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November 13, 2012

(Fiscal) Cliff Notes

Since it is indisputably the policy question of the moment, here are a few of my own observations regarding the "fiscal cliff." Throughout, I will rely on the analysis of the Congressional Budget Office (CBO), as reported in the CBO reports titled An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 and Economic Effects of Policies Contributing to Fiscal Tightening in 2013.

Since the CBO analysis and definitions of the fiscal cliff are familiar to many, I will forgo a rehash of the details. However, in case you haven't been following the conversation closely or are in the mood for a refresher, you can go here first for a quick summary. This "appendix" also includes a description of the CBO's alternative scenario, which amounts to renewing most expiring tax provisions and rescinding the automatic budget cuts to be implemented under the provisions of last year's debt-ceiling extension.

On, then, to a few facts about the fiscal cliff scenario that have caught my attention.

1. Going over the cliff would put the federal budget on the path to sustainability.

If reducing the level of federal debt relative to gross domestic (GDP) is your goal, the fiscal cliff would indeed do the trick. According to the CBO:

Budget deficits are projected to continue to shrink for several years—to 2.4 percent of GDP in 2014 and 0.4 percent by 2018—before rising again to 0.9 percent by 2022. With deficits small relative to the size of the economy, debt held by the public is also projected to drop relative to GDP—from about 77 percent in 2014 to about 58 percent in 2022. Even with that decline, however, debt would represent a larger share of GDP in 2022 than in any year between 1955 and 2009.

Such would not be the case should the status quo of the CBO's alternative scenario prevail. Under (more or less) status quo policy, the debt-to-GDP ratio would rise to a hair under 90 percent by 2022:


The current debt-to-GDP ratio of 67 percent is already nearly double the 2007 level, which checked in at about 36 percent. However, though the increase in the debt-to-GDP ratio over the past five years is smaller in percentage terms, a jump to 90 percent from where we are today may be more problematic. There is some evidence of "threshold effects" that associate negative effects on growth with debt levels that exceed a critical upper bound relative to the size of the economy. At the Federal Reserve Bank of Kansas City's 2011 Economic Symposium, Steve Cecchetti offered the following observation, based on his research with M.S. Mohanty and Fabrizio Zampolli:

Using a new dataset on debt levels in 18 Organisation for Economic Co-operation and Development (OECD) countries from 1980 to 2010 (based primarily on flow of funds data), we examine the impact of debt on economic growth....

Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the number is about 85 percent of GDP.

Of course, causation is always a tricky thing to establish, and Cecchetti et al. are clear that their estimates are subject to considerable uncertainty. Still, it is clear that the fiscal cliff moves the level of debt in the right direction. The status quo does not.

2. The fiscal cliff moves in the direction of budget balance really fast.

By the CBO's estimates, over the next three years the fiscal cliff would reduce deficits relative to GDP by about 6 percentage points, from the current ratio of 7.3 percent to the projected 2015 level of 1.2 percent.

Deficit reduction of this magnitude is not unprecedented. A comparable decline occurred in the 1990s, when the federal budget moved from deficits that were 4.7 percent of GDP to a surplus equal to 1.4 percent of GDP. However, that 6 percentage point change in deficits relative to GDP happened over an eight-year span, from 1992 to 1999.

It is probably also worth noting that the average annual rate of GDP growth over the 1993–99 period was 4 percent. The CBO projects real growth rates over the next three years at 2.7 percent, which incorporates two years of growth in excess of 4 percent following negative growth in 2013.

The upshot is that, though the fiscal cliff would move the federal budget in the right direction vis à vis sustainability, it does so at an extremely rapid pace. I'm not sure speed kills in this case, but it sounds pretty risky.

3. The fiscal cliff heavily weights deficit reduction in the direction of higher taxation.

Over the first five years off the cliff, almost three-quarters of the deficit reduction relative to the CBO's no-cliff alternative would be accounted for by revenue increases. Only 28 percent would be a result of lower outlays:


The balance shifts only slightly over the full 10-year horizon of the CBO projections, with outlays increasing to 34 percent of the total and revenues falling to 66 percent.

Particularly for the nearer-term horizon, there is at least some evidence that this revenue/outlay mix may not be optimal. A few months back, Greg Mankiw highlighted this, from new research by Alberto Alesina, Carlo Favero, and Francesco Giavazzi:

This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions.

Of course, that in the end is a relatively short-run impact. It does not directly confront the growth aspects of the policy mix associated with fiscal reform. Controversy on the growth-maximizing size of government and the best growth-supporting mix of spending and tax policies is longstanding. The dustup on a Congressional Research Services report questioning the relationship between top marginal tax rates and growth is but a recent installment of this debate.

Here's what I think we know, in theory anyway: Government spending can be growth-enhancing. Tax increases can be growth-retarding. It's all about the tradeoffs, the details matter, and unqualified statements about the "right" thing to do should be treated with suspicion. (If you are an advanced student of economics or otherwise tolerant of a bit of a math slog, you can find an excellent summary of the whole issue here.)

In other words, there are lots of decisions to be made—and it would probably be better if those decisions are not made by default.

Dave AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed

 


November 13, 2012 in Federal Debt and Deficits, Fiscal Policy, Taxes | Permalink

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"Tax increases can be growth-retarding." That has yet to be demonstrated. On the other hand, we do know that tax increases can be growth-enhancing. This has been demonstrated repeatedly.

Posted by: Kaleberg | November 14, 2012 at 10:46 PM

We could make it sustainable by moving revenue to 20% of GDP and reducing spending to 18% GDP. That would leave a 2% surplus as far as the eye could see and pay off the national debt in 45 years.

Fiscal Cliff is half of the solution that we need. Entitlement reform is the other half.

Posted by: John | November 15, 2012 at 09:10 AM

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September 01, 2011

The pull between spending and saving

In a speech on Wednesday, Atlanta Fed President Dennis Lockhart talked about how the economic outlook is being shaped by the process of deleveraging (reducing debt and increasing saving) that is occurring in the economy.

By way of background, President Lockhart emphasized the important role that some amount of debt plays in economic growth: while difficult to measure precisely, research suggests that debt levels that get high enough are associated with extended periods of subpar economic growth.

"Debt is not in and of itself a bad thing. Debt supports economic growth by allowing households, businesses, and governments to smooth their spending and investment over time. Borrowing and lending can help facilitate the allocation of capital to productive uses in the economy. But high debt levels can also result in lower economic growth, a point that Stephen Cecchetti, of the Bank for International Settlements, made in a paper presented at the Kansas City Fed's symposium in Jackson Hole, Wyo., last week."

Relative to the 1990s, the last decade witnessed a surge in borrowing by the nonfinancial sector (comprising households, nonfinancial businesses and governments). Indeed, as President Lockhart noted:

"Relative to the size of the U.S. economy measured in terms of GDP, the total domestic debt of nonfinancial sectors of the economy reached 248 percent in 2009, increasing by almost 75 percentage points over the previous decade alone."

While no longer growing, the overall debt position of the nonfinancial sector has barely declined since peaking in 2009.


How did we get to this point? Much of the increase in total debt during the 2000s was in the form of real estate debt, and most of that was by households and unincorporated businesses (mostly sole proprietorships and partnerships). During the 1990s the mortgage debt of households was relatively stable at around 45 percent of GDP, but it increased to a peak of 76 percent of GDP in 2009. Over the same period, mortgage debt for unincorporated businesses increased from around 12 percent of GDP to almost 20 percent.



Because real estate is relatively expensive, it is not surprising that mortgage debt heavily influences the overall debt burden of individuals. Rapidly rising home values from the late 1990s to 2006 supported the notion that housing was a good asset to purchase…until it wasn't. According to the S&P Case-Shiller national home price index, home values have declined by more than 30 percent from their peak in 2006, after having increased by more than 150 percent compared with the previous decade.


