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Thread: Stimulus. Slimutus. Slumitus. Slutumis.

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    Stimulus. Slimutus. Slumitus. Slutumis.

    KRUGMAN IN 2009.

    Oct 5, 10:04 am
    The story of the stimulus

    I read the Ryan Lizza piece on Larry Summers with a great sense of relief. It turns out that in talking to Ryan, I managed to say almost nothing worth quoting — which is, in these circumstances, very much the goal. (If I have something controversial to say, I’ll say it in the column or this blog, thank you.)

    For me, the really interesting passage was this one:

    The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

    So Christy Romer’s math looked similar to mine: even given what we knew last December, the straight economics said that we should have a stimulus much bigger than the Obama administration’s initial proposal. And given what happened to that proposal in the Senate — we actually ended up with only about $600 billion of actual stimulus — what we eventually got was half of what seemed appropriate in December. And the actual news on the economy since then has been worse than was expected back then, so that the stimulus now looks way short of what we need.

    Maybe that was all that could have been done, politically. But it does not sound, from the Lizza article, as if either the economic team or the political team thought much about the risks of finding themselves where we are now — with the economy still failing to deliver job growth despite the stimulus — even though those risks were completely apparent at the time.

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    American Recovery and Reinvestment Act of 2009
    From Wikipedia, the free encyclopedia
    Long title
    An act making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, State, and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes.

    Nickname(s) The Recovery Act, Stimulus, The Stimulus Package
    Enacted by the 111th United States Congress
    Effective February 17, 2009
    Citations
    Public Law 111-5
    Stat. 123 Stat. 115
    Legislative history
    Introduced in the House as H.R. 1 by Dave Obey (D-WI) on January 26, 2009
    Committee consideration by: Appropriations and Budget
    Passed the House on January 28, 2009 (244—188)
    Passed the Senate on February 10, 2009 (61–37)
    Reported by the joint conference committee on February 12, 2009; agreed to by the House on February 13, 2009 (246—183) and by the Senate on February 13, 2009 (60—38)
    Signed into law by President Barack Obama on February 17, 2009

    The American Recovery and Reinvestment Act of 2009 (ARRA) (Pub.L. 111–5), commonly referred to as the Stimulus or The Recovery Act, was an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.

    To respond to the Great Recession, the primary objective for ARRA was to save and create jobs almost immediately. Secondary objectives were to provide temporary relief programs for those most impacted by the recession and invest in infrastructure, education, health, and renewable energy. The approximate cost of the economic stimulus package was estimated to be $787 billion at the time of passage, later revised to $831 billion between 2009 and 2019.[1] The Act included direct spending in infrastructure, education, health, and energy, federal tax incentives, and expansion of unemployment benefits and other social welfare provisions. The rationale for ARRA was from Keynesian macroeconomic theory, which argues that, during recessions, the government should offset the decrease in private spending with an increase in public spending in order to save jobs and stop further economic deterioration. Shortly after the law was passed, however, Nobel laureate Paul Krugman while supportive of the law, criticized the law for being too weak because it did not "even cover one third of the (spending) gap".[2]

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    The Stimulus Tragedy
    FEB. 20, 2014
    Paul Krugman
    Five years have passed since President Obama signed the American Recovery and Reinvestment Act — the “stimulus” — into law. With the passage of time, it has become clear that the act did a vast amount of good. It helped end the economy’s plunge; it created or saved millions of jobs; it left behind an important legacy of public and private investment.
    It was also a political disaster. And the consequences of that political disaster — the perception that stimulus failed — have haunted economic policy ever since.
    Let’s start with the good the stimulus did.
    The case for stimulus was that we were suffering from a huge shortfall in overall spending, and that the hit to the economy from the financial crisis and the bursting of the housing bubble was so severe that the Federal Reserve, which normally fights recessions by cutting short-term interest rates, couldn’t overcome this slump on its own. The idea, then, was to provide a temporary boost both by having the government directly spend more and by using tax cuts and public aid to boost family incomes, inducing more private spending.

    Opponents of stimulus argued vociferously that deficit spending would send interest rates skyrocketing, “crowding out” private spending. Proponents responded, however, that crowding out — a real issue when the economy is near full employment — wouldn’t happen in a deeply depressed economy, awash in excess capacity and excess savings. And stimulus supporters were right: far from soaring, interest rates fell to historic lows.

    What about positive evidence for the benefits of stimulus? That’s trickier, because it’s hard to disentangle the effects of the Recovery Act from all the other things that were going on at the time. Nonetheless, most careful studies have found evidence of strong positive effects on employment and output.

    Even more important, I’d argue, is the huge natural experiment Europe has provided on the effects of sharp changes in government spending. You see, some but not all members of the euro area, the group of countries sharing Europe’s common currency, were forced into imposing draconian fiscal austerity, that is, negative stimulus. If stimulus opponents had been right about the way the world works, these austerity programs wouldn’t have had severe adverse economic effects, because cuts in government spending would have been offset by rising private spending. In fact, austerity led to nasty, in some cases catastrophic, declines in output and employment. And private spending in countries imposing harsh austerity ended up falling instead of rising, amplifying the direct effects of government cutbacks.

    All the evidence, then, points to substantial positive short-run effects from the Obama stimulus. And there were surely long-term benefits, too: big investments in everything from green energy to electronic medical records.

    So why does everyone — or, to be more accurate, everyone except those who have seriously studied the issue — believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.

    There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

    This is not, by the way, a case of making excuses after the fact. Regular readers know that I was more or less tearing my hair out in early 2009, warning that the Recovery Act was inadequate — and that by falling short, the act would end up discrediting the very idea of stimulus. And so it proved.

    There’s a long-running debate over whether the Obama administration could have gotten more. The administration compounded the damage with excessively optimistic forecasts, based on the false premise that the economy would quickly bounce back once confidence in the financial system was restored.

    But that’s all water under the bridge. The important point is that U.S. fiscal policy went completely in the wrong direction after 2010. With the stimulus perceived as a failure, job creation almost disappeared from inside-the-Beltway discourse, replaced with obsessive concern over budget deficits. Government spending, which had been temporarily boosted both by the Recovery Act and by safety-net programs like food stamps and unemployment benefits, began falling, with public investment hit worst. And this anti-stimulus has destroyed millions of jobs.

    In other words, the overall narrative of the stimulus is tragic. A policy initiative that was good but not good enough ended up being seen as a failure, and set the stage for an immensely destructive wrong turn.

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