Friday, July 31, 2009

Mutually Exclusive

Memo to the President:

You can't say both this and this. You have to choose.

That is all.


Ben said...

Um....sure you can. Obama and his peeps are saying that, although unemployement is up, the stimulus is doing some good. They are arguing that things would be worse without the stimulus and they attribute the slowing-down of the economy's decline to the stimulus.

Perhaps you can dispute whether that is true, but I'm not seeing any mutually exclusive propositions here.

-Dave said...

The point of one was not that the stimulus is reducing unemployment - rather, that you can't cite the high unemployment rate as evidence that the stimulus has failed, because it hasn't had time to kick in.

That is a mutually exclusive proposition with saying that the GDP for the same time period is significantly improved because of the efficacy of the stimulus.

It can't be both "not yet kicking in" and "having a strong positive effect."

Personally, I disagree with the Republican mantra "the stimulus has failed" because it hasn't yet had time to kick in... but for the same reason, I don't attribute the moderation of the decline in GDP to the stimulus, either (except, perhaps, the TARP and associated bailout funds taht kept the financial market from imploding utterly).

I may not, however, have picked the best examples of the arguments I was hearing in those two weeks in late July. The point remains - if you want to say "only moderate impact so far" on the one hand, you have to say it in both instances. Otherwise, you're just attributing anything good to your own policy, and anything not good to not your policy's fault, and that's dishonest (but, sadly, typical).

-Dave said...

To clarify, look at this paragraph from the Summers article:

“Both administration and independent forecasts predicted that only a very small part of the total job creation expected from the Recovery Act would take place within six months,” he continued. “Indeed, a Council of Economic Advisers’ study predicted that only 10 percent of the total job impact of the Recovery Act would take place during calendar year 2009. Given lags in spending and hiring, the peak impact of the stimulus on jobs was expected not to be achieved until the end of 2010.”

This is what's mutually exclusive with the following:

President Obama said Friday afternoon that new figures showing the Gross Domestic Product contracted at a much lower rate in the second quarter than it did at the start of the year illustrate that the "in the last few months, the economy has done measurably better than we had thought."

The president attributed the improved situation to his nearly $800 billion economic stimulus package, saying progress is "directly attributable to the Recovery Act."

Ben said...

Still not mutually exclusive. The Summers article is talking about job creation and the other article is talking about GDP. Employment tends to lag behind GDP growth. Every article I've read on the economy in the last few weeks predicts the GDP to slowly rise later this year...and yet doesn't think unemployment will fall until next year.

So it's quite possible to say the stimulus hasn't "kicked in yet" with respect to job creation, as Summers said, and yet also say it has "kicked in" with respect to the GDP. Now is that true? Even a recent (read: today) NY Times article that is quite supportive of Obama's reading of the effect of the stimulus admits there's a lot of other factors (i.e. the Fed's buying mortgage-backed securities) that are likely contributing to the slowing decline.

-Dave said...

I would say it is mutually exclusive, because the primary impact of the stimulus was intended to be job creation. This is clear from the way the stimulus package was sold ("we will create or save X jobs with this), and through the intended economic effect (creating jobs through government spending, to increase consumption to offset the decline in demand due to the massive job loss the economy has seen).

This was the intended effect, and it's the intended mechanism.

To look back after the fact and say "well, the employment effects will be mostly in 2010, but it's the stimulus that caused a massive GDP improvement in April through June."

It's almost nonsensical to me to so divorce those two factors. Employment lags recoveries - but not because recoveries have nothing to do with employment, but rather because the first bits of recovery in employment are not job creation, but lengthening the workweeks of people who are still employed.

The Summers article does more than talk about job creation - it specifically talks about the timing of money being spent.

The real problem for me is this: imagine that the unemployment rate had come in along the lines of what was being projected. What would we be hearing? That the stimulus package is responsible. But instead, the numbers came in much higher. So instead, we hear "well, we can't really blame the stimulus - it's kicking in much later."

That is a dishonest way to discuss the effects of policy. Obama was not selling the GDP improvement as "in some small part because of the small fraction of stimulus money that has been spent," but rather he's attributing a change of several percentage points in the GDP number - some several hundred billion dollars of economic activity to the tens of billions of dollars that have been spent with the stimulus. Such multipliers are beyond anything any responsible economist would allow for.

The more accurate story would be that the economy is recovering much as it would have without the stimulus (in large part, though I'll accept that the stimulus that has gone out has had some effect).

In 2000, I half wanted to vote for a Democrat because the economy was clearly heading into recession, and I knew whoever was President - and his party, by extension - would be blamed for it. Similarly, his year I had a stronger hope that the Democrats would somehow lose, because the economy was going to recover in 2009 (or at worst, 2010), probably no matter who was in office, barring some disastrous handling of the economy.

One of my pet peeves is politicians taking too much credit for the happenings in the economy. This, for me, is a particularly fine example of that, because of the timing of the two perspectives.

Yes, they are discussing job creation and economic activity. Yes, there are fundamental differences between those points. But the effect the stimulus is intended to have links the two together, so it's silly to divorce them, particularly when you are talking about the effects in the exact same time period. Employment can fall while GDP rises - I myself predict that exact same effect in my professional role with my state government. But you can't say that the stimulus has had a huge positive effect in one, while being not implemented enough yet to have a huge effect on the other. Either it's having an effect on both (though outweighed on the one hand by the weight of slack still in the economy), or it's having little effect yet because most of the money has not yet been spent. The latter is, in my opinion, the most reasonable explanation.