From their peak in 2009, debt levels for households and unincorporated businesses have declined relative to GDP notably by a combined 15 percentage points. Reduced mortgage debt accounted for three quarters of that decline. As President Lockhart notes, repairing the balance sheet of the household sector, just as it does for businesses, can occur through some combination of debt reduction and increased savings.

"Household deleveraging has occurred mostly through a combination of increased savings, debt repayment, and also debt forgiveness. At the same time, there has generally been less access to credit for households as a result of stricter underwriting standards. The inability to qualify for home equity loans and other forms of credit has slowed the pace at which new debt is taken on by households replacing paid-down debt. The effect is to reduce their debt burden over time."

In contrast to households and unincorporated businesses, the amount of debt owed by the nonfinancial corporate sector has not declined very much since 2009. Nonfinancial corporations increased borrowing during the second half of the 2000s. But most of the debt growth was from increased issuance of corporate bonds. Since its historical peak in 2009, the total debt of the nonfinancial corporate sector has remained at around 50 percent of GDP, as continued bond issuance has largely offset declines in other types of corporate borrowing.

If individuals are aggressively reducing their debt burden, and corporations haven't increased their overall borrowing, why hasn't the overall debt burden of the nonfinancial sector of the economy declined since 2009? The primary reason is that the amount of federal government debt has increased sharply in recent years—from 35 percent of GDP in 2007 to about 65 percent of GDP in early 2011.


As President Lockhart observes:

"While the private sector—households and businesses—has made notable progress in lowering its debt burden, discussions of how to reduce public debt have only just begun. The government still needs to introduce major policy changes to put public debt on a sustainable path. Demographic trends, which I referenced earlier, will make public debt reduction even more challenging."

How long will the deleveraging process take to play out? I'm pretty confident that nobody really knows precisely, but President Lockhart suggests that we may be closer to the beginning of the process than the end:

"Rebalancing simply takes time. A 2010 report by McKinsey surveyed 32 international periods of deleveraging following financial crises and found that, on average, the duration of these episodes was about six and a half years. U.S. debt to GDP peaked in the first quarter of 2009. So, by that standard we are much closer to the beginning than the end of our deleveraging process."

Lockhart also makes the point that this necessary structural adjustment has consequences for the medium-term outlook:

"When economies are deleveraging they cannot grow as rapidly as they might otherwise. It is obvious as consumers reduce spending they divert more of their incomes to paying off debt. This shift in consumer behavior increases the amount of capital available for financing investment. But higher rates of business investment are not likely to fully offset weakness in consumer spending for some time, as businesses continue to grapple with uncertainties about the future."

From a monetary policy perspective, slower growth as a result of deleveraging raises important challenges:

"To my mind, it's becoming increasingly clear the challenge we policymakers face is balancing appropriate policy responses for the near to medium term with what's needed for the longer term. In other words, we must continue to help the economy achieve a healthy enough cyclical recovery, especially with unemployment high and consumer spending lackluster. At the same time, we must recognize the longer-term need for directionally opposite structural adjustments, including deleveraging."

How does President Lockhart size up the role of monetary policy in this context?

"Given the weak data we've seen recently and considering the rising concern about chronic slow growth or worse, I don't think any policy option can be ruled out at the moment. However, it is important that monetary policy not be seen as a panacea. The kinds of structural adjustments I've been discussing today take time, and I am acutely aware that pushing beyond what monetary policy can plausibly deliver runs the risk of creating new distortions and imbalances.

"We may find, as economic circumstances evolve, that policy adjustments are required. In more adverse scenarios, further policy accommodation might be called for. But as of today, I am comfortable with the current stance of policy, especially considering the tensions policy must navigate between the short and long term and between recovery and the need for longer-term structural adjustments."

John Robertson By John Robertson, vice president and senior economist in the Atlanta Fed's research department

 

September 1, 2011 in Economic Growth and Development, Federal Debt and Deficits, Monetary Policy, Real Estate | Permalink

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This post clearly shows that movements in household leverage (a rise in the last expansion and a fall that began in the recession) are a signature of the latest economic cycle. However, there are a number of important 'why' questions that the aggregate time series cannot answer. It is unlikely that a change in the 'taste for debt' alone can explain the changes in leverage. Moreover, different explanations for the levering up have very different policy prescriptions and forecasts for deleveraging going forward. Just to name two examples, Atif Mian and Amir Sufi have several papers that suggest the loosening of the supply of credit led to the levering up. In contrast, Tyler Cowen in the The Great Stagnation points to the over-confidence of households and other agents about income prospects. There are other possible explanations and the truth may be a combination. So while the post raises some interesting questions with aggregate time series, there is a lot of empirical work that can and should be done with micro data, like the Survey of Consumer Finances and the American Life Panel.

Posted by: Claudia Sahm | September 01, 2011 at 07:10 PM

Sumner writes a lot of crap, but let's face it, he's right on at least two counts:

1. There's no such thing as neutral monetary policy. Before 'waiting to act' for fear of causing "new distortions", consider the distortions you may presently be causing.

2. Monetary policy should target the forecast. Why, for example, are you doing this to inflation expectations
http://research.stlouisfed.org/fred2/graph/?g=1WL
with one-off programs of limited duration announced in advance?! I could come up with a better monetary policy in my basement.

Once you stabilize inflation expectations, consider raising them to 4% for a while, to ease the burden of the above household debt, help correct our foreign trade imbalances (Sumner is also right that international trade is not a zero-sum game), and spur corporate investment.

Then tell Barney Frank to cut the crap and stop letting people like me buy houses at 30:1 margin, as I just did in June. The greater the portion of a loan that is secured by the asset it purchases, the stronger the feedback loop between willingness to lend and prices (about the only thing Soros gets right), which is the only way you got those curves above.

Sure, there are political problems around creating inflation. That's where Bernanke needs to start eating his oysters and stop standing around blinking his eyes like a toad lickin' lightning. I'll tell you a secret: Bernanke is smarter than Rick Perry. Why let such facts go unnoticed? But as is obvious from the above speech, he can't even defeat his critics in his own organization (not that Lockhart is one, but it seems to me he's addressing some of them).

Posted by: Carl Lumma | September 01, 2011 at 10:33 PM

I think the problem with society today is the inability to defer gratifcation that is until recently. Get a collage degree borrow to pay for it' buy a new car borrow to pay for it' need a bigger house borrow to pay for it' why save to pay when you can play now would be a good way to decribe things up until about five years ago.

Posted by: dennis the menace | September 06, 2011 at 02:48 PM

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April 18, 2011

Can Keynesians be anti-Keynesian?

Follow any policy debate, and you are sure to find a list of economists who support or inspire those on both sides of the issue. In The Economist, we find some of those on the roster for the new Republican leadership in the House of Representatives, and why:

"When Republicans proposed slashing billions of dollars from federal spending this year, Democrats circulated predictions by economists that jobs and growth would be hit. John Boehner, the Republican speaker in the House of Representatives, countered with an economic expert of his own: John Taylor of Stanford University. 'Nothing could be more contrary to basic economics, experience and facts,' Mr. Taylor asserted on his blog, which Mr. Boehner cited. By cutting government spending, he said, the Republicans would 'crowd in' private investment and create jobs.

"… if there is one ideology that unites today's Republicans, it is Keynesianism, whose nefarious influence they are determined to stamp out. 'Young Guns,' the book-sized manifesto of Eric Cantor, Kevin McCarthy and Paul Ryan, leading Republican House members, devotes several pages to the evils of Keynesian activism and its exponents in the administration."

