There are three pillars of the conservative economic thought concerning the economic environment that I believe must be addressed in order for us to reconceptualize how we discuss the current economic situation, and especially how we assess the substance of the various policy solutions that have been put forward.
These three assumptions are the “failure” of the stimulus packages put forth by our government, the necessity of austerity, and the problem of over-regulation. Here, I will address the “failed stimulus”' argument.
In discussing the perceived failure of the stimulus, one needs to take into consideration the conditions in which it was developed and the expectations of its impact. It is true that the Obama administration woefully overestimated the successes of the stimulus. However, the Obama administration’s overly optimistic attitude is somewhat tempered by the informational environment they were in when they made their assumptions.
Assessments made by the Bureau of Economic Analysis, the organization that provides official statistics on economic growth, were consistently undervalued. Initial projections of a contraction of 3.8% in the fourth quarter of 2008 were increased to a 6.3% contraction before finally reporting an 8.9% contraction, a report that was published this year. As Ezra Klein explains, “That makes it one of the worst quarters in American history.”
In formulating their assessments of the impact of the stimulus, the Obama administration was using the best economic evidence available, but evidence that inaccurately described the severity of the crisis. There is a suspicion among policy analysts and pundits that, even if accurate statistics were available, the feasibility of a larger stimulus was quite low. So, perhaps a more aggressive stimulus package would’ve failed less, but it might not have happened anyway. The administration was hamstrung to put forward a stimulus package that could have a substantial economic impact (according to the under-weighted statistics available), but one that was also a viable policy option.
I would argue that a few important things would have been different, had more accurate information been available:
- The severity of the crisis would have been made clear (a 9% contraction), which might have provided the political cover needed to pass a broader stimulus;
- The official estimates of the impact of the stimulus package would have been tempered (in the event the size of the stimulus did not change);
- Better information could have provided avenues for a different approach in how the stimulus would be implemented, perhaps increasing its effectiveness;
Ultimately, both the initial assessments of the crisis and the current assessments of the stimulus are based on the same flawed attitude: that this is a normal recession. The literature on recessions induced by financial crises is rife with statistics that suggest such recessions are characterized by long periods of stagnant growth driven by inertia from substantial debt hangover. Carmen Reinhart and Ken Rogoff, the authors of a study in financial crises, This Time Is Different, offer a sobering assessment, “If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level.”
So, I will concede that, based on the estimates put forward by the Obama administration in early 2009, the stimulus failed. However, an assessment based on flawed expectations, must itself be flawed. The stimulus was effective as a re-stabilizing force in an economy that had just suffered an historic blow. There is an argument that claims the positive effects were too fleeting and the gains too brief; it should be noted that the stimulus was not structured to achieve “stimulation” beyond a certain point (that is beyond the benefit of infrastructure investments, unemployment benefits and tax cuts, etc). It was meant to provide a boost in the short term. What we know now is that that boost was just enough to recover from negative growth, but not enough to stimulate lasting positive growth.
This kind of failure, that of a deficit of information on a time-sensitive issue, is an all too common failure of policy and one that is hard to remedy. It would be a mistake to confuse this particular failure as an argument against stimulus as a fundamental tool of expansionary economic policy.
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