Kevin Drum

How Stimulating is the Stimulus?

| Fri Oct. 2, 2009 3:07 AM EDT

A fiscal "multiplier" is a measure of how effective government spending is.  If it's greater than 1, it means that a dollar of federal spending produces more than a dollar of increased economic activity.  So to evaluate how effective a stimulus package is, we need to know what multiplier to use.

Today we get estimates from two sources.  First up is Robert Barro, who has done a detailed study of the effect of increased defense spending:

World War II tends to dominate....the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7....It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.

To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however....The effects of tax rates on GDP growth can be analyzed from a time series we've constructed....a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year.

So: at the current rate of unemployment the multiplier for defense spending is about 0.85.  For nondefense spending, Barro guessed a few months ago that it's approximately zero, but this time around he just says that he doesn't know.  And tax cuts tend to be fairly effective.

Next up is a team of CEPR economists who have done a cross-national comparison of fiscal multipliers in 45 different countries:

For the US....The impact multiplier is 0.64 and the long-run cumulative multiplier is 1.19....pre-1980 multipliers are considerably larger than the post-1980 multipliers. The post-1980 multipliers are just 0.32 on impact and 0.4 in the long-run.

....In practice, a sizable component of President Obama's package consists of government investment, as opposed to government consumption....The multipliers are 2.31 on impact and 1.83 in the long run.

So: for the post-1980 period, the multiplier is some average of 0.4 and 1.83, depending on how much of the stimulus bill is consumption and how much is investment.  Roughly speaking, then, it's probably around 1.1 or so if they're evenly balanced.

I'll be fascinated to read learned commentary on this.  Barro's work strikes me as pretty shaky, since it's dominated so heavily by an extreme event many years ago (World War II).  On the positive side, he does take into account the fact that the multiplier ought to be higher as the economy gets worse and unemployment goes up.

The CEPR results are interesting, and the cross country dataset seems like a novel and worthwhile approach.  On the other hand, they produce only a single number that doesn't depend on economic conditions.  But that doesn't seem right.  In good economic times, it makes sense that the multiplier is low, since increased government spending probably just crowds out private spending.  During a deep recession, when monetary policy is already at its lower bound and lots of people are out of work, government spending ought to be more effective.  A single number doesn't capture that.

All told, then, I'm not sure how much either of these studies tells us about the size of the multiplier right now.  Zero really doesn't seem very likely, though.  Since Obama's stimulus package was a combination of investment, consumption, and tax cuts, and the unemployment rate is currently 9.7%, I'd guess that these studies taken together suggest an overall long-run multiplier somewhere in the range of 1.0-1.3.  But that's just an amateur swag.  Let's hear from the economists.

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Public Opinion on Abortion

| Thu Oct. 1, 2009 6:59 PM EDT

Is support for legal abortion declining?  A new Pew poll says yes, but ABC's polling director doubts it:

The problem: These two Pew results don’t match other polls that asked the same question this year. Support for legal abortion was 55-43 percent when we polled on it in June, 52-44 percent in an AP/GfK poll also in June and 52-41 percent in a Quinnipiac poll (among registered voters) in April.

....In a question we asked in June, for example, 60 percent said they’d want Sonia Sotomayor to vote to uphold Roe v. Wade if it came before the Supreme Court — very similar to the average (63 percent) when we asked this question four times (re Samuel Alito and John Roberts) in 2005. In somewhat different questions in CNN and CBS/NYT polls in May and June, 68 and 64 percent, respectively, did not want to see the high court overturn (or, in CNN’s phrasing, “completely overturn”) Roe — matching the high in occasional askings by CNN since 1989.

Abortion polling is notoriously sensitive to precise question wording and placement, but the Pew results really do appear to be outliers.  Worth keeping an eye on, though.

No-Win in Afghanistan

| Thu Oct. 1, 2009 3:29 PM EDT

Marc Lynch is unimpressed with conservative sniping that Barack Obama is "dithering" over Afghanistan:

The overwhelming odds are that if the escalation option is chosen, in a year or two we will be confronting the exact same questions. More troops will once again be needed, a new strategy will once again be demanded, we’ll still be reading about how the Taliban is out-communicating us and about how the corruption of the Karzai government poses a serious challenge. And then the exact same debate will recur... the Kagans will demand more troops, dark mutterings about tensions between the administration and the generals will roil the waters, the Washington Post editorial page will publish debates where everyone is on the same side, the smart think-tankers will agonize over the tough choices but ultimately come down on the side of escalation.  Might as well have this debate now, and get it right.

That's admirably cynical.  Welcome to the dark side, Marc!

But he's got good reason: the aims of the all-in counterinsurgency supporters are flatly unrealistic.  "If the goal is the creation of a functioning, effective, legitimate Afghan state," he says, "then I would say the prospects are close to zero. Not with 40,000 troops, not with 400,000 troops, not in twelve months and not in twelve years."

