Tuesday, March 20, 2012

Stimulus Doesn't Add up


Joseph Stiglitz is a Nobel Prize winner for economics (2001) and a very influential economist. We should expect more from him in the way of good analysis. But like his other Keynesian compatriots (e.g. Paul Krugman, Martin Wolf) he writes cogently but is so driven by ideological goals that his analysis falls short of anything that one might actually call macroeconomics. In his recent article in the Financial Times (The American labor market remains a shambles, page 9, Tuesday, March 13, 2012), Stiglitz continues baying at the moon about macroeconomic stimulus. I have written numerous times in this blog about the risks of continued stimulus several years after the end of the US recession. I won’t repeat all that here but suffice it to say it behooves me to explain and defend my obnoxious allegation that such great economists fail to come even close to connecting the dots.

In this article, Stiglitz admits there has been a recovery in the US and comments that we have had several recent occasions of green shoots. Clearly this amounts to a recognition that all is not as fragile in 2012 as things were in 2008. But then Stiglitz brings up the risk factors – explaining adroitly how this recovery and expansion phase pales in terms of past ones in the US.  Stiglitz raises the correct issue – there is a concern that we have adequate policies to deal with an economy that simply won’t create jobs or output as fast as it used to. In the body of his article – and this is the frustrating part – he mentions some very real risks yet his own policy recommendation seems to avoid treating  these monsters in favor of mumbling a worn out Keynesian mantra – drill baby drill. No – just trying to see if you were still awake. The Stiglitz-Keynesian mantra is for continued big deficits, bigger debt, and a central bank that accommodates all that with more and more money.

Here are some of the trends and risks he singles out in his article:
  • ·         Extrapolating current employment trends it could take 13 years to reach full employment in the USA
  • ·         It will take sustained output growth of more than 4% to pull the unemployment rate down.
  • ·         Even after deleveraging we should not expect the consumer to go back to previous rates of spending.
  • ·         Over-building in housing leaves that sector unable to pull demand up sufficiently.
  • ·         States and local governments have financial problems that prevent them from leading an upsurge in spending
  • ·         Redistribution of income towards higher income individuals (who spend a smaller portion of their incomes) retards consumer spending. Wages not keeping up with inflation have exacerbated the redistribution of income.
  • ·         The Great Recession reflects a transition from manufacturing to services.
  • ·         Risks faced by the American economy include the European downturn, complacency in the US which prevents adequate government support, and that we are content with an unemployment rate above 7%.

From this he concludes…”the economy will almost certainly need more stimulus if it to return to full employment any time soon”.

It is telling that nowhere in this list of trends or risks is a worry about the negative impacts derived from sovereign risk associated with rising government deficits and debt. Equally noteworthy is how he fails to provide any connection between this very worthy list of trends/risks and his policy prescription for more stimulus.

It makes me think of the patient who sees his doctor about a knee problem and explains that she has been recently running 15 miles a day to prepare for the next Ironman race. The doctor says, young lady, I recommend that you take 6 aspirins with a spoonful of JD each day. While it is true that this medicine might have some impact on the pain it totally ignores the question of what is actually causing the knee problem – too much running. If this doctor has an improper relationship with Bayer or the Jack Daniels Company, then we might understand why he would give such bad advice. Of course, if the doctor is running for office then maybe he concluded that the patient would feel happier until the next election without giving her the tough advice to forget the Ironman.

Stiglitz’s advice is no different.  Like drugs the stimulus could have a short-term remedial effect. And like the drugs the bad advice could lead to long-term negative consequences.  An economist might say the risk of the stimulus is tolerable if it leads to some improvement. But surely this reasoning misses the point. If one does not attack the real causes of the knee problem or of the labor market’s under-performance, then we are certainly destined to stimulus addiction. Make no mistake that Stiglitz is advocating more stimulus. Those are his words.  I do not favor a strong and fast movement toward austerity in the USA. But many times in this blog I have explained why continuing the same level of stimulus or expanding it is the wrong thing to be doing now. 

Whether it is changes in age distribution, shift to a services sector, productivity, globalization, leverage, housing excess capacity or whatever – we get nowhere today if we do not address those issues head on.  Addressing these issues has nothing to do with more stimulus. Addressing those issues is what it will take to create the growth that will improve employment opportunities in the US.  And addressing those issues is why things are not likely to improve quickly. What is so devastating about Stiglits’s weak analysis is that it raises expectations about something that cannot and will not happen. These trends and risks that he mentions have been building for decades and the solutions will take time to work. Yes, we want the patient to have a good outlook and be positive about the future. But false confidence is wrong and will be counter-productive.

