Stimulus Follies

I’ll let you go over and read the words of Thomas F. Cooley and Peter Rupert. (Cooley is the the Paganelli-Bull professor of economics and Richard R. West dean of the NYU Stern School of Business. Rupert is a professor of economics and associate director of the Laboratory for Aggregate Economics and Finance at the University of California, Santa Barbara.) They explain why the people claiming that the stimulus is working are, well, silly.

But the most important stuff–the discretionary spending on infrastructure–has hardly started. By the end of the fiscal year, only 11% of the budgeted discretionary spending on highways, mass transit, energy efficiency and medical infrastructure will have gone out the door. This is the really direct government spending that many associate with the stimulus. By the end of fiscal 2010, Elmendorf estimates that only 47% of the infrastructure spending will have occurred.

There has been remarkably expansionary monetary policy in place for the last year. And there is the promise of massive spending, most of it in the future. If you, the reader, had to pick one as the key fact, would you pick the one that has already occurred and that clearly re-capitalized the banking system and restored liquidity, or the one that hasn’t hit yet?

What I found truly disturbing about the piece is in the very easily understood graphics that accompany the piece. They compare this downturn with several past events.

And they are very, very ugly. Real personal consumption expenditures down some 2%. Real gross domestic investment down 30%. Employment down some 5% from the previous peak. All of these numbers are grossly out of whack with previous downturns – in the wrong direction. 

Worse yet, the numbers for this down cycle have not even begun to show any upturn.  

If anything, the authors of this piece are starry-eyed optimists about the effects of the “stimulus”. The people pronouncing it a rousing success are not inhabiting the same planet as the rest of us.

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4 Responses to Stimulus Follies

  1. Roy Lofquist says:

    For far too long now the economists have been “flying the instruments instead of the airplane”. There are a number of competing schools of economic theory. They are all quite complicated and elaborate but all are based on the reading the tea leaves – financial data. What if they’re wrong? What if the numbers don’t mean what they think they mean?

    Here’s the view from the from the trenches and not the rarefied air in which they fly. It is informed by the older generation. My parents lived through the Great Depression – I know the thinking of that generation quite well.

    Bottom line – the money is going into the mattresses. We saw what happened in the Depression – no matter what was tried the money just refused to flow. All kinds of theories about fiscal and monetary policy – the levers and strings just didn’t work.

    Right now the whole edifice of post war economic growth has crashed about our feet. We were caught in a massive credit bubble that has burst. Used to be “I wonder if my credit is good enough to get that new car?” Now it’s “I wonder if I’ll have a job next week?”.

    I wouldn’t be surprised if the economy, as measured by the numbers, was abolutely flat for the next ten years.

  2. gary gulrud says:

    “flying the intruments instead of the airplane”

    Astute analogy.

    Even Roubini in latest Forbes column is perhaps too optimistic in cautioning a narrow window for fiscal recovery. The monetized debt the Fed has taken on, and that being bid up in the markets, is mostly worthless, or worth far less than face value. Unwind that, Bernanke.

    Yeah, we could escape disaster. I could hit the lottery too.

  3. crosspatch says:

    This economic downturn was different than most because it was caused by a sudden loss of liquidity for lending and a huge destruction of personal wealth both caused by the collapse of home prices and increase in mortgage defaults.

    This downturn was not caused by a change in the business cycle or other “normal” causes. What we saw was mortgages defaulting which the lenders did not have reserves to “cover” because they were “riskless”. Once it was determined that they were not, in fact, “riskless”, banks were required to stop lending and attempt to accumulate capital to create reserves to cover defaults. At the same time, the companies providing “default insurance” were now forced to pay out claims AND increase reserves. There not being enough capital in the world available in the traditional capital markets, the federal government was forced to back these financial institutions through injections of capital that went to reserves.

    So, instead of a situation we would normally see where the injected capital would be lent out to stimulate business, the capital sits in the vault as reserves against mortgages. In the meantime, business lending practically stopped.

    So while there is a lot of money sitting in vaults, there is no “velocity” to the money. It isn’t being spread around.


    A: Mortgage defaults decrease and B: housing values stop declining

    There really isn’t anything anyone can do and even after things stabilize, the financial companies and their insurers are going to require more in capital reserves than before the bubble burst because the loans they are backing will no longer be considered “riskless”. This means that for a given amount of money supply, a smaller proportion will actually be “in flight” and moving around the economy with more sitting as reserves.

  4. TimF says:

    Good explaination by Crosspatch. The more proper term for this type of downturn is a “Debt-Deflation” (see Irving Fisher’s seminal paper from 1934 here:

    Mish and JohnZ at Generational Dynamics website have been highlighting the cyclical attitude change toward debt revulsion and frugality for some time. You’ll know we’re at bottom when personal debt is shunned.

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