One of the interesting things about the article is that among the economists cited as being among the critics of "Keynesianism," you find the names John Taylor, Robert Mundell, and Kenneth Rogoff. I find that list interesting because if you follow the links I attached to those names you will find work with models that are decidedly Keynesian in structure. Works by Taylor and Rogoff are, in fact, seminal contributions to the "New Keynesian" paradigm that dominates macroeconomics today.

As far as I know, none of these men have repudiated the basic worldview that motivates the referenced work. In fact, as recently as last year John Taylor approvingly described, as he has many times, a key characteristic of the paradigm for monetary policy that was in place the decades before the financial crisis:

"… the central bank has a strategy, or rule, to adjust the interest rate depending on economic conditions: In general, the interest rate rises by a certain amount when inflation increases above its target and the interest rate falls when by a certain amount when the economy goes into a recession."

I added the emphasis to the last part of that passage as it is a feature of the so-called Taylor rule that is entirely built on the foundation of the New Keynesian model.

How, then, to explain the Keynesian predilections of the economists mentioned as presumed carriers of the anti-Keynesian mantle? The source of the confusion, I think, goes back to the historical, but somewhat obsolete, distinction between so-called Keynesianism and monetarism. The latter was, of course, personified in Milton Friedman and his dispute with what was the orthodoxy in the three decades following the Great Depression. Lost in the early-days labeling, however, was the fact that the disputes were more about the empirical details of theory rather than the theory itself.

In particular, Friedman did not deny the effectiveness of policy in principle but rather its wisdom or impact in practice. This sentiment is exactly the one he expressed in his prescient and transformative 1968 presidential address to the American Economics Association:

"In the United States the revival of belief in the potency of monetary policy was strengthened also by the increasing disillusionment with fiscal policy, not so much by its potential to increase aggregate demand as with the practical and political feasibility of so using it."

In a recent essay on Friedman's views about the ineffectiveness of fiscal policy, Tim Congdon notes Friedman's views on the issue:

"Friedman offered two informal theoretical arguments for the virtual irrelevance of fiscal policy, as he saw it. The second was that fiscal policy is much harder to adjust in a sensitive short-term way than monetary policy. But the first was the more telling and deserves detailed discussion.… In Friedman's words, 'I believe it to be true… that the Keynesian view that a government deficit is stimulating is simply wrong.' The explanation was the wider effects of the way the budget deficit is financed. To quote again, 'A deficit is not stimulating because it has to be financed, and the negative effects of financing it counterbalance the positive effects, if there are any, on spending.' "

Though Congdon emphasizes different channels (associated with the mix of monetary and fiscal policy associated with deficit spending), those who follow such things may recognize in Friedman's remarks the notion of Ricardian equivalence:

"This is the idea that increased government borrowing may have no impact on consumer spending because consumers predict tax cuts or higher spending will lead to future tax increases to pay back the debt.

"If this theory is true, it would mean a tax cut financed by higher borrowing would have no impact on increasing aggregate demand because consumers would save the tax cut to pay the future tax increases."

My point is not to dispute or defend the truth of the Ricardian proposition. My point is that it has absolutely nothing to do with whether one believes (or does not believe) that the New Keynesian framework is the right way to view the world. The essential policy implications of the New Keynesian idea (like the old Keynesian idea) is that changes in gross domestic product can be driven by changes in desired spending by households, businesses, foreigners, and the government in sum. You can believe that and still believe in fiscal policy ineffectiveness, as long as you believe that total spending is unaltered by a particular policy intervention.

There are, of course, plenty of arguments against fiscal policy activism that do not require adherence to Ricardian equivalence, in total or in part. The most obvious would be the position that any short-term rush from stimulative policies is more than reversed in the long run by the negative consequences of higher tax rates on productive activity, or the redirection of private investment to lower return public spending. Again, the point is that a self-professed adherent to a Keynesian reality need suffer no doubts about the coherence of his or her intellectual framework if he or she objects to fiscal policies aimed at juicing the economy through greater government spending.

This whole discussion may seem like a bit of inside baseball, and perhaps it is. But the stakes in this debate are high, as clearly illustrated by today's announcement from rating agency Standard & Poor's that it reduced its outlook to negative on the triple-A credit rating of the United States. In my view, productive discussions about the truly pressing issues of our day are unlikely unless we understand where the disagreements lie—and where they do not.

Photo of Dave Altig By Dave Altig
senior vice president and research director at the Atlanta Fed



April 18, 2011 in Deficits, Federal Debt and Deficits, Fiscal Policy | Permalink

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I'm a rank amateur, so please let me know where I go wrong.

Fiscal stimulus is government spending, and government spending comes from either taxes or borrowing (bonds). Since raising taxes is pretty much the worst possible policy in a recession, let's assume the stimulus is entirely borrowed.

Bonds are repaid via future taxes, hence the idea of Ricardian equivalence. However there's always uncertainty in the future. To the extent the public believes the recession is due to a temporary market failure which the stimulus can repair ("nothing to fear but fear itself")... to the extent they believe the stimulus may be offset by future spending cuts... Ricardian equivalence will fail. So 0 < R < 1.

Now let's compare to monetary stimulus. It's also funded by the sale of bonds* but this time the public sells them to the Fed. Except all bonds originate at the Treasury, and additional demand from the Fed must ultimately cause additional supply. This is especially likely since recessions often cause a flight to safety, sending organic bond demand high. And, primary dealers are required to sell.

So the only difference is whether the Treasury sells bonds to the public or to the Fed. The Fed destroys bonds and even refunds the coupons, so R = 0. The cost of the procedure is inflationary pressure. And inflation... also stimulates the economy,** by spurring investors to renew existing contracts and seek higher nominal returns. So Friedman was right, though maybe not as right as he thought or for the reasons he gave.

That's the financing issue. What about Taylor's crowding out? Here I think there are more teeth: http://lumma.org/microwave/#2010.07.18

-Carl

* Unless the Fed has been doing something weird, like you know, buying MBS. Those are money-quantity neutral if the payments are destroyed. So I don't get all the talk about an exit strategy. The Fed can simply hold its MBS to maturity, alternatively destroying or reinvesting the payments as part of its overall operations.

** Provided inflation expectations remain anchored. I think.

Posted by: Carl Lumma | April 18, 2011 at 11:03 PM

Essentially there is no difference between Keynesianism and its opponents like monetarism. They all agree on the basic notion that money is equivalent to cash balances (though how you can define money as something that is not spent and then try to relate it to total income or total expenditure is beyond me).

Keynes argued about the tension between bonds and cash balances. Friedman added stuff like equity and consumer durables and Keynesians like Tobin did not disagree.

Keynes's classic money equation
M = M1 + M2 = L1(Y) + L2(r)
where M2 is the speculative demand for money
simply reduces to monetarism if speculative demand is zero.

Posted by: Philip George | April 19, 2011 at 04:59 AM

Both Carl and Philip make good points. Carl's contribution is noting "uncertainty". Ricardian equivalence doesn't hold for, at least, two reasons: 1) the future is irreducibly uncertain, and 2) most people outside of finance and economics recognize this basic fact and thus heavily weight the present observable economic activity from employment-producing fiscal stimulus and assign very little weight to the distribution of possible future tax rates. Thus they don’t save their current earnings to pay the tax man. If you believe that people use future tax rates in their present consumption calculus, please provide me the probability distribution and parameters that they are using for their calculations.

Technically, Keynes posited that inflation stimulates the economy by increasing people's expectations of the marginal efficiency of capital (i.e., the return on invested capital). When capital is plentiful the marginal efficiency is low and people are not motivated to invest it in new capital projects that employ people and resources. This leads to the similarity with Friedman. People compare the marginal efficiency of capital to the schedule of interest rates when they decide to invest (notice that marginal efficiency of capital is not always equal to the interest rate as Classical, Neo-Classical, Monetarists, Neo-Classical Keynesian Synthesis [in the long run] schools all assume). Thus, when the marginal efficiency of capital (return on invested capital) is greater than the interest rate people invest, when it's not they don't.

