Who Killed Stimulus as a Policy Option?

Wasn’t me. Was it you?

Obama has been out pitching his “stimulus” plan after leaking most of it earlier. It’s kind of hard to believe his rhetoric while paying any attention to how his solutions are playing out in Greece.

That comment comes from someone thoroughly schooled in Keynesian theory. Keynes had a lot to say, but some of it proved wrong. Even when right, it’s dangerous to ignore the limitations, and as the last few postings pointed out, economics didn’t stop with Keynes.

One doesn’t need to be an economist to know who is destroying fiscal policy as a tool. Just review what has been done. Consider the direct results of the Obama programs. Some seem to be effective subsidies for specific industries like auto bailouts (cash for clunkers and cram down on bond holders). Others like housing programs didn’t do much. But, stimulus has to create jobs, preferably permanent jobs. Obama’s first stimulus failed at that by any definition including his own. It’s possible to argue that the failure was then: this is now. That, however, is an experiment we can’t afford. By some estimates, his first stimulus bill cost $280,000 per job even using the administration's inflated estimates of jobs "created or saved." That is over five times the median pay. Using more realistic estimates of job creation, the picture is worse.

As was pointed out in the postings on stimulus back in September of 2010, there is plenty of room for quibbling over what to include in stimulus (in particular see: “Stimulus more or less? A failure not being acknowledged. PART 3”). That posting includes the statement:

“Interesting thing is that reassigning individual measures shifts some items from a financial measure in TARP into the stimulus category and vies-a-versa. (Retain that idea because it will explain why The Hedged Economist uses a larger number when discussing stimulus …).”

Thus, while a range of estimates of the cost per job is appropriate, it should not be surprising that The Hedged Economist’s estimate is at the high end of the range. That alone wouldn’t be enough to discredit stimulus. The problem is those darn rational consumers. The public has completely out thought the Keynesians. Increase the stimulus and the public saves more in order to pay the inevitable higher taxes. Furthermore, drive down interest rates and they’ll just hold cash.

Liquidity trap is what economists call it when people hoard their cash. In the discussion of stimulus back in September 2010, this blog argued the multiplier wouldn’t be linear. Well, it seems the wizards in charge may have succeeded in producing a negative aggregate multiplier, a result that should be darn near impossible.

Rational expectations may be the cause, but understanding opportunity costs is the solution. It may be too much to ask, but sooner or later politicians and Keynesian economist will have to acknowledge microeconomics. There is a distinct possibility people might know what to do with their own money. They may borrow too much during good times, save too much during hard times, and waste some by someone else’s definition, but for goodness sake, they don’t destroy it the way our policies have.