links for 2009-09-18
Hoisted From Comments: The Donald Luskin Paradox

*Sigh*: The Effects of the Obama Fiscal Stimulus Once Again

Gerard writes, in comments:

"The Childish Babbling of a Say...": I think it is totally appropriate to pick on the ridiculous and seemingly childish claims made by John Cochrane. But I am surprised at the lack of comment, so far, on the nonsense that John Taylor et al presented on the op-ed page of the WSJ today. The main problem with the piece is well highlighted by economists at Goldman, so I will just quote their most relevant passage.

Our second problem with the Cogan-Taylor-Wieland analysis is the absence of a serious attempt to construct a counterfactual baseline – the path the economy or some part of it would have followed in the absence of fiscal stimulus. Analytically, this is a much more serious issue than the lack of sufficient data availability, which will take care of itself. Nobody can know for sure what the baseline is, but it is incumbent on economists claiming either an effect from stimulus or the absence of one to provide some defense of the implied alternative path...

The Goldman Sachs analysis nails it. The betting among the forecasting community is that in the absence of the stimulus consumption would not have held steady in the second quarter but would have fallen significantly, and state and local government spending would not have held steady but would have fallen significantly. The absence of a counterfactual no-stimulus baseline makes the Cogan-Taylor-Wieland argument at best incoherent.

It is also simply--in context--bizarre. You plot Cogan-Taylor-Wieland's estimates of the effects of the stimulus against those of other forecasters[1]:


And the Cogan-Taylor-Wieland estimate looks very strange indeed. As forecaster--and former deputy economic adviser to John McCain--Mark Zandi says:

I don't think it's any accident that the economy has gone out of recession and into recovery at the same time stimulus is providing its maximum economic impact...

Other Republican-leaning economists also disagree with Taylor et al.:

Douglas Holtz-Eakin former chief economic adviser to John McCain:

David Weigel, August 7, 2009: Douglas Holtz-Eakin: ‘No One Would Argue That the Stimulus Has Done Nothing’: Republicans are pushing back hard against today’s unemployment report, which showed a lowerr-than-expected 247,000 new jobless and the overall unemployment rate falling 0.1 points to 9.4 percent.... Holtz-Eakin challenged Democratic rhetoric about the effect their policies have had in mitigating economic problems, though he allowed that “no one would argue that the stimulus has done nothing”...

Phil Swagel, former Assistant Secretary of the Treasury under George W. Bush:

It's starting to play a role, helping us to have slightly positive rather than slightly negative GDP growth. It's a gigantic amount of fiscal stimulus, and anyone who tells you it has had no impact, you should be skeptical of...

Let me add three points:

First, right-wing pieces that serve Republican political interests that are published on the Wall Street Journal op-ed page should always be regarded with grave suspicion. Their appearance in that venue guarantees that they must be relatively weak arguments. Such right-wing pieces have much less impact ghettoized in the WSJ editorial section than they would have elsewhere. So people who can get them published elsewhere do so. The WSJ op-ed page will publish literally anything--there is no quality filter at all.

Second, virtually every builder of structural macro models besides Taylor and company (see, for example, the survey Douglas Laxton finds that the test of whether expansionary fiscal policy is successful lies in what happens to interest rates: if interest rates rise far and fast in response to an expansionary fiscal policy it is probably ineffective; otherwise it is effective. Interest rates have not risen far and fast in response to Obama policy.

Third, when I asked Taylor why his results were in such disagreement with those of others--Macroeconomic Associates, Mark Zandi, Phil Swagel, Douglas Holtz-Eakin, Doug Elmendorf, IHS, Goldman Sachs, Morgan Chase--he replied that they were simply repeating forecasts that they had made last winter and had not taken a look at the numbers.