I was recently invited to speak on the topic of “Whether the Obama Administration’s policies are making the recession worse” and asked to recommend someone to appear with me who would take the opposite position from mine. The interesting thing to me is what do they think my position is on that topic. I’m not sure myself. My educated guess (because I know the requester) is that he expected me to take the negative position and wanted me to find the right person to straighten me out—to tell it like it is. This is not good. I don’t think I’ve opined on that particular question before, although I may have skirted around its edges. I’m on the record saying I thought the Bernanke Fed did a good job dealing with the financial crisis. I’ve also said that Treasury’s TARP program has been successful is supporting the banking system. But neither of these were part of the Obama administration. Mr. Bernanke is supposedly independent of administrations and Mr. Paulson and TARP were part of the Bush administration. The huge stimulus program was developed and deployed by the Obama administration and a democrat congress, but I’ve been publicly critical of it. I’ve likened it to trying to kill a wild hog with a shotgun—a lot of fire power (taxpayer money) but too scattershot and unfocused to do much good in its goal of creating jobs. The stimulus program probably created some jobs, but any net job creation would be far short of the gross job creation associated with the stimulus spending. Remember the broken window fallacy. The broken window caused spending to increase on window repair, etc., but diverted spending that would have taken place elsewhere. The net effect must take both into account. In any case, any net job creation from the stimulus program was hardly enough to notice as the jobless totals kept climbing, but they came at a huge cost in deficits and debt. The health care legislation was chocked full of hidden tax increases, and the financial reform legislation is itself a huge tax increase in the form of higher costs and reduced services in the financial sector. Those can’t be expansionary. But, most of all is the prospect of tax increases on both capital and labor at the end of the year with the expiration of the Bush tax cuts. We’ve tried raising marginal tax rates in the middle of a deep recession and the outcome wasn’t good. All the banker bashing hasn’t helped either. All this adds up, in my opinion, to costly policies that haven’t helped much. I don’t know if they’ve actually made the recession worse. One problem of jumping on the “made worse” bandwagon is some of the arguments used by its proponents. While it’s disingenuous to count every new job as a net new job attributable to the stimulus program, it’s equally silly to say the stimulus program hasn’t helped any because the unemployment rate rose above the foolishly promised 8 percent level. The broken window story didn’t just teach us about alternative spending streams. Its main message was to consider the unseen as well as the seen, to consider what doesn’t happen (unseen) because of what does happen (seen). I think they call them “counterfactuals” these days. The stimulus program and other spending obviously contributed greatly to the deficit and the debt, but, to be evenhanded in our consideration of counter-factuals, we must acknowledge that the fiscal deficits might conceivably have been worse without the spending. Spending adds to deficits, but so do tax revenue losses resulting from declining economic activity and increased unemployment. The debate would sound more respectable if it discussed degrees rather than absolutes—dials rather than switches.
updated Sep 08, 2010
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