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Did Stimulus Work?

Today's earlier post has naturally aroused suspicions that I am simply a knee-jerk stimulus opponent.  This is not true.  I tepidly supported the notion of stimulus, though I also thought that the stimulus we did was not well executed, because Democrats wanted to use it to execute their policy priorities, rather than to provide maximal stimulus.  I said at the time that "shovel-ready" infrastructure projects really weren't; that's not how the government procurement process works, and the federal government tends to slow things down, not speed them up.  As it was under George Bush, politicians seemed more interested in using stimulus as an excuse for stuff they already wanted to do, than in actually figuring out what was most stimulative.  (My candidates:  payroll tax cut, more lavish unemployment benefits).

And what do I think now?  Well, protestations aside, the stimulus we ended up doing was huge.  Maybe it wasn't as huge as some would have liked, but $800 billion dollars is almost 6% of GDP. (2% if you spread it over 3 years, as the stimulus was).  All told, running a deficit of 10+% of GDP ought to have some pretty powerful stimulative effect.

So far, I've been underwhelmed.  Maybe we were going to end up so far in a ditch that we wouldn't even be able to see sky when we looked up, only mud.  On the other hand, maybe simply not repeating the massive, massive monetary mistakes of the 1930s was enough to keep us out of the Great Depression, and the stimulus merely tinkered around the edges.  I find the latter at least as plausible as the former.

When you combine middling and hard-to-prove results with the fact that the stimulus we got was so obviously wrapped up in the political agenda of the Democratic Party, I think that the case for stimulus has gotten weaker.  Stimulus is always going to get wrapped up in the agenda of whatever party is in power--it will concentrate too much on long-term strategic attempts to change the aggregate level of government expenditure; it will be deployed inefficiently; it will be stretched out to maximize electoral rather than economic effectiveness.

I'd much rather see people talking about how best to ease the economic transition.  One way to think of recessions is that they always represent the transition point between two states of the economy:  high inflation to low inflation, overleveraged to under, or what have you.  Those transitions involve a great deal of human suffering, and contra the "work the rot out" school of economic policy, I do not think that this suffering is necessary. 

Yes, some of it is--people need to be unemployed if their job is no longer productive, and unemployment is inherently unpleasant.  But people do not need to lose the house, the spouse, the car, and their fragile sense of self-worth, in order to make our economy more productive.  I don't think it is a good trade to gain a marginally faster rate of re-employment, in exchange for pushing people into debilitating financial holes from which it may take them years to recover.  Big mountains of debt are as bad for the economy as low rates of labor mobility; they're both ways of tying people to a dead past.

We cannot eliminate all the suffering inherent in unemployment, and more to the point, I don't think we should; being on the dole for life should not be an attractive alternative to working.  But we can go a long way towards ensuring that people don't starve or become homeless in a terrifying recession, without much danger that we'll turn into Scandinavia.

I'd like to think that had Democrats focused on alleviating suffering, rather than chasing "shovel ready" stimulus projects, Republicans might have gone along more easily.  I have no reason, however, to think that this is actually true--any more than I have reason to think that Democrats would have seriously considered projects they couldn't plaster their names all over come election time.  I am, in fact, extraordinarily depressed by the extent to which arguments over stimulus seem to be proxy wars over the permanent level of government spending, rather than serious attempts to address the problem at hand.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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