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    The dagbuzz for 2/18/09: (Cars and Houses and Chimps, Oh My!)

    By Deadman on Wed, 02/18/2009 - 12:36pm |

    I'm starting to feel the economy is like the chimp gone mad yesterday in Connecticut. You know, the one who ripped off the face of his owner's friend.

    "It's eating us!! Listen to me, you have to shoot it!!"

    Today's economic damage tally:

    $22 billion more for the car companies, 50,000+ expected jobs lost anyway.

    $75 billion in mortgage relief for irresponsible homebuyers. (BTW, just got done reading through the details of the mortgage relief plan, and it actually looks fairly sensible on first blush. Bravo!)

    Thanks again to Yahoo! buzz:

    911 tape captures chimp owner's horror

    GM, Chrysler seek billions more, to cut more jobs (AP)

    Image: $75 billion mortgage plan
    Seen on Yahoo.com

    $75 billion mortgage plan

    Image: Recession will be worst since 1930s: Greenspan (Reuters)

    Recession will be worst since 1930s: Greenspan (Reuters)

    Comments

    I enjoyed the chimp-economy parellel. You best vlog moment to date. My initial thought was "Who has a pet chimp?" but the story details are actually pretty sad.

    I have to say that I hate the filter though. There's just too much going on; I have to avert my eyes.


    by Michael Wolraich on Wed, 02/18/2009 - 11:05pm

    I really love hearing Alan Greenspan of all people tell us about how we're going to have to be responsible in the future.  That's rich.  Then again, he did have the decency to admit that his world-view was fundamentally flawed.  Better luck the next time around I suppose.

    Of course, both you and he are right on that point.  However, that does little to change the fact that we can't do anything about the debt right now.  You certainly can't pay down a debt this size with a waning economic outlook.

    I've given it some thought and I've discovered what I think is the flaw in the logic behind being overly concerned with the debt right now.  While it's true that we shouldn't have done some of the things that got us here, that doesn't change where we are and it's not an argument for not doing what we can to straighten things out.  In other words, it's argument that we shouldn't do what we should be doing now because we didn't do what we should have done then, which is nothing if not consistent.

    It's also different for me to hear it coming from you than it is coming from someone like Boehner, but that's basically because I know that he's being a disingenuous prick and you actually mean well.

    As for whether we act responsibly in the future, I think it comes down to one word: Taxes.  The GOP loves to accuse the Dems of being "tax and spend liberals", but the GOP is just borrow and spend.  As I've noted before, macroeconomists generally take is a foregone conclusion that G always goes up because neither party ever really cuts spending, not even the precocious finger-waggers of fiscal responsibility that come out of the GOP woodwork everytime they get done with their turn of running up the deficit and filling the coffers of finance and defense.


    by DF on Thu, 02/19/2009 - 12:10am

    Precocious?

    I'm curious about this phenomenon, DF. Not people like Boehner. They obviously don't care about the deficit; they're just opposed to government spending. But the people who are genuinely anxious about the deficit like Deadman, where were they in 2001 when Bush rolled out his $1.3T tax cuts.

    Deadman, you weren't blogging then, and I assume that you were opposed, but were you as concerned about the tax cuts then as you are about the the stimulus now? And if not, why not?


    by Michael Wolraich on Thu, 02/19/2009 - 12:43am

    Yeah, I'm really not sure why I used the word precocious there.  It really doesn't make sense.  Poor choice.

    I don't think they are opposed to government spending.  It's a matter of what it's spent on.  If it goes to finance or the military industrial complex, then fine.  The tax cuts you mention were described by Bush as a "fiscal straight-jacket", but they view running deficits as a part of that strategy.

    I don't believe that Deadman's concerns about the deficit are at all in bad faith.  Quite the opposite.


    by DF on Thu, 02/19/2009 - 1:15am

    I'm sure his concerns are in good faith. But I knew Deadman in 2001, and he seems much more excised about the stimulus than he was about the tax cuts, even though the tax cuts were larger and the peak of the dotcom boom was a much more appropriate time to pay down debt.

