Tuesday, September 14, 2010

Stimulus more or less? A failure not being acknowledged. PART 2

The economic impact of fiscal stimulus isn’t a partisan issue. But, “experts” need to define their criteria of assessment.

An article in CNNMoney entitled “Economists offer mixed review of U.S. policy” caught my eye recently. Mainly because of the obviousness of the headline, stating that economists disagree isn’t news. There’s a saying among economists: “put two economists in a room and you’re likely to find at least three opinions.” That’s certainly the case on an issue as broad as policy.

One can retrieve the article under a different headline: “Economists: I dunno, man. What do you think?” by Ben Rooney, CNNMoney August 31, 2010: 1:29 PM ET. That’s a more telling headline, but totally inaccurate. Don’t know is nonsense. They all know; they just don’t all know the same thing. “How’s that possible?” you ask. Simple: they are each applying different criteria for assessing policy and may actually be assessing different policies: some assessing past policy, some assessing current policy and some speculating on the impact of future policy.

Most of the article is a report on a survey of opinions about future policy. Problem is: who cares about there conclusions if they haven’t defined the objective?. There is one question about what economists think should be the objective, but it is presented without context. Again, without context, who cares? Economist can be helpful addressing how policy works, but when it comes to what policy should address, the “I dunno” should be an economist’s professional answer. If not “I dunno,” a lot of context should be presented.

There is one statement in the article that is just not true. The article says, “Deflation occurs when both prices and demand fall, creating a downward spiral that can stifle economic growth for years.” Prices can fall without demand falling; think productivity. Further, both can fall while an economy grows; think exports. Prices and demand can fall while savings are flowing into investments that grow exports.

Deflation is, by definition, a price phenomenon. In the US during the twentieth century price declines and economic stagnation often occurred within short timeframes. But, inflation and stagnation also occurred at the same time, also. Further, the worst downward spiral that not only stifled, but destroyed economic growth, was associated with hyperinflation during of the 20’s and 30’s in Germany.

Let’s not confuse things by implying that the link between price and growth is causal. Each can have their own cause. Perhaps fast growth with falling prices and consumption playing a smaller part in demand is an objective worth considering. If one defines them as incompatible, there better be a strong argument why a situation that occurred for long periods in the past can’t be achieved now.

So, there are three takeaways from the article: First, if the criteria aren’t identified, don’t assume others are using your criteria or even uniform criteria. Second, without criteria, assessments are meaningless. Third, don’t let anyone rule out an objective without explaining why to YOUR satisfaction.

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