The Brass Tack

Let's get down to it.

Well, but actually, you want a shampoo

Posted by srconstantin on July 13, 2009

Ezra Klein quotes Brad Delong approvingly on the stimulus :

Jared Bernstein and Christy Romer constructed extremely crude estimates of the delta-effect of the stimulus package on the economy by taking when they thought the different components of the $787 billion would be spent and how long it would then take for the government spending to have an impact on the economy. Their estimate is that we saw the effect of $0 (zero) (none) (nada) dollars of the stimulus package on the economy in the first quarter, that we saw the effects of only $14.5 billion in the second quarter, and that we are about to see the effects of $38.6 billion now in the third quarter as the effects of the package ramp up to their peak in the fall of 2010, when we will see $82.1 billion of stimulus spending hit the economy.

To say that what happened in the second quarter means that “the last few hundred billion dollars have had virtually no effect” is like sticking your toe into the ocean and pointing out that your hair is still dry…

Well, that may be true, but to some degree it misses the point. The average length of a recession in the past fifty years has been 13 months. This recession began in 2008. By 2010, the Wall Street Journal predicts that recovery will have progressed enough for employment to rise again. So by the time the stimulus kicks in, the recession may already be righting itself… which means it isn’t really a stimulus, because the increase in aggregate demand comes too late.

The main objection to the stimulus package, apart from the contention by some economists that no fiscal stimulus can ever succeed, is that it would be too slow. It was heavy on infrastructure projects, which take time to get started. It seemed to be an attempt to stimulate while also squeezing in a lot of long-held ambitions for the administration, like high-speed rail and green technology. Now, it’s clear that Romer and Bernstein were aware of the time frame from the beginning, and were honest about it, but that doesn’t mean it was the best choice. If you only dip your toe in the water, it’s reasonable to point out that your hair is still dry if you previously announced that you wanted to wash your hair.

To be fair, let’s point out that the Bernstein-Romer projections turned out to be too optimistic. They thought unemployment would peak at 8%, but it’s now 9.5%. That could be a sign that the recession will last longer than expected, and that unemployment will peak after the predicted date of 2010. If true, that means the stimulus won’t be useless — we’ll still be in a recession a one or two years from now when the dollars kick in. That, however, would be an accidental success of the plan, and one that I hope nobody is cheering for.


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