Obama has lost his way on jobs By Jeffrey Sachs Published: November 10 2009 20:45 | Last updated: November 10 2009 20:45 The past week brought news of US double-digit unemployment and the Federal Reserve’s decision to maintain near-zero interest rates. Both pieces of news expose the inadequacy of US economic policymaking. The Obama administration’s stimulus policies are not well-targeted. The... [more]
Obama has lost his way on jobs
By Jeffrey Sachs
Published: November 10 2009 20:45 | Last updated: November 10 2009 20:45
The past week brought news of US double-digit unemployment and the Federal Reserve’s decision to maintain near-zero interest rates. Both pieces of news expose the inadequacy of US economic policymaking. The Obama administration’s stimulus policies are not well-targeted. The Republican alternatives are even worse. Both sides are missing the key fact: the US economy needs structural change that requires a new set of economic tools.
Consumer and investment demands are too low for full employment. Consumer sectors such as housing no longer generate adequate spending by households and businesses.
Potential investors exploring more promising areas, such as low-carbon energy and infrastructure, are stymied because of the lack of a clear policy framework. Neither the Keynesian approach favoured by the Obama administration, nor the tax-cuts favoured by Republicans, addresses the problem at this structural source.
Following a Keynesian approach, the Obama administration has focused on restoring consumer spending. They have gone about this with a combination of near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new homebuyers and cash for clunkers.
During the previous bubble, the US consumer was encouraged to over-borrow. Recreating a new bubble is like offering just one more drink, on the government’s account, to overcome a mass hangover. With budget deficits of about 10 per cent of gross domestic product, government spending needs to be far more consequential than temporary boosts to consumer spending.
The Republican alternative is equally fatuous. For every problem there is a single Republican answer: tax cuts. Simple arithmetic reveals the stunning shortsightedness of this proposition. The federal government collects about 17 per cent of GDP in tax revenues. That roughly equals the outlays on social security, Medicare, Medicaid, veterans’ benefits, defence and interest payments on debt.
All the rest – roads, rail, clean energy, science and technology, diplomacy, international disease control, space, education, job training, water, transport, courts, poverty relief, homeland security, conservation, climate adaptation – is financed on borrowed money. All of these critical areas are underfunded, which hinders productivity, national security and private investment.
There are three parts of a long-term solution. The first is to promote greater exports, partly through dollar depreciation and partly through expanded government support for export financing, for example extended to credit-constrained low-income countries that want to purchase US-produced technology. Dollar depreciation is under way but other kinds of export promotion have not begun.
A second component is a massive expansion of education spending and job training. The unemployment rate among college graduates is only 4.7 per cent, while it is 15.5 per cent among those without a high-school diploma. The US woefully under-invests in education outlays for the poor, who drop out of school and then cannot find gainful employment.
A massive expansion of education and training would address the current unemployment crisis in three ways: by shrinking the numbers of young people searching for work, by building job skills for the future, and by increasing total spending in the economy through education outlays.
The third component is to spur an investment boom in areas of high social return that are currently blocked by the lack of clear policies. The conversion to a low-carbon economy would create jobs in the short run, a more productive economy in the medium run, and US technological leadership in the longer run.
The same is true with the overhaul of America’s ageing infrastructure at a time when cutting-edge technologies can dramatically improve the efficiency of resource use, the safety of the built environment, and the sustainability of our ecosystems.
During the Obama campaign we were told about a green recovery – one where the jobs would come through a massive expansion of low-carbon energy. We were told about plug-in hybrids, intercity fast rail and new water and sewerage plants to replace the crumbling infrastructure. We were told about a new infrastructure bank to fashion complex multi-state projects that would employ huge numbers of workers while building a cutting-edge economy.
Little bits of these efforts are strewn through the stimulus legislation, the pending climate legislation and elsewhere. But the administration has not done the hard work to bring these complex initiatives to reality. Intercity rail does not just appear by itself. Direct-voltage transmission lines require a new federal and regional power grid strategy. Nuclear power requires presidential leadership to get moving again. Carbon-capture and storage requires a partnership of science and industry, backed in early stages by public technology funds.
