Tuesday, September 28, 2010

Demand-side Economic Policies Work. Will Anyone Notice?

Some recent comments from Republicans on President Obama's efforts to stimulate the economy:

"We do not have the luxury of waiting months for the president to pick scapegoats for his failing stimulus policies." - U.S. House minority leader John Boehner

"The president will use the Labor Day holiday as the launching pad for yet another government stimulus effort, another play called from the same failed Keynesian playbook." - Congressman Eric Cantor

"The point is that the Obama Keynesian-on-steroids has not worked,"
- Senator John McCain

"The Keynesian experiment, which was more spending, has failed to produce jobs." - Congressman Paul Ryan

Ok, so here's a couple of questions:
1. These Republicans claim that the American Recovery and Reinvestment Act of 2009, otherwise known as the Stimulus, failed to create jobs and to promote investment and consumer spending. Are they correct?
2. Who is Keynes, and what has he got to do with it?

I'm only going to tackle the first question in this post. Here are some comments on the stimulus from various smart persons.

From the New York Times: "officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression."

"In a new paper," economists Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, "argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year. In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation."

Hey, not bad! Here's some more, from Reuters: "The massive U.S. stimulus package put millions of people to work and boosted national output by hundreds of billions of dollars in the second quarter (of 2010), the nonpartisan Congressional Budget Office said on Tuesday. CBO's latest estimate indicates that the stimulus effort, which remains a political hot potato ahead of the November congressional elections, may have prevented the sluggish U.S. economy from contracting between April and June. CBO said President Barack Obama's stimulus boosted real GDP in the quarter by between 1.7 percent and 4.5 percent, adding at least $200 billion in economic activity." "It raised employment by between 1.4 million and 3.3 million jobs during the second quarter of this year, CBO estimated."

Sounds like the stimulus accomplished quite a lot. Anything else? From USA Today: "President Obama's stimulus package saved jobs — but the government still needs to do more to breathe life into the economy, according to USA TODAY's quarterly survey of 50 economists. Unemployment would have hit 10.8% — higher than December's 10% rate — without Obama's $787 billion stimulus program, according to the economists' median estimate. The difference would translate into another 1.2 million lost jobs."
Furthermore, the stimulus did a lot of good things besides helping the economy, as even conservative Time Magazine is willing to admit: "For starters, the Recovery Act is the most ambitious energy legislation in history, converting the Energy Department into the world's largest venture-capital fund. It's pouring $90 billion into clean energy, including unprecedented investments in a smart grid; energy efficiency; electric cars; renewable power from the sun, wind and earth; cleaner coal; advanced biofuels; and factories to manufacture green stuff in the U.S."

"The stimulus is also stocked with nonenergy game changers, like a tenfold increase in funding to expand access to broadband and an effort to sequence more than 2,300 complete human genomes — when only 34 were sequenced with all previous aid. There's $8 billion for a high-speed passenger rail network, the boldest federal transportation initiative since the interstate highways. There's $4.35 billion in Race to the Top grants to promote accountability in public schools, perhaps the most significant federal education initiative ever — it's already prompted 35 states and the District of Columbia to adopt reforms to qualify for the cash."

Fantastic! So is there any down side? Only that President Obama is really, really bad at doing things that are popular as well as useful. He cut taxes for 95% of Americans. Not popular. He passed dramatic reforms in health care. Not popular. The same goes for the stimulus. As Alan Blinder notes, "It seems that more Americans believe that "Barack Obama's economic policies," (according to a new poll) "have made economic conditions worse (29%) than better (23%), and another 35% of Americans think his policies have "not had an effect so far.""

So it was a bittersweet moment yesterday when President Obama signed the Small Business Jobs Act. A Republican wave at the ballot box this year will put an end to demand-side economics in Congress. Welcome back, supply-side.

In my next post, I'll be talking some more about demand-side versus supply-side, and who this mysterious Keynes person is.

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