Over the weekend he posted an article on the issues related to the stimulus and the recovery. It is one of the best pieces I've read on the players and politics involved. I simply wanted to focus on two points from the story that really highlight the central problem with the stimulus:
The Bureau of Economic Analysis, the agency charged with measuring the size and growth of the U.S. economy, initially projected that the economy shrank at an annual rate of 3.8 percent in the last quarter of 2008. Months later, the bureau almost doubled that estimate, saying the number was 6.2 percent. Then it was revised to 6.3 percent. But it wasn’t until this year that the actual number was revealed: 8.9 percent. That makes it one of the worst quarters in American history. Bernstein and Romer knew in 2008 that the economy had sustained a tough blow; t hey didn’t know that it had been run over by a truck.In other words, a central reason why the stimulus didn't work as advertised is it was based on data that grossly underestimated the overall contraction. Initial estimates showed a contract that was half as small as the actual contraction that occurred. That is a huge understatement.
Some partisans offer a simple explanation for the depth and severity of the recession: It’s the stimulus’s fault. If we had done nothing, they say, unemployment would never have reached 10 percent.The argument that the stimulus didn't do anything is simply wrong. Government spending is a variable in the GDP equation; when you increase it, there will be an effect. There is no way to get around that basic mathematical truth.
That notion doesn’t find much support even among Republican economists. Doug Holtz-Eakin is president of the right-leaning American Action Forum and served as Sen. John McCain’s top economic adviser during the 2008 presidential campaign. He’s no fan of the stimulus, but he has no patience with the idea that it made matters worse.
“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”
A fairer assessment of the stimulus is that it did much more than its detractors admit, but much less than its advocates promised.
I would encourage you to read the entire article as it's really well done.
3 comments:
What an amazing piece by Ezra Klein!
I like these two quotes in particular:
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1) “I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” says Peter Orszag, who led the Office of Management and Budget before departing the administration to work at Citigroup. “I didn’t realize we were in a Reinhart-Rogoff situation until 2010.”
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That's what people like Orszag were supposed to know coming into the job, not in hindsight. Turns out Krugman was right on this from the beginning!
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2) “We’re trying right now to keep our lifestyles going,” says Michael Spence, a Nobel Prize-winning economist at New York University. “It’s not really working, but the way we’re doing it is putting all the burden on the unemployed while trying to leave the employed untouched. Eventually, this is going to require a redistribution of that burden.”
In other countries, he says, the burden is more widely shared. The employed work less — and get paid less — so there are more jobs to go around. That leads to a little pain for a lot of people, rather than a lot of pain for fewer people. It also keeps more workers on the job, which means their skills don’t deteriorate and the economy isn’t left with people who became unemployed and then found themselves unemployable.
That’s what we’ve seen here: Employers have become so leery of hiring the unemployed that the Obama administration has proposed to make it illegal to discriminate against them. Such a policy is easier said than done, but it speaks to the downside of letting workers fall out of the labor force for long periods of time.
Germany’s response to the recession included a work-sharing program that subsidized salaries when employers trimmed the hours of individual workers to keep more people on the job. If workers attended job training, the government gave a more generous subsidy.
The program worked. Even though Germany’s economy was devastated by the recession — declining by almost 7 percent — the jobless rate fell slightly, from 7.9 percent at the start of the recession to 7 percent in May 2010.
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Imagine that! By doing something that I proposed here a long time ago -- reducing the workweek to create more full-time jobs -- is exactly what worked in Germany to help reduce their unemployment rate.
I'll propose it again just to be clear: I think we should reduce the full-time workweek to either 32- or 35- hours per week, with time-and-a-half after that, and I would add double-time after 40 hours per week. Not only would it salvage the lives of many of the permanently unemployed (i.e., the 99ers), but it would de-stress those who aready do have jobs but are being worked to death in a culture that pushes workers too hard to begin with.
Thanks, bonddad. This is a great article, unusually thoughtful - may be the definitive summary of the past few years. Very thorough, very sad.
Let me also say how much I appreciate this blog, especially the daily summaries.
Mark S
Ezra Klein is a master apologist and excuse maker. I'll give him credit for that. Did the stimulus have some positive effect? Probably. When you borrow $800B from the future to spend it today, you do get the illusion of temporary prosperity. But then reality sets in and it's time for stimulus II.
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