To Stimulate Or Not To Stimulate, That Is The Question

First things first – I have my personal views on the effects of fiscal stimulus and I might address those more in depth in a later blog post.

I stumbled across a section in ‘The Economist’ about the debate on whether fiscal stimulus ‘worked’ or not. Some say the CBO has used flawed models, and that it has contributed to government debt and an eventual rise in interest rates (the bond market has shown otherwise). Others say that without a doubt the stimulus saved the economy, pointing to the obvious halt in rising unemployment, ect ect (which I agree with). After reading the article, I skimmed over the comments section (which ‘The Economist’ has some of the best) and found a good comment I wanted to post here.

>> I think “works” needs to be defined more clearly. Personally, I don’t really buy the notion that government stimulus can return us to full employment in anything but theoretical models. The world’s just too messy and most anything suffers from diminishing returns.

On the other hand, I also don’t buy the notion that stimulus does nothing or even hurts. I think it’s reasonable to assume it does something and that given the depth or the downturn doing something is likely worth it both for the reduction in the human cost and that it will likely pay for itself in greater future economic growth (though I wouldn’t bet on it, interest rates may wash this effect out). Based on what I’ve read, I’d find it perfectly reasonable if someone were arguing that a larger and better targeted stimlulus would have reduced unemployment by a point or so and increased GDP by about the same. More than this and I get sceptical.

As for current debt, I hear you. It’s definitely a worry but I think we still have some scope left for more intervention. The real trick with public policy isn’t so much what we do in a crisis it’s how effectively we deal with the years where there isn’t one. Great societies don’t decline because they face a sharp challenge, they usually rally to those, it’s about how they face the years without a challenge that determines their ability to survive and face crises.

Back to defining works. I tend to agree with economists that think the stimulus helped but was insufficient. I also think that if we had done more of the well targeted interventions, aid for states and laying the groudwork for longer term infrastructure improvements, we’d be marginally better off than we are now. However, I don’t think this would be works in a political sense. As far as the electorate is concerned nothing but a return to full employment would be it “worked.” This I think is beyond the scope of effective stimulus. So, I think we could have raised GDP growth by a point and decreased unemployment by the same and probably shortened the downturn by some inestimable point in time. However, I still think the Democrats would get hammered at the polls just as badly in November in this scenario and that your colleagues would still have been reporting about Beck’s rally last weekend. So while more stimulus would have been good for the country; it also wouldn’t have “worked” in a sense of the term meaningful to most people. The models economists use give too much of an illusion of certainty, which is just an illusion, but because this is how the profession tends to be seen the failure to achieve those perfect results will always mean that to most people, no intervention worked because it will never quite match the model.


Leave a comment

Filed under Uncategorized

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s