Stimulus Rope-a-Dope, Pt. 2 - Stephen Spruiell - The Corner on National Review Online
Yesterday I had to run before finishing my post on Brad DeLong's piece for The Week titled, "Keynes and Co. have lost the stimulus argument." DeLong and his fellow Keynesian Paul Krugman have been wringing their hands of late with worry that policymakers in the White House, Congress and the Federal Reserve are losing faith in their religion of huge deficits and money-printing. I think their concerns are exaggerated — the president of the United States was recently seen urging Europe not to turn off its stimulus machine just yet — but for the sake of argument, let's say they're right, and the Keynesians have lost the debate. Why might that be? Yesterday I ran through a few of Krugman and DeLong's proffered reasons, which I didn't find persuasive. Here are some alternative theories:
1. The stimulus didn't work. Right now, Democrats in Congress are having trouble getting the votes for the latest stimulus package, but if it passes, we will have spent more on fiscal stimulus since 2008 than we have spent on the wars in Iraq and Afghanistan since 2001 (see my latest piece in NRODT for the numbers breakdown). Now, spending nearly a trillion dollars on fiscal stimulus might have prevented the recession from being deeper and mitigated job losses somewhat, but it also might have slowed the recovery by A) creating the expectation of higher taxes in the future and B) preventing the economy from finding a bottom, from which point I'm pretty sure investors could have found better things to do with that trillion dollars than the U.S. government. Keynesian stimulus is all about mitigating the short-term severity of recessions, but in so doing it creates all kinds of valuation problems — idle resources stay idle because private investors are waiting for bargains. Government borrowing and spending distorts values throughout the economy and locks up capital in bad investments, so that less money is available when good investments start to emerge.
Nowhere has this been more evident than with regard to the Homebuyers Tax Credit. The $8,000 credit was intended to stimulate demand for housing and keep prices from falling. Every day since its expiration in April, we've been getting more evidence that we spent in the neighborhood of $15 billion just to delay the day of reckoning by a year or so. Here's the latest, from the Boston Herald, via Calculated Risk:
There’s a silver lining for would-be home buyers who missed the April 30 deadline for the $8,000 federal tax credit: Sellers are dropping prices.
The average price reduction for a single-family home or condominium in the Bay State last month was 8 percent, or $38,883 off the original asking price, according to real estate search engine Trulia.com.
In Suffolk County, which includes the cities of Boston, Chelsea, Revere and Winthrop, the price reduction was $43,288, or 7 percent off the listing price.
Krugman and DeLong argue that the stimulus simply wasn't big enough. Convenient argument, that. Impossible to falsify. The fact remains that the four stimulus bills we've passed since early 2008 have failed to deliver the sustainable economic growth and job creation their proponents promised. The president's economic team predicted that the stimulus would hold unemployment at 8 percent. It is currently at 9.5 percent and stuck there, not sloping off as the president's team predicted. I don't know for sure, but maybe that's why Keynes and Co. have lost the stimulus argument.
2. The Keynesians got us into this mess. At least that's what the arguments advanced by Stanford economist John Taylor lead us to conclude. Taylor has persuasively argued that the Federal Reserve took Keynesian monetary stimulus too far in an attempt to fight the recession that followed the collapse of the dot-com bubble. Taylor is the author of the Taylor Rule, which sets reasonable parameters for central bank interest-rate policies. As Taylor explained last January: ...
If you really want some more of this highly accurate analysis (together with links to sources): http://corner.nationalreview.com/post/?q=ZjBjN2I0MjkxNjExNTI4MTM2NGQ2YzIxZDA5YWY1Yzg=
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