How large is the government spending multiplier? Professor Barro estimate it to be .8 during war times and insignificantly different from zero in peace time. With these estimates one would conclude that the multiplier of 1.5, presently assumed by President Obama's economic team is way out of line and we should not expect substantial benefits from the stimulus package.
A similar point is raised by Professor Fama. He asserts that bailouts and stimulus plans must be financed, and if the financing takes the form of additional government debt, the added debt displaces other uses of the same funds. This being so, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Assuming the logic of Professor Fama's analysis is correct, there is nothing in Fama's argument that says that the government multiplier cannot be substantial. Yes it can be small, but it can also be large too. Also note as Professor Krugman has pointed out Professor Fama is interpreting an accounting identity as a behavioral relationship, a common fallacy.
For more see Cochrane and Fama's response to Krugman.
Friday, January 30, 2009
Wednesday, January 28, 2009
House Passes Stimulus Package
The WSJ reports on the passage of President Obama's stimulus package.
The House passed an $819 billion tax-and-spending bill Wednesday, in a recession-fighting effort that would extend the reach of the federal government across the U.S. economy by reshaping policy on energy, education, health care and social programs.
The House bill is one of the largest single stimulus packages in history, almost equal to the entire cost of annual federal spending under Congress's discretion. A parallel Senate measure, which is expected to come to a vote next week, is now valued at nearly $900 billion.
Either bill, if enacted, would push the federal debt toward levels not seen since the second World War.
For more, click here.
The House passed an $819 billion tax-and-spending bill Wednesday, in a recession-fighting effort that would extend the reach of the federal government across the U.S. economy by reshaping policy on energy, education, health care and social programs.
The House bill is one of the largest single stimulus packages in history, almost equal to the entire cost of annual federal spending under Congress's discretion. A parallel Senate measure, which is expected to come to a vote next week, is now valued at nearly $900 billion.
Either bill, if enacted, would push the federal debt toward levels not seen since the second World War.
For more, click here.
Tuesday, January 27, 2009
Phillips Curve Makes Ugly Comeback
The WSJ is claiming that the Phillips curve is making an ugly come back. I do not think that this is the case. Those in the 1990s who did not shelve the Phillips curve did so, becuase they drew a distintion between a static Phillips curve and a Phillips curve that is shifting; That was the issue not that there was no Phillips curve.
Here is the comeback story from the WSJ.
The recent comeback of the economic theory known as the Phillips Curve is a little like Mickey Rourke’s latest comeback on the Hollywood red carpet: it’s kind of scary to watch it play out.
The central idea of the theory named for economist Alban William Phillips is that there’s an inverse relationship between unemployment and inflation. It was shelved by some in the 1990s when unemployment fell to historically low levels without the expected uptick in inflation.
But the relationship appears to have reinserted itself, something households are being reminded of in painful ways via job and salary cutbacks almost daily.
The national unemployment rate already increased over two percentage points in the final eight months of 2008 to 7.2%, and that’s before the recent flood of corporate layoffs. Meanwhile, inflation has fallen off sharply.
In a one-day bloodbath for the economy, companies from across the economic spectrum, including Caterpillar Inc., Sprint Nextel Corp., Pfizer Inc., Home Depot Inc. and General Motors Corp., all announced layoffs on Monday alone.
And as the Phillips Curve would predict, the effects are being felt not just by the unemployed but the employed, too. Companies from Home Depot to Yahoo Inc. and Eddie Bauer Holdings Inc. have recently launched salary freezes for at least some of their staffs. Even the Obama Administration has instituted pay freezes for top White House positions.
Predictably, households fearful of job or at least income cuts are reporting record-low levels of confidence, according to the latest Conference Board survey released Tuesday. And inflation has come down drastically even when energy prices are excluded, reflecting the reluctance of consumers to spend.
“The Phillips Curve was out of vogue for a while, but now it’s back,” said Sung Won Sohn, a professor at California State University.
The point is more than just academic.
As Laurence Meyer and Brian Sack of Macroeconomic Advisers point out, there are two ways of looking at the inflation outlook now. Those who think monetary aggregates such as bank reserves are a determinant would likely see greater risk that inflation will bubble up again once the economy stabilizes.
Yet those economists that generally base their forecasts on a Phillips Curve framework, including Meyer and Sack, think outright deflation is the greater risk. “Exit from extraordinary policy actions is a very long way off from this perspective,” they said in a research note.
“The current episode looks almost like a laboratory experiment to test the validity of the Phillips curve and, particularly, the relative usefulness of the Phillips curve and the monetary aggregates in forecasting near-term inflation,” said Meyer, a former Fed governor, and Sack, a former Fed economist.
That economists are even reexamining the validity of the Phillips Curve is surprising. After the mid-1990s the theory appeared woefully outdated as the unemployment rate fell below levels long thought to be inflationary. Indeed even rates as low as 4% didn’t appear to be driving price pressures higher.
Explanations abounded: productivity had changed the relationship between joblessness and wages; global competition meant the U.S. unemployment rate was too narrow of a focus; better management of monetary policy since the 1980s had already licked inflation; and, more recently, energy and commodity prices were key drivers of inflation.
But with the unemployment-wage link apparently reestablished, “it’s possible that for the next couple of years we could see the Phillips Curve operate as it’s supposed to,” said Sohn.
