27 Aug 2009


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Thomas F. Cooley and Peter Rupert discuss, in Forbes, the recent triumphant claims heard widely on the left that “the stimulus is working.”

The bloviators of the blogosphere have been in full roar the past few weeks over the claimed success of the economic stimulus program. Much of this was ignited by Christina Romer, chair of the President’s Council of Economic Advisors, in a speech addressing the question of whether the stimulus was working–and concluding that it was, “absolutely.” …

The recent economic news has been encouraging. The pace of contraction of output and the rate of job losses has declined. This is evidence enough for many people to conclude that the stimulus is working. Writing in The New York Times, Robert H. Frank concludes that the stimulus is working, and that we need more of it. It is perfectly reasonable to have that as an opinion but it isn’t supported by either facts or reasoning.

Now understand that, no matter what point of view you start from–whether you believe stimulus is effective or that it is the voodoo economics of the new millennium–the Economic Recovery Act is a grand fiscal experiment. It is a bit like throwing the baby in the swimming pool to see if it swims.

At some future time, after careful parsing of the data and studying people’s decisions, we may have a much better estimate of the effectiveness of debt-financed government spending of this sort. One should keep in mind, however, that the effectiveness (or ineffectiveness) of the programs to combat the Great Depression in the 1930s is still a matter of great debate. Of course it would be a lot easier if the stimulus programs were better designed and more focused.

To claim, however, that the evidence suggests it is working–and that we need more of it–is nonsense for two reasons. The first, which ought to be obvious, is that we only get one observation on events. To draw a causal connection between the stimulus and the fact that we haven’t plunged into another Great Depression seems bold, to say the least. Since we don’t have a parallel universe in which to play out events without the stimulus, we can’t refute it. …

The other reason why it is illogical to claim a boost from the stimulus is that, for the most part, it hasn’t gone out the door yet. …

Doug Elmendorf, director of the Congressional Budget Office… estimates that by the end of fiscal year 2009, which falls on Sept. 30, just a month from now, 32% of the income transfers for things such as food stamps and extended unemployment benefits will have been spent and 31% of the tax cuts will have been disbursed. And by the end of fiscal year 2010 just 73% of the money allocated to these programs will have been spent.

Even Christina Romer concedes that this part of the stimulus hasn’t done much. …

..the most important stuff–the discretionary spending on infrastructure–has hardly started. By the end of the fiscal year, only 11% of the budgeted discretionary spending on highways, mass transit, energy efficiency and medical infrastructure will have gone out the door. …

There has been remarkably expansionary monetary policy in place for the last year. And there is the promise of massive spending, most of it in the future. If you, the reader, had to pick one as the key fact, would you pick the one that has already occurred and that clearly re-capitalized the banking system and restored liquidity, or the one that hasn’t hit yet?

There is nothing like data to kill a good story.

With or without stimuli, economies do recover from recessions, even great ones.

One Feedback on "“Absolutely”"

Scott D

Every year, Cherokee rain dancers hold their ceremonies. And every year when it starts to rain they proclaim their importance to the tribe.


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