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Stimulus as a State of Mind

Posted by ROBERT STEIN in Economy.
Aug 11th, 2009 | Comments

Nothing significant has happened, but suddenly the economy is looking better. Excitement over snippets of good news, or more accurately less-bad news, is underscoring how much of it all is psychological and suggesting that Obama’s aggressive stimulus attack, no matter how flawed, wasteful and even wrong-headed, has been crucial to keeping us from going over the edge.

In the past few days, the usually sober New York Times has been agog with happy talk about the economic crisis, climaxed today by a Paul Krugman assertion that Big Government “saved us” by not fearfully cutting spending and “unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed.”

This follows an analysis saying: “A report card on the stimulus plan offered by analysts nearly six months after it was passed by Congress suggests that the punch from increased government spending has helped the economy begin to bottom out faster than it would have otherwise.”

Yet another interpretive piece concludes that “the evidence is now pointing pretty strongly in one direction: history books may conclude that the financial crisis of 2008 turned out to be far less bad than it could have been and that Washington deserved much of the credit.”

Before passing all this off as liberal wishful thinking, contrast today’s situation with the economic free fall of the 1970s when accidental president Gerald Ford tried to cheerlead the nation out of stagflation with WIN buttons (Whip Inflation Now) and presided over low growth and runaway inflation that persisted through the Carter years into the Reagan era.

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bradt

As much as I tend to think the stimulus package was an expensive waste, if it prevented a depression, it was worth it. People are already forgetting how terrifying last September was, when the financial system came close to collapsing. The same goes for the TARP, which probably was needed to prevent disaster. Even if it was to save himself, Bush turned out to be more pragmatic than most Republicans on those issues and it made a huge difference. Somehow, I don't think that Newt Gingrich's solution to the financial panic of a capital gains tax cut would have solved anything last Fall when Wall Street was teetering on the brink. The people in charge actually had learned lessons from history, go figure.

superdestroyer

The contrarians believe that this is a dead cat bounce. Business have cut expansion, lower debt, and lay off a huge number of people. The economic benefits is due to cuts. The question is whether the private sector has reached the limits to the benefits of cuts.

D. E.Rodriguez

Let's face it: When and if the economy recovers---even if it is eventually determined that the stimukus and other government actions were factors---the "critics" will never give this administration the slightest bit of credit.

The "verdict" will be that in spite of the Obama administration, and because of blah, blah, blah, the economy miraculously recovered.

Just facts of (political) life.

I hope I am wrong...

DaGoat

Let's face it: When and if the economy recovers---even if it is eventually determined that the stimukus and other government actions were factors---the "critics" will never give this administration the slightest bit of credit.

The opposite will also occur - even though every other recession has come to an end many people will give Obama credit for ending this one.

The correct answer is probably in middle. I think to an extent recessions and recoveries are self-fulfilling prophecies, ie if everybody is expecting a recovery then a recovery is more likely to happen. In that sense Obama's optimism was helpful in the country's eventual recovery. The increased government spending probably also will help in the short term.

Like I said a few months ago though Obama is sacrificing long term prosperity in order to have a softer landing on the recession. That may well be the right decision. Like you said you have to stop digging the hole before you can fill it up. But with the increased spending and deficits we are going to have an awfully big hole.

casualobserver

@@The "verdict" will be that in spite of the Obama administration, and because of blah, blah, blah, the economy miraculously recovered.@@

Well, present some logically-tight cause and effect arguments instead of punditry and we'll examine it.

As for Bobby's piece, the only actual facts stipulated I read were 3:

-capital injections into the credit markets (and you guys are going to claim that one for Obama?)

-10% of stimulus funds spent, most of it in the form of extended unemployment benefits and the Democrat definition of "tax cuts". The former, by definition, does nothing to create jobs and the latter is adjudged in Bobby's own cut-off quotation as ineffectual for "stimulating".

-500,000 jobs estimated to be saved.......(.what were the dollars spent to save those jobs?)

I'm willing to listen to how Obama turned the economy around, but most of what is in the articles above amounts to saying the stock market is going up in the same time period Obama is occupying the WH.

I wonder how many other times that same thing happened?

D. E.Rodriguez

DG, "Like I said a few months ago though Obama is sacrificing long term prosperity in order to have a softer landing on the recession. That may well be the right decision. Like you said you have to stop digging the hole before you can fill it up. But with the increased spending and deficits we are going to have an awfully big hole."

I am no doctor, but when a patient life's depends, say, on immediately amputating a limb, you'd probably do that, and take care of the consequences and rehab later.

