Wednesday, September 29, 2010

Stimulus more or less? A failure not being acknowledged. PART 5

Sometimes one can’t imagine an explanation for what has been said other than that it’s designed to conceal the failure.

In an article entitled: “Economists agree: Stimulus created nearly 3 million jobs” by David J. Lynch, USA TODAY, it is hard to explain the inaccuracies by any explanation other than personal partisan leanings. This example is used because the author clearly understands something about economics. That can’t be said for every reporter. However, there are unfortunate, almost deceptive, aspects of this report.

For starters: “Economists agree.” You know that’s wrong. Economists never agree on an issue as broad as the impact of the stimulus. The title is either unfortunate or designed to mislead anyone who doesn’t read the article. One of the things that makes Lynch’s article much better than most is that he does the research needed to report on a wide spectrum of opinions (both of economists and politicians). If one ignores the headline, the article is worth reading. He even cites economists who might strongly disagree with his title.

Sticking with the title, the Blinder and Zandi article discussed previously in this series on policy is one source being used for this media report. It states: “The fiscal stimulus created 2.7 million jobs…” (The previous posting pointed out some limitations of that statement). Even ignoring the limitations on that estimate, that’s not 3 million by 300 thousand jobs; 300 over 2,700 or nearly 11%. Doesn’t sound like nearly 3M any more than the Dow was nearly at it’s high for the year; it was down about 800 from its record for the year at the time the article was written; that’s 11,200-10,400 / 10,400 measuring it the same way as the jobs misstatement, or only 8%. Granted Blinder and Zandi might grant that an 11% range for an estimate of the impact isn’t unreasonable, but that is not the way the report is presented. The 3 million is close to the White House’s claim, not a point of agreement among economists.

Lynch points out that roughly one-third of the stimulus came in the form of tax cuts that will “eventually result in related hiring.” His quoting Paul Krugman’s unsupported and incorrect statement that “…tax cuts that would have a less-immediate impact on job creation.” doesn’t help. Timing is the issue. Being dead wrong on this timing issue is important. There is ample evidence tax rebates and cuts that meet certain criteria produce an almost immediate response. The critique is that it is very transitory or temporary. So, if timely and temporary are still criteria for a stimulus, what does that imply about the statement?

The article states “In the partisan war over the economy's performance, the word ‘stimulus’ has become synonymous with ‘boondoggle’…." Perhaps that’s because in the partisan world of journalism stimulus has become synonymous with Recovery Act. Even though, as Lynch points out, stimulus has been a bipartisan approach. The issue cuts across partisan lines. It’s a philosophical issue not a partisan issue. A bipartisan philosophical issue isn’t how Lynch presents it. Partisan isn’t how the Blinder/Zandi article presents it. In fact, a substantial portion of the tax cuts which Lynch implies don’t create jobs fast enough were not a part of the Recovery Act.

Zandi points out that the multiplier (the bang for the buck) is not the same at all points in the business cycle and is less than one over the cycle. Thus, Lynch is given a perfect opening to discuss some of the ridiculous assertion made by Klugman in a competitive newspaper. Instead the assertions are just cited without comment. In this case however, one should give Lynch a pass regarding intentional bias. More than likely he just suffers from journalistic intimidation by the competitive paper. Further, he reports what is being said. One can’t criticize him for not refuting it. He’s doing a good job of reporting and his article deserves credit for that.

It would be interesting to see a similar report surveying economists on the financial measures taken. Lynch cites Blinder and Zandi whose article states that they found the financial measures were “…substantially more powerful…” than the stimulus. Lynch also quotes Rogoff’s comment about the financial measures: “I think it was important for confidence. ... But fiscal stimulus was the least important of the three planks of the government's strategy.” Rogoff might consider the financial measure more important than the stimulus. The financial measures certainly targeted confidence.

The quote is from Harvard University's Kenneth Rogoff, former chief economist of the International Monetary Fund and coauthor of THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY by Carmen M. Reinhart and Kenneth S. Rogoff (a book The Hedged Economist strongly recommends). Clearly, Lynch has the contacts and the skill to write an interesting report on the topic.

Further, as Lynch reports “…the spending's impact was dwarfed by other crisis-fighting tools….” But, to do them justice, he’ll have to get past some inaccurate preconceptions. For example, he refers to “…costly efforts to stabilize crippled banks and the Fed's unconventional monetary policy.” Well, if he talks to people who made an honest effort to measure the cost, he might choose alternative wording like “arguably profitable efforts to stabilize crippled banks.”

Further, a broader brush than recent events shows the Fed’s unconventional monetary policy is only unconventional for the Fed. The same policies, even some of the same tactics, have been used for centuries, long before there was a Fed. They show up in many countries even in the pre-Fed monetary history of the US. In fact, one finds some of the policies were pursued in more recent history often over the objections of the Fed.

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