Saturday, July 3, 2010

Remembering the Good Ole' Days...

Let's not forget those, like Greg Mankiw, who argued against the stimulus. Here he argues that Government spending was "too easy an answer" after attacking the stimulus on his blog for not being timely.

Now, of course, over half of the stimulus money has been spent, and we're still not quite out of the woods yet. Mankiw, and Brooks who he approvingly linked, were worried about that third of stimulus spending which happens in FY 2011, which is now less than three months away. Although I was also angry that so much of the tax cuts didn't come right away (and that it included the AMT patch), more spending in FY2011 doesn't seem a bad idea about now, does it?

The other thing which is funny about Mankiw's article is when he wrote, about the stimulus, disapprovingly, that "the centerpiece is likely to be a huge increase in government spending." Of course, due to huge cuts at the state and local levels -- the pothole-filled highways near my house have not been repaved recently, and given state budget troubles, anytime soon -- this huge increase in spending never happened. What happened is that the Federal stimulus basically just canceled out cuts at the local level, which was perfectly predictable at the time.

It's also become increasingly clear that the big problem with the stimulus was not the timing, but the size. Another $300 billion allocated to states and local governments to prevent tax hikes and budget cuts, and we'd be living in a different world right now. A world with less potholes.

Of course, defenders of Mankiw and Brooks might say, "How could you possibly have known that the recovery from the deepest financial crisis since the Great Depression wouldn't be quick and easy?" Well, that really took a crystal ball now, didn't it?

And, as for Stimulus Round II, intrade now has a 34% chance of there being another recession in 2011, and 37% in 2012! And it has unemployment above 9.25% for this December... With the Fed unwilling to act, I think the case is clear for more stimulus. I would do another round of large stimulus checks before the mid-terms, and then send another $300 billion to states and local governments, sent out immediately. In this way, the central government can say they "disbursed" the entire stimulus in one month, and the checks to individuals will hit soon, and even if the money sent to local governments doesn't affect budgets until this fall or next spring, it will still have been plenty "timely".

Before, I was luke-warm on a second stimulus, given that Bernanke had ended QE and raised the discount rate back in January -- thinking if Congress did more, he'd do less. But now the way I see it is that if Congress does nothing, neither will Bernanke, and if Congress does something, Bernanke won't do anything stupid unless we get some really good economic numbers. While this would crowd out the effect of the stimulus, we have no idea if we're actually going to get good economic numbers, and so it's better to safeguard against the alternative.

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