Monthly Archive for February, 2009

Sachs On The Dangers Of Too Much Stimulus

Jeffrey Sachs warns of the danger of too much stimulus:

The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated.

President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession. These policies may work in the short term but they threaten to produce still greater crises within a few years. Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels….

We need to avoid reckless short-term swings in policy. Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment. Deficit spending in a recession makes sense, but the deficits should remain limited (less than 5 percent of GNP) and our interest rates should be kept far enough above zero to avoid wild future swings.

The full article can be found here.

Macroeconomists On The Stimulus Bill

Will Wilkinson, interviews two leading Marcoeconomists on the recently passed Stimulus bill:

I talked to Prescott just hours before Obama set the presidential pen to the stimulus bill. “There is an old, discarded theory that’s been tried and failed spectacularly, which is where that language of stimulus comes from.” The stimulus bill, Prescott told me, “is likely to depress the economy.”

That was from Edward Prescott, 2004 Nobel Laureate in economics.

He also asked Edmund Phelps, the most recent macroeconomist to win the Nobel Prize. He writes:

“There’s a chance that some of the infrastructure spending will do the job of creating more work for earth-moving equipment and construction workers, Phelps noted. “I said, ‘a chance’,” he continued. “Now, there’s also a chance that the perceived increase in the role of government of this sort will have some unanticipated effects on the animal spirits of entrepreneurs. These projects may stand as a sort of symbol of the weakening of the private sector.”

By significantly increasing government involvement in so many sectors of the economy, Phelps worries the enacted stimulus plan could make the climate of investment more rather than less uncertain, and make growth-enhancing innovation less rather than more likely. Potential investors may become spooked by businesses increasingly dependent on government contracts, Phelps notes, since these firms may face additional regulations and bureaucratic requirements which may make them appear less able nimbly to adapt. Additionally, the anticipation of higher future taxes–the price of the current spending surge–could dampen consumer demand and “have a chilling effect upon the desire of entrepreneurs to innovate,” Phelps says…

Phelps says he “just doesn’t understand” the argument that government can spur innovation through top-down subsidies for selected new technologies. Citing his Columbia colleague Amar Bhide, Phelps suspects that “a lot of money will be made by being in the right place at the right time and knowing the right people. Especially knowing the right people.” Phelps is disturbed by the thought that we may be shifting from an entrepreneurial economy toward a lobbying economy. “A lot of potential entrepreneurs, who were contemplating making an innovation and launching it in the marketplace, will now think, ‘Well maybe the safer thing to do is to try to get that government contract.’ … And nobody does the innovation. They’re all too busy trying to get the government contract.” 

The full article, which should be read in full, is here.

Quote Of The Day

“The American health-care system may be a crazy mess, but it is the prime mover in the global ecology of medical treatment, creating the world’s biggest market for new drugs and devices. Even as we argue about whether or how our health-care system should change, most Americans take for granted our access to the best available cancer treatments—including the one that arguably saved my life.” — Virginia Postrel, writing in The Atlantic Magazine on how the US’s healthcare market’s advanced technological and pharmaceutical breakthroughs save lives…and moving to a single-pay system could jeopardize it

Understanding Financial Markets

For those who want to get a deeper understanding of the financial markets, Yale University provides Yale economics professor Robert Shiller’s (one of the leading authorities on financial markets) course for free, as part of its Open Course list.

The video for the courses along with syllabus and homework material can be found here.

Quote Of The Day

“The simple truth is that so far economic policy has fallen short of being good.  Some (not all) left-wing bloggers may be reluctant to say this so early in the tenure of such a long-awaited administration, but perhaps a few of them are thinking it.  There is the stimulus, the Geithner banking plan, and the housing plan.  Of course there are differences of opinion but perhaps it is fair to say he is straining to be one out of three?” — Tyler Cowen, economics professor at George Mason University, on the Obama administrations record thus far

Quote Of The Day

“Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves.  Mark is right to make fun.  What a ridiculous thing to believe.  All the good economists know that it is spending increases that more than pay for themselves. ” —

A Fiscal Stimulus I Can Accept


Tim Kane has more here.

Bush’s Foresight In The Financial Crisis

Though I agree that there was alot the Bush administration missed, I don’t agree that it was all Bush’s fault and Democrats deserve less blame. Here is a chronology, brought up before the financial crisis, of Bush’s warnings and calls for regulations and Democrats adamant refusal to do so.


Why Are Profitable Companies Laying Off?

Here is a good primer I came across that answers that question and shows just how fundamental the financial markets are to todays companies. Go here.

Anti-Immigration Surfaces

First it was “buy American only”, now its this:

While I think President Obama has been doing his best to keep the worst protectionist impulses in Congress out of his stimulus plan, the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas.

The Democrat nativism is to hard to contain.

Update: Jagdish Bhagwati has more.

Quote Of The Day

“Another cause of long-term unemployment is unionization. High union wages that exceed the competitive market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for example, a state with a 20 percent unionization rate, approximately the average for the fifty states and the District of Columbia, experienced an unemployment rate that was 1.2 percentage points higher than that of a hypothetical state that had no unions.” —Larry Summers, Harvard economist and now the head of the White House’s National Economic Council for President Barack Obama.

Quote Of The Day

“President Obama has issued an executive order that permits federal agencies to require union labor for work on federal contracts. This is good news for union workers, bad news for non-union workers, and bad news for taxpayers, who will pay more for what the government buys on their behalf. In my judgment, it is bad news from a macroeconomic perspective. As I learned from Professor Larry Summers, one “cause of long-term unemployment is unionization.”” — Greg Mankiw, economics professor at Harvard University on Obama’s recent executive order benefiting unions

The Right Way To Look At The “Stimulus” Bill

Economist Arnold Kling explains:

Why is the stimulus bill so filled with non-stimulus while it omits real stimulus measures, such as cutting payroll taxes?

I think the answer is that it is a reparations bill, not a stimulus bill. People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic. To the Democrats, the Bush tax cuts were a heinous evil, comparable to Germany’s violation of Belgian neutrality in World War I. Now, they are demanding reparations, with hundreds of billions of dollars to be paid into teachers unions and other members of the coalition that won the election.

Most of the bill makes no sense from a stimulus perspective. But all of it makes sense from a reparations perspective.

Now it all makes sense.

Quote Of The Day

“This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.” — Robert Barro, professor of economics at Harvard University on the “fiscal stimulus” under consideration in congress

500 Million Americans Will Lose Their Job!

Nancy Pelosi says that if we don’t pass the stimulus package soon – as opposed to taking some time to remove the pork – 500 million Americans will lose their job!


Now that’s what I call an emergency!

Quote Of The Day

“Milwaukee Public Schools would reap $88.6 million over two years for new construction under the economic stimulus package just passed by the U.S. House of Representatives – even though the district has 15 vacant school buildings, a large surplus of property and no plans for new construction….The amounts for MPS are particularly eye-catching, and not only because they are the largest in the state. Enrollment is declining every year, and the last major wave of construction in MPS – the $102 million Neighborhood School Initiative launched in 2000 – resulted in projects that are underused, have not met enrollment projections or have closed.” —The Mikwaukee Journal Sentinal, link via Greg Mankiw