Stimulus one year later (posted by DT)

Here's some correspondence with a conservative email buddy. I asked him what he thought of stimulus spending, now that the CBO has declared that it worked to keep us out of a much deeper hole. He is unconvinced:

This is classic economics, in that it is impossible to know definitively what the null hypothesis result is. What would the state be if everything else were held constant? What if a different policy were followed? I personally can't answer these questions. I have generally found that economists that supported the stimulus think that it worked, while those who did not support it think that it failed.

I remember asking you a long while back what you would take as proof that the stimulus did not work. You said that probably you would look at a country who followed a different policy to compare results. So, I think you should take a look at Germany, or at Canada. Both of these countries followed policies that involved controlling government spending - they are doing much better than we are. There are of course lots of variables that are different, so if you want to believe the stimulus worked, you'll discount these examples.

I think you should also look at what the President and his economists were saying prior to the stimulus. Without the stimulus, unemployment would rise to 9%, with the stimulus, unemployment would stay at 8% and then drop. Obama established he exact criteria by which he should be measured.

Me? I think that the overall policies following by the current administration - massive government spending, anti-business rhetoric, tax increases or the threat of tax increases, increased regulation, etc. have created a climate that is damaging the economy in a big way. This is the worst recovery from a recession ever. Unemployment is the highest in our lifetimes, with no sign that it will go down in a meaningful way for a long time. Obama owns these results, even if the recession started before he took office.

Oviously I disagree:

Of course counterfactuals are impossible in economics; but we have to go on the data we have. I've read some commentators who say that because we can't scientifically measure the effects, we should therefore not do stimulus, but of course that's absurd since any course of action can be criticized on that count, including inaction.

I think there are a few stances one could take on the stimulus:
It was a complete failure, the "multiplier" effect is 1, and we've gotten nothing from it except debt
Stimulus worked to boost production and increased GDP, but the effect wasn't enough to justify the debt incurred (i.e. it accepts Keynes theoretically but still isn't convinced). This argument could also encapsulate the Moral Hazard issue- moral hazard problem is too big to justify the temporary economic benefit.
Stimulus was a success, and without it things would have been much worse. It was worth the debt incurred.
Germany is an interesting comparison, but I don't think it can be looked at without seeing it as a part of the larger European Union, which makes economic decisions as a whole. I would see Germany as analogous to the Northeast Corridor, as the most educated and advanced part of the European economy. Like us here in the northeast, Germany has lower unemployment than southern Europe, which also didn't do much stimulus (as part of the same EU). Like the less developed parts of the US, southern Europe was hurt badly by this recession and isn't recovering well at all.

But I accept your point that we're all set in our preconceptions.

The President's economic team blundered badly in predicting an 8% top unemployment rate, but that speaks to their poor crystal-ball reading, and doesn't say anything about effects of stimulus. After all, unemployment went past 8% long before significant stimulus was in place.

As for your final point, it's true that the Democrats own the recovery (though not the Crash). I think they blundered in not doing enough stimulus (many on the economic team argued for stimulus well north of $1 trillion, and it ended up being $700 billion), but of course now we're into more counterfactuals.

The continued poor economy will hurt Dems at the polls, as it should. You think it's because they're pursuing the wrong policies, and I think it's because they didn't have the courage of their convictions. Either way it's their fault though.

The nice thing about an undivided government (like 2009-2010, and of course 2001-2007) is that we can hold the majority responsible for their record. If the GOP takes one or both houses of congress, things get much murkier.