So, there are 2 options, in general: raise the marginal efficiency of capital through boosting confidence ("animal spirits") and/or use an “exogenous” force to employ people to build capital (e.g., fiscal stimulus). Keynes also believed that you could lower the interest rate below the schedule of the marginal efficiency of capital by increasing the money supply as Friedman would advocate. However, Keynes believed this was inefficient because there is no substitute for money so as people demand more and more in uncertain times as they struggle to build a security blanket made of dollars big enough and they just let them sit in bank accounts, under mattresses, or in Treasuries (Keynes’s used the word “hoard”). This idle money cannot increase employment (Keynes's main goal for moral and economic reasons).

This is exactly what we have seen--corporations haven't really invested and banks haven't lent (due to lack of willingness and now they claim lack of demand) thus it's left to the government to spend and increase employment. One might point to increases in the equity markets as a mechanism for saved money to go towards employment producing investment. But, remember that an overwhelming amount of money that has flowed to asset markets post the crisis was in the secondary markets and not primary issuance (e.g., IPOs). Thus, the money is simply trading hands based on past investments that employed people to build the products or provide the services of the businesses represented by the ownership stakes provided by stocks. Outside of employing people in the financial community, this “spending” doesn’t employ many people. This is why you see a tight labor market for people in finance and a weak market for construction workers.

Posted by: Joshua Packwood | April 19, 2011 at 07:14 PM

Keynesians are anti-keynesian. Monetarists are keynesian. What a confusion!
Have any of you ever tried marxist economic theory for a change?

Posted by: wskarma | April 20, 2011 at 04:56 AM


Thanks, Dave for a thought-provoking and brave post. A few comments. First, neo-Keynesianism dominates the world of applied macroeconomics because it has empirical content. The theory can be tested and implications for policy made based on parameters derived from experience. True tests come when events occur outside the historical norms, such as what has occurred in the past few years, and in general the theory has stood up well.

As a result, this paradigm dominates the applied world, where there are quantitative benchmarks for performance. Unfortunately in other realms the theory does not dominate, and in fact is ridiculed. The first such realm is academia. Here, neoclassical theory has all but squeezed the neo-Keynesian paradigm from the classroom. The grip of the neoclassicals is such that one can barely find a neo-Keynesian article in a major journal. The benchmark in this world now is model elegance. Abstract optimization is prized far over empirical validity. The fact that these models rely on unfounded assumptions such as rational expectations and efficient markets and that recessions are the result of productivity shocks are not subjects for discussion. No $100 bills on the sidewalk, but trillions in losses.

The second realm is policy. If we give conservatives the benefit of the doubt as to their motives (a significant assumption), then what they feel is a strong aversion to government action of nearly any type. This explains the mental gymnastics of the economists you cite whose research has been based on an empirically valid theory, but whose implications run into their ideology. The resulting cognitive dissonance is an embarrassment to them and to the profession. I put it this way: a Keynesian would say that the government should pull the Chilean miners out of the mine, while a conservative would say it's not effective because either it would encourage future miners to be relaxed on the job or because the cost would imply that the private sector would be crowded out and less money would be spent on safety.

One last point: your last line on S&P and the US debt rating. Of course, the problem is serious and needs attention. But please do not encourage these guys by citing them as a source of authority on these matters. Their track record on sovereign debt is abysmal, to say nothing of securitized products. Their incentives are highly questionable and their use by investors as a crutch is a key factor behind the financial collapse we have just gone through. Please devote your efforts to unwinding them and encouraging independent analysis.


Posted by: Rich888 | April 20, 2011 at 09:56 AM

I believe the concept that, with a Federal deficit, one would spend less now because taxes are going to be higher in the future is just not in the American conciousness.

Indeed, I see as the other way around: people pulling income into these low tax years, and then increasing spending now, rather than have the income in what might be higher tax years in the future.

But this is an empirical question. Surely polls have been done: "Are you spending less now, because taxes might be higher in the future?" To which the answer, "What are you talking about?" should be a possible choice.

[this comment occured because of a Krugman link]

Posted by: David Fields | April 20, 2011 at 09:59 AM

David Fields has it correct. The future for 70% of Americans is the bill due at the end of the month, not the marginal efficiency of capital.

Posted by: DR | April 20, 2011 at 11:34 AM

I would think that David Field's comments on testing Ricardian equivalences with the American public might be applied to corporations as well. If corporations were concerned about future taxes, we would see that factored into the tax rate used in DCF analysis for longer-term projects. There would be increased tax-rate assumptions in later years, or at least future tax rates would be factored into the sensitivity analysis.

It would be easy enough to poll corporate finance managers to find out if this was in fact happening, and then try to calculate what impact that had on the acceptance of business projects. My suspicion is that it might have an impact, but at much less than Ricardian equivalence.

John

Posted by: Ragweed | April 21, 2011 at 03:06 PM

"If we give conservatives the benefit of the doubt as to their motives (a significant assumption), then ..."

If you are going to claim to give conservatives the benefit of doubt as to their motives, then you should do so. You do no such thing. It would be as if a conservative said: "If we give liberals the benefit of doubt as to their motives, then we should assume [the same exact things we already assume without giving them the benefit of doubt]." If you are unable to accurately or objectively describe the positions and motives without your own biases, try not to claim that you are in fact doing so.

Posted by: sparky | April 22, 2011 at 07:36 AM

Keynes did not ponder what drove the economies of the world in order to get published or to achieve tenure. He eschewed elaborate mathematical economics, even though his intellect and mathematical skill fully permitted him to engage in such analysis. Rather, he was practical, and looked for an explanation in the Great Depression of why what he observed was as it was. A highly successful investor, he spent the first hour of every day doing the equivalent now of reading the WSJ and the Financial Times. He also had worked for the British treasury. He was directly responsible for financing the First World War for Britain. From these practical, real life experiences, he arrived at economic conclusions that are indeed the paradigm by which most operate today, including Mr. Taylor. So, the Young Guns have cited economists who have stood on the shoulders of Keynes.

Last, we make a grave policy error if we fail to recognize that the steps of governmental intervention taken by Chairman Bernanke, the Congress, and Secretary Paulson, in the early fall of 2008, are the chief reason that we did not see in late 2009 and early 2010 unemployment go to 20%. Forgotten, for example, in the current discussion of cutting government spending, is the effect the stimulus package had on state governments, which would otherwise have severely curtailed expenditure. The federal government used its collective strength to avoid the kind of reamplification of recessionary tendencies that would have been the inevitable result of such state layoffs.

Finally, it does not help to analyze these economic issues in terms of conservative and liberal, or Republican and Democrat. As the collapse of communism demonstrates, rigid adherence to a purely ideological notion of economics is doomed to fail. Rather, the policy issues should be addressed in a practical way, avoiding dogma and with a keen eye to the demonstrable.

Posted by: Michael Egan | May 24, 2011 at 10:14 PM

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November 23, 2010

Federal Reserve policies focused

This blog posting was originally an article in the Sunday, November 21, edition of the Atlanta Journal-Constitution. The article was written by Atlanta Fed Senior Vice President and Research Director David Altig.

On Nov. 3, the Federal Open Market Committee (FOMC)—the group within the Federal Reserve charged with formulating monetary policy for the United States—announced its plans to purchase, over the course of the next eight months, up to $600 billion worth of longer-term Treasury securities.

In many circles (maybe including yours), this decision has generated some controversy. A good deal of the controversy revolves around the view that this monetary policy decision is aimed at buying up government debt for the purpose of making it easier for the country to continue on the path of deficit spending. This view is inaccurate.

