The Catholic University of America
Feb 17 2010

On the Fiscal Stimulus

Posted by Ernest Zampelli at 5:13 PM
2 comments
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On my drive into the university this morning, I was listening to a report on National Public Radio regarding the public’s perception of the President’s economic policies, especially his stimulus package.  In short, the public believes that the stimulus package was a failure and that an additional stimulus, as is being proposed, is a bad idea especially in light of federal deficit and debt concerns.

First, the perception that the stimulus was a failure is likely the result of an (official) unemployment rate that still hovers around 10 percent.  It needs to be pointed out, however, that this is not evidence of the failure of the stimulus.  Most private economists, including this one, believe that the stimulus was a significant contributor to saving about 2 to 2.5 million jobs, reducing the number of monthly job losses, and generating positive rates of growth in GDP over the last two quarters.

The stubbornly high unemployment rate, which by the way the Republicans are using to lambaste continuously (and effectively) the President’s  stimulus, is likely the result of two things:  (1) underestimating the severity of the recession and (2) a stimulus package that was too small. To blame Obama for the first is a bit harsh.  There are no crystal balls in economic forecasting and most economists, private or otherwise, didn’t foresee a downturn of such intensity.  To blame Obama for the second is basically blaming him for playing politics—he took what he could get.

But, his own Council of Economic Advisor Chairperson, Christina Romer, thought that the stimulus should have been $300 to $400 billion more than what it was.  So too did Nobel laureates Paul Krugman and Joseph Stiglitz.  I share the opinion that the stimulus was too small but I also believe that the composition of the stimulus was weighed too heavily towards tax cuts and that it included spending measures like green technology subsidies, increases in Pell grants, etc. that have no business in a fiscal stimulus package.  These are best left to (permanent) policy discussions and long term planning.  In my view, more emphasis should have been placed on temporary increases in unemployment compensation, food stamps, and aid to state and local governments.  Those are the areas that generate the most bang for the federal buck and do not commit us to increases in long term spending which rightfully should be left to long term budget and policy initiatives.

Unfortunately, because the public perception of the stimulus has been shaped by much mis- and dis-information, getting a meaningful, additional stimulus package through Congress represents an almost insurmountable task for the President. Without it, however, I don’t  expect to see any significant reduction in the unemployment rate this year.

Comments

Scott Montgomery

Scott Montgomery wrote on 02/23/10 4:48 PM

I tend to agree with the fact that the economic crisis was primarily a result of bad mortgages the banks issued. The original Bush stimulus was supposed to aleviate that problem. There is no need for any more stimulus. I agree with Larry Kudlow when he says that taxes should be cut accross the board and John Taylor when he says that money was too cheap to come by. It is now time to cut spending and let the free market carry the recovery.
Matthew Green

Matthew Green wrote on 02/25/10 4:10 PM

Excellent points. Unfortunately, most new presidents have only limited opportunity (what John Kingdon called an "open policy window") to enact major legislation. Perhaps Obama should have used that opportunity to pass something much larger.

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