Robert Samuelson Is Tired of Stimulus

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Monday, 17 September 2012 03:59

That's the gist of his column today. After all, it really gets exhausting watching folks like Ben Bernanke try to create jobs for people who are unemployed because folks like Alan Greenspan and Ben Bernanke were too incompetent to recognize an $8 trillion housing bubble.

I'm not kidding. Here's the opening line:

"We are reaching — or may already have passed — the practical limits of 'economic stimulus.'"

Samuelson concludes the paragraph by telling us:

"The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year."

Wow, that sure sounds like the end!

Okay, this is getting beyond silly. Limited stimulus has limited impact. Bernanke proposed (in my view) a very limited measure. I answered a different poll the same way, its impact on employment would be limited. (I still wouldn't dismiss the possibility of creating 200,000-300,000 jobs at no cost.) Only in Washington Post land would this imply that stronger stimulus would not have more impact.

Suppose Bernanke had said that he would buy enough bonds and mortgage backed securities to lower the 30-year mortgage rate to 2.5 percent as advocated by former Fed economist Joe Gagnon? Suppose Bernanke had pledged to buy enough bonds to raise the inflation rate to 3-4 percent, a policy he advocated for Japan's central bank in 1999.

The score that I and many other economists would put on these policies would be much more than a drop of 0.1 percentage point in the unemployment rate. If you invest $300 a year in a retirement fund then you probably cannot expect a very comfortable retirement. In Washington Post land this is a conclusive argument that saving is not a route to retirement security, but most other folks can figure out that the problem was that you had to save more money.

Samuelson's brief tour of various stimulus efforts gives examples of limited stimulus that produced the limited result that was predicted, starting with President Obama's original stimulus package. By almost all accounts, this package produced the 2-3 million jobs that had been predicted at the time. (The paper predicts 3-4 million, but it assumes more spending than Congress approved.) Of course we needed on the order of 10-12 million jobs, as fans of arithmetic said at the time

But Samuelson is somehow baffled:

"Whatever the benefits, massive stimulus clearly hasn’t triggered a monster recovery."

Just to recap the arithmetic we lost $1.2-$1.5 trillion in annual (as in every year, as in recurring) demand when the housing bubble collapsed. Residential construction fell by roughly 4 percentage points of GDP (@$600 billion a year) as the bubble driven boom went bust.

We also lost close to $500 billion in bubble driven consumption. This is not a debt story. We had $8 trillion in ephemeral housing wealth that disappeared when the bubble burst. People spent based on this wealth. The wealth ain't there any more, therefore the spending stopped.

Throw in another $100-$200 billion from the collapse of a bubble in non-residential real estate and state and local government cutbacks in response to lost tax revenue and you get the total amount of demand that we need to replace.

Samuelson and most of his ilk don't even have a clue as to where they expect this demand to come from. Do we expect consumption to go back to its bubble-inflated levels even when the wealth that supported this consumption is gone? Why? How? Consumption is still unusually high relative to disposable income, not low. What on earth is Samuelson thinking?

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                                Source: Bureau of Economic Analysis.

Do we expect that investment will soar through the roof to replace this lost demand? If we focus on equipment and software investment (sorry the overbuilding from the bubble will prevent a surge in construction any time soon), this component of expenditures is almost back to its pre-recession level of GDP. How high does Samuelson think it will go?

(Samuelson gives an often-repeated silly argument on investment, telling readers:

"Low rates don’t matter if tougher credit standards prevent potential homebuyers from qualifying for loans. Or banks curb lending to restore capital."

Companies that make up close to half of the economy have direct access to credit markets by issuing bonds. These companies don't need bank loans. If the problem is that lack of access to bank loans is preventing smaller firms from growing, then we should see the big firms, that can borrow at record low interest rates, expanding like crazy to seize market share.

We don't. Firms like Wal-Mart and Starbucks have scaled back their expansion plans in the downturn. This means that either we don't think these companies want profits or the problem is a lack of demand, not a lack of access to credit.)

If we don't expect consumption or investment to produce the demand necessary to replace the demand lost when the bubble burst then we have the government sector and net exports. If don't expect consumption or investment to produce the demand necessary to replace the demand lost when the bubble burst then we have the government sector and net exports. (Sorry, the repetition was just in case someone from the WAPO was reading.)

The former means big budget deficits. I know how painful this is for deficit hawks, but that is what the arithmetic tells us. Fortunately the financial markets also tell us that big deficits are fine (near record low interest rates) and interest payments as a share of GDP are near a post-war low.

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                                Source: Economic Report of the President.

In the longer term we need to replace the lost demand with increased net exports, getting our trade deficit closer to balance. That means a lower-valued dollar. Politicians are scared to say this because it isn't macho like losing jobs with a "strong" dollar. Anyhow, until we bring the dollar down to restore trade balance (sorry, the trade agreements are a joke in this respect -- I have some Internet stocks to sell to anyone who takes them seriously as tools for reducing our deficit), we need large government deficits to sustain demand. That is arithmetic, not ideology. There is no way around this story.