    It could just be the context of the blog which wasn't around back then, but Deadman isn't the only honest person I know raising debt concerns now. And while I remember plenty of people who were angry about giving money to the rich in 2001, I don't remember many people expressing concern about the national debt. So my question is, are honest critics like D more concerned about the deficit now then they were then, and if so, why?


    by Michael Wolraich on Thu, 02/19/2009 - 1:46am

    honestly, i dont remember feeling strongly about the tax cuts either way back then. as you've pointed out i wasn't nearly as engaged on that level as I am now (or frankly as educated on the issues), and given my day job, I had other concerns (i.e. 2001 was hardly the peak of the dot-com boom).

    however, the national debt was actually at a manageable level back in 2001 (thanks to a decade-long expansion and reasonably conservative fiscal policies from a (gasp!) democrat), and if bush had pursued even a modest amount of spending cuts alongside his tax cuts, we probably would have still been OK on the deficit front (or at least in somewhat better shape).

    On a theorectical level, I am not at all against tax cuts in good OR bad times - It's all about the bottom line as far as I'm concerned, and I think tax cuts often do generate more tax revenue not less (clinton's did). the real problem is that politicians show such little backbone to cut spending, and bush was among the worst of the bunch, esp. given his conservative leanings.

    The other real problem is that at best the government looked the other way as the credit markets started to overheat and then got out of hand - and at worst, it actively encouraged the irresponsible behavior through a variety of means and by a variety of culprits - legislated mortgage lending to unqualified consumers (democrats), loose monetary policy way past the point of necessity (easy al greenspan), systematic deregulation of the banking industry (republicans).


    by Deadman on Thu, 02/19/2009 - 2:05am

    2001 was hardly the peak of the dot-com boom

    My bad. Not sure how I could get that wrong having suffered through the bust.

    I think tax cuts often do generate more tax revenue not less

    There is only one way that tax cuts might generate more revenue--by stimulating the economy. Stimulating. The economy. I think you get my point.

    the national debt was actually at a manageable level back in 2001

    I'm not sure why 60% of the GDP is considered manageable but 70% is not. Seems a rather arbitrary line. But the better comparison is probably not the tax cuts of 2001 but the tax cut extensions of 2006. The economy was growing, the Iraq War was continuing, and debt was at 65%. By your own analysis, that was the more important time to cut spending or raise taxes. But other than a little grousing, not many people were concerned about the deficit back then either.

    What I'm getting at, and why I raised the question, is that I think that there are some inconsistent standards at work. First, I think people tend to blame spending for deficits rather than tax cuts, as in your implication that tax cuts indirectly increase revenue but not stimulus spending. Thus, when Republicans who gleefully cut taxes while Iraq raged and deficits rose now sob about what spending stimulus will cost, many nod their bobbling heads.

    Second, people tend to worry about deficits when the economy is bad. You're quite right that politicians don't pay down the debt in the boom times as they should. That's partly because no one demands it of them. When the money is flowing in, everyone thinks it's time to return the money as tax cuts or spend on new programs because we can afford it. When revenues are shrinking, everyone worries that we've been living beyond our means and that we need to cut back. That's the parent principle, and as I've argued, it's backward.

    So my challenge is, are you guilty of these inconsistent standards? Do you attack spending for its effects on the deficit but not tax cuts? And do you worry about deficits more when we're in a depression than when we're in a boom?


    by Michael Wolraich on Thu, 02/19/2009 - 8:49am

    A few things. Don't be fooled: Our debt as a percentage of GDP will soon be way, way above 70% (First it's already at almost 75%. And the $14.3 trillion GDP number will likely fall by 5% or more this year, and the $10.7 trillion debt number is going to rise by probably 25% or more. I bet we're over 100% of GDP when it's all said and done this year. And like i've said many times before, we are facing a demographic shift that will stretch the resources of our system in a profound way, so i believe we'll have even less flexibility). And of course, we now have two to three times as much of that debt held by foreign governments, a much more dangerous situation.

