Did the Stimulus Fail?

James Hanley

James Hanley is a two-bit college professor who'd rather be canoeing.

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71 Responses

  1. North says:

    All very succinctly worded. So, had you been on a committee of economic advisors at the beginning of Obama’s administration what would you have recommended?
    Please consider, at least somewhat, the political aspect of yours recommended action; Obama and the Democrats had only just finished co-operating with the Republicans and Bush on TARP which was a massive and unpopular financial bailout of an assortment of major institutions without which, they were assured by economists all and sundry, the entire economy would crash and burn like the Hindenburg. Would you say that the TARP intervention had the same negative effects of crowding out investment, raising the deficit, creating uncertainty and having bad timing?

    With that in mind what politically feasible alternative would you have suggested?Report

  2. I think the strongest argument Keynesians have going for them is that employing people gives them something to put on their resumes instead of committing robberies. (Not everyone can turn to entrepreneurship or small-business ownership when times are tough.) But this is more an argument in favor of specific programs, like, for example, building another tunnel into Manhattan or a high-spreed train from Boston to Atlanta, based on the virtues of those programs. Keynesians tend to skip over the obvious, concrete goals of said policies and straight to admiring the vague complexities of their own elegant and totally-off-the-mark theories.

    If the stimulus was great for anybody, it was the corporate fatcats holding the rights to labors derived from the wage slavery of deskbound obese boomers. The corps can sell naked-imaging-machines to the people we pay to grope us and invade our persons when we travel. And they can get public money to fund their ripping-off-the-public debt-parties and cars no one wants to buy.

    But the stimulus (and really decades of effectively same) has been quite ungreat for people who like to make good economic decisions and don’t want government leaches between themselves and the recipients of their individual, subjective and nuanced supply and/or demand.Report

    • North in reply to Christopher Carr says:

      What’d you think of TARP?Report

      • Christopher Carr in reply to North says:

        TARP was kind of like if I set my own house on fire, I must then flood it to salvage anything. For all the number’s crunching and success narratives surrounding TARP, if we create a system that encourages excessively risky behavior, do we have a responsibility to save everybody when they do what we tell them to do and it backfires? Especially if people who were not engaging in risky behavior will be equally hurt? TARP is like giving another syringe full of smack to a junkie: we’ll either have to do it again and again and again every time systemic risk boils over or we’ll have to radically reinvent the economy. Either way, we gotta start letting people fail.Report

  3. dexter45 says:

    Three questions. How much money are the corps sitting on? Question number two is for the religous writers here. What would Jesus think of billionaires sitting on their money while people starved? Finally, at what point does enlightened self interest become greed?Report

    • Jaybird in reply to dexter45 says:

      Would Thor have an opinion? Bast? Hestia? What about Mohammed?

      Which religion do you think the corporations ought to follow? Is there a particular God that hates greed to the point where you think “we ought to follow *THAT* God?”

      How ought we deal with people who believe in a different God than the one we believe in?

      Or no God at all? How ought we deal with atheists? What about moral nihilists?Report

      • dexter45 in reply to Jaybird says:

        Since America is a nation founded on Judeo-Christian thought I asked about that god? If I had wanted to know what Thor would do, I would have asked the Thorians. The whole essay is a rehashing of a George Will oped from a few years ago. Also, you got angry without answering any of my questions. If I want animosity, I will denigrate Mr. Cheeks. He is better at than you are.Report

        • James Hanley in reply to dexter45 says:

          Since America is a nation founded on Judeo-Christian thought

          Funny, I thought it was founded on enlightenment political philosophy and a very universal antipathy toward loss of political autonomy. I’m pretty sure I’m right about that.

          The whole essay is a rehashing of a George Will oped from a few years ago.

          A) I rarely read George Will, so I’ve certainly not rehashed anything he said. B) George Will writes shorter pieces, as op-eds are invariably shorter than the 1800+ words I’ve put up here, so if anything it would be an extension of what he might have argued. C) I have to write something that nobody else has ever written about or you’re going to dismiss it as a rehash? D) Cite, please, or it didn’t happen.Report

          • dexter45 in reply to James Hanley says:

            I originally found this site after typing libertarian on google. What you gave the world this morning is just another memo of the day from the right wing overlords. If I wanted the same old blather I would not bother trying new sites. Please accept my apologies if I think little of more of the same from right wingers. You say the republicans are crazy and then repeat them. I am sorry if I did not keep the paper from five or six years ago. I have a tendancy to recyle and believe me when I say I read something, I have read it. I have a habit of hyperbole, but I rarely lie. And since there is nothing new under the sun, no, you do not have to be original, but I would like something from the elites other than old news. Reguarding the comment about america being a christian nation, I was being sarcastic. I think Jefferson had more to do with our government than Calvin.Report

            • James Hanley in reply to dexter45 says:


              Well, glad you were being sarcastic about the Christian nation argument. Sarcasm’s hard to perceive on the internet if you’re not familiar with a person, and I missed it.

