My two blog entries (August 18 and 19) about Christina Romer's August 6 speech on the stimulus package have drawn an unusual amount of commentary, including criticisms (some by seemingly reputable economists) that are at once obtuse and vitriolic.
Some of the criticisms by economists are downright goofy (I have said before, and will say once again, that business-cycle economics is a very weak field), such as that, in treating output, conventionally enough, as the sum of personal consumption expenditures, investment, and government expenditures, I included "financial assets" in investment.
Output (measured for example by Gross Domestic Product) is a flow concept, not a stock concept. The nation's housing stock, and its other assets, including stocks and bonds, are not part of GDP. What I said, in criticism of economists who deny that a stimulus program can have any beneficial effects, is that while it is true that if a dollar invested by government, say in hiring a road contractor to build a new highway, reduces private investment by a dollar, the government expenditure is unlikely to increase net output, but that I doubted that that would be the effect of the stimulus. If private investment and consumption are down because people and firms are hoarding cash for fear of what the future holds for them, government can in effect put those inert savings to work by deficit spending on public works.
This same economist, Mark Thoma, who like DeLong is notably abusive, resorts to the academic trick of reading a passage literally in order to make the author seem an ignoramus. I had said that one of the events in the second quarter that might have helped reduce the rate of decline in output and employment was increased foreign demand for U.S. goods, relative to the first quarter. Thoma says: "he [Posner] talks about foreign demand for US goods, but doesn't include NX in his definition of output." "NX" means net exports. That is to say that increased foreign demand for U.S. goods is a good thing, since exports increase national income, unless U.S. demand for imported goods grows more. That's true, and if that happened in the second quarter (it didn't) I would not have pointed to the increase in foreign demand as a factor favorable to U.S. output, hence a possible confounding causal factor with the modest stimulus disbursements in the second quarter.
My critics are leftwing economists, and I think they simply can't believe that I really support the stimulus program, that I am a Keynesian, and that I am a critic of conservative macroeonomists and finance theorists, though I do not accuse John Cochrane, a distinguished finance theoriest, as Thomas does, of not knowing freshman economics.
Well, on to substance.
Romer's speech argues that the disbursements of stimulus funds through the end of the second quarter of this year (that is, through June 30) have had a big effect on economic output and employment. I said this was unlikely as a matter of theory, and that she had no persuasive evidence to back up her claim. And I raised the question of the ethical responsibilities of an academic who takes a government job and then makes a speech that although it deals with a subject that she had studied and written about as an academic is not a responsible academic analysis. My concern is enhanced by the statement of one of my critics that the Council of Economic Advisers, of which Romer is the chairman, has a sterling reputation for political neutrality and analytical rigor. Romer's speech does not bode well for the preservation of that reputation. Another critic argues that since it was just a speech, intended therefore to be heard rather than read, Romer should be permitted to have rounded off her numbers, and thus to have rounded off $89 billion (this critic's estimate of how much stimulus money had been disbursed by the end of the second quarter) to "more than $100 billion" (her language). This overlooks the fact that the speech was posted on the CEA's website, and is replete with footnotes, which I doubt she read aloud.
In fact, while I am on the subject of the amount of stimulus money disbursed so far, $89 billion seems too high. The government's official figure is $60 billion, and a recent estimate by msnbc.com is $58 billion. One of my fiercest critics estimates the figure at "about $60 billion," without however remarking the discrepancy between "about 60 billion" and Romer's "more than $100 billion.
Far more important than the amount of money disbursed is the amount spent. The distinction is essential. When an individual or for that matter a state treasurer (for the entire stimulus disbursements through the end of the second quarter consisted of transfer payments) receives a check, he has a choice between saving it or spending it, or doing some of both; and if he decides to save it, he has to decide whether to hold it in cash, deposit it in a bank account or a money-market account, buy stock, etc. The more of it he decides to save in a safe form, the less the stimulus he received will do to stimulate economic activity. Most economists believe that "transitory" (one-shot) income is mostly saved rather than spent; and the belief is confirmed by most studies of the effect of the $150 billion in tax relief implemented in the spring of 2008 to fight the then-nascent recession.
Romer's speech does not indicate what percentage of the "more than $100 billion" (or is it $58 billion?) had actually been spent rather than squirreled away during the second quarter. Moreover, given the inevitable lag between the disbursement and the expenditure of disbursed funds by the recipient of the disbursement, disbursements made toward the end of the second quarter could not have affected output and employment in that quarter.
Romer's failure to address these points would be understandable if she were not an academic student of stimulus programs; but she is.
When I read her speech the first time, I missed this startling statement: "the fact that consumption fell slightly in the second quarter after rising slightly in the first quarter could be a sign that households are initially using the tax cut mainly to increase their savings and pay off debt" (emphasis added). Well, if that's what they're doing, they aren't doing much to stimulate economic activity. I agree with Keynes that consumption is the motor of the economy (one my critics says that "consumption does not produce," which rather misses the point), and that what government needs to do when personal consumption expenditures drop is to increase government consumption--and that means public works, which employ people, and not transfer payments, which may not translate into proportionately increased consumption, or at least not without a lag. Romer says that public works (she calls them "direct investments," but the meaning is the same) "have short-run effects roughly 60 percent larger than tax cuts." She doesn't indicate where she gets the number, but it is further evidence that she believes that transfer payments are not as efficient in stimulating economic activity as public works are.