Stiglitz has every right to his opinion. But it is frustrating when a senior and prize-winning economist’s analysis is so superficial. The Financial Times has sophisticated readers and deserve to read a more thoughtful analysis of cause and effect. As in the doctor example wherein his poor prescription arose from an unethical relationship with drug companies or a populist approach to medicine, one wonders what promotes this lack of good economic analysis on the part of such an important economist. 

12 comments:

  1. A stimulus will only stimulate the deficit. - F.A. Hayek

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  2. Dear LSD. Yeah, it’s frustrating to continue to hear the likes of Stiglitz-Krugman carry on about insufficient stimulus despite the inconvenient facts Stiglitz himself points out. Curious, though, that he says the Great Recession “reflects” a transition from manufacturing to services. I think it is not A transition but THE transition starting in the late 70’s / early 80’s. Where has he been? More to my point on this: if the Great Recession “reflects” anything it is that it is primarily due to the wrong-headed liberal policy to compel the extension of credit to the uncreditworthy, and secondarily to borrowers’ naiveté to prudent credit and borrowing standards, lenders’ greed and compliance, and govomit agencies’ fecklessness in monitoring the quality of loans and the secondary mortgage securities market. But, I digress – this is just one point Stigmata makes that is pointless to the major issue you point out, which is that more stimmilus isn’t the solution.

    It’s unfortunate the Stigmatas and Krugmans of the world don’t run for elected office where they would have to face specific challenges and counter-arguments to their socialistic dogmas. Fortunately, by proxy, the Campaigner-Complainer-Blamer-in-Chief cannot embrace Stigmata-Krugman’s dogma any longer because the deficit has become so big – and as you said last week – interest rates are on the rise. That’s a nasty brew that will cause the deficit to feed on itself and become a major election issue come Nov. 6th. Obummer will have to reject the siren calls for more stimmilus and probably will make a courtesy to call to Big Ben to lay off the monetizing spigot until Jan. ’12.

    Peel the onion (or banana) and you’ll find within the Stigmata-Krugman-Obummer triumvirate (just kidding – it’s actually Obummer-Reed-Pelosi) the aroma and embryonic membrane of lusting socialism. The only anecdote for your frustration malady – other than asking your doc for more aspirin and/or JD – is pulling the red lever Nov. 6th. But even a successful pull will not silence Stiglitz-Krugman’s barking from the sidelines calling for mo bigger govomit.

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  3. HMM! sounds like a huge conflict of thought. We all agree with the risks. So how is adding more stimulus which can be either saving or creating more inefficient government jobs or pouring more dollars into the economy that really have no where to go except into investment accounts? We have to address why the risks are there and how to properly mitigate them.

    Then again we are on the transition from manufacturing to service...not because manufacturing is declining but because its need for labor is declining.

    I think it is like those lyrics by Bobby Dylan - "There is no way out of here said the joker to the queen" " All along the watchtower....

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  4. Like a bad neighbor -- the barking will always be there.

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  5. You asked some good questons James. Let's see if some of our friends will provide some answers. As for Dylan -- we can also remember "How many times can a man turn his head and pretend that he just doesn't see -- the answer my friend is blowing in the wind"...keep on blowing!

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  6. "There must be some kind of way out of here,"
    Said the joker to the thief, -- Jimmy Hendricks, "All Along the Watchtower."

    The way out is the red lever. Joker = Obummer; thief = liberals.

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  7. Rocknroll and macro -- what could be better! Then there is always -- we gotta get outa this place -- if its the last thing we ever do....wwe gotta get outa this place...girl there's a better life for me and you.

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  8. The Eagles: "You can check-in any time you want, but you can never leave." Ain't we 'bout there?

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  9. The Watchtower was sung first by Dylan and then Hendrix. Jimmy did a better job.

    Seriously, this mess is a big mess and the leaders ( misnomer) are finding distractions and spinning failure into success. What was that story about the woman who had a spinning wheel that turned cotton into gold or was it flax? Somebody has to step up and pull the clothes off of the emperor. That somebody is us. It is supposed to be the press but that type of press coverage disappeared in the 60's. What we have now is i-coverage in the form of instant half written but very biased news to sell ads on the internet. They are supposed to be our supposed interrogators who ask difficult questions and publish the answers.

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  10. James, the big problem is that there is little, if any, journalistic integrity in today's media, and it's even worse in the main stream media. It's all about ideology, and the "journalists" don't even attempt to disguise it a la Soledad O'Brien.

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