Fiscal Stimulus II

See this from the Center on Budget and Policy Priorities: http://www.cbpp.org/cms/index.cfm?fa=view&id=2815

And on intrade, I see that "the market" says that unemployment will be above 10.75% by December, with an 18% chance of topping 12%!

If in government, I would propose a swift, immediate transfer of about $400 billion to state and local governments to be used for deficit reduction, preventing the cutting of necessary services, preventing more tax hikes, and stimulus, letting the states decide whether to give temporary tax cuts or fund more public infrastructure projects.

It was clear back in February that the stimulus was imprudently small -- that if things got better, it could be scaled back and we really wouldn't have lost much, but that if things got worse, it might be tough politically to send another stimulus back through the Congress, with the Republicans no doubt jabbering about how, why, if the first stimulus failed, why you'd want to throw more good money after bad. And now the public is stupidly more concerned with deficit reduction than fighting the recession.

What I suspect will happen is this: the economy will continue to muddle along, perhaps with slowing unemployment losses, but more or less along a trajectory of 11% unemployment by years end and 12+ sometime next year, by which time GDP may stop contracting, and then we'll go through a whole 'nuther year or so of just very slow growth and a very weak economy. Without any genuine cliff-diving, we won't get another stimulus, but just a Japanese-style muddle.

For this we can thank that brilliant wunderkind Larry Summers.

Hoisted from the Comments

Anonymous writes:

Is there any chance you can mess with the html for the site to widen the margins (it's a pain to read something this narrow!), but I like the work.

I'll work on it.

And then writes:

I still don't understand how you're an aspiring academic economist - my personal favorites are mostly people who work in finance (either some of the bigger analysts like Rosenberg and Xie, hedge funders like Dalio, and Fleckenstein, or the enigmas of Roubini/Duy/Setser). You spend a lot of time ripping apart the field, and seem to have a strong interdisciplinary background. Who are the economists you really look to? Are you more of a post-Keynesian? Where do you really place yourself in the field?

OK, so the reason I'm an aspiring academic economist is because I think education is actually quite important, and I'd like to change the field. It doesn't have to be the case that academic economists are like medieval priests. They could potentially function as a useful segment of society. Or so I hope.

I'll admit I had not heard of most of the people you just mentioned. I just took a look at a Bill Fleckenstein article "Printing Money Isn't the Cure", and it looks Acemoglu look like a genius. In or close to a liquidity trap, which is where we are, then printing money is precisely what needs to be done. If inflation is ignited (which is our goal), then the fed can scale back later. And if we have 4-5% inflation, so what?

I have actually had a difficult time finding good economists, but my favorite is probably Joseph Stiglitz, then Krugman. Peter Temin and Gavin Wright have done some good work. David Card is of course excellent. Dani Rodrik can be ok on occasion. For econ history, i like Crosby, Diamond, Landes and Clark (plus krugman's geog & trade). I believe all of these books can tell you something about why some countries are rich and others are poor.

I lean left politically and that explains my economics. I believe Keynesian spending makes sense when you are close to being in a liquidity trap. I think that when state governments cut their budgets in the middle of recessions it's the dumbest policy imaginable. In normal recessions, however, I think the Fed alone is well-equipped to handle things, but I also like having automatic stabilizers. I think all of this is fairly standard for most economists on the center-right, center, center left, or far left. (Usually have faith in monetary policy except for steep recessions/liquidity traps.)

It's time Thorstein Veblen went to bed...

Summers is good!

at manipulating newsman.

This is a piece of garbage:

http://www.nytimes.com/2009/06/08/us/politics/08team.html?_r=2&ref=todayspaper&pagewanted=all

Note that, in all of the disputes except one, Summers was allegedly arguing for the more liberal position... I just can't believe that. The other thing is that Geithner, Romer, and Goolsbee are all basically centrists, so one wouldn't really expect any big ideological debates between them. The issue is w/ the Bernstein's, the Volcker's, the Stiglitz's and the Krugman's being cut off.

And they are cut off.

Naomi Klein on Summers:

http://www.naomiklein.org/articles/2009/04/why-we-should-banish-larry-summers-public-life

Sleepy Summers

Poor guy. Sleepin' during a White House meeting. Maybe it's time to call it quits so he can spend more time with Peter Orszag's children.