              As to a “right wing” argument, libertarianism tends to overlap with both the left and the right. I had right-wingers accuse me of being a lefty anti-American (literally) when I opposed the invasion of Iraq, and I get all kinds of crap about being an elitist ivory tower liberal when I condemn Christian nation arguments. On economic issues, I get accused by lefties of being a right-winger. Same ol, same ol. I can only write what I think is correct, but I notice you don’t actually give a reasoned critique–you just dismiss it as right-wing. Don’t expect me to be too impressed with such a flimsy rebuttal. Of course from my perspective, the problem with right-wingers is they don’t really agree with what I’m arguing here, at least not as it works out in their actual policies. So I don’t even think you have that correct.

              But don’t leave the blog because of me. I’m brand new here anyway. Read the others, enjoy the ones who say things you like, and feel free to ignore me.Report

              • dexter45 in reply to James Hanley says:

                First and foremost, I have no intention of leaving this blog. I read a few right wing blogs. I call it spying on the enemy. I am very much in the social libertarian camp, but have serious problems with much of their anti-statist thoughts. I don’t have the background in words that many of the writers here have. I am merely a blue collar man that has seen my wages fall through the floor in the thirty years since President Reagan and probably would not have replied if your essay had not been so close to Will’s. I used to read Will because I thought he was a better than average writer, but quit reading him after an oped piece extolling global warming because it would help farmers and how hurricanes would not get worse because of global warming. I am not an intellectual, but I do live in Louisiana and know that hurricanes get stronger the higher the water temperature in the Gulf. After that article, my opinion of Will went from a decent writer who is usually wrong to lying schmuck.Report

              • James Hanley in reply to dexter45 says:

                First and foremost, I have no intention of leaving this blog.

                Good, glad I didn’t drive you off.

                I read a few right wing blogs. I call it spying on the enemy.

                Sorry to disappoint you, but I’m not right-wing, whatever you may think. Right-wingers are pro-business. I’m pro-market because real competition constrains business, and distrustful of government regulation largely because so much of it works to protect businesses from competition, thus harming consumers. This is a point I’ll insist upon repeatedly–being pro-market is distinct from being a right-winger, because they want to subsidize and protect favored businesses from the rigors of market competition. They also want to make my children say their prayers in school, tell them whether they can have abortions or not, and throw them in jail if they smoke pot. I’m definitely not one of those folks.

                I used to read [George] Will because I thought he was a better than average writer,

                Well, to be fair, he is a better than average writer. I think we have to give him that. Whether he’s a better than average thinker, though, well that’s far more doubtful. Once upon a time he seemed to be, too, but like Paul Krugman, he seems to have found ideology more satisfying than insight. Or perhaps my own knowledge matured enough to recognize Will’s frequent shallowness.Report

              • dexter45 in reply to James Hanley says:

                I should have left out the sentence about reading right wing blogs because it is very easy to think I was referring to this one. I like this blog because of the different ideas and the congeniality. I do not think it is right wing. I am looking forward to more on markets and such. You are new here, and like I said, I would not have responded if your essay hadn’t reminded me so much of Will’s. I was afraid that you were a right winger.Report

              • James Hanley in reply to dexter45 says:

                Ah, I get you. My jet lag may be affecting my ability to correctly interpret commenters’ meaning.

                You may find my advocacy of markets too close to right-wing for your taste, which is entirely fair, but I do assure you I’m not one. I also sometimes check in on them, to keep an eye on them, but frankly I get nauseated too quickly to be able to do it regularly. Fortunately there are non-right-wing blogs I read that take care of that ugly task for me, and just report the “highlights” (if that word can even be appropriate).Report

            • Jaybird in reply to dexter45 says:

              This site? Libertarian?

              It’s a bunch of technocrat apologists!

              I love y’all dearly, of course, but, hey, let’s be honest.Report

        • Jaybird in reply to dexter45 says:

          Is Judeo-Christian thought as monolithic as, say, Islam?

          Or does it have many splinter groups and nuances and any attempt to say “oh, they’d think this about greed” as likely to miss the mark as an attempt to paint, say, Islam as a monolithic religion?Report

        • Jaybird in reply to dexter45 says:

          (And, dude! I ain’t mad! I was *TRYING* to point out the absurdity of an (I presume you are an) atheist appealing to the religious beliefs of folks who belong to a religion that you don’t belong to. If I were “angry”, I would have instead implied that you were a fan of instituting Christian Theology Into Law when it comes to gay marriage, abortion, medicinal marijuana, and equality for chicks. Jaybird rolling his eyes asks silly questions (that, honestly, he would like to see answered). Jaybird mad starts questioning your character.)Report

          • dexter45 in reply to Jaybird says:

            I am glad you are not mad. I was not “appealing to the religious beliefs of folks who belong to a religion” I do not believe in. I am almost, but not quite an athiest and one of the reasons I don’t think much of Christianity is because of the disconnect between what I think of Jesus as a moral philosopher and what the christians do. I am truly interested in how christians can be so hateful and claim to follow a god, who I see, as one of the greatest moral people. Maybe I was being a little snarky because I think so little of George Will. His thoughts have the same weight as William Kristal. If he is talking, he is trying to shaft the people who actually make things besides piles of paper.Report

  4. James Hanley says:

    Wow, we have some fast readers here.

    Mr. Carr–“wage slavery”? Now that’s a phrase I never saw at my old blogs. A bit of culture shock to me for sure.

