Monday, October 22, 2012

Christina Romer on Stimulus

(Small update to clarify in response to early comments)
Christiana Romer has an important column in Sunday's New York Times on the stimulus. You will recall that as chair of the Council of Economic advisers, she played a big part in designing the stimulus, and forecasting its effects. She also is one of the preeminent academics who have done empirical work evaluating the effects of stimulus programs. You expect a thoughtful essay.

She explains how cause-and-effect empirical work in economics is hard
To understand what’s wrong with that reasoning, think of someone who’s been in a terrible accident and has massive internal bleeding. After lifesaving surgery, the patient still feels rotten. But we shouldn’t conclude from this lingering pain that the surgery was useless — because without it, the patient would have died.

Without knowing where the economy was headed in the absence of the stimulus, it’s impossible to judge what it contributed just from what happened afterward. That’s why empirical economists rely on other approaches.
This is really good compared to the usual "of course it worked you blockhead" sort of argument from stimulus sympathizers (you know who, and "blockhead" is being polite).

Of course I might have used the image of doctors bleeding the patient, applying poultices or voodoo, and then claiming great power when the patient heals on his own, but the principle is the same.
A growing literature examines the effects of such tax cuts and increases in government spending over history and across countries, and the overwhelming conclusion is that fiscal stimulus raises employment and output in the near term.
Wow, that's strong. .
..states that received more money [for random reasons] fared substantially better. This is the strongest direct evidence that the Recovery Act contributed to employment growth. Based on the estimated size of the effect, the studies suggest that the act created more than three million jobs. 
This does not follow at all. I don't think anyone disagrees with the proposition that if the government takes money from residents of state A and splashes them on state B, the economy of state B improves.  But this totally evades the whole issue: what about state A? This is the entirety of the stimulus debate: The government can transfer resources, but not get resources to fall from the sky. (Whether it taxes or borrows form the residents of state A, it's still transferring resources.) Stimulus is  supposed to raise aggregate demand, not transfer demand from state A to state B.  Yes, if the government builds a military base in the desert, GDP in that desert goes up. From this, stimulus raising the whole country does not follow.

The web version cites the studies. I've read about half of them, and they are careful not to jump to this conclusion. (This is about cross-state studies. There is another industry of time-series studies, trying to see if times when the US overall has stimulated it did any good. That's another issue, which Romer doesn't talk about, so I will also put off for another day.)

She goes on,
In addition to its near-term jobs effects, the Recovery Act may also be having more lasting benefits. It’s too early to measure the value of the roads, bridges...
Fine, but that's not the issue either, and never was. Sure, if there is a positive rate of return investment, make it, and a recession is a good time to do it. But the argument for Keynesian stimulus is that spending money helps the economy at that moment, whether or not it does any long run good. Paul Krugman is admirably honest by  advocating we fake an alien invasion so we can build useless defenses. (I'm not sure why he's not for building useless ships and submarines, but that's for another day.) Whether that works is the issue, not whether the money turned out not to have been totally wasted.

She discusses some faults of the stimulus, finishing with
Finally, there’s little question that policy makers — myself included — should have worked harder to earn the public’s support for the act.
Well, I might say, now is a good time to start. The question for our time is whether stimulus was a great tool rediscovered or a grand failure waiting the ash heap of history. If its central architect, and a noted scholar, has to stoop to such illogical arguments to summarize our experience, I'd say earning support is unlikely.