    I do think you're mostly right about your second point - that is the biggest problem with our deficit spending philosophy: it's too easy to continue during good times. that said, clinton could have been done even more in terms of reducing our deficits considering the enormous increases in tax revenue, but as a percentage of GDP, it did fall dramatically from the reagan years.

    And I think you're 100% right awhen you rail against the cost of the Iraq war. Wars can be very stimulative, with WWII serving as a particularly good example of this phenomenon. But that's only when resources are being widely underutilized (i.e. as in recessions and depressions). Wars during boom times take away from economic growth just like all government spending because it's not particularly useful or efficient spending (it's even worse now because we manufacture a lot less of our own weaponry). And of course, we're not even going to start talking about the foolishness and criminality of this particular endeavor.

    That said, I'll repeat myself ... I generally do think tax cuts are more stimulative than spending. That's probably where I differ from a lot of others on this site.

    But I also think that economic growth is not the only goal our tax policies should be concerned with: I think we had pretty good growth for most of this decade, yet income inequality became a bigger and bigger problem. Tax policies should address that, even at the expense of some growth. Plus, I also feel that like spending, tax cuts lose their marginal effectiveness the bigger they get.

    i've never claimed to be consistent in my opinions. You can either call it being flexible and openminded or indecisive and inconsistent. I choose the former. I don't pretend to know the answers for sure. I think reasonable people can disagree about these matters as economics is much more of an art than a science, in my opinion, and even the best practitioners of it are complete disasters when it comes to real-life forecasting and predictions.


    by Deadman on Thu, 02/19/2009 - 11:26am

    That said, I'll repeat myself ... I generally do think tax cuts are more stimulative than spending. That's probably where I differ from a lot of others on this site.

    I'm sure there's a reason that you believe this, but what is it?  All of the data that I've ever seen on this question says that tax cuts are far less stimulative and they basically have no real long-term stimulative effect of consequence, ie either the Laffer curve is totall bullshit or we've never been far enough ahead of the curve when taxes have been cut for it to matter (of course, if you support tax cuts and the Laffer curve, you can't afford to admit that the problem is that we were cutting taxes when the curve itself would have told us to increase them).  At any rate, I'm geniuinely curious about why you think this is so.


    by DF on Thu, 02/19/2009 - 1:17pm

    i don't trust data generally. i don't trust economic data specifically.

    in my opinion, you can find stats to support almost any economic argument you want to throw out there. Unfortunately, economics isn't a real science. We are not going to one day all agree the world isn't flat. For heavens sake, we are still debating whether it was the New Deal, WWII, or just the normal ebbs and flow of the business cycle that most contributed to the end of the Great Depression.

    We pore and pore over reams of data to buttress arguments that I think can be better made by just using some common sense.

    So here's my common sense: I am just saying that in the vast majority of cases, individuals will spend their money in better ways, with less waste and more foresight, than governments. period.

    so giving people more of the money they earn and government less is generally a worthwhile goal, though i happen to believe there are exceptions to that rule. if you don't believe that core philosophy, though, then I'm not sure we're going to make much headway in seeing eye-to-eye.

    however, i dont believe individuals, even when taken as a whole unit, will care enough about their fellow man to give enough charity for the less fortunate, they will not care enough about the earth to make wise long-term environmental decisions, they will not be moral enough to police themselves justly and protect the minority. So that's where governments must step in. the private market will also sometimes do very stupid things like create derivatives with no underlying assets at 30x leverage, so government needs to be there to stop that as well because while the private market would eventually figure things out and self-correct, we could avoid a lot of pain between point A and B.


    by Deadman on Thu, 02/19/2009 - 1:57pm

    Yeah, I definitely don't agree with you there.  Economics has weak scientific credentials, but that doesn't mean that good faith efforts to apply a scientific approach with transparent methodology are automatically inferior to common sense.  "Common sense" is another way of saying a priori.  It was sensible, at one point, to say that the world was flat.  Eratosthenes didn't figure out that the Earth was curved by just using common sense.  For that, he needed data.

