Saturday, March 07, 2009

I'm a stimulus skeptic

Unemployment is at 8%, and some people are already saying "See? The stimulus is too small!"

I guess they were counting on some kind of magical Stimulus Anticipation Effect to occur before any actual money was spent?

I'm biased; I am deeply skeptical of our government's ability to do just about anything effectively. I'm trying really hard to be optimistic and believe the "government bravely steps into the breach and puts idle resources to productive use" stimulus story. But how will I know whether or not that story is true? I'm biased, so I'll be looking for evidence that the government screwed up, and will tend to ignore evidence that it made things better.

I think I see a way out. On January 10'th the Obama economic team released "The Job Impact of the American Recovery and Reinvestment Plan." It contains projections for their best estimates of what the unemployment rate would be with and without the stimulus, from 2009 through 2014.

If the actual unemployment numbers look like their "with stimulus" numbers, I'll revise my opinion.

If the numbers look like their "without stimulus" numbers, then I'll conclude that the stimulus didn't do diddly-squat.

And if the numbers are worse than "without stimulus," then I'll conclude that the stimulus did more harm than good.

Now: if their predictions turn out to be incorrect, the Obama economic team will undoubtedly find all sorts of reasons why they didn't get it right-- they didn't realize the banking crisis was as severe as it is, or they'll blame it on Treasury or Federal Reserve policy, or they didn't realize it would be so darn hard to spend eight hundred billion dollars. All of which might be true, but all of which would reinforce my core belief in the ineffectiveness of Big Government.


Joseph said...

"I'm a stimulus skeptic". Go Gavin! Looking forward to seeing how the results track. Thanks!

Anonymous said...

There are people like Paul Krugman who have been saying FROM THE BEGINNING, i.e. since November, that the stimulus was shaping up to be too small. So your caricature of this viewpoint is really unfair.

Folks like Krugman simply have a different, more fearful sense of the size and scope of the problem than either the Obama Administration or the Republicans (and perhaps even you) and they anticipate, from bitter past experience, the potential political resistance to a second bite of the stimulus apple.

You may not agree, but, if you're going to be a fair commentator, you've got to play it straight with the substance of the opposing argument.

The point about the significance of World War II is this: it was a public works program that dwarfed the supposedly ambitious ones that came before it in the New Deal. It WAS the fiscal stimulus that was big enough to get us out of the Depression. It's an argument from historical experience, not goofy psychology as you suggest, about the scale of what needs to be done NOW.

If your skepticism goes to whether this is a different country culturally than the US of the 1940's, now THAT's something worth discussing.

Rich Morse

Gavin Andresen said...

Yes, the opposing argument is "the GDP gap is $X billion, the multiplier will be Y, so the stimulus should be $X/Y dollars."

And economists argue over what X and Y are. I think we should judge the Obama administration based on their estimates; if unemployment hits double digits economists will argue for years over whether or not the problem was doing too little (as Krugman would argue), or too much.

One very good point I haven't seen the "we need more stimulus" proponents address: there MUST be a point of diminishing returns. We cannot spend 100% of GDP on a stimulus and expect happy results (we'd be recreating the command-and-control economies that put Eastern Europe in the poor house).

So: where is that point of diminishing returns? As far as I can tell, nobody really knows. I don't think it is POSSIBLE to know-- the economy is too complex and ever-changing, and spending a billion dollars on ethanol subsidies isn't going to have the same effect as spending a billion dollars on fixing roads.

And second: there's not universal agreement among economists that the "New Deal" got us out of the Depression; see, for example this blog entry that links to a 1995 survey of economists and economic historians.

I can't find it, but I think even Krugman agrees (I recall reading him saying that it COULD NOT have got us out of the depression, because it wasn't big enough).