Probably true.  And it's why I'm glad I'm not president right now.  If Obama doesn't approve all the new troops the Pentagon wants, then he's caving in to the terrorists.  If he does approve them, he's hitching himself to a policy that's almost certain to drag us ever further into a quagmire without ever producing results.  If that's not a no-win situation, I don't know what is.

Obama and the South

| Thu Oct. 1, 2009 2:38 PM EDT

Are Democrats going to lose the House in 2010?  Just to make things clear up front, I think it's dumb to even be asking this question so early in the election cycle.  The answer depends on healthcare, it depends on the economy, it depends on Afghanistan and Iraq.  Come back in April, when we have a better read on those things, and we can talk.

But Charlie Cook is talking now, and he thinks Democrats are in big trouble.  Brendan Nyhan, hauling out some fancy poli sci analysis, isn't so sure Cook is right, and Cook responds:

Have you been in the South lately? The level of anti-Obama, anti-Democratic and anti-Congress venom is extraordinary, and with 59 Democrat-held seats in the region, 22 in or potentially in competitive districts, this is a very serious situation for Democrats. I have had several Democratic members from the region say the atmosphere is as bad or worse than it was in 1994.

This is no surprise.  For the last forty years the South has been represented in the Oval Office one way or another.  They've been represented when a Republican was president, because Republicans represent their values.  (Or, at the very least, they talk a good game.)  And they've been represented when a Democrat was in office, because the last three Democratic presidents have all been Southerners.

But Barack Obama?  He's a northern Democrat.  What's worse, he's not from Hope or Plains or Johnson City and he doesn't pretend to be.  He's a biracial, urban, Harvard-educated northern Democrat.  If there's anyone in the world more likely to scare the hell out of traditionally-minded Southerners, I'm not sure who it is.  For the first time in decades, the South is completely out in the cold.  Completely powerless.

So their conspiracy-laden backlash against Obama is no surprise, and it might well lead to a further loss of seats for Dems in the South.  But will they lose all 22 of the competitive districts?  I doubt it.  And will they lose another 20-30 more outside the South?  I doubt that too.  If you live in Washington it's all too easy to get caught up in whatever whirlwind happens to be whirling at the moment, but this one won't last forever.  If Democrats manage to avoid terminal stupidity over the next few months1, they'll take some hits in the midterms but come out still retaining a sizable majority.  If Charlie or anyone else has some money they want put down on this, just let me know.

1Yes, yes, I know.

Our Debt to Ronald Reagan

| Thu Oct. 1, 2009 1:28 PM EDT

Paul Krugman looks at this chart of the personal savings rate in the United States and concludes that Reaganomics is the most likely reason that it fell off a cliff.  Matt Yglesias admits the timing is right: "But is there a causal link? I think it’s suggestive, but I don’t know what it would be."

Krugman suggests that part of the cause was Reagan's blithe acceptance of federal deficits.  After all, if the government didn't need to balance its books, why should anyone else?  Thus was born an era of binge spending.

Fine.  But I'd point to two other things that Krugman mentions: financial deregulation and stagnant median wages.  Those seem like much more likely villains to me.  Starting in the late 70s, middle class wages flattened out, which meant there was only one way for most people to support the increasing prosperity they had long been accustomed to: borrowing.  At the same time, financial deregulation unleashed an industry that marketed itself ever more aggressively on all fronts: credit cards, debit cards, payday loans, day trading, funky home mortgage loans, and more.  It was a match made in hell: a culture that suddenly glorified debt; an easy money policy from the Fed that made it available; a predatory financial industry that promoted it; and middle-class workers who dived in to the deep end without ever quite knowing why they were doing it.

So, yeah, Reagan did it.  Sort of.  But he had plenty of help.

Ben Bernanke and You

| Thu Oct. 1, 2009 12:52 PM EDT

The AP reports that Ben Bernanke didn't talk much about consumer protection in today's testimony before Congress:

Rep. Melvin Watt, D-N.C., was stunned by what he thought was Bernanke's short shrift to the consumer protection issue. "Five sentences on consumer protection when everything else gets substantially more space," Watt said. "It is just not a good message to send."

During the hearing, Bernanke conceded that the Fed didn't do the job it should have in protecting consumers, but said improvements are being made. He suggested the central bank could take further steps to strengthen such oversight.

"We are competent and have the skills ... I think we can do that," he said.

You could take this two ways.  First, maybe Watts is right: this is evidence that Bernanke just fundamentally doesn't care about consumer protection.  Second, it might mean that Bernanke has decided not to continue opposing the creation of an independent consumer protection agency.  He's still making some pro forma remarks about the Fed's capabilities, but he's not really fighting to keep hold of its consumer protection portfolio any longer.

Either way, though, the next step is still the same: strip the Fed of its consumer responsibilities and put them in a CFPA that will actually make them a top priority.  Bernanke's testimony puts us a step closer to that.