    North–I can only provide an incomplete answer for the moment, as I plan to write a follow-up post suggesting what I would propose to Obama were I his adviser. However I’m not going to make any claims to political feasibility. Given the Keynesianism of the Democrats, and the sheer irrationality of the Republicans, I’m not sure there is any available policy that is both beneficial and currently politically viable. As to TARP, I’d have to think a while before I answered your specific questions. My primary objection to it is that it was a textbook example of moral hazard. It perpetuated–probably worsened–the “too big to fail” phenomenon, and further encouraged, rather than discouraged, unwise investment strategies by ensuring investment firms they’d have a good chance of not being held accountable. If no-0ne suffers consequences, no-one changes behavior.Report

    • Jaybird in reply to James Hanley says:

      Do you have a response for those who argue that, without TARP, we would have seen TEOTWAWKI?Report

      • James Hanley in reply to Jaybird says:

        That’s a tough one. I think letting the financial system wholly collapse would have been catastrophic. On the other hand, I think TARP was very badly conceived. Yet I’m not smart enough to make a good claim for what policy we ought to have followed in that case. (In general, I think making good public policies is just one heck of a lot trickier than those who advocate policies with confidence ever understand, or at least ever let on.)Report

        • Jaybird in reply to James Hanley says:

          I’m a fan of TEOTWAWKI, myself.

          Additionally, I sincerely doubt that any crash would have been anywhere near as long-term and/or catastrophic as attempts to resuscitate the zombie will eventually prove to be.Report

          • Rufus F. in reply to Jaybird says:

            Jay, is there an example of a government that stayed out of the way while a segment of their (obviously modern, industrialized, capitalist, etc.) economy crashed? I’m asking seriously- I don’t know the history well enough to think of one. But, it seems like, every time this subject comes up, someone says that TEOTWAWKI option would have worked a lot better and I’m trying to understand if that’s a pure counterfactual thought experiment, or if it’s based on a real example in which a government actually let the village be destroyed in order to save the village and it sped up the recovery.Report

        • North in reply to James Hanley says:

          I appreciate the honest answer James, I’m looking forward to (and expecting) the follow up post.

          The thing about the stimulus is that it occurred in the shadow of TARP. If, as you believe (and as I do), TARP was necessary to prevent a cataclysm in the country’s financial system then Obama pretty much had to issue a vigorous stimulus plan of some sort for the general economy as a follow up. Even Republicans wouldn’t have dared to “bailout Wall Street” and then “tell Main Street to go hang” it would have been pure political suicide.Report

  5. James Hanley says:

    Followup on the issue of political viability: A good response will probably induce short-term pain, with the results coming only in the long-term. Unless voters begin to vote retrospectively, rewarding politicians for making good long-range decisions, instead of retrospectively, punishing them for causing pain now, political viability of good policies is hard to ensure.Report

  6. Scott Hanley says:

    I’m wondering how the government action = uncertainty explanation accounts for the recovery, then? No one disputes that the end of the Depression coincides with the rearmament for WWII, but that hardly engenders a steady investment environment, at least not for a anything beyond a three or four year horizon.

    As an example, the Kaiser Shipyards built three shipyards just in the Portland-Vancouver area, and four others elsewhere on the West Coast, only to shut them down again at the end of the war. To house the influx of workers, a temporary city of 40,000 was built and also abandoned (see Vanport. The short term returns were certain enough to justify that kind of investment; the long term prospects couldn’t possibly justify it.

    That would seem to support Krugman’s assertion that – contra the business lobbyists – the major impediment to investment is a lack of customers, and that if the government is going to make up for lost private consumption, they have to do it on a massive scale.Report

    • James Hanley in reply to Scott Hanley says:

      There’s a lacuna in your argument. While rearmament for WWII certain coincides with the end of the Depression, it does not coincide with recovery. The WWII economy was a command economy, not a recovered market economy, and it was absolutely unsustainable. (That’s not to say it was a bad thing–in the context of the time, I think it was necessary. It just wasn’t sustainable.) The big question after the war was how to actually have an economic recovery–i.e., how to shift to a fully productive market system instead of falling back into a recession. The war had taken millions of unemployed, or government make-work, folks and put them in uniform. Simply taking them out of uniform and putting them on the unemployment line wasn’t an attractive strategy. Part of the policy strategy was to stage the re-entry into the (potential) workforce, by not mustering them out all at once, and by creating the GI Bill (which both slowed their re-entry into the work force and sent them back in with greater skills–I’d call that a great government policy, except for the racial exclusivity aspect). But IMO the biggest boosts to economic recovery were a) rebuilding Europe, and b) simply optimism. When people are optimistic they invest and buy. When people invest and buy, the economy hums.

      I just can’t accept the claim that the biggest impediment to investment is lack of customers, because investment helps create customers. OK, at least in the aggregate. An investment in producing widgets may not create widget customers, as the people it puts to work may be more interested in buying gadgets. But overall it seems to work, because economies do recover. The Keynesian specter of market economies persisting at less than (nearly) full employment just doesn’t seem to ever happen.

