Guts of New Yorker Essay on The Stimulus

The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7% in recent months. Economists at various Wall Street houses suggest that it boosted GDP by more than 2%. A recent study by Mark Zandi and Alan Blinder, economists from respectively, Moody's and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above 11% and that GDP would've been almost half $1 trillion lower. The weight of the evidence suggests that fiscal policies softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. It did so without any of the negative effects that deficit spending can entail: interest rates remained at remarkably low levels, and government borrowing didn't crowd out private investment.

Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they are opposed to the new stimulus plan.

Many voters conflate the stimulus bill with the highly unpopular bailouts of the banking sector and the auto industry;

Rep. Mike Pence, of Indiana, referred to the "bailout stimulus."

The very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. That tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping states avoid layoffs and spending cuts, but politically it didn't get much notice, because it was the dog that didn't bark -- saving jobs just isn't as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. Unless you are unemployed this wasn't something you’d pay attention to.

The stimulus was also back-loaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and ensure that money would be kept flowing into 2010, lessening the risk of a double-dip recession. It also made the stimulus less potent in 2009 when the economy was in dire straits, leaving voters with the impression that the plan wasn't working. Or subtly, while the plan may end up having a transformative impact on things like the clean energy industry, broadband access and the national power grid, it's hard for voters to find concrete visual evidence of what the stimulus has done (as occasional road signs telling us our tax dollars are at work notwithstanding). That's a sharp contrast with the new deal legacy of new highways, massive dams, and rural electrification. Dramatic, high profile deeds have a profound effect on people's opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it's not surprising that the voters view is: "we spent $800 billion and all I got was this lousy T-shirt."

If you take action and things go wrong, you're often held more responsible than if you do nothing, even when the failure to act would lead to a disastrous outcome. Of course, presidents are always blamed or rewarded for the state of the economy. That, in pushing through the stimulus plan, the Administration tied itself to the fate of the economy more tightly than if it had done nothing. It's a harsh lesson: when Rome is burning, trying to put out the fire may cost you more than just sitting by and fiddling.

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You Must Read This!

You can blow up the actual copy by clicking on it and then "control +" until it is as big as you like.  (Before I realized you could do this I "Nuanced" the article by reading it into Nuance.  That result is below, with my bolding.)

The New Yorker, September 20, 2010, at 52:

When Pres. Obama unveiled an array of new tax cuts and spending proposals last week, one word was noticeably missing from his speeches: "stimulus." Republicans, meanwhile, energetically set about decrying the plan as "more of the same failed stimulus" and as simply a "second stimulus" -- as if the word itself were a damning indictment....

By any reasonable measure, the $800 million stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7% in recent months. Economists at various Wall Street houses suggest that it boosted GDP by more than 2%. A recent study by Mark Zandi and Alan Blinder, economists from respectively, Moody's and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above 11% and that GDP would've been almost half $1 trillion lower. The weight of the evidence suggests that fiscal policies softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. It did so without any of the negative effects that deficit spending can entail: interest rates remained at remarkably low levels, and government borrowing didn't crowd out private investment.

Lately, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they are opposed to the new stimulus plan. The hostility has numerous sources. Many voters conflate the stimulus bill with the highly unpopular bailouts of the banking sector and the auto industry; Republicans have done a good job of encouraging such misconception, as when Rep. Mike Pence, of Indiana, referred to the "bailout stimulus." Also, the stimulus -- which, to begin with, was too small to completely offset the economy's precipitous drop in demand -- was oversold. The Administration's forecast about the recession "particularly regarding job losses" were too optimistic, and so its promises about what the stimulus would accomplish set the public up for disappointment.

But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. That tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping states avoid layoffs and spending cuts, but politically it didn't get much notice, because it was the dog that didn't bark -- saving jobs just isn't as conspicuous as creating them. Extending unemploy-ment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. Unless you are unemployed this wasn't something you’d pay attention to.

