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I agree with Jeffrey Sachs
Greg Mankiw points us to this article by Sachs, excerpt:
President
Barack Obama’s economic team is now calling for an unprecedented
stimulus of large budget deficits and zero interest rates to counteract
the recession. These policies may work in the short term but they
threaten to produce still greater crises within a few years. Our
recovery will be faster if short-term policies are put within a
medium-term framework in which the budget credibly comes back to
balance and interest rates come back to moderate sustainable levels....
We need to avoid
reckless short-term swings in policy. Massive deficits and zero
interest rates might temporarily perk up spending but at the risk of a
collapsing currency, loss of confidence in the government and growing
anxieties about the government’s ability to pay its debts. That outcome
could frustrate rather than speed the recovery of private consumption
and investment. Deficit spending in a recession makes sense, but the
deficits should remain limited (less than 5 percent of GNP) and our
interest rates should be kept far enough above zero to avoid wild
future swings.
Posted by Tyler Cowen on February 23, 2009 at 08:09 AM in Economics | Permalink
Comments
It's good to see that Jeffrey has become reasonable. Unfortunately Jeffrey's target --Larry Summers-- has moved in the opposite direction.
Posted by: E. Barandiaran at Feb 23, 2009 8:31:19 AM
I often agree with Jeff Sachs, but in this case he sounds a bit like Herbert Hoover, and we all know how well Hoover's "stable policies" worked out. More to the point, does Sachs or anyone else believe that it was politically feasible for the Obama Administration to come into office and announce that its only response to the crisis would be a new set of "sustainable policies"?
The constant sniping of economists, including friends of mine, is becoming tiresome. They sit comfortably in their armchairs, responsible to no one, offering only criticisms, most of it based on nothing more than ideology and little of it constructive, while millions are losing their jobs and homes.
Finally, I have to say that this blog, and other economics blogs, were a lot more fun to read before everyone became overnight a self-proclaimed expert in macroeconomics.
Posted by: dan cole at Feb 23, 2009 8:41:25 AM
I agree with a lot of what Sachs says about analysis of past policy. What's different now though is that we've never experienced a bank solvency crisis of this magnitude except during the Great Depression, and that one only really began after the economy had already contracted by about 15%. This one is occurring very early and it has economic policy makers (like Bernanke) terrified. I sometimes wonder if they are overreacting and overestimating the severity of the crisis. But I understand the desire to undertake insurance against a worst case scenario. After all, who has confidence in macroeconomic models any more?
Posted by: Phil P at Feb 23, 2009 8:50:37 AM
I often agree with Jeff Sachs, but in this case he sounds a bit like Herbert Hoover, and we all know how well Hoover's "stable policies" worked out.
Are you referring to Hoover's unprecedented peacetime deficits, which gave Roosevelt a good campaign issue in 1932?
Posted by: Bob Murphy at Feb 23, 2009 8:50:47 AM
One of the benefits of this financial disaster has been to clearly demonstrate that economists don't know any more than anyone else which policies should be implemented to solve the problem.
Posted by: JDM at Feb 23, 2009 8:55:44 AM
After all, who has confidence in macroeconomic models any more?
Didn't we just enact a huge stimulus bill in hopes that the Keynesian multiplier will save us?
Funny thing, though. We never found out what the Obama administration's number for the multiplier is. I guess it's going to be like Batman, heroically saving us in the dead of night while never showing its true face.
Posted by: Zach at Feb 23, 2009 9:42:53 AM
Don't forget the Smoot-Hawley Tariff during Hoover's term, which ignited a trade war and destroyed export markets. Hoover was not a free market president and his record should stand as a warning for those seeking to actively manage the economy.
Posted by: @zmyth at Feb 23, 2009 9:49:16 AM
"Didn't we just enact a huge stimulus bill in hopes that the Keynesian multiplier will save us?"
Problem is, Zach, we also don't know what the multiplier is for the negative shocks that precipitated the recession, which is to say, we don't know how far down the economy will go absent government action. My understanding is that the Keynesian multiplier would depend on how large the output gap is. Keynesian economists believe they have a correct model of the economy in conceptual terms, but nobody knows what the true parameters are. Sachs may be right that fear is once again driving us to overstimulate. (I don't really know). Maybe we truly have nothing to fear but fear itself, but in a somewhat different sense than FDR meant.
"We never found out what the Obama administration's number for the multiplier is."