      As to the Kaiser shipyards, when you get a cost-plus contract, any investment will pay off, no?Report

      • Scott Hanley in reply to James Hanley says:

        Re: Kaiser. That’s the point – the certainty of customers trumps the uncertainty of future taxes and regulations. Yes, WWII was an unsustainable command economy, but at the end of the war the US transitioned from that command economy back to a sustainable market economy with only a mild downturn, despite demobilizing millions of men and billions of dollars worth of armaments contracts. As a jumpstart mechanism, that makes it an appealing model, one with honest-to-god historical evidence behind it. My largest reservation is that, as you noted, the missing element of optimism (whether well-reasoned or not) might turn out to be crucial.

        As for investment creating demand, that doesn’t exactly happen right away, does it? When you start a farm, you can’t survive until harvest by eating your first crop. Unless you have deep enough pockets to take a very long view, you need to bring in some money right away. It appears that right now, a lot of savers could invest their money, but they don’t see an adequate reason to do it right now. Safer to just wait until things pick up, rather than investing while the economy is down. It might be the short-term insecurity, not the long-term, that inhibits investment.Report

        • James Hanley in reply to Scott Hanley says:


          No, I think Kaiser’s a lousy example, because it didn’t actually create consumer demand. It’s customer was simply the government. It didn’t actually translate into real economic growth.

          As to the claim that there was only a “mild downturn,” I don’t think a contraction of over 10% can really be passed off as mild.

          Anyway, you ignore the unique circumstances of the end of WWII that make it a lousy comparison to today. Where are the war shattered countries we’re rebuilding? Where is the boundless optimism in the future going to come from?

          And actually investment can create demand right away. When I borrow money to buy machine tools, people may be put to work right away (depending on inventories), so it’s not exactly the same as sitting around waiting for corn to grow. But if your argument here is correct, what’s the logical distinction between government investment and private investment? If investment takes a long time to create demand, government investment isn’t going to be superior to private investment in that regard, unless you’re positing some magic effects to the private sector (which I know you’re not).

          Look, the simple fact is that the “WWII ended the Great Depression” story is neither strictly true nor very applicable. It shifted us from a Depressed regulatory economy into a full command economy, but WWII spending did not create an actual economic recovery by any meaningful definition. And the post WWII conditions that did lead to an economic recovery are not present now.Report

  7. ppnl says:

    I dunno but I really wish Milton Friedman had lived long enough to give his opinion on this.Report

  8. Pat Cahalan says:

    > While an extensive argument is too much to go into right here, in general
    > the arguments that free market economies can go into a decade long
    > depression lack a coherent mechanism in their explanation.

    Given the fact that economics is (at this stage of the scientific game), mostly descriptive and mostly forensic, that’s not entirely a surprise. I’m not going to deride economists as being no better than tea leaf readers, since I actually have respect for the field, but the predictive capabilities of economics are woefully limited, and the complex adaptive systems nature of the problem domain makes coherent mechanisms very difficult to suss out.

    > Third–and this is the crucial point–the government action may deter
    > private investment by creating uncertainty.

    The Tennessee Valley Authority argument. That’s a valid contention, but this is something that has to have at least weak evidence already extant in the economics literature to support it. Someone, somewhere, has to have done a statistical study of the rate of government interventionism and private equity investment rates. If this is the crucial point of your argument, seems like you ought to be able to provide some sort of substantive evidence in support.

    I think the present economic climate is pretty basically explained by the lack of sales. We’re a highly consumer-driven economy (which is bad, but not particularly relevant at the moment). Sales volume highly correlates with both cap-ex and hiring decisions; if nobody’s selling anything, they’re not hiring and they’re not building more production capacity.

    I agree, uncertainty does have a negative impact on investment, but this is far less of a problem right now than people just not buying crap.

    Additional side note: government intervention may indeed have a causal link with uncertainty, but there’s also the question of, “So what?” Right now, there is uncertainty in every sector of the economy. There is uncertainty in labor. There is uncertainty in manufacturing. There is uncertainty in real estate. Heck, there’s uncertainty in base metal and other commodity investments. So if the government is making things *more* uncertain, is this actually making things worse? Maybe it is, but it might be like throwing a bucket of kerosene on a raging house fire 🙂Report

    • James Hanley in reply to Pat Cahalan says:

      Pat, Lack of sales should equal more savings, which should equal more investment. So it still gets back to the question of, “why isn’t there enough investment”?

      One possible rebuttal is “there’s no savings because of unemployment.” But then we have to ask what happened to sales to cause that unemployment. Why did sales drop? I think it had to do with the investment climate.

      As to uncertainty, I think it’s self-evident that the level of uncertainty does matter, both in terms of degree and in terms of kind. In terms of degree, if I estimate my odds of success at 40%, that’s a whole lot different than estimating my odds of success at 10%. In terms of kind, market uncertainty and policy uncertainty are substantively different. Investors are accustomed to market uncertainty, and to some degree at least know how to account for it (the greater the uncertainty, the greater the required rate of potential return, for example). But policy uncertainty is a different matter–if you don’t know what the rules of the game are going to be, you don’t know how to invest, period.Report

      • > Pat, Lack of sales should equal more savings, which should equal
        > more investment. So it still gets back to the question of, “why isn’t
        > there enough investment”?

        It “should”, but right now it’s clearly not. And that’s because “should” in theory doesn’t exactly hit the road of the real world with grace.

