The Dallas Fed (led by my favorite Fed president, Richard Fisher) has released a letter looking at Can the Nation Stimulate Its Way to Prosperity? My favorite line:
Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point.
At first glance, it doesn’t appear the stimulus achieved these objectives.
In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage (Chart 5).
This seems inconsistent with official estimates of the plan’s performance. The first quarterly report, including data through September 2009, found that the plan had created or saved about 1 million jobs and boosted GDP 2 to 3 percentage points in the second and third quarters.[2] Subsequent analysis from the Council of Economic Advisers and several private forecasting firms found even more favorable results, seeing the stimulus on track to save or create the 3.5 million jobs that were originally forecast for the 2009–10 period. How can this be?
To be fair to administrations past and present, I think the economic situation if left alone would be worse than it is now, but I'm not sure we've justified the costs.
The basic equation of macro-econ is: GDP = C + I + G + net export (where C= consumption, I=investment, G=Govt spending). If a country's economic health is measured in GDP or GDP per capita (which are very debatable issues, but that's an entirely different post), then we are simply running against the old adage by trying to spend our way to prosperity or borrow our way out of debt. The fact that it is now the public sector instead of the private sector (we saw how this would turn out starting in August 2007) shouldn't make that big of a difference right?
There's a good analogy on saving v. spending in the article: If I give you seed corn, you can either eat it now or plant it and eat it later (after some further investment) as a much larger quantity. The growth rate of the corn would be analogous to our current interest rate environment. Low rates should induce spending v. saving but we're not seeing that because of future concerns. Companies are raising capital at record low rates (IBM sub 1%) but not increasing CapEx. No one is hiring because of political uncertainty and overhead costs.
Despite record low rates, the velocity of money (as measured by M2) doesn't seem to be creeping higher at all and consumer prices are dropping. It's very possible (even likely) that I'm missing something, but how are we not entering a deflationary period? Especially if home prices have another 10% down to go? And I won't even go into the ridiculous lengths the gov't is going to in order to give the banks higher profitability and a larger cushion for real estate losses that they aren't even marking down.
Everyone has a proposed solution and none of them are perfect, but it certainly does seem to me that fiscal policy has failed (mostly because of poor execution of the stimulus) and monetary policy isn't being as effective as normal because of political uncertainty. I'm not sure that there is a point of no return for deficit to GDP ratios, but I am sure that its not good to test it in any case. In some ways its similar to my stance of global warming/climate change: we don't know how bad it will be (or exactly how to deal with it), but we are very certain it won't be good.
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