August 6, 2010

ARRA Stimulus Failure

[NOTE: I'm only posting today quick posts as a result of my schedule, more detailed posts are sure to return at some point.]

$787 billion buys you not much of a recovery.  Let's get that into the history books.  In fact let's put it in there that that level of stimulus as a percentage of GDP, as put forward in the details of the ARRA will net you an unemployment rate 2 percentage points higher than promised, a quarter or two if GDP spike and then a drop off to tepid GDP growth after the money fades, and perhaps even a double dip recession (it remains to be seen).

Why did the stimulus fail to deliver?

Without drilling down into the actual dollars spent and the nitty gritty details (something I'd love to have the time to do), there's an obvious factor that addresses the question.  When you pump stimulus dollars into the economy and much of that money goes to bailing out failure (helping banks not become insolvent), you are shoring up the status quo.  In other words you are solving liquidity problems but with so many people and businesses overspent, there is a retrenching.  With unemployment so high, people are coming to their senses and paying down debt rather then going back out and spending.  That's a good thing; solvency, is a good thing.  But it means the GDP will inevitably stall.  As that government spending bulge works it's way through the economy (the part that wasn't used for bailouts but on supposedly shovel-ready projects), the GDP blip inevitably disappears and you are left with banks unwilling to lend cavalierly and businesses and consumers unwilling to spend cavalierly.  People are rightfully worried about their economic situations.  People should always be cognizant of their economic situations. That has not been the case, but after decades of relatively uninterrupted growth, it's time people looked at their wallets, and they are. All of that means increasing solvency but stagnating growth.

The alternative that would have avoided this mess would have been to lower taxes permanently.  That means people would have more liquidity on an ongoing basis, and businesses too.  Spending would have not declined and the stimulus effect would have been more immediate and more permanent.  Of course you would have to couple that decrease in government revenue (assuming we are on the left side of the Laffer curve) with  decreased government spending.

The Democrats would never have touched that option so it was never really a valid consideration.  There's a silver lining though, studies over the coming decades will bear out the failure of Keynesian solutions to downturns and 2008-2009 will mark an excellent example of the failure of those Keynesian solutions.  It might not help us now, but it marks a huge opportunity for learning in the future.

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