        Lack of sales doesn’t necessarily posit more savings if you weren’t saving anything to begin with; it’s pretty well given that most Americans are/have been living beyond their means (at least what a generally historically conservative approach to personal finances would call “means”).

        If the average American household has been paying down unsecured debt (as the last four FSB reports indicate – http://www.federalreserve.gov/releases/g19/Current/), well, then that’s where the money is going. People aren’t buying stuff because they’re finally starting to pay off *stuff they already bought*.

        And while that may mean that the financial institution has more liquid money to turn around and offer to investors, that doesn’t necessarily follow that they’re actually going to do that (not to mention the fact that a financial institution may have its own outstanding bad bets to pay down). And even if they were, the end-consumers, who drive 2/3rd of the economy, still aren’t buying anything, so increased investment capital isn’t something that will help anyway, because nobody needs more production capacity. They need people to buy stuff, and nobody’s buying.

        > But policy uncertainty is a different matter–if you don’t know
        > what the rules of the game are going to be, you don’t know
        > how to invest, period.

        It’s different, but it’s not necessarily the bogeyman. My point, though, was that if the entire breadth of investment vehicles is uncertain, one more bit of uncertainty isn’t necessarily going to impact anything.

        Where do you put your money, right now? Stock? Real Estate? Commodities? Bonds? Foreign Currency? Yank all the money and buy gold? By my read, all of those investments right now just suck, including gold. So if the government decision or non-decision to maybe revoke the mortgage tax exemption and maybe not introduces more uncertainty to the equation… so what? Can it get more uncertain than, “Gee, the whole economy is a pile of doodie?”

        Sure, if construction was going like gangbusters and everything else wasn’t, adding some uncertainty to capital gains taxes might have the consequence you’re talking about, because more conservative blokes might cut 15% out of that branch of their investment porfolio and up their construction investments. But if there isn’t anything *more* certain to switch *to*, “uncertainty” starts to lose its differentiating capabilities.Report

        • James Hanley in reply to Pat Cahalan says:

          Lack of sales doesn’t necessarily posit more savings if you weren’t saving anything to begin with; it’s pretty well given that most Americans are/have been living beyond their means (at least what a generally historically conservative approach to personal finances would call “means”).

          Exactly, which is why for government to try to solve the problem with yet more living beyond our means is a perverse exercise. As I’ll argue in my follow-up post, that’s the cycle we have to break.

          But even so, there are businesses that have money to invest. The question is why they aren’t. I say it’s uncertainty.Report

          • > Exactly, which is why for government to try to solve the
            > problem with yet more living beyond our means is a perverse
            > exercise. As I’ll argue in my follow-up post, that’s the cycle
            > we have to break.

            I more or less agree; however, there’s a difference between “our” living beyond our means (as individuals in an economy) and “our” living beyond our means (as the Federal government). I’m all on board with cutting lots of stuff out of the operational role of the Federal government (albeit probably not as much as most of the League regulars). On the other hand, in principle I’m not against the government deciding to pump some liquidity into the economy (to ease the transition from a 2/3rd consumption-based economy to something more sustainable), but a rather large swath of the Federal budget could be hacked off while simultaneously doing this.

            > But even so, there are businesses that have money to invest. The
            > question is why they aren’t. I say it’s uncertainty.

            Oh, I definitely agree it’s uncertainty. I just don’t think, “We don’t know what the government is going to do!” contributes much effective uncertainty from a decision-making standpoint at the present time. Things are uncertain all over. If the swing to responsible consumerism isn’t just a fad but a longer term trend, sales are going to suck for a while, at least in this U.S. market.Report

  9. James Hanley says:

    Jaybird–I’m much too Burkean to want to risk the end of the world as we know it scenario. From a general engineering standpoint, there are far more ways for that to go wrong than there are for it to go right.

    Rufus–“I don’t get how the “if we had this totally different thing, which we didn’t do, the results would have been much better” isn’t equally unprovable.” Thanks for the catch. I meant to fess up to that in the post, but had to interrupt the writing to take my kids to school, and consequently forgot to do so. It is in fact equally unprovable, so the best I could do was to argue against the claim that Great Depressions result from government non-action.

    North–Assuming for the sake of argument that TARP was necessary, I don’t see how it made a follow-up stimulus also necessary. If anything, the necessity of TARP would seem to undermine the necessity of further action, by remediating the problems. As to “perfect vs. good” and “politically viable,” my concern is that no “good” policy is politically viable, much less a perfect one. (Nor would I have the hubris, I hope, to suggest my policy proposals approach perfection!)Report

    • North in reply to James Hanley says:

      Assuming as you do then yes, in practice the economy should have been able to proceed in some form of another without further stimulus. Of course Obama would have been burned in effigy politically had the extent of his intervention begun and ended with making whole the vilified banks and finance companies (remember at the time no one had any idea that the money could or would be paid back).

      As to policy prescriptions, well we’ll see once you lay em out in your future post. I’ll be gentle I promise.Report

      • James Hanley in reply to North says:


        I agree with you that Obama faced incredible political pressure to “do something, anything.” It didn’t help that he hasn’t the first clue about economics, but even if he did, and even if he wholly agreed with me, he might not be able to resist the pressure to engage in stimulus. Heck, I can’t claim with certainty that I wouldn’t do the same in his case. I know that even though I really didn’t support the stimulus package at the time, I felt very uncertain in making arguments against it, and that’s even though I was in a position where I could have no possible influence. So if I had been in a position of influence, I have to conclude that I might have been too politically fearful to object to the stimulus.

