My Thoughts on More Stimulus, Part III

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):

SPX at 884.88 as this post is written


Copyright 2009 by Ted Kavadas