The president has lost the economic initiative, weighed down by a tedious fight between two outmoded ideologies: Keynesianism and supply-side tax cuts, as well as by the president’s excessive deference to Congress.
The president occasionally sings these lyrics but has not yet presented a plan. Move now, Mr President, or we will spend our time digging out of the next consumer bust and buying our technology from China.
The writer is director of The Earth Institute at Columbia University
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In this paper we used a modern empirical approach to estimate government spending
multipliers, and we contrasted these multipliers with those that have recently been used in
practice to analyze fiscal policy in the United States. We focused on an empirically estimated
macroeconomic model—the Smets-Wouters model—recently published in the American
Economic Review. As attested by leading macroeconomic researchers, such as Michael
Woodford in his recent survey, this model well represents new Keynesian macroeconomic
thinking of the kind that many macroeconomists now teach their graduate students and use in
their research.
We find that the government spending multipliers from permanent increases in federal
government purchases are much less in new Keynesian models than in old Keynesian models.
The differences are even larger when one estimates the impacts of the actual path of
government purchases in fiscal packages, such as the one enacted in February 2009 in the
United States or similar ones discussed in other countries. The multipliers are less than one as
consumption and investment are crowded out. The impact in the first year is very small. And
as the government purchases decline in the later years of the simulation, the multipliers turn
negative.
The estimates reported here of the impact of such packages are in stark contrast to
those reported in the paper by Christina Romer and Jared Bernstein. They report impacts on
GDP for a broad fiscal package that are six times larger than those implied by government
spending multipliers in a typical new Keynesian model and our calculations based on
generous assumptions of the impacts of tax rebates and transfers on GDP. They also report
job estimates that are six times larger than these alternative models, and the impacts on
19
private sector jobs are likely to be at variance with the alternative models by an even larger
amount. At the least, our findings raise serious doubts about the robustness of the models and
the approach currently used for practical fiscal policy evaluation.
**********************************************************
Because of the negative effects on consumption and investment, it is possible to get
negative GDP multipliers in the first year with government purchases paths slightly different
from those in Figures 2 and 3. For example, a sharper increase in government spending in the
second year compared to the first leads to more crowding out of consumption and investment
in the first year and the multiplier can turn negative. In fact, our simulations of the first
stimulus bill passed by the House of Representatives in 2009 had this property, but changes
by the conference committee and revised estimates of the path of government purchases by
the Congressional Budget Office removed the negative multiplier.
There is a large literature on whether an increase in government spending reduces
consumption and investment in real business cycle models, and the literature carries over to
some degree to new Keynesian models with sticky prices and wages like the Smets-Wouters
model. See Coenen and Straub (2005) for a discussion and references to many other
contributions. In the standard real business cycle model government spending has a negative
wealth effect. Households consume less. Investment also declines.
Ignored comment.
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Response by stevejhx
about 16 years ago
Posts: 12656
Member since: Feb 2008
What's your point, RS? That economies change over time?
Ignored comment.
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Response by columbiacounty
about 16 years ago
Posts: 12708
Member since: Jan 2009
riversider never has a point. just endless stupid posting. over and over. endless.
Ignored comment.
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Response by LICComment
about 16 years ago
Posts: 3610
Member since: Dec 2007
The point is there for people who can understand it steve. The Keynesian multiplier theory of government stimulus is a farce.
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
The paper makes the case that the multiplier effect is over-rated. Classic argument is crowding out effect. In the depression the TVA authority just crowded out a private effort to electrify. Personally my view is that the kind of investment is important to look at.
Ignoring the multiplier discussion, my own view is the biggest argument FOR gov't investment is that to build infrastructure that private business cannot but which promotes economic growth later on. Number one on that list would be improving the power grid, which no individual business would undertake but benefits the entire economy later on.
Ignored comment.
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Response by LICComment
about 16 years ago
Posts: 3610
Member since: Dec 2007
Riversider. I completely agree. The power grid, inter-city fast trains, and alternative energy development should have been the focus of the stimulus, rather than throwing money at states to maintain bloated municipal union jobs and other Congressional pork projects.