        But ultimately, being a political consultant and being a policy analyst are different jobs, and I don’t claim to be a political consultant.Report

    • Jaybird in reply to James Hanley says:

      We’re a robust people, nation, and ecosystem. There are worse things than TEOTWAWKI.

      Trying to resuscitate the zombie will use resources better used on ammo, for example.Report

      • North in reply to Jaybird says:

        I suppose Jay, and as an able bodied man with not too much skin in the game I suppose I can see a certain appeal but a the elderly, women and comfortable would probably prefer that the country not plunge into anarchy of roaring guns and rule of the strong.Report

  10. E.C. Gach says:

    Great post James. The cliches have been rolling in about how Obama’s party was hammered in the midterms because he didn’t focus enough on the economy. Of course, the immediate follow up is, what was he not doing that would have helped? Central to figuring this question out, from the Left or the Right, is hashing out this pretty large impasse over fiscal/monetary stimulus.

    So I’m glad you’re tackling it in such an analytic way with more posts to come. My one question regards elaborating more on the following idea of a:

    “…relative certain investment climate.”

    I’m curious if relatively certain investment climate ever actually exists. Elections swing back and forth, Congress almost never sits on its hands, issuing cuts/increases, new laws, and new programs all the time, and markets, given the new global environment and the volatile rise of third world countries is almost certain to lead to and uncertain climate.

    Also, having just finished Nassim Taleb’s Fooled by Randomness, I’m disposed to think that any degree of certainty regarding any kind of investment is rather likely to be in our minds only.

    Finally, wouldn’t the greatest amount of uncertainty on the parts of corporations come from not knowing when demand is going to pick back up again?

    For instance I work at a “small business” (for real). And while there are many ways in which we could invest more in our technology and systems management, to make the business more streamlined and capable, if anything, this boost in productivity or inventory would only lead to more layoffs, because where as before it took me 4 hours a day to finish a certain task, it now only takes 2, deleting 8 hours of labor from our daily upkeep. In the end, the only real reason for us to invest or hire more people, is if business picks up. Double the number of customers we have per day and our uncertainty with regard to the market will naturally be greatly reduced.

    Perhaps you would argue that gains in efficiency would allow us to lower prices. That’s true. But then there would still be the uncertainty of whether those lower prices would bring in enough greater business, whereas if the customers come first, the certainty as to future demand will be more so.

    It seems a fundamental disagreement on the idea of, “if you build it, they will come,” as oppose to, “if they come, we will build it.”

    Sorry for the long winded comment, I’m curious what you think I’m leaving out and the aspects of your argument that I’m missing or not fully appreciating.Report

    • James Hanley in reply to E.C. Gach says:

      Thanks for the compliment. A few thoughts in response. I haven’t read Taleb’s Fooled by Randomness, but I absolutely despised his book, The Black Swan, so I’m not likely to pick up anything by him. So I can’t, and will probably never be able to, comment intelligently on how the other book applies.

      I’m a Schumpetarian and a bit of a Hayekian. That is, I believe the market is inevitably chaotic, and deterministic planning is not possible. But that doesn’t mean some things aren’t more likely than others. And of course businesses make efforts to minimize their risks, from market research to futures markets. So if I’ve given the impression that I think sometimes investment is relatively certain and risk-free, I should dispel that impression right away. You want a risk-free investment? Buy U.S. Savings Bonds. That’s all the financial advice I’ll ever give.

      But as to the policy uncertainty created by elections swinging back and forth, that’s a good question and one I’ve only lately come to understand a bit better. I have many friends, both on the left and right, who complain that American politics is unduly narrow, that the differences between the American left and the American right are very narrow compared to, say, Europe. While I think there are substantive and important differences between the Democrats and Republicans in government, they are right that the differences are generally less than found in many other Democratic countries. Nobody here is seriously proposing nationalization, for instance (and even the government’s current ownership of a majority of GM stock is clearly not intended to be a long-term nationalization). That in itself creates some degree of policy certainty–investors can know that the swings aren’t likely to be too wild, most of the time.

      In addition, divided government enhances policy certainty by creating political gridlock. Major policy initiatives rarely get through when we have divided government, unless it’s something for which there is widespread support anyway, so investors can anticipate a period of relative policy stability.

      Finally, and this one came as a surprise to me, too much political instability can create a type of policy certainty. Italy, by a straightforward application of my arguments above, ought to be a perpetual economic basketcase because of its perpetually changing government. But as it turns out (and I’ve only learned this in the last couple years), the same factors that have caused Italian governments to collapse so frequently–fragile political coalitions in parliament–also tend to prevent those governments from accomplishing any big policy initiatives. So investors can predict, with relative confidence, that the rules of the game aren’t going to change anytime soon.

