06 Apr 2013

DeLong Flirts With Notion That Stimulus Efforts Thus Far Have Gained Nothing on the Margin

DeLong, Economics, Federal Reserve 12 Comments

It’s ironic. In this lengthy essay, Brad DeLong is obviously arguing about the urgent need for more stimulus. Yet he tries so hard that he achieves the opposite result he intended. (Sort of like me on the dating scene in college.) Here’s DeLong:

In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.

In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression… [Bold added.]

Now I know, I know, DeLong, Krugman, Thoma, Baker, et al. wanted more stimulus from the get-go. But it sounds like DeLong is here saying that the 50% increase in federal debt since 2008, as well as the tripling of the Fed’s balance sheet, have achieved virtually nothing. Remember, the way everybody justified those things–even as the economy stayed in the crapper lo these many years–was to say, “Sure, but use counterfactuals: Had we done nothing, this would have been like the Great Depression.”

According to DeLong, this is (almost) like the Great Depression.

In the same vein, let’s see just how dire things are, in DeLong’s view, from our inadequate stimulus efforts thus far. He writes:

Nevertheless, my conclusion is that I should stop calling the current episode the Lesser Depression. Yes, its shape is different from that of the Great Depression; but, so far at least, there is no reason to rank it any lower in the hierarchy of macroeconomic disasters.

The US bond market agrees with me. Since 1975, the nominal annual premium on the 30-year Treasury bill has averaged 2.2%…The current 30-year T-bill yields 3.2% annually…The US Federal Reserve keeps the short-term nominal T-bill rate near 1% only when the economy is depressed, capacity is slack, labor is idle, and the principal risk is deflation rather than upward pressure on prices. Since WWII, the US unemployment rate has averaged 8% when the short-term nominal T-bill rate is 2% or lower.

That is the future that the bond market sees for America: a slack and depressed economy, if not for the next generation, at least for most of it. [Bold added.]

Wow! We increased the federal debt by 50%, and tripled the Fed’s balance sheet…and yet DeLong is saying we are still screwed for at least most of the next generation. We need to borrow and print even more to at least let our kids see what a good economy looks like, at some point in their lives.

Is this the story people were telling us back in 2008? Does anyone remember DeLong saying something like:

[FAKE DELONG QUOTE FROM 2008]: Don’t listen to those nutjob Austrians who want to let the investment bankers eat their bad loans! The economy would be absolutely awful if you follow their liquidatonist advice. What you need to do, see, is bail out the banks, and spend such-and-such for everything to be fine; trust us, we’ve read Keynes. Oh, by the way, should you for some reason only do 85% of what we tell you, then we will have a repeat of the Great Depression and your kids will think 8% unemployment is normal. So don’t wuss out on us.


I sure don’t. I think that might have influenced the public’s acceptance of the stimulus package and various rounds of QE, had DeLong explained that upfront.

12 Responses to “DeLong Flirts With Notion That Stimulus Efforts Thus Far Have Gained Nothing on the Margin”

  1. JSR08 says:

    What’s that saying about the definition of insanity…?

  2. joe says:

    He does not seem to be saying that the stimulus measures “have achieved virtually nothing.”

    Between Oct 1, 2007 and Oct 1, 2009, the national debt increased 32%. Don’t see where Delong is suggesting that 2.9 trillion in deficit reduction over 2 years when the private sector was shedding 339,000 jobs a month would have been of no consequence.

    National Debt
    09/30/2009 11,909,829,003,511.75
    09/30/2008 10,024,724,896,912.49
    09/30/2007 9,007,653,372,262.48

    Historical Debt Outstanding – Annual 2000 – 2012

    Private payroll employment:
    Sept 2007:115473
    Sept 2009: 107327

    8.146 million jobs lost in 24 monhts or 339,417/month

    The Fed’s balance sheet also more than doubled during that 2 year period (138% increase)

    08/29/07 867409.
    9/2/2009 2065337.

    In Dec 2008, the Fed was lending 1.5 trillion to financial institutions. DeLong certainly does not believe this did not help in some way.