Summers Defending the Small Size of Stimulus...

http://www.youtube.com/watch?v=eGXYvcZF9ek

Don't know how I missed this. Summers is asked repeatedly why the stimulus was too small. He doesn't have an answer. He alludes to "the multiplier", but the stimulus is only around 1% of GDP. The GDP gap is closer to 6-8%. Even with a multiplier of 2 -- implausibly large -- the gap isn't filled. Now, much of the economic news in the past few months suggests that the economy is getting worse at a much slower rate, and may even start to get better soon. There's almost no chance we'll see unemployment below 6 or 7% by the end of next year, however, so the stimulus won't have been wasted. On the other hand, what if the economy doesn't start to get better. What if it keeps getting worse? Then the stimulus will have been way too small, and we'll need another round, which could take awhile to be injected into the economy. That's why we (liberal economists) thought and think that the stimulus was imprudently large. There was no downside to doing too much, only a downside to doing too little, and that's what Obama did.

Bob Allen's New Book Discussion Thread

OK, so Bob Allen made my summer reading list. 17 pages in, however, and I'm already discouraged...

For, on page 4, Allen writes "[Greg] Clark... claims that medieval institutions were almost perfect for economic development." Now, this isn't a wholly inaccurate representation of Clark, but it would be more accurate to say that if the key institutions and keys for development are as the IMF/Washington Consensus sees them, then medieval european institutions were pretty good. Low inflation. Free, well-integrated markets. Low government spending. Very low tax rates (generally 0% on wage income, compared to 50-60% as a top tax rate in many modern european countries). But if these things aren't really the causes of economic growth (as at least I do not believe), then it's inappropriate to say that they are "perfect for economic development", and certainly wrong to say that Clark thinks that. This is just a small issue, however, compared to what comes next...

Allen then writes that "One can reach an optimistic conclusion about medieval institutions only by glossing over their most characteristic forms -- e.g. serfdom. For most of the middle ages, a majority of English were serfs..." But there are two major problems with using this as your key example about how it was poor institutions which held back the world economy before 1760 -- serfdom ended in most of europe by 1450-1500, due to the Black Death-induced high wage economy (thereafter it revived in eastern europe which didn't have the European marriage pattern nor as high of wages). So, there's a 300 year gap between the end of the key institutions Allen sees as holding back economic growth and the start of the modern world, which is problem number one. Problem number two is that if as powerful an institution as serfdom could be eradicated due to the shock of the black death, then does that not imply that institutions also are malleable, and reply to economic shocks?

The next example Allen brings up is about property rights -- he paints a picture whereby commoners had no incentive to invest in things such as land b/c it could just be taken by their lords. While this might be true, since there was a very active land market in England in the late middle ages we can actually test this theory by looking at Clark's series on property prices, and by looking at the variability. What we see, of course, is that property prices were extremely stable for most of the entire period from 1200-1800. (in the netherlands, which experienced more warfare over the same period, prices rose and fell much more...) Stability of prices implies lack of risk of expropriation.

And those are basically the only examples allen has of "institutions" holding back medieval england.

Another thing which caught my eye is on page 16, when he seems to have said that around 1500, "productivity and incomes were low" in britain. That couldn't be further from the truth. We know from clark's time series, eye-witness accounts, and various other series on wages that they were extraordinarily high around 1500 owing to the black death and decimated populations. I suspect this was just an innocent slip-up, however.

I am also sad to see that he modeled his thesis on Paul David's work -- he writes that "David's approach has strongly influenced my own views." This is unfortunate, b/c as Alan Olmstead has shown, a long, careful look at the relative prices of agricultural inputs & output prices in the US failed to support David's hypothesis...

Hopefully the next 250 pages will be better. The book is on an interesting topic and does contain interesting data, however, so I do recommend it!

I'm curious to see what other people think...

Acemoglu Text Review

Haven't posted in awhile. Been busy. Arm is better.

Anyway, today I had the considerable misfortune of sifting through Acemoglu's new textbook for a paper I'm writing. It's f*cking terrible. So, I reviewed it for Amazon, and the posted it on DeLong's blog as well. Here it is, for posterity:

This book is bad, bad, bad. Plain and simple. I give it one star b/c I don't know how to advance to the next screen and submit for no stars.

Having suffered the extreme misfortune of having been assigned to read and present some of Acemoglu's papers (some 2-3 times now), I have a lot of pent-up aggression that needs to be released. Now will be that time.

