Dr. J. mentioned yesterday that Keynesian economics doesn’t work. Today, Ezra Klein (of Journolist fame) in his blog, he posts a damning graph to this effect.
As you can see, the stimulus did not work. Mr. Klein trys to explain why and goes to work making excuse after excuse. First he says that the estimates of how bad unemployment was going to be without a stimulus plan was flat out wrong.
The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn’t know that it had been run over by a truck.
In other words, garbage in, garbage out. Ezra intimates they knew that there was 8.9% negative growth rather than 3.8% negative growth, the light blue curve would have been shifted significantly upward. He goes on to say that Obama’s economic advisors were far too optimistic with their expectations.
Per Mr. Klein, there were two economists who got it right at the time. Reinhart and Rogoff published a book the year before called “This Time Is Different” whose main point was that recessions caused by financials crises are far worse than ones that are cyclical. The reason for this is that the recession is single symptom of the disease. You have to treat the illness (the cause of the financial crisis) to cure the disease.
At this point, Mr. Klein starts tilting at strawmen.
Some partisans offer a simple explanation for the depth and severity of the recession: It’s the stimulus’s fault. If we had done nothing, they say, unemployment would never have reached 10 percent.
That notion doesn’t find much support even among Republican economists. Doug Holtz-Eakin…“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”
Ezra Klein does not name the partisans who blame the lack of recovery on the stimulus. While it is clear from observation that the stimulus did not work, we must be clear as to what we mean that it didn’t work. Because of the stimulus, the deficit and debt have grown astronomically, to the point where S&P downgraded our bond rating. Unemployment is not better, consumer confidence is low, businesses have growth plans in a hold pattern, and it is not clear, beyond a few roadsigns, where and how the stimulus tangibly benefited America or Americans. The dollars were so targeted that any benefits are hard to see.
Another economist, Bernstein argues, “if you look at the trajectory of job losses, you will find that right on the heels of the Recovery Act, the rate of job losses began to diminish and then jobs numbers turned positive.”
Dr. J. has to call shenanigans on this as well, because if you look at the slope of the unemployment line doesn’t even match ‘doing nothing’ let alone ‘with the stimulus’ projections. It is a longer slower decline, if any. Now you may argue that the reason for that is because unemployment is being buoyed up folks re-entering the jobs market, but that would go for both of other recovery lines as well.
Dr. J. won’t even rehash arguments for ‘more cowbell.’
But in this article, even Goolsbee argued that after ‘infrastructure,’ tax cuts are the next best stimulus. Ezra, however isn’t a believer, but he’s drunk more kool aid than even Goolsbee who got off the sinking ship.
Really, deregulation combined with permanent simple tax cuts are the best way to go, you know it, Dr. J. knows it, Dr. J.’s favorite economist Art Laffer knows it. Even later in the article, Mr. Klein has what alcoholics call a moment of clarity:
A more accurate understanding of the recession could, however, have led to a somewhat different stimulus — and perhaps a more durable political strategy. The policy was constructed at breakneck speed, with the emphasis on getting money spent fast. That led to more tax cuts, as they could happen quickly, and less infrastructure, as projects — particularly anything more complex than road repair — can take years to begin, by which point a typical recession has ended of its own volition.
Another cost of moving quickly was that it put a premium on policies already floating around that could be easily dropped into the legislation. That, according to Holtz-Eakin, solidified Republican opposition.
“If you’re a staffer and you have been watching business in the House and Senate for a long time,” he says, “what you saw them doing was pulling old ideas off the shelf — old ideas you had fought and that Democrats had abandoned. So Republicans in Congress just hated it.”
In other words, the administration and policy wonks rushed to put together something that they could do faster than allowing nature taking its course would. So doing, they created a Frankenstein Crap Sandwich. Indeed, even the CBO suggested that doing nothing would be better than passing the stimulus
. The article gets into the politics of curing the disease (addressing the housing bubble). But that’s a post in itself, as is quantitative easing, which we’ve talked about ad nauseaum
…the only thing that Dr. J. will add substantively to the QE argument is that he’s convinced that inflation is being underestimated.
What’s worse is that Mr. Klein then tries to argue for shared pain…maybe we can all be a little unemployed…
“We’re trying right now to keep our lifestyles going,” says Michael Spence, a Nobel Prize-winning economist at New York University. “It’s not really working, but the way we’re doing it is putting all the burden on the unemployed while trying to leave the employed untouched. Eventually, this is going to require a redistribution of that burden.”
In other countries, he says, the burden is more widely shared. The employed work less — and get paid less — so there are more jobs to go around. That leads to a little pain for a lot of people, rather than a lot of pain for fewer people. It also keeps more workers on the job, which means their skills don’t deteriorate and the economy isn’t left with people who became unemployed and then found themselves unemployable.
Right. Dr. J., who has a lil medstudent, a lil resident, a lovely bride, and two saber-toothed tigers to support really wants to take one for the team, and he is sure that the torches and pitchforks will come out if you were asked to take a 20% pay cut and work 4 days a week so that others may do the same. That may work in Europe, but it ain’t going to fly in the U.S. of A.
Spending to hire Robins for publically employed Batmen ain’t going to work either. Because once you create a government job, it will NEVER…GO…AWAY…
Ultimately, after a rant longer than this, Klein shrugs and blames politics for why this all didn’t work. Well, that’s probably correct. When one side wants to pander to core constituencies and worship at the altar of false economic policies, the other side will say no. Unfortunately it took $900 billion and a downgrade of our credit rating to do so.