I understand the concerns that are triggered when the Fed announces a significant Treasury purchase program at a time when the fiscal situation is so challenging and unsettled. Be it the hyperinflations of Germany's Weimar Republic in the period between the two world wars; Hungary after World War II; or the more recent case of Zimbabwe, most of us have heard or read of extreme examples of countries that ended up creating big problems trying to finance government by printing money.

Generating government revenues via the printing press is a policy that is often referred to as "monetizing the debt." I think the emphasis in that sentence should be on the word policy. A policy is really a sort of rule—sometimes explicit, sometimes only implicit—that lays out a decision maker's objectives and how they are going to be attained. The objective of a policy of monetizing the debt is to create inflation as a means of lowering the burden of government debt by lowering the value of the debt and interest the government must repay in inflation-adjusted terms.

Monetizing debt is decidedly not the current policy of the Federal Reserve, at least not according to Federal Reserve Chairman Ben Bernanke. Speaking at a recent conference hosted by the Federal Reserve Bank of Atlanta, Chairman Bernanke was unequivocal: "We are not in the business of trying to create inflation."

So what business is the Fed in?

In short, the Fed's so-called dual mandate charges the FOMC with promoting sustainable growth and low and stable inflation. Though the economy is moving forward, it is doing so at a pace that is only slowly yielding job growth. This forward momentum has not yet proved robust or sustained enough to dent the unemployment rate.

More important, the economic landscape at the end of the summer was colored by the continuation of a declining inflation trend that was bleeding into expectations about the probability of deflation. In a still-recovering economy with very low interest rates, the emergence of deflation expectations would be a most unwelcome development that could seriously impede the prospect for continued recovery.

As Atlanta Fed President Dennis Lockhart has said, stabilizing inflation expectations is a key to policy success, and "managing inflation expectations requires following through with policy actions consistent with stated objectives—in this case ensuring that inflation trends remain in a desired zone. The FOMC's November decision should be seen in that light."

The policy represented by the November decision appears to be working. As markets came to expect the November announcement, price expectations that had been declining all summer began to stabilize and have now returned to pre-summer levels.

Could the policy be too successful? That is, there a risk that the policy will overshoot and replace declining inflation rates with too-high inflation rates?

There are, of course, always risks to action and inaction. Now that the FOMC's action has apparently mitigated the risk of a recovery-threatening disinflationary spiral, at some point it will be appropriate to turn attention to inflation risks. As President Lockhart recently commented, we at the Atlanta Fed are confident these decisions will be made independent of fiscal considerations.

The current focus is on rising commodity prices, and the Federal Reserve, including the Atlanta Fed, is watching those developments too.

As one of the 12 Federal Reserve Banks charged with bringing a real-time sense of the economy to the monetary policy process, the Atlanta Fed queries hundreds of contacts every month. In general, our contacts, while acknowledging some rising cost pressures, do not indicate they are likely to respond with price hikes of their own.

But we will keep asking, watching for signs that things are changing, and preparing in the event that a change in course is warranted.

And this vigilance is precisely the point. Intentions do matter, and President Lockhart has made his very clear: "Rest assured, should inflation begin to move above desired levels, I am confident the FOMC will work hard to keep it from getting away from us."

By Dave Altig, senior vice president and research director at the Atlanta Fed

 

November 23, 2010 in Federal Debt and Deficits, Federal Reserve and Monetary Policy, Fiscal Policy, Monetary Policy | Permalink

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I don't like the QE2 because it seems the govt is always behind the curve on economic developments. The reason the economy is stagnant is not due to Fed policy-but fiscal policy.

Money is available-it's just no one wants it.

BTW, in a survey of some leading commodity prices about a week ago, there are no signs of inflation. I compared December delivery 2010 to 2011. The increase in prices this year compared to 2009 can purely be assigned to weather.

Maybe read Farmer's Almanac or consult a Medicine Man to find out how weather will affect crops next year!! ; )

Posted by: Jeff | November 29, 2010 at 12:29 PM

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December 08, 2009

Another rescue plan comes in below the original price tag

Though the tab to taxpayers could still be substantial when all is said and done, it now appears the taxpayer cost of the Troubled Asset Relief Program (TARP) will be substantially lower than was thought not too long ago:

"The Obama administration expects the cost of the Troubled Asset Relief Program to be $200 billion less than projected, helping to reduce the size of the budget deficit, a Treasury Department official said yesterday.

"The administration forecast in August that the TARP would ultimately cost $341 billion, once banks had repaid the government for capital injections and other investments. Congress authorized $700 billion for the program in October 2008."

There is precedent for such good news. Travel back for a moment to the formation and operation of the Resolution Trust Corporation (RTC), the agency formed to purchase and sell the "toxic assets" of failed financial institutions following the savings and loan crisis of the 1980s. As noted in a postmortem by Timothy Curry and Lynn Shibut of the Federal Deposit Insurance Corporation (FDIC), the cost projections for the RTC ballooned in the early days of its operations:

"Reflecting the increased number of failures and costs per failure, the official Treasury and RTC projections of the cost of the RTC resolutions rose from $50 billion in August 1989 to a range of $100 billion to $160 billion at the height of the crisis peak in June 1991..."

In the end, however, the outcome, though higher than the very first projections, came in well below the figures suggested by the worst case scenario:

"As of December 31, 1999, the RTC losses for resolving the 747 failed thrifts taken over between January 1, 1989, and June 30, 1995, amounted to an estimated $82.7 billion, of which the public sector accounted for $75.6 billion, or 91 percent, and the private sector accounted for $7.1 billion, or 9 percent."

While people may debate the approaches taken, it is heartening to see evidence that TARP, like the RTC before it, is ultimately costing considerably less than estimated.

By David Altig, senior vice president and research director of the Atlanta Fed

December 8, 2009 in Deficits, Federal Debt and Deficits, Financial System, Fiscal Policy | Permalink

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TARP should be judged on the basis of its effects on the financial system, and not its cost. So far looks like its working.

Visit econdashboards.com

Posted by: ZZ | December 08, 2009 at 10:56 PM

Since the expressed purpose was to 'save Main Street' by handing out the future to Wall Street, the plan has decidedly not worked. Main Street has been pulled through the knothole anyway, and paid for the experience.

Posted by: wally | December 09, 2009 at 09:25 AM

Please. Give us a break. What about trillions of dollars in guarantees given to various institutions. How about junk MBS paper bought by the federal reserve and GSE's. Lets not pretend that the cost to tax payer is going to be minimal. This is going to end badly but only for the tax payers. The banks will make out like bandits.

Posted by: sartre | December 10, 2009 at 01:10 AM

Interesting. An interview I read with Kashkarian had him stating that "700 billion" was a number pulled out of thin air. They had no idea how much to ask, so they decided to ask for as large a number as they could get.

I am glad they didn't go over it. However, I am dismayed at the outcomes learned. The government now wants to create more bureaucracy to oversee the financial system. The TARP has created even more concentration-bringing with it anti-competitive oligopolies.

We need to restructure the marketplace, not re or over regulate it.

Posted by: jeff | December 10, 2009 at 11:41 AM

You're omitting the other expenditures by the government to ensure that these loans would be repaid.

At the time TARP was authorized, they didn't envision spending 850 billion dollars to stimulate the economy and 1.8 trillion dollars to inflate asset prices.

The cost is going to be much higher over time because the Federal government will be running trillion dollar deficits for some time.

Posted by: Les | December 14, 2009 at 09:31 AM

You are ignoring a couple of *extremely* important facts:

The banks are "healthier" and able to buy their way out of TARP (perhaps only for awhile - a disgusting TARP II is not beyond belief) because:

1) The Fed (backed by the Treasury) has bought a trillion dollars worth of crappy MBS assets from the banks - at insanely inflated prices given their risks.

The default risks have therefore been transferred to the taxpayers - who will bleed out for years to come in order to transfuse degenerate banks.

