Day: January 28, 2009

Senate Testimony Tomorrow

From 10am until about noon on Thursday (January 29th), I’ll be testifying to the Senate Budget Committee on a panel discussing The Global Economy: Outlook, Risks, and Implications for Policy. I’ll post my testimony here after the session, and – potentially with some edits – this will also serve as the revised version of our Baseline Scenario.

Now would be a good time to tell me if you think there are important developments around the world, big or small, that we have overlooked recently. And if you have other policy-related points that you think I should consider making, please post those as comments here also.

Long-Term Returns to Stimulus: Education

The fiscal stimulus debate is currently hampered by confusion over its objectives. On the one hand, one purpose of the stimulus is to generate economic activity quickly in order to boost aggregate demand and break the recessionary spiral we seem to be in. On the other hand, people rightly worry about the capacity of the government to spend large amounts of money quickly without wasting it, and argue that the money should be put to productive use, rather than paying people to dig holes and then fill them in again. (This is why you see (at least) two versions of criticism of the stimulus plan: on the one hand, the criticism is that the government is incapable of putting money to productive use; on the other hand, the criticism is that money for things like electronic health records will not be spent in time to have a short-term effect.)

My opinion is that both are valid purposes. There probably is a limit to the number of tens of billions of dollars the government can spend next month without wasting some of it. But given the projected duration of the output gap (the difference between potential and actual GDP, meaning that the economy is performing below its full-employment capacity), I think there is also value in programs that take several quarters to disburse their money – as long as those programs are also good investments.

One major area of spending is education, where the plan includes more than $150 billion in new spending over two years. While politicians (and economists) reflexively cite education as an area where investments can have positive long-term returns (through increases in productivity which increase GDP and our average standard of living), I wanted to see what empirical research there has been on this topic. There has been a lot of research on the impact on individuals’ earnings of additional education (this is a common example used in first-year statistics classes), but somewhat less on the impact on national economic growth.

Continue reading “Long-Term Returns to Stimulus: Education” →

The Scariest Blog Post Ever

Seeking Alpha is perhaps the largest financial blog/blog aggregator around. And for at least a week now, one of their “most popular” posts has been The Scariest Chart Ever. Take a look. Then come back here.

The chart itself isn’t very scary. It shows that the amount borrowed by banks from the Federal Reserve – “Borrowings of Depository Institutions from the Federal Reserve” – has spiked from a trivial level (a few billion dollars) to several hundred billion. It sat at a trivial level because, in ordinary times, there is no reason for a bank to borrow at the discount window when it can borrow instead from another bank at a lower rate (since the Fed funds rate is usually lower than the discount rate). It has spiked up recently as a symptom of the credit crisis; basically, what the chart shows is that the Fed is doing its job of providing liquidity in a crisis.

What’s scary is that the author of the post claims that the chart shows “federal borrowing,” called it “the scariest chart ever,” and concluded, “Anyone still think there are not some rough patches down the road?” . . . and then this became the most popular post on the most popular financial blog in the world. And even though a few people (including me) tried to point out the basic error, the vast majority of the comments pile on to the idea that this chart shows a huge spike in government borrowing.

This is scary (actually, depressing might be a better word) for those of us who think that blogs (and the Internet in general) can serve a valuable purpose in disseminating useful information and allowing constructive discussion. It also points to the importance of financial education, although maybe this example is more about basic verbal education (read the title of the chart) and numerical education (read the numbers on the Y axis: if the chart says that government borrowing was a few billion dollars as recently as 2007, then there’s something wrong).

Update: I should point out that in general I think Seeking Alpha provides a useful service by aggregating information from a wide variety of blogs and using community techniques to filter through them. Among other things, they republish some articles that Simon and I write here. This example just shows that sometimes the community filtering technique produces weird results.