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The Obama Stimulus Bill

December 18, 2011

So, here’s why my analysis of the multiplier was necessary for a discussion of the “American Recovery and Reinvestment Act of 2009”, the $787 billion bill that was enacted to stave off the “Great Recession” (an unfortunately mundane title compared to the thunderous “Global Financial Crisis”).

Borrowing a line from Paul Krugman, the Obama administration’s execution of its stimulus policy was done in exactly the right way to completely discredit the effectiveness of Keynesian fiscal policy. Through a combination of poor political judgement and the compromised nature of the bill itself, it was never going to be seen as a success, something which was pointed out by economists such as Krugman at the time, but really could be seen by any half-baked Keynesian economist. Christina Romer, one of the bill’s chief architects and a half-baked Keynesian economist if ever there was one, reveals part of the problem when defending the stimulus act from accusations that it didn’t do anything:

After life-saving surgery to stop the bleeding, the patient is likely to still feel
pretty awful and will have a long way to go before he is fully healed. But that doesn’t
mean the surgery didn’t work. You have to judge the effect of the surgery relative to
what otherwise would have happened. Without surgery, the patient would have died.

Now, on the surface, this is substantially true. There is overwhelming evidence that the stimulus bill prevented the American economy from free-falling, not least that unemployment peaked at 10.1% in October 2009 and remained relatively stagnant during 2010-11, trending at 9%, when the stimulus money began to run out (I’ll explain why later). So yes, Romer is completely accurate in saying that economic stimulus does not guarantee immediate recovery – after all, the Great Depression lasted for well over 10 years.

The issue with what Romer is saying is that it should never have had to come to this point in the first place. She should never have been required to defend the stimulus, whose impact was one of stabilisation rather than revitalisation. This put her, Timothy Geithner and President Obama in the unenviable position of being required to prove a negative – to argue that the recession “could have been worse”, which is an unconvincing argument no matter how you spin it. That isn’t to say that the Democrats couldn’t have successfully argued such a position, but like our own Labor party, they proved not only incompetent but gutless in selling their successes, which allowed a conservative leave-it-to-beaver movement to gain credence, convincing the public that in fact, black is white, and cutting spending will increase jobs.

That was a political failure trumping economic success. However, let’s now move onto that “success”. Romer later admits:

The biggest deficiency in the act was that it was too small relative to the problem
we were facing. It is hard to imagine that nearly $800 billion could ever be thought of
as too small. It was, as I mentioned before, the largest countercyclical fiscal stimulus
ever enacted.

But we were facing what turned out to be the worst recession since the Great
Depression. At the time we were designing the Recovery Act, we knew the downturn
was very bad and getting worse. But neither the Administration nor most other
forecasters correctly predicted just how truly horrible it would become. As a result, the
will to do the truly monumental fiscal stimulus that was needed did not exist.

Well, $800 billion probably was enough, if it was actually spent properly (US GDP stood at $14 trillion at the beginning of 2009, so perhaps an extra $200-400b was warranted to give the US economy a real kick-start, the like it hadn’t seen since Reagan’s perverse Keynesian arms boom in the early 80s). Admittedly, Romer does have a point – the state of the US was very ill even before the GFC. Public investment had been neglected for fifty years, and as a result much of the infrastructure built many decades ago required reinvestment, to no avail. As such, states have both raised taxes, or cut services, or in most cases, both. These costs are neglected when one looks purely at the federal situation. It was therefore understandable why a considerable part of the stimulus package was aid towards states. However, this hardly counts as stimulus, and is unlikely to have a high multiplier effect. Similarly, the tax cuts, comprising a substantial part of the bill, were bound to be ineffective. When Kennedy reduced taxes from low-90% brackets to 70%, the American economy would have benefited from a corresponding stimulus, because 90% is, as Reagan himself found in his acting career, rather impunitive (as a side-note: this is far more relevant for those who actually engage in labour work, not finance). However, contemporary US taxes are so low already, that a slight decrease always was going to achieve little. Besides, entrepreneurs aren’t going to invest just because they have a little more pocket money. They’ll invest if their expectations are reasonable. The best way to achieve that? Public works programs, as Keynes said himself.

Unfortunately, infrastructure spending didn’t appear to be the priority. And what was spent was largely “shovel-ready” works; that is, building projects that can start right away. The US economy required overhauling, not patching up – a New Deal, not a half-assed fix. As such, it is easy to see why the money (and subsequently unemployment) dried up mid-2010, which is where the economy’s essentially stagnated. In the excellently chosen words of Mr Krugman:

Everybody knows that President Barack Obama tried to stimulate the economy with a huge increase in government spending and that it didn’t work. But what everyone knows is wrong.

Think about it: where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Obama took office. So what happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had. This isn’t 20-20 hindsight: some of us warned from the beginning that tax cuts would be ineffective and that the proposed spending was woefully inadequate. And so it proved.

It’s also worth noting that in another area where government could make a difference – help for troubled homeowners – almost nothing has been done. The administration’s program of mortgage relief has gone nowhere. Of the $US46 billion allotted to help families stay in their homes, less than $2 billion has been spent.

So we have established that the stimulus bill was inadequate in both quality and quantity. Well, you may say, what’s new? Politics is about compromise, is it not? To which I say, yes, of course. However, what this neglects is how the bill itself was sold to the American people. As Christie Romer highlights above, they thought the bill was the cat’s pyjamas, the bees knees – there had never been a stimulus bill so huge in size before. And that’s how they sold it to the American people. It wasn’t the fight of “We tried as hard as we could, we did our best, but clearly some thought that tax cuts for the rich were more important than investment in public infrastructure. We will not stop fighting to ensure that the country gets the economic stimulus it deserves, and we’ll commit to getting every worker out there a job, no matter what Fox News or the Republicans tell you, or dare I say it, even some Democrats.” Instead the fight was “We have designed a stimulus bill, we have tried to get as much bi-partisan support, and we think this is the bill our country needs.” You may suggest that the former statement suggests that the President is weak and unable to achieve what he wants, which no doubt is a reasonable concern. On the other hand, is that worse than claiming that what you didn’t want is actually perfect and being liable for the bad results? Undoubtedly, rightly or wrongly, the public tends to believe that at the end of the day the President is responsible for the country, regardless of political obstacles, but there is also a world of difference between having your discontent confirmed and having your predictions proven wrong and policy inadequate. That is to say, the President cannot wholly shift blame, but he can certainly point out that he was right from the beginning.

The real shame is that we’re seeing this all over again with the American Jobs Act, the approximately $450b package that consists of 56% tax cuts, repeatedly sold as the perfect compromise between Democrats and Republicans. It’s unfortunate that the Democrats don’t seem to realise that the Republicans aren’t playing the same game as them. They’re not in it for the American people. The sooner they realise that the better. Then again, maybe they just don’t care. After all, with Timothy “Our Man In Washington” Geithner as Treasury Secretary, the fox is well and truly guarding the hen house.

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From → Economic, Political

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