Some success.

2) Savers have had the present value of their savings expropriated due to the zero interest rate policies pursued to save our scummy banks.

Again, some success.

Posted by: cas127 | December 15, 2009 at 08:43 AM

The banks also received massive tax breaks in the stimulus which are inflating the value of the shares that were exchanged for cash from the government. There's a good article in todays Washington Post.

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/15/AR2009121504534.html

Posted by: Les | December 15, 2009 at 09:20 PM

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June 03, 2009

Debt and money

If you are hunkered down on inflation watch, yesterday's news offered some soothing words. From Reuters:

"Chinese officials have expressed concern that heavy deficit spending and an ultra-loose monetary policy could spark inflation, eroding the value of China's U.S. bond holdings.

"But [U.S. Treasury Secretary Timothy] Geithner said: 'We have a strong, independent Fed and I am completely confident they have the ability to do their job under the law, which is to keep inflation stable and low over time, and that they will be able to—and certainly intend to—unwind these exceptional measures as soon as they have served their purpose.' "

And from Bloomberg:

"He said that there was 'no risk' of the U.S. monetizing its debt, a response to a question about whether the government would seek to finance the national debt by expanding the money supply and thus trigger a rise in inflation."

Concerns about such monetization arose in the wake of the FOMC's decision at its March meeting to purchase up to $300 billion of longer-term Treasury securities and that decision's coincidence with the very large fiscal deficits contemplated in President Obama's budget proposals. Those concerns have accelerated as longer-term Treasury yields have moved higher since.

There will, I trust, be plenty of opportunity to expand on these concerns as things develop, but for now I will offer just a little perspective in the form of the chart below, which shows the recent and (near-term) prospective shares of federal debt held by the Federal Reserve. The red line represents the share of debt that will be held by the Fed at the end of fiscal year 2009 if the $300 billion Treasury purchase program is completed and the federal deficit emerges as currently predicted by the Congressional Budget Office.

060209a

The financial crisis has, of course, borne witness to the shift in the Fed's balance sheet from Treasuries (which have been much in demand by the private sector) to a variety of loans and mortgage-backed securities. The consequence has been a sharp fall in the fraction of government debt held by the central bank, a fact that will be little changed under the current trajectory of Fed purchases and projected deficit spending.

A large decline in Fed holdings of Treasury bills—securities that mature in one year or less—drives much of the pattern seen in the chart above. The drop-off in share is not as large for Treasury notes—securities in the two- to ten-year maturity range, and some assumptions have to be made to get a picture of how the Fed's share might evolve over the near term. Without knowing how this evolution will occur, I developed two general assumptions for argument sake. If net new issues of Treasury debt follow historical averages, meaning just over half of net new debt is in the form of notes, and if the central bank applies the remainder of the $300 billion of longer-term Treasury purchases (about $170 billion at the end May) to notes, then the Fed would hold roughly 13 percent of the outstanding stock by the end of the year. If the Treasury were to issue nothing but bills or bonds, a $170 billion purchase of notes by the Fed would bring its share up to the neighborhood of 17 percent. Though these numbers are not as unusually low in historical context as is the case for total outstanding debt, neither would they jump off the page as an extreme aberration in the other direction.

060209b

Some might argue that "monetization" these days involves a whole lot more than government debt, but Chairman Bernanke has been pretty clear about his intentions regarding the overall size of the Fed's balance sheet. And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.

By David Altig, senior vice president and research director at the Atlanta Fed

June 3, 2009 in Federal Debt and Deficits, Federal Reserve and Monetary Policy, Inflation | Permalink

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I think this is an oversimplification. large number of Treasuries in the past were being held as assets from banks not the result of Quantative Easing.

If you look at the fact the fed has been trading sercure T-bills for dubious assests and printing money to acquire treasuries.

I think their is a strong possibility that the Fed ia allowing positioning itself to absorb billions in write downs on the non-Treasury assets.

The end result will be another laundering of Toxic Assets for the banks. The Fed will have basically monetized the Bank Losses onto the American Taxpayer who will be stuck paying the Fed to moentize banks bad lending.

Posted by: Kevin | June 04, 2009 at 10:25 AM

I found this blog really good, this is a best way to share information to increase knowledge and learning capabilities. good work

Posted by: Research Paper Writing | June 05, 2009 at 02:46 AM

David - thanks. You "wouldn't believe" how widespread, prevalent, virulent and heartfelt this meme is; nor what damage it's doing about the finance/invest/econ/bizz communities AND the normal folk who don't walk like that. Here and in your day job it would be in your and your organization's interest to continue to pursue and explain the situation, mechanisms and ramifications.

The sound and fury signifying nothing is about 99% of the discussion; other than one Krugman column and this I can find little or nothing sensible.

Posted by: dblwyo | June 05, 2009 at 09:01 PM

Now all that said two strictly bloggish comments or questions that build on the concerns:
1) in charting TNX for the last several charts I see nothing aberrational about current rates; instead there's an aberrational price jump beginning around Sep08 or so. Gee, I wonder why that is ?

2) how do you guys estimate Velocity ? I tried a poor man's version using FRED II data on GDP (real,nominal), M2 (M3 and MZM were similar)and the GDP Deflator for MV=PQ by V = GDP/MZM. On that basis V has fallen ~21% since Q406 having risen ~9.2% from Q303 to Q306. That rise would seem reasonable for a slow recovery but that seems like a significant fall in a shorter timeframe ?

Posted by: dblwyo | June 05, 2009 at 09:20 PM

People who are concerned about "monetization" simply don't understand how our monetary system works. Reserves are one kind of deposit at the Fed; Treasuries are another kind of deposit. Other than interest rates (and with the Fed paying interest on reserves now, even that is a wash), there is no difference between them - they are both financial liabilities of the Federal government, not convertible into anything else. If the Treasury ceased to issue securities, all that would happen is that interest rates would drop to zero.

The monetization-phobes are stuck in a gold-standard way of thinking that is totally inapplicable to current floating exchange rate fiat money regimes.

Posted by: Jim Baird | June 08, 2009 at 09:02 AM

Great article thanks very much for sharing. thanks.

Posted by: wii24 | July 17, 2009 at 06:36 PM

Wonderfully informative blog. Great article-thanks for helping keep the masses informed!

Posted by: Grace | July 29, 2009 at 11:51 AM

Great post, i've already subscribed to your feed. thanks

Posted by: renda extra | August 01, 2009 at 08:44 AM

Thanks for the post. It's good to see that someone remembers how and why the "idea" of money works.

Posted by: Jons Debt News | August 05, 2009 at 10:14 PM

Great article. I just wish the sound bite news media would publish detailed facts like you. Keep up the good work.

Posted by: Ron Stone | August 12, 2009 at 04:07 PM

Great post. Your blog has become one of my regular reads. Thanks.

Posted by: Make Money Online | August 19, 2009 at 12:24 AM

HI
Thanks for the article on debt and money. Some very good points and interesting information. I have bookmarked your site and will be back to learn more! Thanks again,
Rod

Posted by: Rod Bird | September 13, 2009 at 08:25 PM

If we aren't loading up on one thing then it's another.

Personally I don't really care what value China has in the USA. If China isn't ready to roll with the bad and the good they shouldn't be handing us money over and over again.

Posted by: Penny Stocks to Buy | October 12, 2009 at 11:37 AM

China really should have expected this would happen. We're still the bullies out there and can get away with things like this!

Posted by: Fast Cash Lydia | October 17, 2009 at 11:38 PM

chinise money policy is always flawed...they has no farsight at all, all small talks kept aside (includng projections) look at their market so volatile...and look at at the Heterogeneous distributon of wealth..!!

Posted by: Riju@Insure-Investment | October 26, 2009 at 12:18 PM

Great post! It is very interesting!

