Stimulus more or less? A failure not being acknowledged. PART 1

The economic impact of fiscal stimulus isn’t a partisan issue. Nor should partisan leanings be the criteria for defining stimulus.

“Stimulus more or less?” is a question because there is a question of whether the thing our politicians call “stimulus” was more or less than a stimulus. Also, there’s a question about whether we need more “stimulus.” Finally there is the question of how THE “stimulus” failed, or put differently, what’s the “right” criteria by which to judge the recent stimulus efforts. That’s the subject of this posting and a theme that runs through any discussion of the topic, although many discussions don’t make their criteria explicit.

So many people have asked for an assessment of the stimulus efforts that it deserves a posting. Generally, when the response is given face-to-face, a thought-out response disappoints the questioner. They are really asking a different question. They want a partisan answer. As soon as one defines the stimulus as starting with almost $200 bil in tax rebates during 2008, their disappointment is palpable.

Here’s a guide to discussions of the issue. It applies whether verbal or in the media, and unfortunately, it surfaces in articles that misrepresent themselves as economic analysis. If one takes only a single thing away from this posting, let it be this: if someone dismisses the Bush rebates as irrelevant to the issue, don’t take them serious, at least not as it relates to an assessment of fiscal stimulus. That’s true regardless of whatever smokescreen they throw up to justify it. Bush, Obama, two Congresses and the Fed have endorsed stimulus packages.

For those who value economists’ opinions, PART 2 of this posting will cite an article reporting on a survey. That will be followed by an analysis of an assessment by a couple of economists. That will be PART 3 and 4. It won’t be a report or summary of the analysis. Rather, it will be a discussion of it. It will include a link because the article is worth reading and quite readable. PART 5 will cite an example of media coverage of the same analysis of the impact of the stimulus. Despite major criticism of the coverage, the example cited is worth reading. PART 6 will return to the stimulus itself, and it is a perfect illustration of why it failed as a stimulus.

Before proceeding, let’s address the right criteria for judging whether the stimulus succeeded. This is very hard to do without introducing one’s own judgments about what is right. Fortunately in this case one can avoid that risk. Every part of the fiscal stimulus was introduced with a definition of what it was supposed to accomplish. Without any doubt, each “stimulus,” (e.g., Bush tax rebates or the Obama American Restoration and Recovery Act (ARRA)) failed by its own definition of success. Further, their failures were far more than just politicians over-promising.

If one needs proof of how bad the failures were, watch the scramble to redefine success. This too is far more than just politicians and economists changing their criteria. One of the most absurd efforts to change the goalposts is the effort to define the failure of the ARRA as being that there was a forecast of its impact. Deconstruct the implications of the failure of ARRA to keep unemployment under 8% and one starts to appreciate why the policy failed. The most important lesson to learn from that failure isn’t, “don’t forecast.” It is, don’t propose a solution if you are only going to use the “crisis” to accomplish some different objective. “Don’t waste a good crisis” may be good politics, but it can lead to failed economic policy.

While discussing criteria it is worth noting that one doesn’t even hear mention of the three T’s (Targeted, Timely and Temporary) that were initially used to define a good stimulus. As criteria they were abandoned long ago. But, when they were, there wasn’t an explicit definition of new criteria.

One final point before proceeding, two indicators of just how pathetically the stimulus efforts failed are the continued speculation about a double dip and the number of people who believe we are headed into another great depression. Now, the Hedged Economist believes the chances of either are slim. But, the very fact that they are still possible, or even still on the table for discussion, is a failure of the stimulus efforts. Clearly, by any definition, one objective of the stimulus was to avoid a double dip and eliminate the possibility of a great depression.

Other indications of the failure will be noted in subsequent parts of this discussion. It failed by many criteria, not just its own.

The reader shouldn’t interpret this to mean the stimulus efforts were either wrong or bad. That would be a misinterpretation of objectivity. They had an economic impact. However, if one can’t look at the failure of previous efforts or even acknowledge that they failed based on their own criteria, it is highly doubtful future stimulus efforts will succeed.