Obama will get an economic recovery when demand curves slope upwards
Mark Perry’s excellent Carpe Diem blog rehearses the miserable track record of President Obama’s new designee for chairman of the Council of Economic Advisors, Prof. Alan Krueger of Princeton. Back in 1994, after New Jersey raised its minimum wage to $5.05 an hour from $4.25, Krueger (with economist David Card) published a paper claiming that the higher cost of labor led to more rather than less hiring at New Jersey fast food restaurants. Demand curves, as Perry observes, slope downward on this planet (if something costs more, people buy less of it, including labor). But on Planet Krueger, demand curves slope upward, by magic.
Card and Krueger proudly announced the repeal of the most fundamental law of economics: “Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants increased employment by 13 percent.” Except they didn’t. Their data, gathered by telephone survey, turned out to be “so bad that no credible conclusions can be drawn,” another study concluded. Other economists used actual payroll data instead of a phone survey and found just the opposite: the state-mandated pay hike reduced employment.
“Let’s hope that labor economist Alan Krueger, as he assumes his new position as Chief Economist to the President, remembers that demand curves really do slope downward,” Perry concludes.
Once again, it appears that Obama has hired the best incompetence that money can buy. Larry Summers may have one of the highest IQ’s on record, but he believes that the mathematical models which which he plays so cannily have something to do with the real world in which investors lose sleep over risk, entrepreneurs lose sleep over making the payroll, and large-company executives lose sleep over making their numbers.
Large corporations who already have health care plans, and have serried ranks of lawyers to deal with the regulators, are doing very well, in fact. S&P 500 corporations increased employment by 10% over the past year while overall employment was flat. Start-ups who have to deal with Obamacare and the rest of the Washington regulatory burden can’t get over the threshold. Remove the obstacles and let Americans do what they do best and the economy will recover.
Started a thread on this for the inveterate, incorrigible, dyed-in-the-wool, Spengler Geezers:
http://spengler.atimes.net/viewtopic.php?p=436594#436594
Mr. Goldman:
Because you don’t publish an email address for people to write directly to you, I am using this means to draw your attention to the Jonathan Cohn’s article in The New Republic, “One More Time: The Stimulus Worked,” which conclusion he bases on the August 2011 CBO Report, “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2011 Through June 2011.”
I and, I’m sure, many other readers would enjoy reading your comments, either in this blog or in your Asia Times column, on both Mr. Cohn’s article, and on the CBO report.
Thanks!
Gene Schwimmer
Mr. Schwimmer,
Probably true that handing out money for construction jobs or to plug the hole in state and local budgets temporarily created some employment, but the models on which the larger estimates are based seem silly, to my point of view; from an employment standpoint this is the weakest recovery in postwar history, if it can be called a recovery at all. To take a Keynesian model based on a normal business cycle and back out a figure of 2.9 million illustrates why I never hired macroeconomists on Wall Street (and why I dropped out of the doctoral program at LSE). It’s moonbeams and cobwebs. No aggregate model can deal with the main dynamic in the US economy, namely creative destruction: the majority of all new jobs in all the recoveries of the past forty years were generated by new businesses. Unlike the 1980s, large companies (the S&P 500) actually increased employment, by about 10%, in the year through June. Entrepreneurs were absent and employment remained flat. Suppose the stimulus had cut corporate and capital gains tax rates, along with some regulatory relief: I consider it highly probable that startups would have performed as well as the S&P 500 companies and employment would have increased substantially. The CBO argues in effect that by borrowing and spending something under $700 billion, the government created jobs — assuming that the private sector would have done nothing in the absence of that government action! How can anyone take this sort of thing seriously?
Please explain how borrowing money to pay for temporary jobs (to favored political constituencies), with a substantial inherant overhead from government plus a carrying cost for the debt, helps the economy.
How is it different from an individual paying for something on a credit card that won’t be paid off for years? (other then the government overhead, of course) Don’t include the political value of paying people to vote for liberals.
It’s magic! And unlike the Real and True Magics undergirding Reality which I don’t believe in, it needs no, nor can any explanation be provided. Except you’re a hateful hater, and should not ever again speak unless a leftist gives you permission to do so.
