Sunday, January 11, 2009

Obama's fatal conceit (2)

I just finished browsing the paper written by Obama's economic advisors (Christina Romer and Jared Bernstein) to justify his $800 billion stimulus plan. My first thought was that they wrote the conclusion to the paper first (i.e., spending all this money on a combination of tax cuts, rebates, and government spending programs will produce the desire effect of saving or creating at least 3 million jobs), then backed into the the details necessary to justify the conclusion. My second thought was that as with all economic forecasts, the most critical variables are the assumptions one uses. As a former colleague of mine (Michael Bazdarich) who is proficient in econometric forecasting models always used to say, "tell me your assumptions and I'll tell you your conclusions."

As Greg Mankiw notes, it is remarkable (and, I would add, most troubling) that one of the most critical assumptions they make runs directly opposite to the results of Christina Romer's own research. Namely, they assume that the multiplier effect of tax cuts is only 0.99. Romer's prior research suggested that tax multipliers were in the range of 3 (i.e., one dollar of tax cuts yields three dollars of GDP). They justify the numbers they use because they are the average of the ones used by "a leading private forecasting firm and the Federal Reserve’s FRB/US model."

If they had used Romer's own tax multiplier, the stimulus package would have had to include a far larger share of tax cuts than the one being proposed, since she found that tax cuts are a far more effective source of stimulus than spending. But since that doesn't fit with Obama's current preference for making tax cuts about 40% of the overall package, they presumably chose multipliers that justified the desired conclusion, and those were not hard to find or to justify. That the package includes tax cuts at all (since they are assumed to be much less effective than government spending), is solely because they acknowledge that tax cuts can be put into effect much faster than spending, and fast-acting stimulus is judged to be important. To think that this is the way modern day technocrats work to support politicians who believe that rearranging over 5% of our $15 trillion economy will make us all better off!

My hope at this point is that Obama's proposal generates a storm of discussion and disagreement. It is so huge in scope, so difficult to implement, so fraught with complexity, and so swollen rich with money that the political and lobbyist vultures are already circling. Perhaps someone will question the critical assumptions behind the plan. Others will argue whether spending money on A is be better than on B. Perhaps the public will begin to comprehend the massive potential for corruption and waste that lurks beneath the surface of these plans, and react with horror as it did with HillaryCare. And maybe enough people will raise their hands and point out that taking money from one person and giving it to another is hardly likely to make a quick and lasting improvement in overall living standards. If the plan can be delayed long enough, we may discover that in the end it's not really necessary.

10 comments:

bennycal said...

Scott, first of all, thanks for this great site and for sharing your knowledge. The economy, and politics for that matter, are not strengths of mine (to say the least) so I really appreciate what you do here.

My question is this: Do you send this info/perspective to Obama and his staff--someone or place with access to Obama's advisors? Or are you confident that he at least hears this perspective from someone? I sometimes read your views and think, well certainly the present and future administrations must take this information into account. I assume people with access to the administrations (present and future) take this information into consideration... But then politics and politicians often seem to have many blind spots. I'm sure there are a lot of thoughtful and intelligent politicians but the system seems to sometimes work in ways where thoughtfulness and intelligence are not all that valued and important. I hope they are "getting" it.

However it works, thanks again for all the great information.

kb

CDLIC said...

Scott,

After reading your excellent analysis of the recent Obamanationomics plan I clicked on COMMENTS to ask what Bennycal posted earlier, thus, I am 20 minutes late and several keystrokes short. Nevertheless, I was told that CNBC at times passes on some of your thoughts. Is this true? If not, I suggest someone pass your posts to CNBC and others. Your astute findings, suggestions and ideas are well worth much consideration.

CDLIC

Larry Peterson said...

Great article...again.

One should also keep in mind that job loss is an unfortunate by-product of this recession.

While this proposed recovery plan may prove helpful, it is the fundamental problem...linked to the liquidity crisis created last September, the fear that ensued and the remarkable decline in the velocity of money (ie, rate at which Americans are spending) that are at the root of this recession.

And of course that was precipitated by the housing bubble...and all the problems associated with sub-prime mortgage lending.

Hence, efforts that have been underway by Fed Chairman Bernanke & Treasury Secretary Paulson...and carried forward by new Treasury Secretary Geithner may play a much larger role in overall US recovery...as we have seen glimpses of already.

Scott Grannis said...

Unfortunately I don't think my comments reach anyone even remotely connected with Obama. Nevertheless, Larry Kudlow is a loyal reader, he tells me, and he has referred to some of my posts in the past, so that's probably the extent to which I have access to the greater public. (I've been a fan of Larry's since meeting him in 1980.)

Larry: good points.

Bernard said...

The irony is of course, that the GOP constructed this economic snowball in the first place, and that we now find ourselves in a situation where the impacts from the snowballs decent create even larger craters along the way, until ultimately everyone assumes we need a remedy that is even larger than a meteoric size snowball travelling at 1,000 miles per hour down the hill.

Maybe it just needs a pin prick to pop the balloon rather than a backstop the size of a mountain that could eventually turn into a launch pad!

Scott Grannis said...

Bernard: your ability to mix metaphors rivals that of the great Bill Gross.

CDLIC said...

And then there is this. . . just for fun, but how true!

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and dep uty neutrons exchange places In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes. This characteristic of moron promotion leads some scientists to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass. When catalyzed with money, Governmentium becomes Administratium (symbol=Ad), an element that radiates just as much energy as Governmentium, since it has half as many peons but twice as many morons.

brodero said...

I am just glad Obama is at least considering 40% for tax cuts....especially after the rhetoric of the election

Bernard said...

Lol. Thank you Mr Grannis. I think!

Scott Grannis said...

brodero: yes, things could be a lot worse if Obama were sticking to his campaign promises. So far he's thrown just about every one under the bus, and that's good.