Tuesday, August 3, 2010

The President's Council of Economic Advisers' Forecasts and the Memory Hole...

Remember back in the beginning of 2009, when the administration was telling us a small stimulus was sufficient? Well, part of the reason may have been the rose-tinted glasses with which the administrations' economists saw the recession. Check this CEA report from February, 2009, in which they projected that this recession would be one of the lightest and briefest in the postwar era. They projected GDP would decrease only 1.2% in 2009 (following a contraction of 6.4% in Q4 2008 and an expected 6.0% contraction in Q1 2009), making the 2009 recession the 3rd lightest of 11 post-war recessions.

I'm not sure how the deepest financial crises since the Great Depression, in which the Fed hits liquidity trap territory early on, leads any economist to think it's going to be a light, quick recession.

In any case, the latest revision was that GDP shrank 2.6%. So, what seemed at the time to be a hopelessly optimistic forecast turned out to have been a hopelessly optimistic forecast by the "best and brightest" economists around.


  1. I'm personally of the opinion that if the Federal Reserve did their job we wouldn't need fiscal stimulus (aside from just basic automatic stabilizers to ease some of the pain). But, even ignoring that, I still think it's wrong to say $800 billion was necessarily too small (it may have been, but we'll never know). I think an $800 billion stimulus would have done a great job of stabilizing the economy. The problem is - we didn't get an $800 billion stimulus. We got about a stimulus package worth about $0. All our stimulus did was counteract state fiscal contractions, and what matters is aggregate government spending not just federal government spending.

    See: http://www2.ucsc.edu/econ/faculty/aizenman/On_the_ease_2_23_10.pdf

  2. Yeah, but you could also say that if Congress did its job with a large enough stimulus, we wouldn't need the federal reserve to distort the economy with monetary policy.

    Monetary and fiscal policy are generally seen as complimentary. Although people argue against stimulus, I've yet to see anyone argue against automatic fiscal stabilizers, even though its basically the same thing.

    And, even though I believe the Fed can still be effective in a liquidity trap, this Fed is not effective in a liquidity trap. In nortmal times, Ben Bernanke would have responded to the Euro-debt crisis by cutting interest rates. Since rates were already zero, he responded by picking his nose. This implies that a larger stimulus would have made us better off and not been likely to have changed Fed policy much if at all.