Acemoglu is that nerdy, pudgy, 4-eyed kid from school who everyone picks on and hates b/c he doesn't shut-up, is ignorant, and incredibly and persistently annoying. The kid who says stupid, ignorant things which are just plain dumb on multiple levels, who does not understand what he should know -- just doesn't get it -- and who everyone therefore (or perhaps just me) wants to strangle with their bare hands. He evokes the same feelings in me I get when I watch George W. Bush give a speech. (If you like George W. Bush, then you will love this book!)

So that is how Acemoglu makes me feel when I'm forced to read anything by him. Now, what is it that gives me those feelings? Here are some of the things I hate about his research/book:

1) His famed settler mortality data, which Albouy has convincingly shown were fabricated, do not merely affect GDP via institutions -- they also should and would have affected levels of technology, human capital, and culture, each of which are persistent. The kicker is that since he had data on initial institutions, there was no reason to make up the settler mortality proxy in the first place.

2) His unquestioned use of Maddison's data, which Maddison, by all accounts, simply made up, and which implies (counterfactually) that there never was a Malthusian world. Aside from being made-up, Maddison's data are obviously and fatally flawed.

3) His arrogance in thinking that he could write a book about economic growth without knowing anything about history, and his arrogance in thinking that he could write about geography and development without really having read Jared Diamond (and without even citing Alfred Crosby). It is frustrating that he equates the belief that geography is important for development and history with "geographic determinism" -- that geography is the only thing which matters. No thinking person could believe that, and reading Diamond or Sacchs in the round suggests that they are certainly NOT geographical determinists.

4) As such, he "misunderestimates" the "geography hypothesis" as he calls it.

5) He is a full time believer in the idea that by doing algebra (but not by reading the history of development), one can gain insights into the history of development.

6) A troubling array of shoddy facts, inaccurate statements, frustratingly wrong-headed logic, and all hidden behind a veneer of high-handed math and regressions. Some of these include:

a) His insistence that the North Korea/South Korea split tells us that geography and culture does not matter, and that it is institutions such as property rights which do matter for growth. The trouble with this is that North Korea was taken over by an utter madman who was an absolute dictator and who shut off trade and contact with the outside world. Logically, it's like saying that eating well and exercise do not matter for health b/c, look, you and your brother (who got hit by a bus) ate the same things and exercised the same amount, and your brother got hit by a bus and died. Of course, looking both ways before you cross the street is also important, but then again, who is saying that it isn't? (Acemoglu is basically saying it's the only thing...) The question is which institutions matter, and since North Korea got almost all institutions terribly wrong, the North Korea/South Korea split is actually not insightful.

b) In 'moglu logic, the "Reversal of Fortune" was supposedly that countries like Argentina and North America which were poor in 1500 are now rich, and vice versa has just one flaw. The peoples who lived in modern day argentina and north america are now dead, not rich. and we don't actually have any idea that say, north america was more/less developed than mexico. and certainly don't know if it was rich (and those are two different things, which acemoglu doesn't understand, b/c the world was malthusian then.

8) How does a tenured faculty member at MIT in economics not understand the Malthusian model? WTF?

9) In fact, there are many theories that can be taken "off the shelf" so-to-speak, which do tell us quite a bit about economic development, such as in Krugman's Geography & Trade, the Malthusian Model, Crosby-Jared Diamond, Engerman-Sokoloff, etc., which are all either butchered in Acemoglu's retelling or omitted.

OK, so I've clearly used up more actual thought writing this review than Acemoglu has in his entire research career.

In short, this book is sooooo bad it discredits: not Acemoglu, b/c u can't blame him necessarily, he is what he is, but rather, it completely discredits MIT economics, Robert Solow, growth economics (the soft underbelly of Macro, which is the soft underbelly of economics, which is the soft underbelly of Social science), and the entire economics profession. I am know dumber than i was before i read what parts of this book i could stomach. This book is bad enough to cast a black shadow over the department and the entire field of economics. This book is fodder for those who equate economists with medieval priests or doctors, who babble on about things about which they know nothing, and have no value-added to society.

This book is of interest to sociologists or anthropologists wishing to document the funny "sociology of economics" and the anachronistic, heavily ideological lens with which conservative economists view the world.

Lastly, it is rather strange that while many decrie the fall of U of Chicago, the decline and fall of MIT Economics has hardly been commented on. Clearly, Acemoglu's rise at MIT can and should be equated (in its impact on educated society) with the Vandals sacking of Rome.

that is all.

Have a great day!!!