I agree with steve's views on education spending and teachers unions.
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
Not sure what the view on education is, but I'm very on the left with regards to education. Nobody should be turned down due to money. That said, for some this means college, and others it means trade school. Not everyone is college material and society needs many skills.
Ignored comment.
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Response by stevejhx
about 16 years ago
Posts: 12656
Member since: Feb 2008
RS, the crowding-out effect is valid when there is private economic activity. The point is that there is no crowding out if no one is spending. That's the velocity argument.
And just because there is crowding out, it need not be detrimental to the overall economy. The theory is based on a flawed premise: that government spending is always bad, or always less efficient than private spending. Neither of those is true.
This research is sort of like the analysis done on the uptick rule: during normal markets the uptick rule has little effect. That's when the research was done. But during extremely volatile or crashing markets, it's an important safeguard.
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
Steve, I also would also add, that the expectation is out there that any increase in government spending will result in higher taxes, which curtails Consumption. Further in my view we were "over" consuming by borrowing. The best thing we can do is let the system re-balance. Just like a person who gets sick needs bed rest and avoid strenuous activity the economy needs time to recover.
The housing tax credit, cash for clunkers and programs specified in the last spending bill were not productive and wasted resources. Was all for true infrastructure spending, but we did not get that.
Ignored comment.
Unhide
Response by stevejhx
about 16 years ago
Posts: 12656
Member since: Feb 2008
RS, the idea is to prime the pump, then back out - slowly. If you do it too quickly you repeat exactly the mistake Roosevelt made in the 30's: stopping government spending before the economy had healed. That's why WWII did what the New Deal couldn't: there was no cap on spending.
The point is that this administration, unlike the last one, seems to have that in mind. Congress may not, but the administration did. Whereas George II never found a spending bill he didn't like.
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
yea, that was the theory, I don' agree that what we did primed the pump.
agree that George bush was not good on budget.
Ignored comment.
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Response by columbiacounty
about 16 years ago
Posts: 12708
Member since: Jan 2009
so...georgie was wrong on iraq and as you so sweetly put it...not good on the budget.
what was he good at?
Ignored comment.
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Response by stevejhx
about 16 years ago
Posts: 12656
Member since: Feb 2008
I don't hold out much hope for Congress, but I do think Obama is more competent than George II. It's going to take a lot of work to balance the budget again.
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
Congress is who many blame (including myself) for the mis-spent stimulus. In hind sight Obama should not have left it up to Congress which treated it as a grab bag.
Nov. 15 (Bloomberg) -- The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulatory Commission.
“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.
Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”
His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.
http://www.volkerwieland.com/docs/CCTW%20Mar%202.pdf
In this paper we used a modern empirical approach to estimate government spending
multipliers, and we contrasted these multipliers with those that have recently been used in
practice to analyze fiscal policy in the United States. We focused on an empirically estimated
macroeconomic model—the Smets-Wouters model—recently published in the American
Economic Review. As attested by leading macroeconomic researchers, such as Michael
Woodford in his recent survey, this model well represents new Keynesian macroeconomic
thinking of the kind that many macroeconomists now teach their graduate students and use in
their research.
We find that the government spending multipliers from permanent increases in federal
government purchases are much less in new Keynesian models than in old Keynesian models.
The differences are even larger when one estimates the impacts of the actual path of
government purchases in fiscal packages, such as the one enacted in February 2009 in the
United States or similar ones discussed in other countries. The multipliers are less than one as
consumption and investment are crowded out. The impact in the first year is very small. And
as the government purchases decline in the later years of the simulation, the multipliers turn
negative.
The estimates reported here of the impact of such packages are in stark contrast to
those reported in the paper by Christina Romer and Jared Bernstein. They report impacts on
GDP for a broad fiscal package that are six times larger than those implied by government
spending multipliers in a typical new Keynesian model and our calculations based on
generous assumptions of the impacts of tax rebates and transfers on GDP. They also report
job estimates that are six times larger than these alternative models, and the impacts on
19
private sector jobs are likely to be at variance with the alternative models by an even larger
amount. At the least, our findings raise serious doubts about the robustness of the models and
the approach currently used for practical fiscal policy evaluation.