    I also don't understand eschewing data entirely.  Numbers don't lie; people do.  Take, for example, one of the arguments that Amity Shlaes and others are making about the New Deal.  They say that the New Deal didn't decrease unemployment.  However, the lie isn't really the numbers.  The lie is that they don't consider the people who were working for the WPA and other government entities to have actually been employed.  That's not a "job" to them, it's "work" (which is a direct consequence of their particular brand of economic dogma).  It's not statistics that are to blame here.  It's plain old, run of the mill semantic sophistry.  You start there and then the numbers follow.

    Incidentally, you can make the same criticism of every single social science out there.  If you understand math and methodology, it's really not difficult to tell good statistics from bad.  If you either don't understand or aren't willing to, then perhaps all statistics seem equal, but that doesn't mean that they are.  Ultimately, the major intellectual leap that science made (thanks, Galileo!) was to understand that we need to check our assumptions against what happens in the real world.  Economics, like other social sciences, does lack a laboratory, but that doesn't mean it can't observe.  Even some of the hard sciences have this problem, geology being one example.

    When you say that you don't trust data generally, I can't understand that.  I'm not even sure that you really mean it.  You keep talking about the ratio of debt to GDP.  That's data.  The old rag about how you can say anything you want with statistics has the ring of truth, but it's shallow.  What I hear when people say this is, "People lie."  Or perhaps more accurately, "People are inclined towards beginning with an ideological construct and trying to fit information into this construct rather than letting the information inform the construct."  That's precisely why common sense just isn't good enough.  Relying on common sense is how you get a Fed chairman who thinks that financial markets are self-policing.  Common sense didn't tell us that was wrong, reality did.  That's the importance of data.

    In that sense, I think the mission is two-fold.  One, you have to actually assess the data that's being presented.  That means asking whether the math and methodology are sound.  Hard sciences aren't immune to this either.  Remember the cold fusion guys?  This is why a healthy peer review culture is important.

    The other part is more difficult and it's what I was trying to do in my most recent post.  That's to try and get down to the ideological frames that are driving the discussion.  Common sense is a fine starting point, but to me the most important factor is whether we are doggedly adhering to conclusions that we came to prior to observation, despite the fact that observational data might contradict these beliefs.  That's really the most important lesson of science: Skepticism.  It requires the simultaneous recognition that our current understanding is always subject to being incorrect or incomplete, and therefore subject to revision, and that the only way to actually improve this understanding is to allow this process to occur.

    If economics can make progress by refining understanding through applying scientific methodology, then it's scientific enough.  You'll notice that no one really debates the foundations of microeconomics too much right now.  That's probably because it's easier to understand what's going on with a single firm or individual than it is to understand what's going on with all firms and individuals simultaneously.  It's also probably because our understanding of micro concepts isn't being deftly kicked in the shins by reality.  The neoclassical economic model was really the first attempt at giving micro foundations to macroeconomics.  Neokeynesian economics do the same thing for the Keynesian model.  In the meantime, we've come to understand better how Adam Smith's original common sense about markets wasn't the complete picture.  We understand things like market failures and externalities and we can measure these things in many cases.  We also have newer concepts like stickiness and incomplete information that sharpen our understanding.

