Thursday, October 13, 2011

Ezra Klein Hits One Out of the Park

I seldom remember journalists by name; I use an RSS feed and look for headlines that catch my eye, read the story and move on.  Bur Ezra Klein is quickly becoming one of the few writers I actually remember and look for because he writes incredibly well -- especially about economics.

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.

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.
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.

I would encourage you to read the entire article as it's really well done.