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Fun With George Will

Sunday, 12 September 2010 08:32

The Washington Post likes to run columns that are chock full of mistakes so that readers can have fun picking them apart. That is why George Will's columns appear twice a week. Let's have a little fun with the latest, which is an attack on President Obama's economic agenda.

First, Will is anxious to tell readers that Democrats are telling the public that stimulus did not work because many think we need more stimulus. Actually, people who think we need more stimulus simply note that the stimulus was helpful, but not large enough for the task. According to the Congressional Budget Office, the stimulus added between 1.7 and 4.5 percent to GDP since its enactment (that's between $240 billion and $740 billion in additional output). It also lowered the unemployment rate by between 0.7 and 1.8 percentage points.

This was not enough to fully offset the damage from the collapse of an $8 trillion housing bubble. The collapse wiped out more than $1.2 trillion in annual demand (roughly $600 billion in lost consumption and $600 billion in lost construction). By comparison, the stimulus injected about $300 billion a year into the economy in 2009 and 2010. Roughly half of this was offset by cutbacks at the state and local level. So, we were looking at a net increase government sector stimulus of $150 billion, which was being used to counteract a decline in private sector demand of $1.2 trillion. 

Is anyone surprised that this was not enough? Will's conclusion that stimulus does not work is like seeing someone throw a few buckets of water on their burning house and then telling the fire department not to waste time with their hoses, because obviously water will not be effective against the fire.

Will then goes on to tell readers that Herbert Hoover was a great supporter of fiscal stimulus. Actually, real spending did increase under Hoover, but this was primarily because of the huge deflation of the era. In any case, the facts do not support Will's claim that:

"Real per capita federal expenditures almost doubled between 1929, Hoover's first year as president, and 1932, his last."

Actually, real federal expenditures rose by less than 20 percent if we follow Will and take 1932 as the endpoint. If we include 1933, which was partially a Hoover budget, then the increase is still just 44.9 percent. That is substantial, but certainly not "almost doubled."

Will goes on to complain that:

"Barack Obama has self-nullifying plans for stimulating the small-business sector that creates most new jobs. He has just endorsed tax relief for such businesses but opposes extension of the Bush tax cuts for high-income filers, who include small businesses with 48 percent of that sector's earnings."

Actually, most of the businesses whose taxes will be affected by the increase will only be trivially impacted. According to an analysis from the Congressional Joint Committee on Taxation, the average tax hit from Obama's plan on filers earning between $200,000 and $500,000 (the overwhelming majority of the affected small business owners) is $400. It is unlikely that a tax increase of $400 will have a big effect on the investment or hiring decisions of a business netting $350,000 a year. 

Therefore, the answer to question posed by Will: "does this increase anyone's confidence?" is almost certainly that it probably has almost no impact on anyone's confidence since it is largely irrelevant to the decisions of the vast majority of businesses.

Finally, Will ends by making a simple mistake of logic. He wants to beat up on the Cash for Clunkers program by arguing that only 1 in 6 of the cars purchases under the program were actually induced by the tax credit, as opposed to simply moving up a purchase that would have taken place anyhow.

While one may hope for a better ratio (and others have calculated higher ratios), since spending at a time of very high unemployment is essentially free, who cares? If we did not have the cash for clunkers program, fewer people would have bought more fuel efficient cars. The unemployment rate would be higher and we would be consuming more energy and emitting more greenhouse gases. How is that good? 

Will also complains that Cash for Clunkers hit poor people by raising the price of used cars. While it definitely did raise the price of used cars, most poor people already own cars. This means that Cash for Clunkers raised the price of the cars they own. For poor car owners this picture is largely a wash, their next car will cost more, but they will get more money on a trade-in. First time buyers are unambiguously hurt, but this is a minority of the poor.



Comments (9)Add Comment
written by skeptonomist, September 12, 2010 9:48
Hoover and Congress did start taking action late in his second term. After the last bank failures in early 1933 the economy staged a dramatic turnaround and real GDP grew at a 10% average rate 1934-1937. This did not get the country out the the gigantic hole it fell into 1929-1933, but this kind of recovery rate has rarely been seen since. So, judging by real data instead of stale myths, it is possible that the actions late in the Hoover administration did have a beneficial effect.
written by Wes, September 12, 2010 10:46
> the stimulus added between 1.7 and 4.5 percent to GDP

But let's not forget that this was done with borrowed money. So this is really pulled forward demand.
Why Germany's economy grows, while we flounder.
written by diesel, September 12, 2010 12:06
Speaking of "pulled forward demand", there's a fine article in Der Spiegel about the positive effects their stimulus spending had on their speedy economic recovery. I'm too lazy to elaborate, so just go read the article, it's worth it. It's called "A Keynesian Success Story" Germany's New Economic Miracle, from July 19. http://www.spiegel.de/internat...31,00.html
Generally agree but...
written by Robert, September 12, 2010 3:08
The impact of CFC on poor people should not be minimized. When they are in the market for another car, their current car has died and is usually scrap.
written by Calgacus, September 13, 2010 10:24
But let's not forget that this was done with borrowed money. So this is really pulled forward demand. What is this- "Ricardian" equivalence or the like - right up there with homeopathy as one of the stupidest ideas in both fact and theory that mankind has thought up in millenia? "Pulling forward demand" is time travel. It belongs to science fiction.

Governments cannot and do not borrow money in their own currency, which they have the power to create at will. Government selling a bond is exchanging one financial asset, one type of government-to-private-sector IOU, a bond, for another type of the same thing - currency. It is asset swapping, not borrowing. In real borrowing, the IOUs exchanged go in opposite directions. Additionally, the money that the private sector uses to pay for the bond issuance is the money that the government spent, which is supposedly - in bad economics texts - "financed" by the borrowing. End result - private sector has shiny new bonds that came out of nowhere, and the same amount of cash. In super low interest rate times especially, the difference between spending with bond issuance and just printing the money is negligible.
stimulus during the g.d.
written by wellbasically, September 13, 2010 11:00
>>real GDP grew at a 10% average rate 1934-1937

You could cite similar statistics fort the 1970's, and a similar lack of effect on real conditions. In the thirties this is because Roosevelt devalued the dollar from $20.67 per gold ounce to $35/ounce. The growth you cite was illusory inflation. The same thing happened in the 70s on a ten-times scale, and it's not surprising it's happening now, when gold has risen from around $250 in 2000 to $1250 today.
written by Hal, September 13, 2010 8:14
It's been quite a while now that Will has pretended to be so very bright when in fact he is so very stupid. He has the "I'm a bright boy" manner down very well, however, so people are easily taken in.
written by urban legend, September 14, 2010 11:46
I've said this before, but an estimate ranging between 1.7% and 4.5% is virtually useless for convincing anyone of anything. Somehow, liberal economists don't get that, and keep regurgitating this statistic. Any estimate that can't narrow something as important as GDP growth down more than that, or an unemployment rate difference between 0.7 and 1.8 percentage points, does not seem worth using. It sure ain't going to win many arguments.
clunkers failure
written by john, September 15, 2010 11:09
Cash for clunkers induced people to trade in a perfectly working car that was paid off for a new one with large monthly payments. It was yet another attempt to pull forward demand with debt financing. Kinda like what got us into this mess.

It did wonders in stimulating the Japanese economy short-term as the Japanese brands dominated the clunkers program. It will be interesting to see how many clunker inducees will default on their auto loans.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.