John Cochrane talks about the Harvard Stimulus debate between John Taylor and Larry Summers. I cannot recommend Cochrane and Taylor's blogs enough. However, they're both more fun to read if you at least have a good understanding of intermediate micro and have taken one of those silly intro macro classes with ISLM curves.
Even if some of the terminology and references are not familiar to you, these economists have an ability to really get to the heart of the issue without obfuscating the argument with appeals to authority. As Taylor explains, you cannot evaluate whether the various stimuli we were hit with did anything beneficial using the very same models that generate them:
The problem with using these existing macro models to answer the question of this debateDid fiscal stimulus help the economy?is that they will simply repeat the same prediction story over and over again. You learn virtually nothing if you use the same models to evaluate the impact that you used to predict the impact
If tomorrow, real productive resources (not paper money) fell from the sky (similar to finding a new oil field, if you are allowed to get it out), of course, it would help the economy grow. But, stimulus is not manna from heaven, as Cochrane points out:
Stimulus has to be paid for. In evaluating stimulus for the whole economy, you have to count the loss of demand from the paying-for-it side equally with the raise in demand or employment from the spending-it side.
Back in 2009, when Mr. President was pushing stimuli, he said:
There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.
President-Elect Barack Obama, JANUARY 9, 2009.
A lot of us economists took issue with that put our names on CATO's response.
Three years later, we are still listening to fairy tales of recovery.
There is a reason for this. It is one Keynesian economists ought to be familiar with, but somehow either ignore or don't fully comprehend. It's called expectations.
Simply put, groundbreaking research in Economics in the 60s and 70s showed that expectations matter and can nullify a planners well laid out input/output tables and macroeconometric estimates in a jiffy. Karl Shell and David Cass introduced the concept of sunspot equilibria where people's beliefs drive where the economy ends up. As Karl sums up:
The current financial meltdown is largely financial and partly sunspot driven.
I agree with that statement, and the way I see it, the housing bubble was going to burst at some point no matter what. However, what happened afterwards has a lot to do with expectations and beliefs.
The best example I can give to explain my perspective is the Miracle on the Hudson.
The engines were out. The plane was not going to continue to fly indefinitely no matter what the pilot did.
Sure, Sully was a great pilot to be able to land the plane on the river. But, he was an even better leader because of the way he handled the crisis.
Can you imagine anyone would have survived the landing if Sully had gotten on the intercom and started listing all the things that could go wrong before, during, and following the emergency landing:
People, we're probably all going to die. We have no engines, and I am trying to land on water. The slightest error, and the wings might shear off the body, and you might spill into the freezing Hudson river, the fuel on board might explode and you might all burn to a crisp. Even if I put the plane down on the water successfully, you don't have much time to escape. Run for your lives people, run for your lives!!!
He could have landed the plane just as safely as he did only to have the passengers die crushing each other to death and blocking the exits in a panic.
Instead, he said,
brace for impact.
Unfortunately for us, George W. Bush was not that leader in early 2008. I can understand that. He did not have the intuitive understanding of how these things work. Not many people do. He trusted Paulson and Bernanke, who promptly proceeded to do exactly what Sully did not do. Told us that if they did not save Bear Stearns, we would be transported back to 1929.
Seizing on an opportunity in an election year, opportunists of all sorts filled the field. Democrat candidates started pumping full crisis propaganda. Mr. Obama's future treasury secretary, "Turbo Tim" was managing the crisis in New York. It was full on
we're all going to die mode.
Instead of a simple
brace for impact.
And, then, managing the impact.
This panic was seized upon by Mr. Obama as a tool to push his agenda. I have to grow the Federal Government to control every minute detail of your lives, because, if you don't let me do that, we're all going to crash and burn was the message.
In response to today's disappointing job numbers, Reuters mentions that:
Fed Chairman Ben Bernanke said last month the central bank is providing enough support for the economy but kept open the possibility of a further round of bond purchases to push interest rates lower should the economy weaken.
We're beyond fiddling with interest rates. We're at the point where the only thing that will prevent the U.S. from recreating Japan's Lost Decades here is an actual shift in expectations. We (rationally) expect inflation. We (rationally) expect higher and higher tax rates. We (rationally) expect greater and greater intrusion into our lives. Some (rationally) expect not to have to work to feed the children they create. Some (rationally) expect government to fund their businesses.
On top of that, we (rationally) expect widespread conflict in many regions of the world that will disrupt the free flow of oil, the life blood of today's world.
These things all must change for the dynamism of the U.S. economy to be restored.
It is not certain that they will under a Romney presidency.
But, it is certain, after three full years of his stimuli, they are not going to change under this president.