The macroeconomist J. Bradford DeLong (about whom I blogged on June 10) has written an angry criticism of my criticism ("Honesty about the Stimulus," posted yesterday) of Christina Romer's defense of the $787 stimulus package that Congress enacted in February. (He accuses me of writing "dishonestly" and to have committed "at least seven major ethical lapses.") Although Professor DeLong makes one pretty good point (see paragraph numbered 2 below), his criticism on the whole confirms in my distrust of macroeconomists' analysis of the economic crisis.
Let me repeat what I said in my blog entry yesterday, what I said in my book, what I have said repeatedly: I support the stimulus. Although it is badly designed and I believe has not been energetically implemented, it was on balance a good thing to do; and it may have had positive effects as early as the second quarter of this year. And I have no animus against Dr. Romer, whom I have never met, but whose academic work I respect. My criticism was that the argument in her recent talk that the stimulus was just right and had big positive effects last quarter is unpersuasive. And I raised questions about whether academics in government ought to make a clear distinction between academic and political standards of proof.
Now to Professor DeLong's points:
- Romer in her talk says that $100 billion in stimulus funds were distributed by the end of the second quarter. I called this "a suspiciously round number." This infuriates Professor DeLong, who calls it libelous, but his nonadjectival response is to claim that the actual number is $89 billion. I think that makes my point.
- His second point has greater merit. I had said that $100 billiion (of course I should have said $89 billion), being less than two-thirds of one percent of GDP, was too small to be likely to have reduced the decline in output from an annual rate of 6.2 percent in the first quarter of the year to 1 percent in the second quarter. He says that the proper comparison is between one quarter's GDP and $100 billion (which should of course be $89 billion, as by this point he has forgotten), and that is half right. It is only half right because not all the $89 billion received in the second quarter was spent in that quarter. Money received and deposited in June, for example, was not all spent in June; nor, for that matter, was all the money received in April spent by the end of June.
DeLong contends, moreover, that 60 percent of the $89 billion was in the form of tax relief and the other 40 percent in payments to states. In other words, the entire expenditure consisted of transfer payments rather than public-works projects. Since these transfers are transitory rather than permanent income to the recipients, it is likely (and this is confirmed by estimates of the amounts saved from the Bush tax credits of spring 2008) that most of the money was saved rather than spent.
If one assumes generously that one-half of the $89 billion will have been spent (rather than kept as savings) by the end of the third quarter, or $45 billiion, and that the GDP for the second and third quarters will sum to $7 trillion, the stimulus money distributed in the second quarter will have lifted spending by approximately two-thirds of one percent, which was my estimate, though differently arrived at. DeLong assumes that the entire $89 billion was spent (not saved) in the second quarter. That is unsupportable.
If one assumes that by the end of the second quarter only some fraction of $89 billion had been spent--surely less than 50 percent, when one considers not only amounts saved rather than spent but that much of the money would not have been disbursed until June, the last month of the quarter--it seems extremely unlikely that the expenditure reduced the rate of decline of output from a 6.2 percent annual rate to a 1 percent annual rate. And nothing in Romer's talk, or DeLong's blog entry, permits an estimate of how much the disbursements affected the rate of decline of output.
- DeLong cites two bits of evidence to suggest that Romer was aware of and tried to correct for the problem of multiple converging causes for the drop in the rate of decline of output between the first and second quarters. The first is that states that have received a relatively small share of the stimulus are doing poorly, and the second is that countries that responded to the global depression with large stimulus packages are doing better on average than was expected six months ago. But of course other things were happening in those states and those countries besides stimulus, and the other things have to be corrected for, which as far as I know has not been attempted. Much was happening in the United States as well, and the question is the incremental effect of $89 billion in stimulus disbursements (not spending, for much of the disbursements would have been saved rather than spent) in the second quarter, and of that there is nothing in Romer's talk or DeLong's blog post to base an estimate on.
DeLong does not comment on my criticisms of Romer for describing the stimulus package as just right or, a related point, for assuming that recipients of the tax cuts provided for in the package will treat these as permanent rather than transitory increases in income. I am sure that DeLong thinks the stimulus package was too small and too weighted toward transfer payments rather than public works.
DeLong's post supports the concern I've expressed about economists going on holiday when they write for the general public. No one reading his post would dream that he was a professor at a distinguished university. I repeat a passage from my June 10 blog entry about DeLong: "It seems that DeLong, like Paul Krugman, is a high road / low road thinker/writer. He does sober academic writing part of the time and irresponsible popular writing the rest of the time. That's a common enough pattern, but when it is found in macroeconomists, specifically those who write about the business cycle rather than less ideologically charged macroeconomic topics, it makes one wonder how trustworthy their 'scientific' writings are."
(Photo: Flickr User stopnlook)