Of course, the question remains exactly what rate of unemployment is consistent with stable inflation, otherwise known as the non-accelerating inflation rate of unemployment or Nairu. Long thought to have been around 6% until the late 1990s, it’s surely lower than that now, but whether it’s 4% or 5% could have a big effect on just how quickly inflation comes down, especially now that energy prices have stabilized.
Another question is whether the Phillips Curve flattens when inflation hits zero — in other words, can the unemployment rate keep rising without leading to outright deflation.
Unfortunately for many U.S. households, they’ll see that debate play out in the newspaper every day. –Brian Blackstone
Here is the comeback story from the WSJ.
The recent comeback of the economic theory known as the Phillips Curve is a little like Mickey Rourke’s latest comeback on the Hollywood red carpet: it’s kind of scary to watch it play out.
The central idea of the theory named for economist Alban William Phillips is that there’s an inverse relationship between unemployment and inflation. It was shelved by some in the 1990s when unemployment fell to historically low levels without the expected uptick in inflation.
But the relationship appears to have reinserted itself, something households are being reminded of in painful ways via job and salary cutbacks almost daily.
The national unemployment rate already increased over two percentage points in the final eight months of 2008 to 7.2%, and that’s before the recent flood of corporate layoffs. Meanwhile, inflation has fallen off sharply.
In a one-day bloodbath for the economy, companies from across the economic spectrum, including Caterpillar Inc., Sprint Nextel Corp., Pfizer Inc., Home Depot Inc. and General Motors Corp., all announced layoffs on Monday alone.
And as the Phillips Curve would predict, the effects are being felt not just by the unemployed but the employed, too. Companies from Home Depot to Yahoo Inc. and Eddie Bauer Holdings Inc. have recently launched salary freezes for at least some of their staffs. Even the Obama Administration has instituted pay freezes for top White House positions.
Predictably, households fearful of job or at least income cuts are reporting record-low levels of confidence, according to the latest Conference Board survey released Tuesday. And inflation has come down drastically even when energy prices are excluded, reflecting the reluctance of consumers to spend.
“The Phillips Curve was out of vogue for a while, but now it’s back,” said Sung Won Sohn, a professor at California State University.
The point is more than just academic.
As Laurence Meyer and Brian Sack of Macroeconomic Advisers point out, there are two ways of looking at the inflation outlook now. Those who think monetary aggregates such as bank reserves are a determinant would likely see greater risk that inflation will bubble up again once the economy stabilizes.
Yet those economists that generally base their forecasts on a Phillips Curve framework, including Meyer and Sack, think outright deflation is the greater risk. “Exit from extraordinary policy actions is a very long way off from this perspective,” they said in a research note.
“The current episode looks almost like a laboratory experiment to test the validity of the Phillips curve and, particularly, the relative usefulness of the Phillips curve and the monetary aggregates in forecasting near-term inflation,” said Meyer, a former Fed governor, and Sack, a former Fed economist.
That economists are even reexamining the validity of the Phillips Curve is surprising. After the mid-1990s the theory appeared woefully outdated as the unemployment rate fell below levels long thought to be inflationary. Indeed even rates as low as 4% didn’t appear to be driving price pressures higher.
Explanations abounded: productivity had changed the relationship between joblessness and wages; global competition meant the U.S. unemployment rate was too narrow of a focus; better management of monetary policy since the 1980s had already licked inflation; and, more recently, energy and commodity prices were key drivers of inflation.
But with the unemployment-wage link apparently reestablished, “it’s possible that for the next couple of years we could see the Phillips Curve operate as it’s supposed to,” said Sohn.
Of course, the question remains exactly what rate of unemployment is consistent with stable inflation, otherwise known as the non-accelerating inflation rate of unemployment or Nairu. Long thought to have been around 6% until the late 1990s, it’s surely lower than that now, but whether it’s 4% or 5% could have a big effect on just how quickly inflation comes down, especially now that energy prices have stabilized.
Another question is whether the Phillips Curve flattens when inflation hits zero — in other words, can the unemployment rate keep rising without leading to outright deflation.
Unfortunately for many U.S. households, they’ll see that debate play out in the newspaper every day. –Brian Blackstone
Monday, January 26, 2009
Housing resales rise as prices tumble
Existing-home sales rose 6.5% last month, with many distressed deals. The median price fell 15.3% to $175,400. It is important to note the emphasis on distressed deals. The rise in sales is driven by forecosure sales.
Here are some views on the latest data report.
http://blogs.wsj.com/economics/2009/01/26/economists-react-dont-jump-out-of-your-chair-yet/
My favorite is this one:
The most substantial problem with the resales data is the increasing prevalence of bank-owned properties (ordinarily auctioned) are being sold through traditional realtor channels. This will tend to boost both inventories and sales, leaving the impression of higher activity levels, an increasing upward bias in the series. (The fact that the properties are finding buyers is not one of the many negatives) This is not the case with new construction, which shows a decimated sales pace through November 2008 –Steven Wieting, Citigroup
Here are some views on the latest data report.
http://blogs.wsj.com/economics/2009/01/26/economists-react-dont-jump-out-of-your-chair-yet/
My favorite is this one:
The most substantial problem with the resales data is the increasing prevalence of bank-owned properties (ordinarily auctioned) are being sold through traditional realtor channels. This will tend to boost both inventories and sales, leaving the impression of higher activity levels, an increasing upward bias in the series. (The fact that the properties are finding buyers is not one of the many negatives) This is not the case with new construction, which shows a decimated sales pace through November 2008 –Steven Wieting, Citigroup
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