And Demand Curves slope upward because I say they do, you evil raaaaacist! And ‘Reason’ is a code word, or dog whistle for White Male Patriarchy and Christianist Dominionists and Individualism.
/heh
The CBO was very clear that their report applied macroeconomic models to the stimulus spending, it did NOT look at, or even attempt to look at, actual empirical data. Basically, the models that predicted it would work, still predict it should have worked. Facts notwithstanding.
It’s just wheel-spinning, and Elmendorf said as much.
This is all in the public record but such as Cohn and Bernstein and the vast bulk of their audience don’t care. This whole issue has become a classic case of people resolving cognitive dissonance by ignoring facts (the Stimulus didn’t work) in favor of emotion (I want it to have worked, it SHOULD have worked).
I forgot to include a link to the article (which contains an internal link to the CBO report. Here it is:
http://www.tnr.com/blog/jonathan-cohn/94367/one-more-time-the-stimulus-worked
I am not an economist and don’t pretend to be. From the TNR link:
“… (CBO) confirmed its earlier finding that the Recovery Act succeed in its primary goal: Saving or creating jobs in order to offset the effects of the recession.”
The stimulus was not sold as “saving or creating” jobs. It was projected to create millions of new jobs (shovel ready?). It would keep unemployment below 8%. this is the record proponents need to defend. that it probably saved some government union jobs, temporarily, and allowed for states and municipalities to paper over gaping deficits, temporarily, is undeniable AFAIC. This does not make the case for ARRA being successful, IMO.
Dumping hundreds of billions in an ad-hoc manner is bound to have some positive, temporary impacts. It did. saw a talking head liken it to pumping cocaine into a corpse. Not a bad analogy.
This is the same retroactive justification being used with TARP. It worked, to a certain extent. the banking system is still around, barely. but the program wasn’t pitched as a means of propping up the TBTF’s. it was sold as a way of getting rid of toxic paper, which was never done.
There are 7 million fewer Americans employed today than before stimulus. this is the record on which the majority of Americans will decide the success or failure of the program. By that objective measure is it any wonder that most sensible people conclude the stimulus was a boondoggle?
CBO-GIGO. they take a set of assumptions and are not allowed to deviate in any manner. Taking Mr Schwimmer’s high end conclusion that the stimulus ($865 billion) saved or created 3 million jobs, my back of the envelope calculation comes to almost $300,000 per job “created or saved”. If this is success, I shudder to think what would constitute failure.
If the stimulus worked so well, why is the unemployment rate trending upwards? Why are numbers of unemployed constantly being revised HIGHER the month after they come out? What are GDP estimates likewise being revised LOWER? The stimulus was like giving a sick person a shot of meth; the heartrate increases for a while but once it wears off, it’s back to zombie land.
Tigerhawk, writing last year on the regulatory burden which stifles mid-sized businesses, as well as start-ups:
“My morning wish: That when Barack Obama decides he needs the advice of the business “community” (an abuse of the word “community” if there ever was one), he consult somebody other than “top CEOs.” Most if not all of these companies have reduced their U.S. headcount in the last two years. Worse, many of these CEOs are too political and too removed from details to explain to the president, with a painful and granular itemization, how his regulatory policies are stifling the animal spirits of American enterprise. Which, of course, most big companies do not have in the first place.” Real-world examples in the comments. http://tigerhawk.blogspot.com/2010/12/my-whereabouts-and-note-on-president-os.html
And concerning U.S. medical technology on the occasion of Obama’s WSJ op-ed piece calling for a more sensible approach to regulation: “When your regulation is more anti-innovation than the French, you know the pendulum has swung too far. Of course, Barack Obama will never confess that the new, er, “diligence” of the FDA toward medical devices is a policy of his appointees and his administration.” http://tigerhawk.blogspot.com/2011/01/smart-regulation-point-of-interest.html
It is sort of interesting to me that Obama
Observation: something is wrong with present central planning.
1. Top 500 are doing well but GE and Exxon have moved a great deal overseas and capital has joined them. Small business is indeed saddled here with a number of problems. Stimulus investment (see the latest solar energy debacle) is poorly targeted. How this is called management is beyond me.