    In short, I think that you're throwing out the baby with the bathwater, which always seems easier, but doesn't really produce the desired result (unless you're really trying to throw out the baby).  Also, as a friend of mine is fond of saying, "Common sense ain't so common."  It's worth noting, too, that there are still people who argue that the Earth is flat.  Their existence alone isn't grounds to simply throw up our hands and dismiss all of the findings of physics because we don't all agree on the implications.  If universal agreement is a requirement of bona fide understanding, then we don't understand anything about anything and we never will.


    by DF on Thu, 02/19/2009 - 2:57pm

    yes, i was way oversimplifying.

    you just said that all or almost all the data you've seen suggested that cutting taxes wasn't very stimulative or had no real long-term benefits with regard to economic output, and I just believe you most certainly can find data to argue otherwise. modern economics is such a new field, relatively speaking, so the fact that many fairly basic concepts are still hotly debated, replete with contradictory statistics, is hardly a surprise.

    i think data is important, and i think there are obviously economic conclusions that can be drawn, and theories that can be supported, from good, reliable, signifcant samples of data (of course, getting good, reliable, significant samples of economic data is often very difficult - what is the unemployment rate in this country after all?? how high is inflation?? we do so many contortions and manipulations with the data, it's very hard to know how accurate the numbers we get are - the best we can hope for in many cases is that they are consistently inaccurate over time).

    but putting aside the data for a moment, it just makes sense to me that because i believe individuals spend money more effectively than government, that cutting taxes, all other considerations put aside for the moment, is a good thing for the economy.


    by Deadman on Thu, 02/19/2009 - 3:13pm

    What I'm saying is: Who cares if you can find data that says otherwise?  What matters is where it came from, how it was collected and what kind of statistical analysis has been done on it.  Does that deliver perfect information?  No, but it's better than mere belief.  I'd rather have a debate that pushes the state of the art forward rather than simplistic ideological warfare.

    Sure, you can perhaps find data otherwise, but who cares?  Is it good data? Is it relevant?  Do you believe that you can find data that is germane or simply that you can find someone to say anything?  I don't debate the second premise, but it's hardly relevant.

    Inflation is a great example.  Do we have perfect knowledge of inflation?  No, but the CPI-U is generally accepted as a pretty good measure of what we mean when we say inflation.  Is that the best, most meaningful possible measure?  No, but as long as we allow ourselves to discuss the pros and cons to using the CPI-U we keep the door open for more refined understanding in the future.  I find it odd that you seem to be concerned about the potential for inflation in the future, but that you don't really believe that we know anything about inflation in the meantime.  It seems to imply that you do trust the data at least to the point that it may serve to correlate monetary expansion and inflation.  With no such basis for understanding inflation, belief in this sort of consequence is just arbitrary.

    I think it's problematic to simply believe that tax cuts are always good for the economy, just as it's problematic to simply believe that spending is always good.  "Good", of course, is both qualitative and relative.


    by DF on Thu, 02/19/2009 - 3:33pm

    Wow, DF, this is a post in itself and excellently argued. I'm going to add to it by taking Deadman's common sense argument about government versus private spending head on.

    Individuals probably spend money more efficiently than the government, but they spend it on their own interests. The limitation of free market idealogy occurs at the point when individual interest and public interest don't match up. Take the basic concept of taxes. Most people would not voluntarily contribute taxes if they weren't required to. Individually, that would be to their benefit because they would have more money to spend. But if no one paid taxes, there would be anarchy, and everyone would be worse off. So individuals benefit by the government forcing them to pay taxes.

    In normal conditions, the (mostly) free market works and makes the economy grow. But in recessive conditions, people don't invest because they're afraid they'll lose their investment. Individually, that's smart, but if no one invests, the economy continues to shrink, and everyone suffers. If you give me people more money through tax cuts during a recession, that won't necessarily encourage them to invest it. They might spend their money, which would stimulate the economy, unless of course they buy imports, encouraged by a deflationary dollar. Or they might just stick it in bonds. By contrast, the government might not spend money as efficiently as individuals, but at least its spending money and not simply hoarding it. (Yes, I know saving money has benefits as well but saving is not very stimulative; just look at Japan.)