Posted by: Ganhar Dinheiro | November 18, 2009 at 10:05 AM

It's a good thing the Chinese need us as much as we need them, otherwise we would be in some deep you know what. If this recession gets worse (I believe the previous quarter's numbers were seriously inflated by the Auto and Housing incentives), that could change. But no matter what the Fed does, the way our Congress and the President are tax and spending, it won't matter. Our own government will finish off this economy.

Posted by: Ron Stone | November 28, 2009 at 05:22 PM

The amount of debt our government is accumilating trying to assist the big corporations is outrageous.

Posted by: Debt Assistance Program | February 18, 2010 at 09:31 AM

Good post. Hopefully something is done with the current debt problems we are currently facing.

Posted by: Clear Credit Card Debt | February 18, 2010 at 05:45 PM

The fed has been printing money to acquire treasuries for many many years.

The Fed is positioning itself to absorb billions in write downs on the non-Treasury assets.

The Fed will take the bad Assets from the banks and will have basically monetized the Bank's Losses onto the American Taxpayer.

Posted by: Settlement | March 07, 2010 at 10:10 PM

They need to cut all of the entitlement programs and stop mortgaging our childrens futures…

Posted by: Debt Relief | March 26, 2010 at 10:59 PM

I think this is an oversimplification. large number of Treasuries in the past were being held as assets from banks not the result of Quantative Easing.

If you look at the fact the fed has been trading sercure T-bills for dubious assests and printing money to acquire treasuries.

I think their is a strong possibility that the Fed ia allowing positioning itself to absorb billions in write downs on the non-Treasury assets.

Posted by: Moisés Oliveira | May 27, 2012 at 12:33 PM

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February 05, 2009

There is no accounting for priorities

Just in case you are desperately seeking some refuge from the pervasive blogland commentary on the fiscal stimulus proposal winding through the Senate (which already made its way through the House of Representatives), be forewarned: You won't find it here, but you will find an update to the old adage, There's no accounting for taste (de gustibus non est disputandum), which is to say that when it comes to the fiscal stimulus package, there's no accounting for priorities.

The Senate bill is not yet a done deal, of course, but a couple of clear differences between it and the House bill have emerged. According to the Congressional Budget Office—or CBO, from whom all figures in this post spring—the Senate bill is slightly bigger ($884.5 billion versus $819.5 billion) and would implement the stimulus at a faster pace. The current Senate bill would introduce about 79 percent of the expenditures and tax cuts in 2009 and 2010. The corresponding figure in the plan that came out of the House is 64 percent.

Perhaps more interesting—and maybe more confusing—are the priorities reflected in the separate bills:

020509a


020509b

The share of the stimulus devoted to discretionary spending—the place where, for example, infrastructure and education spending reside—is pretty similar in both stimulus plans (about 28 percent in the House version, about 26 percent in the Senate version). What is clearly different is the much greater reliance on tax cuts in the Senate bill, compared with the House bill's emphasis on "direct spending."

In a sense, this distinction is as much an issue of labeling as anything. The majority of the items in this category of direct spending are "provisions that would increase direct spending for unemployment insurance, health care, fiscal relief for states through the Medicaid program, and other programs," according to the CBO. In the language of economists and national income accountants these are "transfer payments," or funds that are transferred to individuals. Formally, they are subsidies for certain types of economic behavior—job seeking and purchasing health care, for example—and hence are really just a negative tax.

There is a certain arbitrariness to the distinction between increases in transfer payments and reductions in tax payments. This arbitrariness is illustrated by a change the CBO made between its initial assessment of the draft House bill and its (largely unchanged) summary of the bill that passed:

"The Congressional Budget Office, in consultation with JCT [Joint Committee on Taxation], has concluded that the subsidy for health insurance assistance for the unemployed should be treated as an increase in outlays rather than a decrease in revenues. Although this treatment is different from that in the table provided in our estimate for H.R. 1 as introduced on January 26, the overall effect on the budget remains the same for each year. JCT has also adjusted its estimates of the mix of revenue losses and outlay increases associated with certain refundable tax credits; that change also has no effect on the budget totals for each year."

Still, if you are likely to be on the receiving end of one of these programs, the distinction is probably not so arbitrary. From this end-user perspective, there is an important economic distinction between approaches taken in the competing plans. So then, which approach to "tax cuts" is better? At this point, I will send you to the aforementioned pervasive blogland commentary. You will find no shortage of opinions.

By David Altig, senior vice president and research director at the Atlanta Fed

February 5, 2009 in Federal Debt and Deficits, Fiscal Policy, Taxes | Permalink

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the stimulus is disturbing to me in where it is spending the money as well. it will go into non-productive things from a GDP perspective.

the other disturbing thing that I saw was an interview with Christine Roemer on CNBC. She was asked point blank if the Obama administration was confident in Bernancke, and she refused to give him that vote of confidence.

mankiw in his blog cites the multiplier effect on tax cuts versus spending. He calculates that tax cuts offer a 3:1 bang to the buck growth in GDP, where govt spending offers a 1:1 bang to the buck.

Economic results over the last 3 decades would tend to prove him right.

Posted by: jeff | February 07, 2009 at 02:03 PM

David,
When are MBS yields affected by the Fed's purchases? At the time the purchase agreement is signed, or afterward, at settlement?

Posted by: Holden Lewis | February 09, 2009 at 02:44 PM

But as past attempts to reduce financial stress on homeowners have shown, the task is not easy.


I'm not sure I agree the purpose was ever to reduce financial stress on homeowners. That said, I agree the task is not easy.

Posted by: FutureRob | April 09, 2009 at 09:55 PM

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February 14, 2007

The Twins Part Ways

From the AP (via abcNews.com):

The deficit for the first four months of the current budget year is down sharply from the same period a year ago as the government continues to benefit from record levels of tax collections.

The Treasury Department reported Monday that the deficit for the budget year that began Oct. 1 totals $42.2 billion, down 57.2 percent from the same period a year ago.

From the New York Times:

The United States ran a record trade deficit in 2006 for the fifth consecutive year, the Census Bureau reported Tuesday in an announcement that quickly reignited the dispute between the Bush administration and Democrats over the value of past and future deals lowering trade barriers.

The bureau said that the trade deficit, or gap between what the United States sells abroad and what it imports, reached a new high of $763.3 billion last year, a 6.5 percent increase over the year before. The deficit was fueled by the continuing American need for foreign oil and imports of consumer goods from China and other countries.

The fact that the two deficits are moving in opposite directions is not really anything new:

   

Budget_and_trade_deficits

   

Twin deficits?  Not so much.

February 14, 2007 in Federal Debt and Deficits, Trade Deficit | Permalink

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While it is gratifying to see a graph indicating a decrease in the rate of increase in the cumulative Federal budget deficit, the continuing rate of increase in trade deficit is much more fundamental. One speaks to the Federal government deficit while the other speaks to a looming economic deficit.

The real question is "how long the US can continue to consume an excess of goods, produced off-shore, and maintain a vibrant, balanced domestic economy?".

Macro-economic theory clearly predicts that, at the peak of an economic boom, the Federal deficit should decline. We can all take one breath that, finally, the rate of growth of the deficit has, at least temporarily, declined. Okay, back to the wait for the other shoe to drop.

Macro-economic theory also predicts that, should massive losses of high paying jobs and key industries to Foreign competition bring on a recession, the deficit will increase.

The trade picture is much worse than the deficit picture is better.

Posted by: zinc | February 15, 2007 at 07:26 AM

The deficit picture that takes a climb from mid 2003 may be based on revenues received from capital gains on RE, but that picture may be quite different with a sobering of house prices now under way.

Posted by: calmo | February 15, 2007 at 11:48 AM

Please be wary of the budget deficit numbers. They do not include deficits incurred by war spending on Iraq and Afghanistan. These are "off budget" items which are not show in the normal quarterly budget deficit numbers. Including this would spread out about $500B in deficit spending over the period from 2003-2006.