2. Some of America’s top military and governmental R & D including high tech production lines have closed shop even with demand high. So other nations with advanced technology are breaking into US market share both commercial and military. Central panning failed to anticipate this: http://www.time.com/time/health/article/0,8599,2091318,00.html
3. A serious cap to our economy is energy. The Left opposes natural gas despite both domestic and foreign sources. The Left opposes an effort for Thorium reactors. The Left thinks clean coal, carbon sequestering, domestic oil and gas extraction as well as any effort to make usable the enormous reserves of Canadian tar oil is MORALLY wrong.
So in short the failure to correct systemic problems, to anticipate trends and threats with sound policy and control the narrative is the source of both anger and stagnation. They say economics is 70% psychological. When you forget that and mess with the other 30%, you’re asking for trouble. If Obama seriously fails down (and Pickens save him once with his investment in BofA), Hillary might rethink her plans…..
On a positive note, researchers ay University of Kansas may have discovered a cheaper way to extract hydrogen from water….
We know what we have to do…
Dude it’s NOT TAR! Stop with the progressive terminology, you aren’t helping when you repeat the watermelon dirty oil mantra. That was the name given 300 years ago when they were first discovered, but we now understand that it’s oil, not tar. Can you just say “oil sands”?
“Larry Summers may have one of the highest IQ’s on record, but he believes that the mathematical models which which he plays so cannily have something to do with the real world in which investors lose sleep over risk, entrepreneurs lose sleep over making the payroll, and large-company executives lose sleep over making their numbers.”
Economics American Style, always depended on the sum being greater than its parts, millions of micro decisions creating a vibrant result. Macro economics, AGW and other aggregation studies are unable to define all the terms, much less describe, mathematically, all the interactions.
I am always amused how the pure academic misuses math. Math is a descriptive language, with rigorous rules and predictive ability yes, but a description of human observation non-the-less and not a natural phenom in its own right. Yet many users think it can cause the events it describes, that is if a logical manipulation can force a curve to change, voila it is done.
Engineers and businessmen are more practical. Numbers are a tool. Reach in the box, pull out the wrench, turn the nut, put it back. Even if the wrench can be used as a hammer, we mostly just turn nuts with it.
Mr. Hoskins, absolutely right. Sadly, most of the comments here reflect the same stupidity. The economy is not a machine, it is the sum total of individual decisions — that is, it is about the behavior of people. As an economics major we used mathematics and graphs as descriptive tools but understood always that the peculiarities of human nature matter most in economics. Currently Obama has messed with the health and energy sectors, and shown a disposition to regulate anything any time elsewhere. This degree of uncertainty kills initiative, and has only served to preserve the downward trend (due to the mortgage mess) of the economy. We would be best served by stopping all initiatives dead in their tracks, allowing employers to believe they can predictably make a profit. ObamaCare, “taxing the rich,” energy costs (anything producing carbon gets taxed and/or regulated — and that’s pretty much everything) and activist NLRB, civil rights, and a zillion nitpicky things (menu calorie counts, etc.) all combine into a huge sword of Damocles hanging over the head of every single business owner, large and small. People have awareness, they aren’t going to continue on like machines that are unaware of their surroundings. And “the rich” by definition can afford to not work, or to gain competitive advantage not by hiring but by accounting gimmicks and legal gamesmanship. So overall we have a situation where no one in their right mind will do much until there is clarity. Obama, as a lifetime socialist, has no notion of the damage he has done by waging war on the economy on multiple fronts. He is by background and political necessity allergic to laissez-faire economics. So the bottom line is we’re dead in the water until he’s gone. Even then, we’ll need a hardline supply sider in office, not a Romney type (the New York Times’ favorite Republican). The level of economic ignorance is a testimony to the stupidity of supposed “intellectuals.”
Mathematics introduced rigor to economics. Also mortis.
Wish I’d said that.
“Obama, as a lifetime socialist, has no notion of the damage he has done by waging war on the economy on multiple fronts.”
Yes he does have a notion of the damage he has done. He wanted it to happen. He made it happen. It was supposed to be like that. Community Organizers cause trouble, and the more trouble, the more trouble they can cause as long as they never actually fix anything. In fact, for a community organizer’the worse the better’.