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Chart of the Day

| Thu Oct. 1, 2009 11:38 AM EDT

The Office of the Speaker of the House emails to nominate this for chart of the day.  Sure.  Why not.  It's a good chart.  Bottom line: the public really likes the idea of having a choice between either a private or a public health insurance plan.

In case you missed it, Jon Stewart had a good riff on this last night.  His question: Why are Democrats so lame?  It's a good one!  They have a huge majority in the Senate, the public is strongly in favor of a public option, and yet....for some reason they can't round up the votes to pass it.  Hell, they can't even round up a normal majority to pass it out of the Finance Committee, let alone a supermajority to overcome an eventual filibuster.

If Democrats really do lose the House next year (about which more later), this will be why.  If they don't pass a healthcare bill at all, they'll be viewed as terminally lame.  If they pass a bill, but it doesn't contain popular features that people want — like the public option — they'll be viewed as terminally lame.  At a wonk level, a bill without a public option can be perfectly good.  But wonks aren't a large voting bloc, and among people who do vote, the public option is very popular.  So, um, why not pass it?

Wall Street's Latest Trick

| Thu Oct. 1, 2009 1:44 AM EDT

As you probably know by now (you have been paying attention, haven't you?), banks are required to retain a certain amount of capital on their books.  The capital is there to keep them solvent even if their assets lose value, so the amount they're required to have depends on how risky their assets are.  If they have, say, a bunch of crummy C-rated securities on their books, they have to maintain a full load of capital to back them up.  But A-rated securities are less likely to lose value, so for those they only have to maintain 50% of the normal capital levels.  And for AAA securities, they can get by with only 20% or less.  After all, AAA securities are pretty unlikely to lose value.  Right?

This was one of the reasons behind the CDO frenzy of the past few years.  If you slice and dice a bundle of securities so that most of them are AAA-rated, then you can reduce the capital you need to back them up, which frees up that capital for other uses.

But then everything came crashing down, the ratings on those bundles tumbled, and suddenly banks had to pony up more capital to back them up.  What to do?  Answer: slice 'em and dice 'em all over again.  Welcome to the re-remic:

The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

....A hypothetical example cited in research by Barclays Capital said that a $100 million asset that required $2 million in capital at a triple-A rating may require $35 million if downgraded to double-B-minus. At triple-C, the capital requirement might rise to 100%, or $100 million.

In a re-remic, three-fourths of the same asset may regain a triple-A rating, requiring just $1.5 million in capital, Barclays said. The remaining one-quarter may require 100% capital, but the total capital requirement would fall to $26.5 million.

...."There is $350 billion to $400 billion in market value of securities with no natural buyer due to their rating," Barclays said in a June report. "The re-remic market provides a way out of this gridlock by creating new AAA securities, which are likely to be viewed as attractively priced."

Shiny new AAA securities!  Hooray!  And there's more!  Ratings for re-remics come from the same ratings agencies that bollixed up the original ratings.  And investment banks pocket fat fees for performing the financial alchemy.  What could possibly go wrong?

Revisiting Banker Pay

| Thu Oct. 1, 2009 12:24 AM EDT

Is banker compensation one of the root causes of last year's financial meltdown?  The Epicurean Dealmaker says no.  A lot of things changed when investment banks evolved from moderate-size partnerships into gigantic public companies, but pay wasn't one of them:

Large public banks did retain much of the partnership compensation model, which deferred ever more of a banker's pay the higher up he got and the more he made. But [...] deferred pay lost its effectiveness as a distributed risk management tool. As investment banks grew ever larger and more complex, each banker had less and less impact on the overall results and health of his bank, almost no matter how much he made.

....Notwithstanding what legions of indignant and self-righteous commentators contend, the incentive system currently in place operates exactly as most of them propose: a large portion of banker pay is deferred for years and is tightly tied to the overall health and success of the firm. Bankers are not incentivized to print huge risky trades and run away as soon as they collect their bonus at the end of the year. In fact, they are more closely tied to the long-term health of the firm and its stock price than any other stakeholder. They just can't do anything about it. Unfortunately for them and for us, such a system does not seem to have prevented anything.

I basically believe this.  The problem wasn't so much that bankers didn't care about long-term results as it was that they never realized they were taking on so much risk in the first place.  They thought they had safely hedged it all away.  Reining in compensation may still be a good idea, but it's just a backstop.  The real fixes to the system are deeper and more fundamental.

Senate Climate Bill Arrives

| Wed Sep. 30, 2009 9:17 PM EDT

Brad Plumer has a very good brief roundup of the Senate climate bill that Barbara Boxer and John Kerry introduced today in the Senate.  In one sense the details of the bill don't matter too much: it still has to get reconciled with other Senate bills and then go into conference to get reconciled with the Waxman-Markey bill in the House, and pretty much everything is going to be thoroughly sanded down before that process finishes up.  Still, it's interesting to at least see the general direction they're pushing toward: basically a little more ambitious than Waxman-Markey but with a few technical adjustments that wonks should like.  The full post is here.  Kate Sheppard has more here.