Of course, every American is concerned about the long-term consequences of the accumulating deficits, but should we have let the patient die?

DaGoat

Of course, every American is concerned about the long-term consequences of the accumulating deficits, but should we have let the patient die?

The patient has never "died" before, it's just a matter of how long it takes to recover. I think Obama sped up the recovery but at a long term cost.

D. E.Rodriguez

Those who experienced the devastating effects of the BIG Depression may say that it was, at the very least, a near-death experience.

But, I do agree with you that Obama is speeding up the recovery "but at a long term cost."

PWT

What is the point of speeding up the recovery if it comes at a long term cost? Back to the medical example, what if cutting off a finger will let the patient enjoy three more good years while cutting off an arm would lead to a normal life albeit without said limb. Does it make any sense to only remove the finger if the patient would likely live more than three years?

Why have we only removed the finger, setting ourselves up for more future pain?

D. E.Rodriguez

"What is the point of speeding up the recovery if it comes at a long term cost?"

It may be more a matter of recovery, period. (Rather than "speeding up" recovery.)

"Back to the medical example, what if cutting off a finger will let the patient enjoy three more good years while cutting off an arm would lead to a normal life albeit without said limb"

It is a matter of interpretation whether we are only "cutting off a finger" or amputating an arm. Some say that what is happening to our economy is drachonian.

"Does it make any sense to only remove the finger if the patient would likely live more than three years?"

This sounds more and more like the health care debate (See a previous post on exactly this subject on the value and quality of human life). But back to the economy, I don't know if what we have done/are doing is similar to removing a finger or amputating a limb. Perhaps you have an opinion on this. I'd be interested.

"Why have we only removed the finger, setting ourselves up for more future pain?" Ditto

PWT

I believe that we have set out to lessen the pain in the short term at the cost of long term growth. The actions taken at the end of Mr. Bush's term and at the begining of Mr. Obama's term had the effect of lessening the blow of the current recession. I believe that because of these actions, the current downturn will be more shallow than it could have been but with a longer duration. The US economy will recover regardless and, I believe, would have recovered more quickly without any political intervention than without.

That said, it is too late for hypotheticals. We have already borrowed the money and the interest from said borrowing will be payable going forward. In the context of a corporation, the US had cut its usable cash flow for the forseeable future. Reduced cash flow leads to reduced growth prospects for all concerned, Govt. and taxpayers.

Just for fun, it would be nice if at least one politician addressed the expense side of the equation and truly cut costs, for a start they could just cut the rate of increases in spending. Bonus material would be to address the costs of entitlements.

Time to cut off the arm.

HemmD

I'll state again what I said back when the stock market crashed. This is/was not the "usual" kind recession everybody is comparing it to. We were very close to a complete dead patient meltdown.

Those who have worried about the cost, calculate where exactly our economy would be if all the auto worker, supliers, and service personnel had lost their jobs. 10% unemployment would have looked good.

as to the money spent on unemployment, all that money went back into the economy to buy food, pay bills, etc. that money kept other people working that would have otherwise followed the autoworkers to the poor house.

We are a service economy. Most of the workforce replies on others in the workforce maintain demand. If the 10% unemployed stopped spending money, that 10% could well have hit 20% in no time.

Lastly, don't forget a big chunk of money went to states to keep them afloat. They too have skated on thin ice, and the stimulus merely kept basic state services going.

This was not the typical recession, and analyzing that way misses its significance and the priorities.

IMO

D. E.Rodriguez

"The US economy will recover regardless and, I believe, would have recovered more quickly without any political intervention than without."

Quite a "safe" statement to make as IMHO no one will be able to prove or disprove the second part of the thesis..

davesnothere

When your fever goes up to 105 and then levels off, you're not in recovery. When it goes down to 101, you're still not in recovery, even though "the numbers are going in the right direction." When you get back to 98.6, then you start to "recover." Until then, you're still sick.

When unemployment goes down because the net number of jobs goes up, on a consistent basis, then we'll be in recovery. Until then, just because the number of jobs lost this weeks is a little fewer than last week, that doesn't mean we're in recovery.

DaGoat

Quite a "safe" statement to make as IMHO no one will be able to prove or disprove the second part of the thesis..

No one will be able to prove or disprove what you think either. No one knows for sure what would have happened with no stimulus bills or spending packages. My prediction is that liberals will give Obama credit for saving the economy and conservatives will say he made things worse.

Like I said above you can make a good case for Obama choosing to go for a faster recovery at the expense of long-term prosperity. I don't know if there's a right or wrong answer there.

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