Posted by: Sekar | February 18, 2007 at 01:02 PM

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February 06, 2007

Just A Thought

This, from John Irons, seems to sum up the general reaction to the President's 2008 budget proposal:

According to news.google.com, there are currently 306 stories on: “dead on arrival” bush budget

Am I the only one finding this sort of reaction increasingly wearisome?  I'm all for critical analysis -- I like to think that that is what macroblog is all about.  But maybe if we start insisting that the first thing out of the ever-moving mouths of pundits and lawmakers alike is about what is doable rather than what is not, we might actually some day make some progress.

As I said, just a thought.

February 6, 2007 in Federal Debt and Deficits, This, That, and the Other | Permalink

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While I agree with your sentiment, I do have one big bugaboo with the Presidential budget. Somehwere in the software that programs the numbers, a tax on futures trading always appears. It is party neutral, meaning both parties seem to include it.

It will move futures trading offshore, overnight. For those that don't think so, the average futures trader in Chicago would pay around 150K-200K a year. that is enough to put you out of business. Most large firms could pay 100K a day! Absolutely stupid.

Posted by: Jeff | February 06, 2007 at 10:40 PM

I have many hours involved thus far reading through this budget.

I haven't written it off yet.

Some of the analysis on program adjustments are pretty good, though the Borg Left and some of the Borg Right would disagree.

But they are only Borg, marching in lockstep.

Me. I read. Then decide. One helluva difference than what we have in play today in blogland and elsewhere.

Yeah, the country is going to hell with regard to reason and common sense.

Posted by: Movie Guy | February 09, 2007 at 09:39 AM

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December 21, 2006

How To Characterize Economic Policy In The 90's

A comment made by pgl in one of yesterday's posts at Angry Bear caught my attention:

And [why is chairman of Bush's Council of Economic Advisers Ed] Lazear opposed to my suggestion of easy money with tight fiscal policy, which was the 1993 approach?

What got me thinking was this:  Was the policy in the period referenced by pgl really one of "easy money" and "tight fiscal policy"?   

Answering that question requires answering the prior question of what, exactly, do those terms mean.  That is not a straightforward task, but let me give it a shot.  I'll start by suggesting -- as I have done before -- that a characterization of the stance of monetary policy -- as tight or easy, restrictive or stimulative, contractionary or expansionary -- can be found in the yield curve, or the spread between short-term interest rates and long-term interest rates.

What about fiscal policy?  I suppose that what many people have in mind is the government surplus of revenue over expenditure relative to GDP or, alternatively, the "standardized" or "cyclically-adjusted" budget surplus relative to "potential" GDP.  As explained by the Congressional Budget Office:

The size of the budget deficit is influenced by temporary factors, such as the effects of the business cycle or one-time shifts in the timing of federal tax receipts and spending, and the longer-lasting impact of such factors as tax and spending legislation, changes in the trend growth rate of the economy, and movements in the distribution and proportion of income subject to taxation. To help separate out those factors, this report presents estimates of two adjusted budget measures: the cyclically adjusted surplus or deficit (which attempts to filter out the effects of the business cycle) and the standardized-budget surplus or deficit (which removes other factors in addition to business-cycle effects).

With that background, here are pictures of the difference between the yield on 10-year (constant-maturity) Treasury securities and the effective federal funds rate...

 

Yield_spread_3

 

  ...and various measures of the government surplus:

 

Budget_surplus

 

Is pgl right?  Does it look like, let's say the Clinton years, were a period of tight fiscal policy and easy monetary policy? 

You are not surprised, I presume, to see that there is a pretty good case on the fiscal policy characterization -- though it is interesting that the G.H.W Bush years look every bit as good as the Clinton years by the standardized surplus measure. (I haven't checked this carefully, but I suspect this may have something to do with smoothing out expenditures and receipts associated with the activities of the Resolution Trust Association created to manage the aftermath of the S&L crisis of the 80's, as well as adjustments for extraordinary capital gains taxes in the latter 90s.)

The case for easy money is a bit tougher.  If you accept the 10-year/funds-rate spread as being related to the relative ease of monetary policy, then the period from 1993 to 1995 looks relatively stimulative.  But the latter part of the decade is not so readily characterized in that manner -- and that is precisely the time when the budget deficits really shrink. 

The story can get complicated if you throw in the proposition that the relationship between short-term and long-term interest rates changed in the past 10 years or so, an idea that is currently in favor as a rationale for not worrying about the inverted yield curve today.  And, of course, you might reasonably object to my whole exercise by arguing that fiscal and monetary policy are really as much about what people expect to happen as they are about what is actually happening at any point in time.      

I can readily agree to the proposition that fiscal policy ought to "tighten" up - though I would emphasize entitlement and tax reform in that definition, as opposed to any particular stand on how fast or how far deficits should recede.  As for monetary policy, I'll appeal to higher authority:

Price stability plays a dual role in modern central banking: It is both an end and a means of monetary policy.

As one of the Fed's mandated objectives, price stability itself is an end, or goal, of policy...

Although price stability is an end of monetary policy, it is also a means by which policy can achieve its other objectives. In the jargon, price stability is both a goal and an intermediate target of policy. As I will discuss, when prices are stable, both economic growth and stability are likely to be enhanced, and long-term interest rates are likely to be moderate. Thus, even a policymaker who places relatively less weight on price stability as a goal in its own right should be careful to maintain price stability as a means of advancing other critical objectives.

If that ends up being "easy" money, well, so be it.   

UPDATE: pgl responds in his usual intelligent fashion, noting (as he does in the comments below), that the high-growth late 1990s did indeed call for a tighter fiscal policy.  What this suggests to me (as I also note in the comments below) is that it is not so clear that we ought to think of the stance of monetary policy in relation to fiscal circumstances.  My inclination is to suggest that something like the Taylor rule -- with its emphasis on inflation goals and the level of economic activity relative to its potential - is a more robust approach to characterizing the appropriate course of monetary policy.

December 21, 2006 in Federal Debt and Deficits, Federal Reserve and Monetary Policy, This, That, and the Other | Permalink

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When I think of tight fiscal policy, my idea is simpler than your approach -- it means low government spending (as a percent of GDP).

This is in contrast to your surplus idea. If taxes are high and spending is high (but not higher than taxes), there will be a surplus but that does not look like tight fiscal policy to me.

Posted by: ErikR | December 22, 2006 at 07:37 AM

Hold on a second. Your analysis suggests easy money during the 1993 to 1995 period when we were below full employment but not easy money for the rest of the decade. But the rest of the decade can be characterized as a strong economy driven in part by an outward shift of the IS curve led by an investment boom. Wouldn't William Poole (QJE 1970) argue that monetary policy should switch from stimulative to restraint? I'm shocked that you think of the only exogenous variables being government aggregate demand policies!

Posted by: pgl | December 22, 2006 at 12:37 PM

Erik: Fair enough -- I really do agree with the proposition that the deficit/surplus is not a sufficient statistic for characterizing the stance of fiscal policy -- minimally, expectations are important.

pgl -- Right. But that just seems to be another way of saying that monetary policy can't really key off of fiscal policy. I think maybe converting things into the Taylor rule prescriptions will cover the bases.

Posted by: Dave Altig | December 22, 2006 at 07:32 PM

I agree with the Taylor rule update. My point was less fining aggregate demand management and more a response to the Dean Baker fear that fiscal restraint leads to recessions. Jan Tinbergen would argue if you wish to raise national savings yet avoid recession, you combine fiscal restraint with monetary expansion. And this seemed to work during the 1993 to 1995 period.

Posted by: pgl | December 23, 2006 at 10:08 AM

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