Bernstein and Romer did publish estimates forecasts when the stimulus was first proposed, but I don't know that they've updated the estimates for the bill Congress actually passed. It would be interesting to know.
Posted by: Phil P at Feb 23, 2009 10:18:30 AM
Re: the failure of macro: Is it possible that the best we could do would be to set up prediction markets for 5-year, 10-year, 20-year, etc. predictions of the economy's various vital signs (GDP, CPI, unemployment, etc.) and let those markets do our predictions for us?
Imagine trying to do an armchair prediction of the weather. It's hopeless! Too complicated. Should we trust any prediction by someone who isn't, say, working at an organization that routinely performs comprehensive, thorough computer simulations of the economy? Or even better, a mathematical aggregation of such predictions as in a prediction market.
Posted by: mk at Feb 23, 2009 10:23:40 AM
In other words: shouldn't we analyze the incentive of macroeconomists in giving us good advice, just as we analyzed the incentives of the credit agencies or the financial decision makers? I don't have full confidence that the incentive structure for economists (academic advancement, participation in gov't, pursuit of truth, publicity) amounts to an efficient-enough system for the advancement of economic knowledge.
Posted by: mk at Feb 23, 2009 10:28:55 AM
Did any of you read the article? He argues that taxes are already too low. That is his main argument against the stimulus. I happen to agree that the tax cuts in the stimulus plan were idiotic, but somehow I doubt that the commentators on this blog view insufficient taxation as our major problem.
Posted by: Barry Ickes at Feb 23, 2009 11:25:41 AM
Sachs is actually a better follower of Keynes than others, like Summers and Krugman, who seem to have the loudest voices. I have an article on this general subject in the American Enterprise Institute (AEI) online journal *The American*. To put it simply, Keynes believed that stimulus followed stability, including policy stability, and not vice versa. The article link is:
http://www.american.com/archive/2009/february-2009/taking-the-name-of-lord-keynes-in-vain
Posted by: Mario Rizzo at Feb 23, 2009 11:46:55 AM
"Is it possible that the best we could do would be to set up prediction markets for 5-year, 10-year, 20-year, etc. predictions of the economy's various vital signs (GDP, CPI, unemployment, etc.) and let those markets do our predictions for us?"
"shouldn't we analyze the incentive of macroeconomists in giving us good advice"
This gives me an idea. Some corporations require top executives to buy stock in their companies. (At least Lou Gerstner instituted this when he ran IBM, I don't know how common it is). Now suppose we had prediction markets and universities required macroeconomic professors to invest part of their salaries in it. We might then see some real scientific progress in macroeconomics.
Markets in Everything!
Posted by: Phil P at Feb 23, 2009 1:24:14 PM
Barry,
I read the article, and I think the revenue point was a separate point from the deficits and monetary policy point. The immediately precedent paragraph started out with this topic sentence: "We need to avoid reckless short-term swings in policy." The following sentence provided these examples: "Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts."
Then, the paragraph you're referencing started with this topic sentence: "We should also avoid further gutting the government’s revenues with more rounds of tax cuts." Note the key word "also". That indicates that he was thinking of the deficits in the precedent paragraph in terms of massive deficit spending, and then addressed the revenue issue as a separate point. While I know that diminished revenue can lead to deficits, I believe Sachs was arguing against each of deficit spending, inflationary monetary policy and tax cuts, not that his main beef with the entire plan was tax cuts.
Posted by: CJS at Feb 23, 2009 1:25:00 PM
Well, Sachs should have written this six months ago. Now is too late.
Posted by: Yancey Ward at Feb 23, 2009 2:35:51 PM
"Conservatives are aghast. The bail-out of the auto industry was hard enough to swallow. Government investments in infrastructure and research and development are viewed with scorn, compared with the tried and true (if disastrously failed) tax cuts of the Bush era. Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so. Free-market ideology is an anachronism in an era of climate change, water stress, food scarcity and energy insecurity. Public-private efforts to steer the economy to a safe technological harbour will be the order of the new era.
There is plenty of room for blunders, to be sure. Government activism can founder on the shoals of massive budget deficits, tax-cutting populism pushed by the right, politically motivated investments such as corn-based ethanol rather than science-based public investments, and more. Yet Obama is absolutely correct that we have no choice but to try.
