Jared Bernstein, the former chief economic adviser to Vice President Joseph Biden who is now at the Center on Budget and Policy Priorities, argues that while fiscal consolidation would have been necessary at some point, the government slammed the brakes on spending before families were ready to spend again, while they were still working to reduce large debt burdens.
“The stimulus didn’t last long enough,” Mr. Bernstein said. “We pivoted to deficit reduction too soon.”
Not everybody agrees. Conservative economists, and most Republicans in the House, make the exact opposite argument: that spending cuts stimulate growth by giving businesses confidence that the government will be able to pay its debts.
Conservative politicians might say that, but macroeconomists don’t — but I’ll get to that later.
The general point being made here is OK. If 1) you think the economy could be better, and 2) you think that government could help make it better by spending more, then 3) this is a great time to increase government spending to do that. Bernstein is emphasizing point 1, while Larry Summers (discussed in the same part of the article) is emphasizing point 2. The conclusion is that with real interest rates negative, the government should be borrowing a ton and investing in improving the economy. Fair enough.
So what’s wrong with what Bernstein said specifically? He’s really making 2 points: 1) there was a stimulus, and 2) the stimulus wasn’t spread out enough.
This is at variance with the facts on both counts. Both were covered years ago on this blog.
- In Spring 2009 “How What Congress Will Do Differs from What the Economy Needs” notes that before the Obama stimulus package was passed 4 years ago it was clear it was stretched too far out into the future.
- In Spring 2010 "Has Government Spending Increased At All?" noted that increases in federal spending were roughly cancelled by declines in state and local spending.
- In Spring 2011 “Keynesian Theory Suggests the Stimulus Package Was Just Crap” and “Was “the Stimulus Package” An Expansionary Keynesian Policy?” argued that only about 3% of the Obama stimulus package had been spent on stimulation within the first 21 months after it passed.
- In Spring 2012 “Wow” discussed the release of an internal Obama administration memo from late 2008 that argued that only about 40% of what was in the stimulus package would actually be stimulating. Largely this is because they put everything stimulating in there that they could think of, and that’s all it amounted to.
Let me summarize: they couldn’t figure out that much to do that was stimulating, so they spent a lot of extra money on stuff they knew wouldn’t work, but the stimulating part was really thinned out, and as a result largely cancelled by other factors … but nonetheless obvious 4 years ago that the package would still be hanging with us now.
And Bernstein’s going around saying the stimulus package didn’t last long enough.
Don’t believe him.
This is cross-posted from SUU Macroblog, which is required reading for my macroeconomics classes.