The non-stop bombardment of inane, partisan yammering which assaults us during an election year, makes it even more refreshing when a level-headed, clear thinker catches our attention. One popular subject of debate during the current election cycle has been the American Recovery and Reinvestment Act (the 2009 stimulus bill). In stark contrast with the propaganda you have been hearing about the 2009 stimulus (from both political parties), a new book by Mike Grabell of ProPublica entitled, Money Well Spent? brought us a rare, objective analysis of what the stimulus did – and did not – accomplish.
Matt Steinglass of The Economist recently wrote a great essay on the “stimulus vs. austerity” debate, which included a discussion of Mike Grabell’s new book:
The debate we had about the stimulus probably should have been a lot like the book Mr Grabell has written: a detailed investigation of what does and doesn’t work in stimulus spending and whether the government really can jump-start a promising industry through investments, tax breaks and industrial policy. But that wasn’t the debate we had. Instead we had a debate about the very concept of whether the government ought to spend money counter-cyclically during a recession in order to keep the economy from collapsing, or whether it should tighten its belt along with consumers and businesses in order to generate confidence in the financial markets and allow markets to clear. We had a debate about whether governments should respond to recessions with deficit spending or austerity.
The ProPublica website gave us a peek at Mike Grabell’s book by publishing a passage concerning how the stimulus helped America maintain its status as a competitor in the electric car industry. Nevertheless, America’s failure to support the new technology with the same zeal as its Asian competitors could push domestic manufacturers completely out of the market:
A report by congressional researchers last year concluded that the cost of batteries, anxiety over mileage range and more efficient internal combustion engines could make it difficult to achieve Obama’s goal of a million electric vehicles by 2015. Even many in the industry say the target is unreachable.
While the $2.4 billion in stimulus money has increased battery manufacturing, the congressional report noted that United States might not be able to keep up in the long run. South Korea and China have announced plans to invest more than five times that amount over the next decade.
As Matt Steinglass concluded in his essay for The Economist, current economic circumstances (as well as the changed opinions of economists John Cochrane and Niall Ferguson) indicate that the proponents of economic stimulus have won the “stimulus vs. austerity” debate:
The 2010 elections took place at a moment when people seemed to have lost faith in Keynesianism. The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity.
Although the oil industry has done a successful job of convincing the public that jobs will be lost if the Keystone Pipeline is not approved, big oil has done a better job of distracting the public from understanding how many jobs will be lost if America fails to earn a niche in the electric vehicle market.
The politicization of the debate over how to address the ongoing unemployment crisis was the subject of a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO). El-Erian lamented that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:
The longer that corrective measures are delayed, the harder the task at hand will be and the greater the eventual costs to society.
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In fact, our current unemployment crisis is a force for broad and disruptive economic, political and social dislocations.
Mr. El-Erian noted that there is a faction – among the opposing forces in the debate over how to address unemployment – seeking a “killer app” which would effectuate dramatic and immediate progress. He explained why those people aren’t being realistic:
There is no killer app. Instead, Congress and the administration need to move simultaneously on three fronts that incorporate multiple measures: those that address the immediate impediments to job creation, including a better mix of demand stimulus and medium-term fiscal reform involving both federal spending and revenue, as well as stronger remedies for housing and housing finance; those that deal with the longer-term enablers of productive employment, such as education, retraining and retooling; and those that strengthen the social safety nets to appropriately protect citizens in the interim.
Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort. It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.
One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago. But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.
In other words, while the election year lunacy continues, the unemployment crisis continues to act as “a force for broad and disruptive economic, political and social dislocations”. Worse yet, the expectation that our political leaders could “come together to address what constitutes America’s biggest national challenge” seems nearly as unrealistic as waiting for that “killer app”. This is yet another reason why Peter Schweizer’s cause – as expressed in his book, Throw Them All Out, should be on everyone’s front burner during the 2012 election year.
No Consensus About the Future
As the election year progresses, we are exposed to wildly diverging predictions about the future of the American economy. The Democrats are telling us that in President Obama’s capable hands, the American economy keeps improving every day – despite the constant efforts by Congressional Republicans to derail the Recovery Express. On the other hand, the Republicans keep warning us that a second Obama term could crush the American economy with unrestrained spending on entitlement programs. Meanwhile, in (what should be) the more sober arena of serious economics, there is a wide spectrum of expectations, motivated by concerns other than partisan politics. Underlying all of these debates is a simple question: How can one predict the future of the economy without an accurate understanding of what is happening in the present? Before asking about where we are headed, it might be a good idea to get a grip on where we are now. Nevertheless, exclusive fixation on past and present conditions can allow future developments to sneak up on us, if we are not watching.
Those who anticipate a less resilient economy consistently emphasize that the “rose-colored glasses crowd” has been basing its expectations on a review of lagging and concurrent economic indicators rather than an analysis of leading economic indicators. One of the most prominent economists to emphasize this distinction is John Hussman of the Hussman Funds. Hussman’s most recent Weekly Market Comment contains what has become a weekly reminder of the flawed analysis used by the optimists:
Hussman’s kindred spirit, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), has been criticized for the predictiction he made last September that the United States would fall back into recession. Nevertheless, the ECRI reaffirmed that position on March 15 with a website posting entitled, “Why Our Recession Call Stands”. Again, note the emphasis on leading economic indicators – rather than concurrent and lagging economic indicators:
Unlike the partisan political rhetoric about the economy, prognostication expressed by economists can be a bit more subtle. In fact, many of the recent, upbeat commentaries have quite restrained and cautious. Consider this piece from The Economist:
A great deal of enthusiastic commentary was published in reaction to the results from the recent round of bank stress tests, released by the Federal Reserve. The stress test results revealed that 15 of the 19 banks tested could survive a stress scenario which included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices. Time magazine published an important article on the Fed’s stress test results. It was written by a gentleman named Christopher Matthews, who used to write for Forbes and the Financial Times. (He is a bit younger than the host of Hardball.) In a surprising departure from traditional, “mainstream media propaganda”, Mr. Matthews demonstrated a unique ability to look “behind the curtain” to give his readers a better idea of where we are now:
When mainstream publications such as Time and Bloomberg News present reasoned analysis about the economy, it should serve as reminder to political bloviators that the only audience for the partisan rhetoric consists of “low-information voters”. The old paradigm – based on
campaign fundingpayola from lobbyists combined with support from low-information voters – is being challenged by what Marshall McLuhan called “the electronic information environment”. Let’s hope that sane economic policy prevails.