Why so harsh on this article? Well, Hilsenrath (the author) begins describing that the Fed will "eventually" have to raise interest rates. Duh #1. Then comes the premise of the whole piece in paragraph two: "What will a Fed tightening cycle look like? When will it begin?" And the answer in the very next sentence "Fed officials don't have answers to either question yet". Gee, thanks for the insight. Duh #2.
Hilsenrath goes on to say the economy isn't strong enough to raise rates yet (duh #3) and that this tightening cycle won't look like the last one (5 duhs for that). He spends a great deal of time expounding on how hard it will be to communicate intent, how little we know, how the market's reaction may be important and then that it won't be important. By two thirds of the way through and fifty "duhs" later, I was feeling like Homer Simpson in one of his painful "doh" chain reaction moments. For the creme de la creme of duhs, the chart in the center of the article displays the last tightening cycle with the caption (emphasis mine) "When the Fed starts raising its federal-funds target rate, it may not follow the same pattern as the last time it tightened monetary policy." Well, thank you Captain Obvious.
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What put me in a mood critical and irritated enough to write nasty things about WSJ articles (from authors I usually like) was The Truth Twister alluded to in the post's title. The AP reported what former GOP presidential candidate Mitt Romney had to say about Obama's economic stimulus plan. Since Romney isn't a name I've seen or heard much in the past twelve months, let's recall that Mitt worked for a prestigious management consulting company before running a private equity group. These credentials were supposed to enable Mitt to lead like a CEO or businessperson instead of a politician. Clearly, Mitt was a credible, financially literate soul who could be trusted to tell it like it is and make decisions based on economic merit rather than political goals.
Such lofty expectations is why I award him the Truth Twister of the Week award. What did Mitt twist the truth about? Well, according to the AP article, Mitt says it is time to stop the stimulus program because the plan "didn't work". As evidence of his twisting, I submit to you the latest GDP report from the BEA (Commerce Department).
If you recall, each quarter's GDP report comes in three reports, an "advanced" report, a "preliminary" report and the final report. You may have already guessed correctly that as the data comes in, more accurate calculations are made and the report is revised. Last Thursday's report was the "advanced" or first, raw, estimate.
Moving along, what did the report tell us? Well, GDP grew at an annual pace of 3.5% from the second quarter to the third which was above the consensus estimate of 3.2%. That should be good news right? The stock market didn't like it much and here is why: it doesn't look as though this performance was possible without the stimulus. Let's take a closer look. Of the 3.5%,
- 1.7% came from motor vehicle output, courtesy of "cash for clunkers" (which spurred 700,000 unit sales)
- 0.5% from residential construction (breaking a 14 quarter losing streak), courtesy of the 1st time homebuyer tax credit universally acknowledged as sparking buying at the low end of the housing market.
- 0.6% from increased Federal government spending
These add to 2.8% of the 3.5% or fully 80% of the increase in GDP due in some way to the stimulus. (The rest came from a small inventory build, most likely as a result of simply low stocks, seasonality and some multiplier effect from the auto build). As a gut check, consider that $173 billion has been reportedly spend so far. Let's say $125B was in the 3rd quarter. On a $14.1 trillion economy, that works out to a 3.6% annual rate. Net imports subtracted 0.5% this quarter, which calculates to about 3.1% growth. Pretty close huh?
All of this means, that sans stimulus economic "growth" was anemic at best. The silver lining might be "stabilization", not growth, for the private sector. As for Mitt, he certainly isn't above twisting the truth to make a political statement. It would be naive to expect differently I suppose.
If I'm following your math, it looks like the stimulus has a multiplier of about 1.
ReplyDeleteThe government spent a dollar, and GDP went up about a dollar. That makes sense to me, since government spending is one of the terms in the definition of GDP.
When the stimulus was being sold back in January, we were told that the multiplier should be 1.3 in the third quarter (rising eventually to 1.5 -- see Greg Mankiw's blog for discussion and pointers to the Romer/Bernstein PDF).
I agree that Romney is wrong when he says "the stimulus didn't work."
However, it seems to me it would be reasonalbe to say "the stimulus didn't work as well as we were promised."
Agreed. Does anything work as the government promises? As you said, it was "being sold". I also see little value in calculating multipliers, especially over such short periods. But, if you want to indulge, I think it may have been less than 1 as such: ~$125B spent vs $113B change in GDP Q/Q. Of course, we're guessing here, but time will tell. It is certainly possible it turns out to be >1; and it won't be constant since velocity, psychology and other factors play a part.
ReplyDeleteI stumbled upon a different estimate of stimulus spending by quarter: $80B in 2Q and $85B in 3Q. If so, it appears the multiplier was <1 in 2Q and rising above 1 in 3Q. Estimating multipliers = throwing darts.
ReplyDelete