Which is why Obama’s economic adviser is not supposed to give advice. His economic adviser is supposed to give Obama political cover, so the true believers can pretend that there is a pony that magically enters the picture after they spread around enough horse manure.
What you describe for “Economics American Style” is the same problem that the climate modelers have, they do not know all of the inputs and interactions but have “settled” conclusions (and moral and policy prescriptions) regardless. Note I do not call them scientists; I am a scientist and what they are doing is not science.
One quibble with your analysis – though the rest is brilliant as usual.
Summers wasn’t that bad of a guy – but he the audacity to think that he should be treated as a peer by Obama. Obama has no peer, he is the One, the great, the O. Obama wanted deference from this lowly economist, and never took any advice from the guy – unless it happened to match what he wanted to do anyway.
Summers might have some theoretical problems, but on the whole he views the world with at least a small amount of honesty. He might even change his mind about things once in a while. That didn’t work with the One, so out he went. I’m sure the feeling was mutual.
Mr. Goldman:
I think you (and others) may have misunderstood my intent. I agree with you 100% and the points you make are excellent – too good to be consigned to a reply to a blog comment. I was entreating you to write an article that would be published in a venue where as many people would see it as saw Jonathan Cohn’s article. If TNR would publish an article or even a letter, that would be good. Having it reprinted on the Real Clear Politics site (where I saw the article), too, would be even better. Or on the National Review Web site. Anywhere.
And now, it’s happened for a second time. Jared Bernstein has an article on the CNN site (http://www.cnn.com/2011/OPINION/08/31/bernstein.obama.recovery/index.html?hpt=op_t1) (and reprinted on the Real Clear Politics site” Look at the evidence: The stimulus worked.” So now we have two prominently published articles claiming that “the stimulus worked,” and zero similarly prominent rebuttals. I was hoping that you might take up the task.
My (our?) mistake. thought you were making the case. Sorry for the misunderstanding.
Rebuttal? (Uh. I hate to say this) Look at the real economy numbers.
And just wait until interest rates go up.
Fashion is one industry where more expensive clothes have more demand. I’ve never understood why thrift stores clothes are so empty; there’s nothing wrong with the clothes at all. This is where economics models slam into the brick wall of human nature.
Presumably, more expensive labor is treated with more respect, even if the floor is artificial. Krugman can be foolish, but he might be right this time.
Where is the edit button? ………
Fashion is one industry where more expensive clothes have more demand.
False. The more expensive clothes have a much lower quantity demanded.
Economists have a working theory on fashion and other luxury goods called “signalling”. Basically, you’re buying the brand and its status, not the item, and a high price is part of the exclusivity of the brand.
Some level of signalling can occur in labor markets, ie a company that wants to attract top-flight talent may want it known that it pays the best in its field. But this sort of thing rarely occurs at the bottom of the labor market.
the latest Bloomberg Businessweek has a lead editrial about how wonderful Krueger is, and a 1-page interview. The editorial says what a GREAT choice he is, how Geithner pushed for him, and lists his policy experience chops as having worked on ARRA (the big, Obama Stimuus bill), Cash for Clunkers, and Buiold America Bonds.
My God, if someone came to me with a resume claiming those as his greatest achievements, and a letter of recommendation from Geithner of all people, I wouldn’t waste my and his time with a full interview for a job he’s demonstrably unqualified to fill.
More seriously, Mr. Goldman’s observation about the slope of demand curves made me think—maybe we have an Administration that really isn’t clear on even so basic a concept as that under most circumstances demand curves slope down and supply curves slope up. Obama doesn’t think about such things at all, and his advisers have convinced themselves that with the right models you can get econoimic results that defy normal logic.
In such a mental universe, economics means nothing—demand may slope up, may slope down, may be wavy lines curving back and forth on themselves, may be circles, may be ANYTHING. Ditto, supply curves. So, as it’s all totally random and unpredictable, none of it matters, none of it can guide policy because the results are random, anyway; let’s just do what seems politically expedient for the next 24-hr news cycle…
This may be right, may be wrong, but it sure does have some explanatory power after 32 months of Obama in office.