The stimulus was also back-loaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and ensure that money would be kept flowing into 2010, lessening the risk of a double-dip recession. It also made the stimulus less potent in 2009 when the economy was in dire straits, leaving voters with the impression that the plan wasn't working. Or subtly, while the plan may end up having a transformative impact on things like the clean energy industry, broadband access and the national power grid, it's hard for voters to find concrete visual evidence of what the stimulus has done (as occasional road signs telling us our tax dollars are at work notwithstanding). That's a sharp contrast with the new deal legacy of new highways, massive dams, and rural electrification. Dramatic, high profile deeds have a profound effect on people's opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it's not surprising that the voters view is: "we spent $800 billion and all I got was this lousy T-shirt."

Bizarre as it may seem, a less well-designed stimulus might have been more popular, and that would've made it easier for Obama to sell the electorate on his new stimulus proposals. But, given the scope and depth of the recession, it's also likely that any stimulus would become a political albatross. As Jonathan Baron -- a professor at the University of Pennsylvania who studies the role of psychology and public policy -- has discussed, if you take action and things go wrong, you're often held more responsible than if you do nothing, even when the failure to act would lead to a disastrous outcome. Of course, presidents are always blamed or rewarded for the state of the economy. That, in pushing through the stimulus plan, the Administration tied itself to the fate of the economy more tightly than if it had done nothing. It's a harsh lesson: when Rome is burning, trying to put out the fire may cost you more than just sitting by and fiddling.

-- James Surowiecki

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Op-Ed Columnist - The Real Story - NYTimes.com

Op-Ed Columnist - The Real Story - NYTimes.com: "Start with interest rates. Those who said the stimulus was too big predicted sharply rising rates. When rates rose in early 2009, The Wall Street Journal published an editorial titled “The Bond Vigilantes: The disciplinarians of U.S. policy makers return.” The editorial declared that it was all about fear of deficits, and concluded, “When in doubt, bet on the markets.”"

comment--comment--comment--comment--comment--comment
[not GOFACT's -- see NYT "Comments" on the above Krugman article
This is hair on fire moment. You either douse the flames and acknowledge there is a real problem with the economy or you get consumed by the flames and sink further into an economic morass. Based the actions or lack thereof over the last 20 months, don’t expect Obama or his economic team to do anything more than give some inspiring platitudes and soaring rhetoric.




Basically, the real power of his economic ideology stems comes from the nexus of Larry Summers, Ben Bernanke and Tim Geithner. Ever since the Bush team left the scene, we have not changed direction, but preserved the status quo Obama railed against during the campaign Wall St. firms, brokerages, rating agencies, and major banks were either bailed out or paid no real consequences through lawsuits or indictments. Worse yet, the financial reform bill (after 15 months of deliberation by Congress and the financial lobbyists) didn’t address the main issues of too-big-to-fail, moral hazard and lets the banks gamble with the other people’s money through loopholes. It seems nothing has changed since the financial meltdown. This Administration has punted and left the real possibility of another crisis down the road.



When you have two moderate and respected people leave your Administration, it’s either because the ship is going down or they are completely marginalized. Peter Ozag, the OMB Director and Christina Romer, Obama’s top economic advisor, who is resigning in September doesn’t bode well. Who is going to counter Mr. Summer and Mr Geithner? Will Elizabeth Warren be head of the new Consumer Financial Protection Agency?



Lastly, Obama is easily cowed by Conservatives from both parties. The talk of deficit spending held up the renewal of unemployment benefits to thousands of needy American – twice. Not a peep came out of the White House even when most economists agree this is most efficient way to spur the economy and get money to people who desperately need it. When the Republican deficit hawks made exception to the retaining the tax cuts to the top 1%, Obama and his Administration finally had a chance to call them out for their hypocrisy and point out how these cuts will balloon the deficit. What did we get from his economic team – silence that was deafening. We may have two parties, but their interests lie in preserving their wealth at the expense of the people on Main St.


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