwillingness to deal with the other side's best arguments rather) in Paul Krugman's ideological posturing that passes for economic policy presentation.

But let's be honest: Krugman is hardly the best point man for Keynesian stimulus, as much as he might like to think so.

That title belongs to Dr Mark Zandi of Moody's, whose recently released analysis of the House stimulus package is the most powerful document that the Obama administration has to support its plan.

It is in this document that we get Zandi's "bang for the buck" table that has become the favorite talking point for liberals and progressives, because it argues that income support and other forms of direct Federal spending create a far stronger economic multiplier than tax cuts.

Unfortunately, unless one is a paid subscriber to Moody's Reports it is impossible to track down hard information on the macroeconomic model that generated this data--but of course it would be proprietary, and as a Libertarian I sure cannot fault them for keeping it close to the vest.

Except when you're basing public policy on it...

Nevertheless, here are three observations:

1) There is a good deal of indirect academic and logical support to the thesis that tax cuts provide immediate but not huge stimulus (only 17% of the 2008 tax rebates was immediately spent); that infrastructure spending provides more impact but takes a lot longer to kick in, and that direct support to poor people results in an immediate (though usually quite temporary) uptick in consumer spending. The evidence is there, although the precise multipliers in the Moody model lack independent attestation. You may not like it, but like the law of gravity you have to deal with the data instead of ignoring it.

2) There are some reasons to question the Moody macroeconomic model, among them its apparent failure to predict the dramatic downturn during 2008 and the dependence of similar models on rational spending behavior and predictions on the part of consumers. When that doesn't happen, such models show significantly poorer performance as predictors. In point of fact, such macroeconomic models are still, if not in infancy, barely through kindergarten, and all too susceptible to technological changes and unpredictable actions (think State actions like war, trade war, or dumping) to be more than gross predictors.

3) These types of macroeconomic models--including Moody's--are far more concerned with predicting short-to-medium term economic impact that they are at simulating the long-term structural impact of the increased debt incurred by the stimulus or the additional planned Obama administration spending on item like health care, energy, or ongoing wars. This is a point that the Zandi himself concedes, but he argues that the short-term danger of sliding into a depression are so serious that we have to accept that risk and worry about dealing with the national debt structure later.

So I conclude that macroeconomic models are practical tools for dealing with economic policy, but they are far from perfect, and worse, far from perfect in ways that we don't know.

An acquaintance of mine in the finance business puts it this way: It's not what you know you that don't know that will hurt you, it's what you don't know that you don't know that will kill you. You may have to say that one out loud to make it make sense, but the essence is this: we can be relatively certain that macroeconomic models of the US/global economy have the capability to produce gigantic errors, and the problem is we really are not sure where.

Murphey's Law suggests that such errors will come in places that will really hurt us.

That having been said, it's important to engage a number of Zandi's other points and observations, including the one that makes much of the nationalization (or pre-privatization as our liberal friends suddenly like to call it, as if they really understood what that meant) of banks and financial institutions:

The public policy response to the financial crisis has been without precedent. The full faith and credit of the U.S. government now effectively backstop the financial system, significant parts of which have been nationalized. With the takeover of Fannie Mae and Freddie Mac, the government makes nearly all the nation's residential mortgage loans. And as the $700 billion Troubled Asset Relief Program is deployed, the government is gaining sizable ownership stakes in the nation's largest financial institutions.

He's absolutely right here: with 362 of the nation's largest banks already having received TARP funds, when that number is put together with the government take-over of Freddie and Fannie, the State has already nationalized as much 16-20% of the economy.

We have entered an era of managerial capitalism whether we like it or not (and I don't!), so we realistically have to deal with new questions.

The new questions are not even how much of the economy is going to be nationalized, but how much of it we will eventually be able to retrieve. And how fast. And what our nation will look like when (if) that happens.

Krugman, Reich, and Zandi look at the aftermath of this recession, which they hope to see in 2011-2012 as being the opportunity to return the US to a post World War Two era (although, in fairness, Zandi is more circumspect about his expectations), but the problem--as I have noted before--is that we live in a completely different political, economic, and cultural world than existed immediately after 1945.

They're calling my plane. More later.


Brian Miller said...

I think the answer to this is pretty clear.

Let's just ask what consumer-spending-based economy "stimulated" itself out of a depression through government spending.

Let's further ask why, if government spending has "higher multipliers" than private sector activity, capitalism is a good idea at all.

After all, if only government can effectively grow the economy rapidly, why not just put government in charge of the whole economy?

And of the countries that tried that "experiment," how many are in the G7 today?


Steve Newton said...

Not to worry, Brian: I intend to deal with Dr Zandi quite thoroughly....

tom said...

While they represent a different demographic than the US, some parts of Japan's attempts to spend itself out of recession / depression over the past two decades ought to be relevant to our situation.