Startups in this environment will be minimal. There is Sarbanes-Oxley, Dodd-Frank, and this: http://disciplinedinvesting.blogspot.com/2011/08/government-regulations-fueling-business.html Add to that rising energy prices spurred on by a government that wants a weak dollar and minimal oil drilling and an EPA intent on gutting the coal industry. We are hosed.
James @ 8 is exactly right – the teleprompter reader doesn’t listen to anyone, so it doesn’t matter who is giving the advise. Higher Game – no, it is almost always safe to assume that Krugman is wrong. Do you think Levi’s (TM) sells more Jeans for $35 than D&G (TM) for $500 a pair?
If Prof. Kreuger were worth his salt as a scientist, he would have been skeptical of his conclusions. When the results of your experiment contradict 100 years of economic experience, you owe it to yourself, let alone your peers, to verify that you’ve discovered something new and different. Given 20 or 30 minutes and a few cups of coffee, I could think of 10 reasons why other factors contributed to the increase in employment, none of which lead to the conclusion that higher minimum wages lead to more employment.
Higher Game
A great many more people buy clothes at Target, Marshalls, Walmart, K Mart because they’re looking for low prices than shop at Giogio Armani for high prices. And even the most expensive clothes are now often made in China at extremely low cost.
What this has to do with Krugman, I don’t know.
The CBO’s analysis was essentially a re-running of their old models with the same model assumptions. Using their methodology would never result in a finding that the stimulus didn’t “work”; it was incapable of such a finding.
http://www.nationalreview.com/corner/196968/cbo-admits-1-5-million-stimulus-jobs-estimate-ignored-deepening-recession-misspent-fun
“Now, CBO director Doug Elmendorf has finally conceded that they never actual examined this stimulus bills’ affect on the economy. Responding to a questioner following a recent speech, he admitted that the CBO’s jobs count was “essentially repeating the same exercise” as their initial projections. When asked if this means their jobs projections would have ignored any failures of stimulus spending to perform as CBO predicted, Mr. Elmendorf responded “that’s right.”
…
More specifically, CBO first programmed their economic model to automatically assume that stimulus spending creates/saves millions of jobs. And then (surprise!), their model concluded that the stimulus created/saved millions of jobs. This is a classic case of the “begging the question” fallacy, also known as assuming what one is trying to prove.”
It’s always important, when examining your data, to know what answer you want to find.
If you are ever in a position where you are trying to defend Supply-side Economics, Voodoo Economics as Daddy Bush so durably named it, the best thing is to compare it to Demand-side Economics. When stated in highly sarcastic irony the precepts of Supply-side certainly sound preposterous, everything does. But the tenets of Demand-side Economics; basically Keynesian, sound preposterous in any tone. Demand-side, as you say, says a lack of money is what ails us, and as individuals that is pretty inarguable even if untrue. Therefore dumping money from helicopters is what the doctor orders for all maladies. Supply-side says employment and prosperity come of our collective enterprise when the government refrains from picking every pocket in range. This shouldn’t be a tough sell.
Leftists accuse our nation of being a place where the middle class is being squeezed out of existence. They claim that we are becoming a 3rd world nation with a small group of very rich people on one side, and a vast morass of poverty on the other.
They make this accusation against conservatives, libertarians, and others who oppose government interference in markets. They proclaim that only state intrusion can counteract this trend and bring prosperity to all.
Then they turn around and implement policies that create the very outcomes they claim to abhor.
Only a damned fool would listen to anything they have to say.
“…Once again, it appears that Obama has hired the best incompetence that money can buy…” Not only that, Obama has absolutely NO EXPERIENCE in real life business, economics or international affairs that might give him some insight as to how bad his advisors are.
Team Obama writes down a few simple formulas and bets $1 trillion and the health of our society that these formulas will predict the future. We should all be afraid, because these formulas are so simple that 2/3rds of the populace can understand and laugh at them.
The Obama Team claims that the stimulus “saved or created” 3.3 million jobs. How do they know? I can reveal their method, as presented by Christina Romer, recently resigned head of the President’s Council of Economic Advisors.
Consider this analogy to the idiotic logic of our government economists.
Say that records from my backyard grill parties show that on average, 20 guests eat 25 hamburgers and 5 hot dogs. I would like to be much more popular, so I double the food to 50 hamburgers and 10 hot dogs for my next party. I expect 40 people to show up without calling more friends.
