Fiscal Stimulus: My First Guest Post
This is my first guest post. It is by Kevin Caves, a PhD Economist at Navigant Economics. Instead of responding to it in this post, since it is substantial, I will respond to it in a separate post this weekend. The following link contains Kevin’s bio:
“Perhaps the best case for additional fiscal stimulus is the evidence that–contrary to conventional wisdom–the first stimulus was actually pretty effective.
But how can that be? After all, according to the conventional wisdom, it was a dismal failure: The economy has clearly failed to fully recover from the crash of ’08, with unemployment stubbornly remaining above 9 percent. Therefore, the first round of stimulus must have failed, and further stimulus would just pour good money after bad. Case closed.
While intuitive and easy to digest (as evidenced by its widespread acceptance), this reasoning ignores the proverbial “but-for world” that we would now be living in without fiscal stimulus. In early 2009, real GDP was falling at a six percent annual rate, and the economy was shedding jobs at the rate of three-quarters of a million per month. We were on a trajectory to a reprise of the Great Depression.
That didn’t happen. Instead, the economy snapped back quickly. The freefall in GDP has been halted, and growth has resumed. The economy began adding jobs, rather than shedding them. To be sure, times are still tough for many, and unemployment is high. But given the damage that the economy sustained in late 2008 and early 2009, how could it be otherwise? It takes a long period of sustained growth to make up for all that lost ground. If we’d continued on anything like the trajectory we started on, unemployment could easily be 15 percent or higher. But it isn’t. And if a first round of stimulus helped bring us back from the brink, why couldn’t a second round help us complete the road to recovery?
The counterargument, I suppose, is that the economy would have bounced back of its own volition, with or without a $787 billion injection (as well as other politically unpopular measures, like TARP, that involved Congress, the Federal Reserve, and two Presidential administrations). I personally don’t buy it, although I realize that many very intelligent people disagree.
At any rate, it’s worth keeping in mind that macroeconomists in academia, the Fed, various government agencies, and (perhaps most tellingly) the private sector have consistently found that the stimulus boosted growth. Bob Barro is a brilliant guy, much smarter than me, and I know that he disagrees with me completely. But, for some reason, private companies don’t pay him millions of dollars to model the macroeconomy. Instead, whether they realize it or not, they have a revealed preference for fundamentally Keynesian models.
Would he call this a market failure?”