Critics have been particularly unsparing of my having expressed the so-called $100 billlion in stimulus disbursements as a percentage of annual GDP. I think it's a fair criticism--and so it is amusing to note the identical procedure in the second sentence of Romer's speech, where she states that the $787 billion is "roughly 5 percent of GDP." It is roughly 5 percent of this year's GDP. But it is to be spent over at least two years.
The most serious problem with Romer's speech is evidence. She thinks she has shown that the economy lost 485,000 fewer jobs in the second quarter as a result of the stimulus. There is no evidence for that, because she makes no effort to adjust for other developments in the economy that affected employment, including other parts of the government's recovery program. I don't criticize her or anyone for the absence of evidence concerning the stimulus program's early effects. As I said in my book, when the government attacks a depression with several different programs, it is very difficult and maybe impossible to disentangle the causal efficacy of each one. I also said, and I have repeated this ad nauseam without my critics noticing, that it was right for the government to try a variety of measures for arresting the economic decline, including the stimulus, even though the result would be that the relative effectiveness of the different measures might be impossible to determine.
One of my critics, after calling me "obnoxious," states: "Does no one see how ridiculous Romer is, to be arguing that no one should blame her for missing how bad the economy was going to be, in one paragraph, and then, almost in the next, arguing that she knows precisely what the effect of the stimulus has been, because she knows what the course of the economy would have been, in its absence?"
I mentioned that Romer's academic work had included findings (not mentioned in her speech) that stimulus measures employed against the recessions that the United States has experienced since World War II have not been effective, because by the time the stimulus is implemented the recession is over. My critics point out that because this recession is already longer than any of its predecessors, those academic findings are irrelevant. That would be true if the stimulus program had been enacted in December 2007, when the recession (or, as I prefer to call it, the depression) began. At this writing, it seems that economic growth is about to restart, yet more than $700 billion of the stimulus money remains to be spent. If economic growth turns out to be rapid, the effect of stimulus spending, on top of our huge deficits, may be to create significant inflationary pressures.
I hope this is something that Romer is beginning to think about, but I am doubtful, because she remarks at the end of her speech that the President is trying to "rebuild the economy better," for example by "urging health care reform to slow the growth rate of spending, tame the budget deficit, and provide all Americans with the [sic] secure health insurance coverage." The first two objectives are inconsistent with the third. And increasingly it looks as if any ambitious health care program that Congress passes will not be funded, and so will add to the national debt and inflationary pressures.
I would like to leave the last word to Lawrence Indyk. Mr. Indyk is a frequent commenter on my blog. His comments, whether critical or supportive (some are the former, some the latter) are invariably thoughtful and lucid. Here is his comment on my discussion of Romer's speech:
"1. Dr Romer gave a speech on August 6th purporting to assess the success of the stimulus up to that point. The analysis she presented to The Economic Club of Washington was quite different from what she would have said had she remained a private academic and not an agent of the current administration.
"2. This difference is, essentially, one of less rigor and, paradoxically, more certainty, than one would otherwise expect, or would otherwise be considered acceptable by peers in the profession. To put it simply, she expressed an extraordinary amount of confidence in her conclusion that the political plan which had been enacted was having, and would continue to have, very close to an optimal effect on the overall economic situation. In other words--it was a Goldilocks stimulus--just right, and working as planned.
"3. She did all this with the reputation of an accomplished and highly esteemed Economist, and therefore with an understanding that her audience would consider anything she said to reflect only the highest standards of objective accuracy. That is why, after all, she was chosen to make this defense of the stimulus plan. Despite this, the analysis she presented was cursory and her conclusions fairly weak.
"4. Though everybody knows it, she did not disclose ahead of time that she was now acting as a political figure and that the statement she was making was not some sterile and disinterested academic seminar, but specifically designed to have a particular political effect. Such a failure to make such a disclosure brings her professional integrity into question in terms of whether we should believe what she says on the basis of her academic reputation so long as she remains in the employ of the government.
"Well, now that the summary is finished, it all seems like much ado over not much to me. Consider paragraph 4 above. Does anyone actually expect Dr Romer to say otherwise? People have been eating similar political-through-professional content with grains of salt for a long time.
"And as for Professor DeLong's outrage (debates over details aside) is the mild charge being levied here really so unbelievable or abominable? No one has said Dr. Romer is incompetent or a bald-faced liar, merely that she speaks for the President, and it seems (as should be expected by all adults) that, while short of outright dishonestly, she is selectively emphasizing a narrative that is favorable to him."
(Photos: Christina Romer White House Official Portrait and Flickr User Ed Yourdon)