********************************************************
**********************************************************
Because of the negative effects on consumption and investment, it is possible to get
negative GDP multipliers in the first year with government purchases paths slightly different
from those in Figures 2 and 3. For example, a sharper increase in government spending in the
second year compared to the first leads to more crowding out of consumption and investment
in the first year and the multiplier can turn negative. In fact, our simulations of the first
stimulus bill passed by the House of Representatives in 2009 had this property, but changes
by the conference committee and revised estimates of the path of government purchases by
the Congressional Budget Office removed the negative multiplier.
There is a large literature on whether an increase in government spending reduces
consumption and investment in real business cycle models, and the literature carries over to
some degree to new Keynesian models with sticky prices and wages like the Smets-Wouters
model. See Coenen and Straub (2005) for a discussion and references to many other
contributions. In the standard real business cycle model government spending has a negative
wealth effect. Households consume less. Investment also declines.
What's your point, RS? That economies change over time?
riversider never has a point. just endless stupid posting. over and over. endless.
The point is there for people who can understand it steve. The Keynesian multiplier theory of government stimulus is a farce.
The paper makes the case that the multiplier effect is over-rated. Classic argument is crowding out effect. In the depression the TVA authority just crowded out a private effort to electrify. Personally my view is that the kind of investment is important to look at.
Ignoring the multiplier discussion, my own view is the biggest argument FOR gov't investment is that to build infrastructure that private business cannot but which promotes economic growth later on. Number one on that list would be improving the power grid, which no individual business would undertake but benefits the entire economy later on.
Riversider. I completely agree. The power grid, inter-city fast trains, and alternative energy development should have been the focus of the stimulus, rather than throwing money at states to maintain bloated municipal union jobs and other Congressional pork projects.
I agree with steve's views on education spending and teachers unions.
Not sure what the view on education is, but I'm very on the left with regards to education. Nobody should be turned down due to money. That said, for some this means college, and others it means trade school. Not everyone is college material and society needs many skills.
RS, the crowding-out effect is valid when there is private economic activity. The point is that there is no crowding out if no one is spending. That's the velocity argument.
And just because there is crowding out, it need not be detrimental to the overall economy. The theory is based on a flawed premise: that government spending is always bad, or always less efficient than private spending. Neither of those is true.
This research is sort of like the analysis done on the uptick rule: during normal markets the uptick rule has little effect. That's when the research was done. But during extremely volatile or crashing markets, it's an important safeguard.
Steve, I also would also add, that the expectation is out there that any increase in government spending will result in higher taxes, which curtails Consumption. Further in my view we were "over" consuming by borrowing. The best thing we can do is let the system re-balance. Just like a person who gets sick needs bed rest and avoid strenuous activity the economy needs time to recover.
The housing tax credit, cash for clunkers and programs specified in the last spending bill were not productive and wasted resources. Was all for true infrastructure spending, but we did not get that.
RS, the idea is to prime the pump, then back out - slowly. If you do it too quickly you repeat exactly the mistake Roosevelt made in the 30's: stopping government spending before the economy had healed. That's why WWII did what the New Deal couldn't: there was no cap on spending.
The point is that this administration, unlike the last one, seems to have that in mind. Congress may not, but the administration did. Whereas George II never found a spending bill he didn't like.
yea, that was the theory, I don' agree that what we did primed the pump.
agree that George bush was not good on budget.
so...georgie was wrong on iraq and as you so sweetly put it...not good on the budget.
what was he good at?
I don't hold out much hope for Congress, but I do think Obama is more competent than George II. It's going to take a lot of work to balance the budget again.
Congress is who many blame (including myself) for the mis-spent stimulus. In hind sight Obama should not have left it up to Congress which treated it as a grab bag.
that's a very low bar...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTQOjxN0UtLw&pos=3
Nov. 15 (Bloomberg) -- The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulatory Commission.
“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.
Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”
His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.