After a few more parties, I find that 23 people (three more) do show up. Maybe they came because they heard about the huge amount of food. I resolve to supply even more food (stimulus) for my next parties.
Government economists are treating the entire population of the US in the same way that my example treats grill parties. You may say that I am unfairly criticizing government economists. They couldn’t be that simplistic and stupid. But, that is exactly the method they used to recommend “stimulus” and estimate new jobs.
–> Romer is Theoretically Correct
The President’s Council Of Economic Advisers in May 2009 [edited]:
=== ===
To estimate the likely impact of the fiscal stimulus on real GDP, we used multipliers that we feel represent a consensus of a broad range of economists and professional forecasters.
The final step is to take the effect on GDP and translate it into job creation. Not all of the increased output reflects increased employment: some comes from increases in hours of work among employed workers and some comes from higher productivity.
We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent. This has been the rough correspondence over history and matches the Federal Reserve Bank model reasonably well.
=== ===
1: Measure the number of jobs in the economy at different levels of GDP. Notice the ratio 1MM jobs per 1% of GDP.
2: Spend money. Each dollar spent adds to GDP by definition.
3: Welcome the newly employed people to the economy.
This is idiocy. This is mere formula crunching. First, express the complexity of the US economy as a simple ratio. Then, play with the ratio by manipulating an accounting measure (the definition of GDP).
Of course, they do get to distribute a huge amount of money to their friends along the way. So, it isn’t all that bad for them.
Andrew_M_Garland:
“To estimate the likely impact of the fiscal stimulus on real GDP, we used multipliers that we feel represent a consensus of a broad range of economists and professional forecasters.”
Note the word used: CONSENSUS That is the same one used by the IPCC in their reports on AGW. It is not science to form a consensus, it is just counting noses… and has nothing to do with the facts at hand. Pure GIGO.
tom
There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.
Since the Democrat’s spending binge began with their first budget in 2008, the Federal Government Monopoly has sucked $4.5+ Trillion from the fuel tank of available job creating investment capital, increasing debt by 35% of GDP. Hoover only sucked 25% of GDP during his presidency, and look what he created, Great Depression 1.0.
Welcome to Great Depression 2.0, we got here the same way as last time (Government borrowing that drained the fuel tank of job creating investment capital), and we will get out of it the same way as last time, when the Government Monopoly starts refilling the fuel tank by paying off the debt as it did after WWII.
Demand = Income + change in private Debt
(The Government Monopoly spending is always a cost to the economy either as taxes, higher interest rates, or compliance with regulations, and is subtracted from income and debt)
This means the economy can’t grow when Debt is declining. M3 money supply is still $500 Billion below its’ 09 peak, despite Fed printing of $2.2+ Trillion.
So until the burden of the Government Monopoly spending is massively lessened this vehicle’s engine lacks the fuel to move. (Automotive references are Manly, very Jacksonian, I’m so proud)
During the first Depression, the government forced farmers to kill livestock and let them rot, to poor milk down the drain to increase food prices via artificial scarcity. During the Obama Depression, the government provided funds to destroy vehicles (cash for clunkers) in an attempt to raise prices for cars via artificial scarcity.
Haven’t learned much, have we.
To DonM,
Agreed.
A progressive doctor treats a man with the flu.
“First, we will tie ice bags around his chest to lower his temperature. Don’t listen to his complaints about being cold; I’m the doctor.
“Next, make him get up and walk around. No more bed for him. Hold him up if you have to, or lean him against the wall. He may complain about having an increased headache, but that is a symptom we cannot evaluate.
“After these few actions we will have a patient with a normal temperature who is out of bed and walking around, with no other verifiable symptoms. He will be cured.”
Mr. Goldman,
Where did you get the S&P 500 hiring figures? 10% sounds pretty high. Could you provide a link to the source.
Thank you,
Gary
There’s a report on the S&P index page at their website.
Thanks, but I don’t see anything on the website that has to do with corporate employment
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
Last time I do your Googling for you:
http://www.standardandpoors.com/products-services/articles/en/us/?assetID=1245315661537
Thank You.