John F Kennedy used to tell the Irish tale of the boys who would throw their hats over the high wall, to ensure that they would make the heroic efforts to surmount it. Obama is throwing the hat over the wall of environmental crisis, and asking us to surmount it together. This is a new era of public action, with the US back in the lead, and we will all find a new economy and new opportunities on the other side of the wall."
Is this the same person?
http://www.guardian.co.uk/commentisfree/2009/jan/28/obama-policy-technology
Posted by: Don the libertarian Democrat at Feb 23, 2009 3:08:09 PM
"I happen to agree that the tax cuts in the stimulus plan were idiotic."
Yeah and the remaining taxes are a beacon of equity and logic. I love it when
people complain about tax cuts, not realizing they are complaining about a broken window in
a delapidated building desperately needing formal condemnation.
Posted by: Superheater at Feb 23, 2009 3:41:18 PM
I disagree with Sachs (and, I guess with Cowen) on interest rates.
_The_ interest rae isn't at zero percent. BAA corporates are at over 8%. AAA corporates are at 5%. The prime lending rate is 2.5%.
Of course, the effective Federal Funds rate is .21% and 4 week T-bills are .22%. These are at least close to zero. I presume that the interest rate on reserve balances is still .25%.
So, _some_ interest rates are _near_ zero.
So what? I think that the true market clearing price on these assets are negative. Zero is too high.
After the failure of Lehman brothers, there was a rush to safety. Many people wanted to accumulate low risk, short term assets. T-bills, insured bank deposits, and reserve balances at the Federal Reserve are key examples. As long as there is this unusual demand for these financial instruments, then their price, or yields, should adjsut to clear the market for this class of financial instruments. I see no reason why zero "should" be the lower bound. If market clearing requires that people pay to obtain this special level of safety, then fine.
If they want to earn yields, let them take some risk and hold corporate bonds.
If the are so fearful of risk and don't want to pay to hold safe assets, then purchase comsumer goods.
Short term interest rates _should_ refect current conditions. Long term interest rates should reflect current and expected future conditions. I find it hard to imagine conditions justifying zero (or negative) long term interest rates. But if they did, so be it.
If the nominal interest rate needed to keep investment equal to saving is negative, then the market price should create the proper signals and incentives to clear markets.
Suppose that there is a temporary "shock" to the oil market. A hurricane hits the gulf coast. The price of gasoline shoots up. But that is looking to the short term. In the medium term, gasoline prices will fall back to a lower level. Clearly, we need price ceilings on gasoline to make sure that no one buys compact cars because they wrongly use temporarily high prices to forecast future prices....
I don't know any economists who favor price ceilings for such a reason. Of course, I have no doubt that Sachs would be one of those advocating an increase in gasoline taxes to offset what he thinks would be a temporary increase in supply or decrease in demand leading to lower market prices for gasolne.
If you think of sort term interest rates, even the federal funds rate, as market prices that should be playing some kind of coordinating role, rather than policy intruments being pushed by technocrats, Sachs reasoning makes no sense.
If gasoline prices need to be volatile to clear the gasoline market, then that is the way the world is. Maybe it would be better if they were more stable.
Posted by: Bill Woolsey at Feb 23, 2009 7:26:00 PM
Well, Sachs should have written this six months ago. Now is too late.
Sachs did not write this 6 mo ago.
As far as I know he never has warned about upcoming financial storm.
Why is he taken seriously?
Why econs virtually all of whom failed to see even 2 weeks into the future, point to other worthless econs and praise them?
A totally useless group that somehow convinced foolish elites that they know what they are talking about.
Nouriel Roubini should be appointed Treas Secretary and the rest of economists must be fired and retrained into taxi drivers. At least some value will be gotten from that worthless gang.
Posted by: Mick at Feb 23, 2009 7:35:23 PM
So if you stipulate that the stimulus plan is a Keynesian, counter-cyclical attempt to spur consumption and avoid a protracted, deflationary spiral than you simply can't limit the plan's expense based on your existing national debt. We live in a world where President Bush's tax cuts and military spending in Iraq mushroomed the federal deficit to an unsustainable level. This leaves President Obama with little choice but to expand that deficit for the time being in an attempt to avoid a prolonged economic slump.
It would be great if we lived in a world where we were running surpluses for the past eight years, but I guess we should have thought of that in 2000 and 2004. Now, the most prudent strategy is to lay plans for bringing spending under control once the economy rights itself. But, I think we can all agree that the enormous government-sector layoffs that would result from foolishly attempting to cut spending in the face of a recession would probably not lead to a faster economic recovery. (Why someone should even need to say this on an economics blog is beyond me. I mean, do you people even read your own textbooks?)