      As to efficiency gains, all economic growth is built on efficiency gains. Yes, it always creates a reduction in labor in that specific area, but the overall economic growth always offsets it. The problem is not that jobs are lost (the U.S. has far more people employed right now, despite the recession, than it did in its manufacturing heyday), but whether the people who lose their jobs will be qualified for the new jobs that are available, and whether they will be capable/willing to move where those jobs are. I’m in Michigan, where the unemployment rate is still over 12%. I keep encouraging one of my former students, who is unemployed, to move to one of the Dakotas, where the unemployment rates are 4% and 3%. He won’t do it. I assume the difficulty of having enough money to manage the move is an issue, and I am certain that fear is also an issue. That’s not the fault of increasing productivity, however. It’s more of a political/social problem than an economic one.Report

    • E.C. Gach in reply to E.C. Gach says:

      I guess the point remains, why would anyone invest right now, no matter the certainty, if there is no demand for whatever their investments will produce?

      And yet there are people who want to work, and people who want to invest, and people who have excess capacity, yet for some reason there is this disconnect. Do you think the disconnect rests only in “uncertainty”? Uncertainty about what specifically? And does that apply to small businesses as much as large corporations?Report

  11. James Hanley says:

    By the way, as much as I’m enjoying the debates (and pleased that my first real post has been so successful in that regard), please don’t get the impression I’ll always be so active and quick to respond.

    I’m sitting at home still trying to get over jet lag, an do not able to do anything that’s actually meaningfully productive today (I don’t know how businessmen who travel frequently can handle it). So instead I’m amusing myself by responding to all the great comments here.Report

  12. Will H. says:

    Just a few quick points:
    Crowding out private investment: No, it’s not. The difference here is that the private ‘savings’ going on is mostly paying down debt; so the savings is going toward prior consumption rather than future consumption.
    Poorly timed: The focus on infrastructure projects ensured that a good share of the stimulus would be poorly timed. And the 27% that was all tax cuts has an even lower rate of return.
    Investor uncertainty: That sort of thing gets priced into the market very quickly. That type of uncertainty is resolved with fundamentals, indicators. And it is within the power of government to pump those up a bit. Granted, they could probably do a better job of it if they were to target a few and give them undeviating attention.
    Long-term interest rates and inflation: A lot of kinetic energy stored there, and it has to come down. But it isn’t going to in the near-term. The word I’ve got is that the long-term bond market is currently being driven by the TIPS program. That is, buyers are accepting the lower rate because the bonds are insured to return, at a minimum, whatever the rate of inflation is over the term of the note. The fact that they still are selling these notes at such low interest rates should be a clue that something is going on.
    Debt load will hampering the U.S. economy for the long term: I think it was late last week that Dagong, the Chinese rating agency, downgraded US T-bills for the second time in six months. That’s not a good sign.Report

  13. Simon K says:


    I’ve started writing long argumentative answers to this post several times and its about to drop off the front page, so let me limit myself to a number of short, argumentative answers:

    1. No-one, not even Jean Baptistie Say, actually believed Say’s law holds. Say’s law is “supply creates its own demand”, or more fully “all production implies an intent to consume goods of equal value”, so there can never be persistent over-supply of anything. Its trivially true in a barter economy and obvious not true in ours, so its more of a puzzle than a law – why is it not true? The answer since well before Keynes, going back at least to the early Austrians is “monetary disequilibrium”. People want to hold money (which is different from saving, which is consuming financial assets), so sometimes they produce without consuming.

    2. Krugman might have been ill-advised to be so rude to Cochrane and Fama, since the result wasn’t very constructive, but they were wrong and its hard to pussy foot around this. They seemed to want to argue that in fact the current downturn is a real (ie. not caused by monetary disequilbrium) business cycle, but they didn’t actually present any argument for it. They just assumed it – it was almost as if they assumed everyone out there believed all business cycles had real causes and were rudely surprised to discover that the consensus it much closer to Krugman’s view than theirs. Fama, by the way, is a brilliant economist – this particular thing isn’t his field, though, he’s a finance guy and in finance you usually do assume full equilibrium. In macro you don’t, because its silly.

    3. Uncle Milton believed that fiscal stimulus worked, in that it did in fact increase nominal expenditure by more than the amount of money spent. There is no consistent position that says that monetary stimulus works and fiscal stimulus doesn’t, and obviously Friedman believe monetary stimulus worked. Look at it this – conventional monetary stimulus is “government issues cash, buys riskless debt”, quantitative easing is “government issues cash, buys riskier debt”. Almost everyone believes both policies work. If they work, why does “government issues short term debt, buys bridges” not work? If the government issued cash and bought bridges would that work? If so, what’s so different about short term debt?

    4. There are basically two ways all stimulus measures can fail – If people are really risk averse about investing and desperately want to hold riskless assets, they’ll hold on the new money and not spend it so there’s be little or no stimulus. This is the deflationary scenario or, in the most extreme case, a liquidity trap – note that it can happen either because there are no private sector investment opportunities. On the other hand, if investors desperately want to get rid of cash, they’ll spend the new money like hot potatoes and there’ll be inflation. Again this can happen either because private sector returns are perceived to be high, or because cash is expected to lose value.

