Saturday, August 13, 2011

In Which I talk to Jacques About the Stimulus

So, Jacques came home from the dog park and said one of the popular dogs was telling everybody that the trillions of stimulus had failed completely. So, I told him that there are two issues here—the 8 trillion number needs to be broken into two pieces: about 800 billion in actual spending/tax cuts to stimulate the economy, and the balance in loans to banks to avoid economic disaster. While we should probably have gotten more back for our loans, they did their job by keeping banks from failing and throwing us into a large depression.

As for the 800 billion of stimulus, I said he should ask the other dog how he KNOWS that it failed? The economists using a Keynesian model said all along that the stimulus was too small, that it would pull us out of a recession, but leave the economy scraping along at about 9% unemployment, leading people to say that the stimulus failed. If they don't believe you, read what Paul Krugman said about the stimulus before it was passed, in January 2009 (the last paragraph is particularly presentient). Without the stimulus package, we'd be looking at a much worse picture, or so says the CBO

The especially important thing to see about the stimulus is that there were two different camps that predicted it's failure. There was the WSJ crowd, who predicted (more than 2 years ago) that sooner than later the bond market would lose faith in the US government debt, and we'd see soaring bond rates. The inflation adjusted interest rate on a 10 year Treasury is currently less than zero, the absolute rate is less that 2.2%. 

What I take that to mean is that one side predicted the outcome almost perfectly (seriously, because you might not like links, I've quoted the last paragraph of the Krugman piece below), and one side keeps talking about the bond vigilantes who never come. One side is using the economic models I learned about in Econ 101, the other side keeps talking about confidence. I'll take the models that accurately predict the market 2 years out over talk of confidence and fear of bond vigilantes that never come.  And that's what you tell the other dogs!


I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

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