EconomicGreenfield

“One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth.”

Steve Forbes, Forbes Magazine, March 1 2010 p. 11 (link found here)

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I have written extensively about interventions, which includes stimulus spending.   Stimulus spending and interventions are widely (and wildly) misunderstood.

I think it is very important to have a full understanding of how the ARRA, a  very large stimulus, is performing.   As I wrote in a July 9 2009 blog post in which I discussed the ARRA, “Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.”  As such, it should be of little surprise that the ARRA has been, at best, such a poor performer when analyzed in a variety of manners.

Here is a recent article from Alan Reynolds concerning the effectiveness of the ARRA.   Although I don’t necessarily agree with some of his conclusions, he does present some interesting statistics and views with regard to how the ARRA has performed.

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SPX at 1102.34 as this post is written

This post will focus on the $787 Billion stimulus.

As mentioned in the last post, there are varying perceptions as to its effect-to-date.

I would like to go back to earlier this year, before the stimulus was enacted. I would like to briefly discuss the plan at that point, as it, as well as the analysis that accompanied it, ostensibly represented (at the time) our national understanding of the economic situation, as well as the solution.

A report was published on 1/9/09 titled “Job Impact of the American Recovery and Reinvestment Plan,” commonly called the “Romer and Bernstein” report.  At the time, I found the report to be very unconvincing with regard to support of the proposed stimulus action.  The analysis, in my opinion, was very tenuous.

Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.  Perhaps the biggest problem is that it is relatively slow to disburse funds.  If it were “front-loaded” it would be delivering funds at a much greater pace – and presumably be more helpful to the economy now, not later. 

There is another issue that this slow disbursement causes – that of measuring the effectiveness of the stimulus.  At this point, the stimulus is plainly lacking in effectiveness vs. plan, as measured by the unemployment rate.  However, some supporters of the stimulus are quick to point out that only a fraction of the funds have been disbursed; therefore, it is too early to assess the viability of the stimulus plan, as its benefits have largely yet to be realized.   Thus, a question forms:  is the stimulus ineffective, or will it just take longer to attain the benefits?   This question creates a conundrum in the following sense:  if the stimulus is ineffective, presumably (according to stimulus proponents) we should then quickly do more stimulus; however, if the existing $787 Billion stimulus has yet to largely “kick in”, then it would be premature to do additional stimulus.  Another conundrum can then be seen:  if we now assume that the $787 billion stimulus will work with time, but are later proven wrong, from a pro-stimulus viewpoint we will have wasted both time, and the ability to proactively stem further economic decline because we have passed on the current opportunity to do additional stimulus.  Thus, as one can see, this timing of the benefit issue has created a difficult and tricky situation, especially for those who are stimulus proponents.

Other problems I have found with the $787 billion stimulus (again, assuming the stimulus should be done) is that much of the theory and practicality of the stimulus is flawed; and the “pork” is very objectionable in both size and (lack of) quality.

Ostensibly, this $787 Billion stimulus represented a “best effort” attempt to improve our economic situation.  If one is of the opinion it is not working, or not working as planned, is it not working because it is poorly designed, or because the inherent concept of stimulus holds little or no validity?

For those that have not seen it, I wrote an article titled “Intervention’s Potential Blind Spots” as I believe that various facets of intervention (including stimulus efforts) deserve further attention.  It can be found here (under the Articles heading):

http://www.economicgreenfield.com/prosperitybypencom-directory/

SPX at 884.88 as this post is written

Copyright 2009 by Ted Kavadas

Perhaps one of the first questions that should be asked with regard to our current economic difficulties is “Do we Understand the Problem?”  I discussed this concept in the article “President Obama’s Greatest Challenge” (listed here as the fourth article):

http://www.economicgreenfield.com/prosperitybypencom-directory/

Do we understand the problem?  I will leave that question unanswered, for now.  However, some aspects to consider:

1. We seem to continually underestimate the complexity and/or severity of our economic situation in that each stimulus is billed as the “solution” to our problems, yet each fails to stem further economic weakness.   This problem has occurred with the $150 billion tax rebate stimulus in 2008; TARP in 2008, and now, based upon results vs. plan (to date), The American Recovery and Reinvestment Act of 2009.
2. As mentioned in yesterday’s post, “An Interesting Chart on Job Losses,” the length and severity of this purported recession are outsized, on a historical basis, despite the very large aggregate intervention steps taken.
3. There is widely varying conclusions as to the effect of the $787 Billion American Recovery and Reinvestment Act.  As mentioned in this Wall Street Journal article (which does a good job of summarizing the current calls for more stimulus): 
   http://online.wsj.com/article/SB124692229711302683.html ”Depending on your perspective, the stimulus plan:
   a. Isn’t working.
   b. Is preventing unemployment from being even worse, or
   c. Hasn’t had enough time to really kick in yet.”
4. The rather disconcerting reality that despite official large-scale interventions (including stimulus plans) since at least mid-2007, the economy is, at best, not getting any worse.  But as mentioned in the following Wall Street Journal editorial,

   http://online.wsj.com/article/SB124657739768489217.html

   “The real question is how strong and sustained any expansion will be. If the “stimulus” were working as advertised, it ought to be very strong.”

5. Add to this list an array of disturbing economic statistics and other “outlier” behavior that I have previously discussed. 

As listed above, as well as for other reasons, there is much to consider when one attempts to answer the question “Do we understand the problem?” 

Part III to follow…

SPX at 880.38 as this post is written

Copyright 2009 by Ted Kavadas