Posner, Redux

The confusing spectacle of Judge Posner blogging about macro continues. His latest missive appears particularly misguided.

To recap, Posner attacked CEA Chair Christina Romer for being too optimistic about the effects that fiscal stimulus had on second-quarter growth. According to Romer, the better performance of the economy in Q2 relative to Q1 was largely attributable to the economic stimulus. But Posner argues that $100 billion in stimulus spending in that quarter is simply too small relative to the size of the economy to make much of a difference. Throw in accusations of unethical or irresponsible behavior, and you have yourself an academic brouhaha.

But the error was Posner’s. As it turned out, he was comparing apples and oranges. Actually, he was comparing a quarter of an apple with a whole apple: by contrasting the amount of stimulus spending in one quarter with an annual measure of gross domestic product, he understated the relative size of the stimulus by a factor of four. He then multiplied his error by comparing it with the change in an annualized growth rate, which overstates the change in quarterly GDP growth by a factor of four. Yes, he was right that his numbers suggested the stimulus was too small to make this much of a difference. But that’s because his numbers understated the relative size of the stimulus by a factor of four and overstated the claimed consequences by a factor of four. And so Posner was wrong by a factor of sixteen. (See if you can spot his correction or apology in his follow-up.)

But now Posner is back, talking about “Christina Romer’s More Than $300 Billion Mistake.” That $300 billion? Beyond stating that number in a headline, he never returns to it, so we don’t know if it’s a typo or a calculation. But reading the full piece, it becomes clear that his real target is that we’ve all been wrong in taking Romer at her word that in Q2 around $100 billion of the stimulus money went out the door. Posner now thinks that it was “too high.” To cut through some confusion, note that this reflects that $60 billion is direct government spending and $40 billion comes in tax reductions. But Posner says:

The figure of $60 billion of [sic] $61 billion is too high. According to recovery.gov, the $61 billion figure is as of last week — seven weeks after the end of the second quarter … the number for the second quarter is undoubtedly significantly lower.

You can see the data from recovery.gov, here.

The chart plainly shows that seven weeks after the end of Q2, $84.6 billion had been paid out, not $61 billion. But Romer’s claims are about the quarter that ended on June 30, and while I don’t have data for precisely that day (although I’m sure Romer does), you can extrapolate the green line backwards. By July 17, $67.4 billion had been spent, and it looks like about $3 to $4 billion per week is being spent. Extrapolating backwards two to three weeks to June 30, the total was probably right around, ummm … $60 billion.

And the other $40 billion? As Menzie Chinn rightly notes, Posner doesn’t think that taxpayers have received it, but he doesn’t say why.

I’m glad that there are folks who are going to monitor the claims of government economists closely, but unfortunately Posner has generated more heat than light. John Maynard Keynes reportedly said, “When the facts change, I change my mind.” My advice to Posner: when your understanding of the facts change, don’t keep attacking the facts, change your mind.


david sugerman

I rarely care for his strong legal opinions. While they're generally well-written, they're often off the mark due to questionable assumptions or perceptions. So while you make a compelling case that he should stick to law, I would prefer he stick to economics, esp. if Freakonomics monitors.

J.

Why should this feud with Posner be on Freakonomics?

Joe Smith

Government stimulus is not all flowing through one channel.

How much real stimulus has been provided by all of the money that the Fed has injected into the financial system? The economy is juiced right up to the eye-balls.

Mark A. Sadowski

On July 8th in congressional testimony Robert L. Nabors Deputy Director of the OMB stated:

"As of June 30, almost $201 billion, or approximately 26 percent, of all Recovery Act funding had been obligated or distributed. This includes $157.7 billion of obligations, representing all major agencies�of which over a third has been outlaid�and $43.2 billion of tax relief."

http://www.whitehouse.gov/omb/assets/testimony/deputy_070809_arra.pdf

On August 7th the Democratic Policy Committee stated:

"The Department of Treasury's Office of Tax Analysis estimates that, through the end of June, approximately $43.2 billion in tax relief has already been made available through Recovery Act tax provisions for Making Work Pay, other individual credits, energy incentives, tax incentives for businesses, and COBRA. [The White House, 7/15/09]"

http://dpc.senate.gov/docs/fs-111-1-109.pdf

Let's look at each of these provisions separately. Evidently, based on Treasury/IRS/Congressional websites, all pay out immediately through a refund or through reduced withholding.
Here are my best guesses on how much was obligated/distributed through the end of the second quarter based on congressional testimony, BEA data and JCT analysis.
1) Make Work Pay
Nabors said that $15 billion in Make Work Pay went out by the end of June. However according to the BEA $0.93 billion went out in March and $4.15 billion went out in each of the three following months for a total of $13.4 billion.
2)Other Individual Incentives
a) Expanded Tax Break for 2009 First-time Buyers
$1.4 billion
b) Sales Tax Deduction for Vehicle Purchases $340 million
c) Exclude up to $2,400 of unemployment
insurance benefits from gross income.
$470 million
3)Energy Incentives
$160 million
4)Tax Incentives for Business
a)Bonus Depreciation
$320 million
b)Carryback of Net operating Losses
$16.25 billion
c)Deferral of Income from Debt Writedowns
$4 billion
5)Cobra
$4.8 billion

The JCT analysis is here:

http://www.jct.gov/publications.html?func=startdown&id=1231

So the total equals $42.8 billion (using Nabor's Make Work Pay figure)which is pretty close to the official $43.2 billion figure.

I wish the administration would be as transparent with the tax expenditure figures as they have been with the direct spending figures. This is only aiding critics like Posner.

Read more...

Mark A. Sadowski

One more thing,

Justin Wolfers,
In the words of Brad DeLong, "does not your computer have the google?"

Everyone who has followed the Recovery Act remembers the figures. I googled and found this image of the cumulative spending as of June 26th:

http://picasaweb.google.com/lh/photo/IxLMoHa1yhg2s79U0kyYuQ?authkey=Gv1sRgCOWcs5m5waORKw&feat=embedwebsite

Note that it was $56.3 billion on that date.

RR

What I'm learning from these posts is that experts don't like laymen who hold themselves out to be experts. Understandable. It peeves us lawyers too whenever the Supreme Court publishes an opinion and every Joe Schmo on the internet is suddenly a constitutional law professor.

Science Minded

What I would like to know is, how much has production increased here in the US, business start-ups expanded (relative to closures), houses bought relative to those sold and new cars bought or rented (since cash for clunkers was introduced). Many stores have closed in my neighborbood and homes on the market are still on the market or have been taken off. In other words, what has the stimulus package really accomplished? Let's take banking. I would like to know what the various banks that benefitted from the stimulus are doing that is different from before? I think that we have a right to know where our money went and what the outcome of such spending has been in real terms.

Kevin H

Isn't it only an overstatement of a factor of 4? Otherwise you'd be doing exactly the opposite, comparing 4 quarters of stimulus to one quarter of growth.

Science Minded Person

If the evidence really shows a real improvement (however small), there is a good reason to be optimistic.

Ryan

The only thing I have to say is that all of this stimulus funding has ridiculous amounts of requirements for "jobs saved or created" that is nearly impossible to quantify. Second, there was ORIGINALLY supposed to be performance and effectiveness targets. A good friend of mine who started and eventually sold his own portfolio management software company for many millions started up a new software company in response to this. Guess what? The government DOESN'T care about effectiveness or efficiency relating to the stimulus payments. That is the real scandal here.

Wayne Lusvardi

Posner might try reading "Moth-Like Agencies Morph into "New Deal" Pollinators" at CaliforniaRepublic.org - link below

http://californiarepublic.org/?p=23/

Even if you are in favor of Keynesian-style stimulus programs at least such programs should not masquerade as anything but jobs programs. Often the public gets no bang for its buck from such public projects. And such projects are sold to the public as butterly-like water or transportation projects or education programs when they end up to be moth-like projects that merely put a hole in your pocket. If we're going to have Keynesian stimulus projects we should demand full disclosure that they are mere jobs programs; or their potential benefits, if any, should be disclosed.