    Credit Easing Policy Tools

    Would love to see a credible argument to defend the claim that 2.9 trillion in deficit reduction and Fed taking no action would have “done nothing” or better yet improved the economy.

    • Bob Murphy says:

      Joe wrote:

      Would love to see a credible argument to defend the claim that 2.9 trillion in deficit reduction and Fed taking no action would have “done nothing” or better yet improved the economy.

      OK Joe here:

      1) In August or so of 2009, Krugman had a post called “Big Government Averts Depression” or something like that. He argued that had it not been for automatic stabilizers, QE, and Obama stimulus, we would have had a repeat of the Great Depression.

      2) DeLong is saying that with automatic stabilizers, QE, and Obama stimulus, we still had a repeat of the Great Depression (almost).

      3) Either (a) Krugman was wrong (b) DeLong is wrong or (c) on the margin, automatic stabilizers, QE, and Obama stimulus did almost nothing.

  3. William Anderson says:

    I have one question for these people: WHY would a bigger amount of “stimulus”money at the start actually given the economy the full “traction” that Krugman and DeLong claim that it would have done? Can they explain exactly why $400 million was exactly the amount of extra money needed to accomplish the permanent jump start?

    A “stimulus” is like putting lighter fluid on soaking wet wood and lighting it. The flame goes high for a while, but eventually goes out. Likewise, even if one puts more fluid on the wood, it still fizzled out, albeit a little bit later. But it still fizzles out.

    If far more than an extra $400 million was not able to keep a boom going, why would a stimulus package do it?

    • George Viaud says:

      It is not like putting lighter fluid on wood.. that is incomplete.

      Its more like:

      You want to buy wood because winter is coming (savings, capital investment etc).

      The government takes your money from you and instead buys lighter fluid.

      They pour this lighter fluid over your remaining wood and burn it all up.

      Now you are out of wood, the government has no more lighter fluid and the fire is out.

      You still have no way to buy wood because the gov took your cash… they no longer have your cash or lighter fluid.. so what do they do?

      They print, borrow and tax more money to buy more lighter fluid and proceed to dump it on the ashes and light them on fire… which promptly flares up and goes out (no wood!!!)

      Much more accurate IMHO 😉

  4. Tel says:

    Does anyone remember DeLong saying something like…


    It is worth stepping back and asking: What would the world economy look like today if policymakers had acceded to the populist demand of no support to the bankers? What would the world economy look like today if Congressional Republican opposition to the Troubled Asset Relief Program (TARP) program and additional deficit spending to stimulate recovery had won the day?

    The only natural historical analogy is the Great Depression itself. That is the only time when (a) a financial crisis caused a widespread, lengthy, and prolonged reinforcing chain of bank failures, and (b) the government neither intervened nor passed the baton to a consortium of private banks to support the system as a whole.

    • Tel says:

      After further study, I might have possibly misrepresented the man above (or been careless in allowing him to misrepresent himself). His first preference was full nationalization:


      Now it’s time to go back to three principles. There are three options:

      * Do nothing.
      * Bailout (a la Paulson)
      * Nationalization (a la Sweden 1992)

      Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let’s not do that again. Let’s decide between bailout and nationalization.

      Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

      I might follow that up by pointing out that Brad is totally wrong to say that Hoover “did nothing”, and more than that, when a bank goes bankrupt the regular process is not to “do nothing”, the regular process is a bankruptcy hearing with a court, a judge, rules of evidence, appointed administrators and all that good stuff… kind of like nationalization, but done by the book rather than done by political whim. Just throwing that out there.

  5. Daniel Kuehn says:

    It sounds like it’s shallower too though. When he talks about projecting slower growth rates into the future (reasonable when you look at Japan), it’s not clear how far but we may be getting a depression equivalent from a long, shallower depression rather than the Great Depression which was deeper but ended abruptly (after monetary policy closed the gap some) by WWII.

    So in that sense, we can certainly say that a combination of monetary and fiscal policy has kept this one from sinking quite so deep.

    • Mike says:

      You had me at WWII ended the Great Depression.

      When your premise is broken, as yours most certainly is here (this fallacy has been thoroughly and repeatedly debunked), your conclusions will be equally flawed.