    That's a simplified common sense explanation for why spending during a recession is more stimulative than taxes. But I wouldn't believe it if it weren't also corroberated by data and the consensus of economists. Because DF is right that common sense explanations aren't good enough.


    by Michael Wolraich on Thu, 02/19/2009 - 4:15pm

    i didn't realize the issue was are tax cuts or govt. spending more stimulative in recessions. if that's the case, then i can buy your argument, G. i particularly despise the tax cuts and credits in this bill - all poorly targeted, half-hearted,  temporary measures that will do nothing to change investment behavior.

    however, if people are really scared of losing money, then i don't think you'll find either one - tax cuts or government spending - being particularly stimulative (govt spending is only stimulative if it increases the velocity of money) - and that's why I believe attempts to stimulate an economy before the time is right are doomed to fail.

    (This is an argument we've rehashed before - and I fully understand why this philosophy is not attractive as it assumes we will have a lot more pain to bear no matter what we do and that it's very likely anything we try will delay a recovery)

    it's interesting you bring up the savings argument, because a) it's a very important consideration in terms of trying to find a solution to our current mess and b) it's a great example of how people can twist data to mean whatever they want it to mean. After a couple of decades of seeing American's personal savings rate decline at a frightening pace, the rate turned slightly negative in 2005 and has hovered at right about zero since then. (a phenomenon only previously seen in the great depression, when people couldn't afford to save).

    Yet economists everywhere dismissed concerns about these numbers by suggesting the data wasn't accurate, or inclusive enough, that it ignored the personal wealth that rising stock markets and home price appreciation were generating (how are those gains looking now???) and that the last thing we wanted to do would be to turn into a bunch of saving namby-pansies like the Chinese, Japanese and Germans. Keeping up with the Joneses was a good thing, and it was the reason America had it so good.

    The problem is, eventually you have to pay a price for that kind of profligacy. More and more income goes toward paying off interest payments, a particularly unproductive type of spending which crowds out investment.

    and heaven forbid, if the stock market and real estate wealth you so heavily relied on proves to be not much more than a bubble-induced illusion, you're setting yourself up for a real disaster. Combine that all with the looming baby boom retirement, and oh boy, I'm literally getting sick just thinking about it.

    do you really think the way out of the mess is to encourage people to spend again?? People who are nearing retirement age and now find themselves with nowhere near the savings they'll need to live 20-plus years in retirement???

    Bullshit. We've got a piper to pay, and all the king's horses and all the king's men won't be able to put Humpty Dumpty together again.


    by Deadman on Thu, 02/19/2009 - 4:57pm

    I thought that you were arguing that tax cuts were more stimulative than spending.

    I've never disagreed that we have to pay the piper, but as I recall, you agreed with me that we have to enact stimulus plans now if we want to see a stimulus effect in a year after we've paid said piper. Otherwise, we might overpay him. The growth at that time would give us revenue to pay down the deficit, which I trust Obama (though not Congress) to do.

    As for savings, I agree with you that our savings rate is abysmal and will have consequences. After we begin to get out of this recession, let's agree to write about how the government should encourage saving.


    by Michael Wolraich on Thu, 02/19/2009 - 5:12pm

    forgot about your policy lag argument. yes, that does shift things a bit, though i still think we may be acting too early.

    in terms of the savings rate, i think we just ot too complacent, and it's very likely that this economic crisis will do the trick, esp. if it gets as bad as i think it will (my grandfather saved like a madman because he was so scared of seeing another great depression). of course, with the baby boomers retiring, even if we get religion and go on a massive savings kick, it wont be enough to compensate for their consumption.