Posted by: Braden at Feb 23, 2009 10:52:28 PM
Braden, in NZ during the 1991 recession the NZ National Government drastically cut government spending. A large number of NZ economists signed a letter warning that this was a very foolish thing to do in a recession. This was followed by a rapid economic recovery and a sustained drop in the unemployment rate.
Now of course correlation does not prove causation. But I don't think that we can all agree your supposition. You don't merely need to say it, you should be providing some supporting evidence.
Posted by: Tracy W at Feb 24, 2009 6:43:31 AM
Sach's (and Cowen's) argument is that there are long and variable lags in monetary and fiscal policy. Economic conditions today depend on monetary and fiscal policy (and other things) from sometime in the past. The expansionary monetary policy (which Sach's measures using short term interest rates, though base money has become highly "exansionary too,) that started last fall will take time to impact the economy. With hindsight, we can say that a year ago, monetary policy should have been more expansionary (maybe, we can say that.) But trying to make it even more expansionary now because of current conditions is a mistake.
Using nominal interest rates, however, to measure monetary policy is a mistake.
Posted by: Bill Woolsey at Feb 24, 2009 6:53:57 AM
Sach's (and Cowen's) argument is that there are long and variable lags in monetary and fiscal policy.
And that argument is directly contradicted by historical data from, e.g., the Great Depression. FDR takes office and starts implementing policy: immediate sharp change. FDR backs off from New Deal in 1937: immediate sharp change. FDR reconsiders, restores previous programs: immediate sharp change.
There's abundant data that economic conditions track policy in near real time. Explaining it away requires an incredible and unwieldy amount of special pleading that only contributes to the reputation of economists as outside-motivated pseudoscientists with no intellectual integrity.
Posted by: Chris at Feb 24, 2009 11:31:35 AM
There's abundant data that economic conditions track policy in near real time.
Sometimes they do, and sometimes they don't. It depends.
There's a concept from ecology called the "limiting factor". Say that a plant's growth is limited by fertiliser. Give it fertiliser and it immediately starts growing faster. But if the big problem is not fertiliser but water, it won't grow much from added fertiliser. It will grow if it gets more water. And if the problem is lack of sunlight, then it will grow quick and furious toward whatever light it can detect. If the problem is that it's getting eaten up by bugs, then adding fertliser or water or light is likely to just help the bugs grow faster.
I figure that the economy will respond well and quickly to government policy provided that government policy was previously the limiting factor for economic growth. But what if the problem is something else?
Under free trade, the USA has far too large a middle class. We need to shrink the middle class to the point they do highly productive work for low pay, then we can be competitive. Is that the problem?
Our balance of trade is still negative, maybe because china is manipulating currencies. Is that the problem?
There's still a worldwide oil shortage, except that parts of the world economy have shut down to the point the shortage is ameliorated. USA uses something like 25% of the world's oil, do we produce 25% of world GDP? Is that our problem?
We have bankers munching on the economy, and we've done nothing to fumigate them. Are they the problem?
Etc.
So, if people want loans but there isn't enough money to lend them, monetay policy can provide the money. But if qualified borrowers don't actually want to take out loans, it doesn't matter how much money you offer them -- nothing will happen. If you make interest rates negative enough they'll take loans like they'd tow your junked car if you offer them enough money to take it.... But if not, then maybe years later other factors change and they want to take out loans *then*. A possibly long and variable lag.
Oh well. I disagree with Mick who says that economists are mostly worthless. It takes professional economists to gather and analyse the data that shows they don't know what they're talking about. If we didn't have them, we wouldn't know that they don't know.
Posted by: J Thomas at Feb 24, 2009 2:24:10 PM
"We never found out what the Obama administration's number for the multiplier is."
The multipliers are documented here:
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
"For the output effects of the recovery package, we started by averaging the multipliers for increases
in government spending and tax cuts from a leading private forecasting firm and the Federal
Reserve’s FRB/US model. The two sets of multipliers are similar and are broadly in line with other
estimates. "
I'm not sure I disagree with the multipliers, but I am more concerned about how financing the future cost of the current stimulus will influence the economy, which everyone seems to ignore.
Posted by: Mr. Econotarian at Feb 24, 2009 7:42:20 PM