  6. Major_Freedom says:

    However much Laissez-faire economists and Keynesians want to argue over history, what cannot be denied is that we are all faced with more than one theory being empirically consistent with history.

    1. Keynesians are arguing that we’re struggling because the historical Keynesian activity X was insufficient, meaning there was too much Laissez-faire activity, such that we would have been out of the doldrums by now if only the Keynesian activity were more pronounced and the Laissez-faire activity were less pronounced.

    2. Laissez-faire economists are arguing that we’re struggling because the historical Laissez faire activity X was insufficient, meaning there was too much Keynesian activity, such that we would have been out of the doldrums by now if only the Laissez-faire activity were more pronounced and the Keynesian activity were less pronounced.

    There is absolutely no way that either of these mutually incompatible theories can prove the other wrong through the method of using only historical data. We must accept the necessary truth that the only way either can prove the other wrong, is by using something other than historical data.

    Laissez-faire theory and Keynesian theory can only be compared and contrasted using a priori logic. There is just no other way. No matter what history looks like, this will be the case. Imagine that history was slightly different. Imagine that the same extents of Keynesian activity and Laissez-faire activity were the same, but the statistics ended up showing 4% unemployment, 3% annual real growth, etc. Contrary to what may be believed, this data also cannot be used by either Laissez-faire economists and Keynesians to prove the other theory wrong. For then a new set of mutually exclusive theories, where both are nevertheless consistent with historical data, come into light.

    The Laissez-faire economists can argue that real growth would have been even higher and unemployment would have been even lower, had there been more Laissez-faire activity and less Keynesian activity. The Keynesians can argue that real growth would have been even higher and unemployment would have been even lower, had there been more Keynesian activity and less Laissez-faire activity. Again, there would absolutely no way for one theory to disprove the other theory, but relying solely on historical data. Again we would have to compare and contrast these theories using something other that history.


    Therefore, Dr. Murphy, you will never be able to disprove DeLong’s fundamental Keynesian theory by referencing history, or even his own comments. DeLong can always say that he underestimated just how bad things were. That the tripling the Fed’s balance sheet, a 50% rise in federal debt, contrary to getting us doing better than the Great Depression, the economy was so bad that even a tripling of the Fed’s balance sheet and 50% rise in federal debt, were even MORE insufficient than even DeLong at first realized. Keynesian theory is still right. What went wrong is DeLong’s judgment of the state of the economy. He could say “If I had been better able to judge the health of the economy, then I would have been able to declare from the rooftops that a meager tripling of the Fed’s balance sheet, and a paltry 50% growth in the federal debt, were so small, so insufficient, that our economy will appear almost like the Great Depression.”

    As soon as you step into the snake pit, and accept the rule that makes history a judge of theory, DeLong can always, always always always always always (did I say always?), interpret history from a Keynesian lens, and he could always blame himself as a judge, rather than the Keynesian theory, which is always consistent with history.

    Even if the Fed quintupled its balance sheet, and even if the federal debt rose 150%, Keynesian theory is immune from challenge on the side of history.

    It’s about time that this point is hammered home, again and again, until positivists like DeLong realize they’re talking gibberish by claiming their theory has a monopoly on history. The rules of debate have to change. After 5 years of experimental Keynesian destruction, the positivist destroyers are still claiming vindication. Why? Because history is always consistent with their a priori flawed theories.

    • Tel says:

      Therefore, Dr. Murphy, you will never be able to disprove DeLong’s fundamental Keynesian theory by referencing history, or even his own comments.

      At least we can prove ourselves to be more accurate than DeLong when it comes to making that reference to history. Surely that’s worth something?

      I accept that there are problems applying a strictly skeptical empiricism to Economics (lack of ability to repeat the test, lack of a control case, many sources of noise, etc), but at the same time there are problems trying to apply strict logical deduction too. Ask yourself whether gold and silver prices correlate… the answer is neither yes, nor no, but some correlation factor (or co-integration if you think that is more useful, or both).

      Even what seems like a drop dead simple question, “Are human actions wilful?” just doesn’t have a clear yes/no answer. Very few real-world questions do.

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