    by Deadman on Thu, 02/19/2009 - 5:30pm

    I don't see how tax cuts can generate enough spending in the 'crisis'  we are in now to make a difference.  I think so many people are in hock up to their ears and are so scared that they are going to put any extra they get toward bills or if they don't have to - it's going in the bank.   You guys may be fine in your personal finances but there are millions of people that aren't.  They are in credit card hell and have been for years.  And tax cuts for the unemployed are not going to stimulate spending.  I really want some figures on tax cuts stimulating the economy because I don't see how it can happen.  Not in the amounts we need now.  I did hear the 'Tear down this Myth' author say that while Regan did cut taxes in his first year, he ended up raising them a couple of time while he was still in office.  And I think that if tax cuts were the miracle worker some maintain, wouldn't politicans be doing more of them.  Does anyone know the percentage of debt incurred in the last adminstration that was not due to war?  Or was it all?  If some of it was wasn't what does that say about the tax cut stimulus theory? 


    by Bluesplashy on Thu, 02/19/2009 - 5:08pm

    we're in agreement that tax cuts can't do the trick (and most certainly not the tax cuts we're getting in the stimulus bill) altho i also question whether spending will do the trick either. government spending by itself may ease the pain, but the only way it will stimulate the economy is if it kickstarts private spending. If people are as scared as I think they are, with household balance sheets in as much disarray as I think they are, then you won't see much of that either.

    I don't have the data you're looking for but apparently DF does Wink. I think here are so many inputs going into the economic cauldron at any one time, it's vitrually impossible to isolate the influence of one particular tactic. But DF will probably disagree!

    While I don't have hard figures to back it up, I absolutely believe that cutting the capital gains and income tax rates helped contribute to our economic growth in the 80s and 90s (which believe it or not wasn;t all just a bubble-induced illusion).

    according to wikipedia as of aug. 2008 we had spent $550 bln directly on the war, which would be a significant but not ungodly percentage (about 11%) of the approximately $5 trillion in public debt that bush tacked on to our deficit during his eight years. This estimate, however, importantly excludes other indirect costs of the war, such as future interest payments, long-term health care costs for veterans, weaponry replacement costs, etc.

    im not sure it says anything about the stimulus effect of tax cuts, except in that it would distort any data you'd get.


    by Deadman on Thu, 02/19/2009 - 5:45pm

    If you define "stimulus" narrowly as being "increase in monetary velocity", then you're going to have the sort of problems you mention.  First, it's hard to get a real measurement of how fast money is changing hands.  Usually I see velocity being estimated by dividing GDP by some share of the money supply, most often M2.  That's fine, but it doesn't necessarily tell you a real measured value velocity.  If that's a big problem in your book, then that's one thing.  However, I would say that the key here is not exact measure, but close enough measure.  No measure is exact, not even in physics.  There's an error bar on every measure in every field of science.

    However, is velocity really the most meaningful measure?  Can we generalize to the point where we say "an increase in monetary velocity is good"?  If you buy MV=PQ, then it's easy to see how a big increase in velocity could lead to inflation if the money supply and output remain constant.  This could arguably be the opposite of good.  In fact, this isn't a terrible description, from a velocity perspective, of where we are right now.  Money was flying around like crazy, but we weren't really increasing our output.

    Additionally, there is the "signal to noise" problem that you allude to.  If we cut taxes, for example, and we see a correlated increase in monetary velocity (and we're still sure that this is generally a good thing), how confident can we be that this was caused by tax cuts?  The correlation would have to big significant enough for us to "hear the signal above the noise".  I'm not aware of any compelling evidence that tax cuts do this very strongly.  Maybe they have an effect on velocity, but to me this is an indicator that whatever changes they might be encouraging aren't really "loud" enough to worry about.  If the overall tax rate was very, very high, then tax cuts could conceivably have a bigger impact.  It doesn't seem out of bounds to conclude that we probably aren't very far from an optimal tax level and that this sort of policy change won't do much.

    Similarly, the people who are typically making this argument are the same people who make the argument that tax cuts increase long-term government revenues that at least make up for the short-term loss in revenues (or, more boldly, surprass them) on similar grounds.  Unlike the relationship between tax cuts and monetary velocity, the relationship between tax cuts and long-term government revenues is much easier to measure and has been tepid at it's most successful.

