South By North Strategies, Ltd.

Smart Policy, Bad Politics

James Surowiecki of The New Yorker wonders why “stimulus” has become a dirty word in Washington.

But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. The tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping the states avoid layoffs and spending cuts, but politically it didn’t get much notice, because it was the dog that didn’t bark—saving jobs just isn’t as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. But unless you were unemployed this wasn’t something you’d pay attention to.

Missing The Obvious?

Dean Baker of the Center for Economic and Policy Research is not impressed by the track record of his fellow economists.

… if economists can’t see an $8tn housing bubble, what can they see? This is bit like the firehouse where everyone sits around calmly sipping their coffee as the school across the street burns down. Completely missing the largest financial bubble in the history of the world is pretty inexcusable, even if economists continue to make excuses.
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Having failed to prevent disaster, economists are now anxious to tell us that there is nothing that they can do to remedy the situation. The story they are pushing is that unemployment is structural, not cyclical – a refrain now echoed by op-ed columnists. This means that people are not unemployed because of a lack of demand in the economy, but rather they are unemployed because there is a mismatch between the available jobs and the skills and location of the available workers.
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Before examining the argument here more closely, it is worth noting that arguments about rising structural unemployment come around during every recession. When the economy fails to produce jobs fast enough to bring down the unemployment rate economists quickly turn to blaming the workers. The problem is not that economists came up with bad policies; the problem is that workers don’t have the right skills or live in the right place. This happened after each of the last four recessions.

Around The Dial – September 14

Economic policy reports, blog postings, and media stories of interest:

• Economix blogs about the year of no inflation.
• Naked Capitalism asks if oversupply fuels medical costs.
• The New York Times reports on the impact of a higher retirement age.
• TaxVox unveils its new online tax calculator.

What Have We Learned?

The PBS NewsHour asks what we’ve learned about finance in the two years since the collapse of Lehman Brothers.

Why Did the Stimulus Run Out of Steam?

In a recent column in The Nation, Thomas Geoghegan argues that the trade deficit helps explain why the stimulus “ran out of steam.”

When we have a big trade deficit, the feds can’t run up a debt just to re-employ Americans. As long as we’ve so much trade debt, we have to figure that a distressing amount of any stimulus will go ultimately to re-employ the workers in China, Brazil, Japan and even Europe, who fill the gap between the “demand” we pump up and what we actually “supply.” When we have a big trade deficit, it means that the more we prime the pump, the more we drain out this distressing amount of our national wealth.
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And why else did the stimulus run out of steam?
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It was probably not big enough, but an even bigger one might have run out of steam. The bigger the trade debt, the less punch there is in running up a deficit. You can’t just blame the GOP for cutting the stimulus down.