The Bogus Recovery

Not to beat a dead horse, but in my last two posts we looked at whether the Keynesian counter-cyclical deficit policies of the current administration are really working. Just to illustrate a little better how ineffectual these policies have been, I have below a comparison of the accumulated federal deficit vs. the accumulated growth in GDP for the first 6 quarters of recovery from the last 4 recessions. In all 4 charts, blue represents GDP growth while red shows the accumulated deficit from the start of the recovery (specifically, from the start of the first full quarter of recovery, to keep it in line with the quarterly GDP numbers). (Click on image for clearer view).


As you can see, this recession's growth is absolutely swamped by our increase in debt - something's that never happened before. We have in effect borrowed our entire recovery - twice over. Could this possibly be sustainable? I don't think so.

Data with sources are shown here.

Did the Stimulus Work?

A common refrain among administration apologists is "The Stimulus Worked!". But did it? Or perhaps the question is has Keynesianism, the policy of deficit spending during recessions to kick-start the economy, worked? Remember, the linchpin of Keynesian economics is the multiplier effect, whereby a dollar of government spending results in greater than $1 of economic growth, because this dollar is further spent by those who receive it. Thus, it is argued, deficit spending is worth it because it more than makes up for itself in an even larger economy. Proponents are quick to point out that tax cuts are a very inefficient form of stimulus because the multiplier effect of tax cuts is less than 1 (because they tend to get saved rather than spent). The ideal approach is to put money directly into workers' pockets via jobs programs.

So how have these big deficits we've been running up worked out? Well the Treasury Dept. is kind enough to provide us with the monthly deficit going back to 1980. So, we can compare the amount of deficits we have run up during recessions compared to size of the subsequent recovery. As everyone knows, we've been out of the recession since June 2009, so this humdinger of a recovery surely must be well worth those deficits.

We also had a really big recession back in the 80's, along with unprecedented deficits that people were screaming about (though back then it was the Democrats complaining because the president was a Republican and the deficits were caused by tax cuts, not spending). And since those tax cuts were responsible for the deficit, then we should expect that recession's recovery to be less impressive compared to the deficits.

So, to that end, I compared the cumulative increase in GDP from the start of the recession out 12 quarters for the 1981/82 recession compared to the recent 2008/09 recession (December 2010 marks the 12th quarter since the recession started) and the accumulated deficits run up during those 12 quarters. I calculated the amount of recovery purchased, in effect, by each dollar of deficit spending.

The results make it awfully hard to argue that deficit spending in this recession has been successful. In fact, as of 12/2010, each dollar of deficit spending has only purchased 17 cents of recovery, as opposed to the early 80's where there was $1.70 of GDP growth for each dollar of deficit.

Indeed, forget the deficit - the entire growth in GDP since the recession began - $579 billion, is considerably less than the size of just the Stimulus itself - $862 billion. There's no way to sugar coat it - the Stimulus was an abject failure.

Data reviewable here.

Austerity or Stimulus

David Leonhardt in the Times argues that deficit spending has been successful in the U.S. while austerity has been a failure in Germany. He points out that the U.S. economy has grown past it's low point while Germany hasn't quite made it back yet.

But at what cost have we acquired this "prosperity"? As of 12/31/2010, our GDP is $836 billion higher than it was at it's lowest measured point, June 2009. Since the end of 2008, we have added $679b. Over the last two years, our budget deficits have totaled $2.7 trillion. Now if you lost, say, $50k in income, and made up for it by borrowing $150k, would you say you had a successful recovery from your income hit?

Deficit spending to pull out of a recession makes sense if the resulting boom will pay for itself in increased revenues from the rapidly growing economy - that's the whole idea. In that we have failed miserably. The stimulus program has clearly been an abject failure. If Germany achieved its more modest growth at a much lower cost, then their approach is the more successful, and the one to be emulated.

Sources: bea.gov and the OMB.

P.S. - Also, from the graphs shown on the sidebar of Leonhardt's column, it looks like Germany has actually grown faster out of its trough, which was deeper to begin with than the U.S. low point, so it's possible Leonhardt's entire premise is faulty from the get-go.

Aisle Seats

I don't get the appeal of aisle seats. They are the first to go, and everyone nods knowingly when someone brags about managing to cop one. But the problem to me is that having the aisle seat requires not only that you get out of your seat each time you yourself wish to get up, but everytime anyone else in your row wants to get up. But if you have the window seat, you only have to get up when you want to get up. That seems much preferable to me. I suppose anyone reading this is thinking "Good - have your window seat!"