    As such, I think that it's more meaningful to look at metrics like real wages, employment  and income equality.  Maybe there's compelling evidence that tax cuts really do push these figures in the right direction, but I'm not aware of it.  The EPI, for example, has not found the Bush tax cuts to have been helpful in these areas.

    OTOH, it's pretty easy to measure the effect of putting people to work with fiscal policy.  We know how much we spend on it, how many people we were employed from a certain date to another, how much they made, etc.  These figures are far less mysterious than monetary velocity.

    And we're essentially where we're at due to process of elimation right now.  We've been dong the tax cut thing, with still more on the way (over a third of the stimulus bill is tax cuts).  We've run out of rope on monetary policy.  Combine this with the fact that there are actually things that we do need to spend money while putting people to work along the way, and I don't really see how what we're doing is all that tenuous.

    Additionally, I will say this: If we believe that tax cuts to be inherently stimulative because individuals are better at deciding how to spend money on consumables (which isn't a bad premise) and tax cuts effectively put more money at their discretion, then shouldn't it be even more stimulative to put the unemployed to work?  Those who are already employed can choose to put this marginal increase in resources into more consumables or, as they have done most recently, into paying off debts.  OTOH, someone who is currently unemployed will almost certainly be delivering the lion's share of their income right back into the economy via consumption upon employment.  If we just want to look at this through the eyes of common sense, sans data, then I don't see how you can assert the stimulative nature of tax cuts without acknowledging similar principles in respect to expansive fiscal policy.

    Finally, there are projections like this one from Moody's (see page 9) and this one from the SF Fed.  Of course, these are estimates of future outcomes based on previous econometric data and data, of course, cannot be trusted. ;)

    EDIT: One more thing.. given that the biil is passed, the conversation is turning toward what to do about banking.  I agree with you (at least I'm pretty sure this is where you stand, correct me if I'm wrong), that this is terribly important and that, academic discussions of economic stimulus aside, how this is handled will have very significant economic impact in both the short and long run.  Major banks are effectively insolvent and there seems to be a high degree of uncertainty as to what moves will be made on this point.


    by DF on Fri, 02/20/2009 - 6:02pm

    Good vlog Deadman.  I don't think this is the time to worry about deficits.  You know "Deficits don't matter" so spend away.  I think the thing to worry about right now is the republicans spouting crap about tax cuts and the deficit and affecting the recovery.  A big part of this recovery is going to be the attitude of the public toward it.  The flipping back and forth on what worked for the Great Depression (war/govt. spending) illustrates the issue.  When did the American people feel they had to come together with a common goal?  With the constant republican squawk when will we be able to view getting out of this 'crisis' as a common goal?

    I like the filter, ye of flashing shirts avert yourself.

    Oh, my neighbors have moved so I have a very poor intermittent connection until I move home in March.  I was in the middle of reseraching the TRUTH behind tax cuts helping the economy.  So far my sources are biased one way or the other and I can't find neutral source.  Does anyone here know about tax cuts?  Reflecting now on what I have found - lots of baised sources - does that mean stats on tax cuts can be used by both parties and the results are inconclusive.

    Also, since this is the third site I come to after mail and weather and my time is so limited, is someone finding out what the republcian sentators are doing with the bailout money going to their states. 

    Sorry about the spelling.  You all know by now I can't spell, but I really have to send this off while I have a connection.  Thanks


    by Bluesplashy on Thu, 02/19/2009 - 5:38am

    This thead is so interesting and informative, thanks guys.  This got forwarded to me- Simon Johnson and Bill Moyers.  Nothing about tax cuts but it is about the crisis. 

    http://www.pbs.org/moyers/journal/02132009/watch.html

    I'm sure you will correct me if I am wrong but thinking about Bushes plan (send the people money and tell them to spend it) and Obamas plan (jobs, jobs. jobs) I think the Obama plan has much better chances of LONG term sucess than the other. 

     


    by Bluesplashy on Thu, 02/19/2009 - 8:33pm

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