    5. Both the inflationary and deflationary scenarios are characterised by uncertainty – in the one case, uncertainty about private sector returns and in the other, uncertainty about the value of money and government debt. But these scenarios are exclusive. Investors can’t simultaneously trust government debt and cash and expect inflation. This is where your “uncertainty” argument is flawed. You want to argue that private sector investment is held back because potential investors expect inflation or a fiscal crisis, therefore we remain in a disinflationary environment. But this is self-contradictory – if investors expected inflation the last thing they’d do is hold nominal debt and cash and yet that’s exactly what they’re doing and why the economy is not growing. If they expected a fiscal crisis the last thing they’d do is hold government debt, but they’re buying everything the treasury can throw at them and every time it looks as if yields can’t go lower, they do.

    6. If investors are risk averse, fiscal or monetary stimulus essentially makes the government act like a bank – it takes short term deposits and makes long term investments. Like any bank it takes a cut of the result in performing this maturity transformation. This is where the “crowding out” argument fails. If investors want a very low risk level, they’re not going to buy private sector debt. At the very most they’ll leave their money in short term deposits. If they want a higher risk level, they’ll buy private sector debt themselves. The only way the government can intervene and be competitive is if investors aren’t willing to take the risk.

    None of this is to say that discretionary fiscal stimulus is a good idea. It isn’t. Monetary policy is the right tool for the job, and really the Fed’s discretion should be reduced by tying the dollar to expected nominal expenditures somehow. I just don’t think any of your arguments above are very good – they serve to confused and flatter right-wing prejudices without actually shedding any light.Report

    • James Hanley in reply to Simon K says:


      I’m afraid I can’t reply to all of that right now, but just a couple of thoughts. First, if Say’s Law is “obviously not true,” it’s news to me and the economists I talk to. And you mis-state it. Says Law says that all inputs into production are someone’s income, so there will always be enough income to afford all that is produced. It’s simply a mathematical equivalency, so to say it’s “obviously not true” is a hard argument to make. But because it’s just a mathematical equivalency, it doesn’t mean that everything that’s actually produced will be something that’s actually demanded, which is why I always object to the vulgar simplification of supply creating its own demand–supply creates capacity for demand. But in general it still holds true that the mathematical equivalency makes general gluts implausible at best, unless we can posit that there are a vast number of producers making things nobody wants to buy. But if you really think Say’s Law is “obviously wrong” you should be able to explain where some value in that mathematical equivalency is leaking out of the system.

      I’d like a cite to where Friedman said fiscal stimulus works. He made his reputation on refuting the idea that fiscal stimulus works. He’s the one who argued that consumption levels remain consistent, contra Keynes’ claim that people essentially stick their money under the mattress, so that government spending was crowding out; and that recession occurred not due to a lack of demand but due to a lack of money in the system.

      Re: item 4. If people hold onto money, they stick it in the bank, not under their mattress, making it available for investment. Investment equals savings, so the more they save the more gets invested. Interest rates will adjust for that. The only puzzle right now is why there’s a lag in investment given how low interest rates are. As to spending the money too quickly, that doesn’t create inflation. As Friedman argued, inflation is always and everywhere a monetary inflation–it’s about money supply, not velocity.

      Re: item 5. Fear of deflation could indeed be one of the causes of uncertainty. As Krugman regularly points out, the Fed can deal with fear of deflation pretty easily, as long as it doesn’t get paralyzed by its fear of inflation. As to the not holding money when they fear inflation, I’m not emphasizing inflation as the only, or even the main, fear, just one of them.

      I do take offense at you saying I’m only flattering right-wing prejudices. You make a mere assertion there, without providing any explanation for how this is a right-wing, rather than a libertarian, argument. Given that you begin by misrepresenting Say’s Law in at least two ways, I’m disinclined to take you too seriously.Report

      • Simon K in reply to James Hanley says:


        I’m sorry I caused offense. I was intending be slightly provocative after having been quite boring for most of the rest of my comment, but obviously I pitched it wrong. Sorry. To be clear – I think there’s an excellent libertarian case against fiscal stimulus that I’d endorse on practical and ethical grounds, but its a very different thing from arguing that it doesn’t work – its really important to be clear about this since making bad arguments along with good ones tends to undermine the good ones.

        There’s a version of Say’s law, which you quote, that is an accounting identity, and there is a version that implies fiscal stimulus doesn’t work, but they’re not the same version. It depends on whether you include the “market” for money explicitly in your analysis or assume that money is neutral. If you do include it, as you do, all production does indeed trivially create demand for exactly the same value of goods (including money). But since money isn’t produced, merely circulated, production doesn’t necessarily create demand for an equivalent value in produced goods – it might create demand to hold money. This is how demand “leaks out” of the system.

        Now of course, we generally “store” money in a bank as savings, and savings are mostly invested, but this is not what I mean by “holding money”. Holding money means actually holding on to money. You and I generally don’t do that directly but the bank does on your behalf – it has to hold enough reserves to pay out any demand for cash and to clear other transactions through its reserve account. When the bank anticipates withdrawals it holds more reserves, so your demand for liquidity still indirectly affects the amount of money being held. More money is held when there is uncertainty because people are more likely to need to spend their wealth and less likely to just hold on to it. In terms of the accounting identity, some bank deposits are money holdings and some are savings – simply noting that the money is in the bank doesn’t tell you whether its been invested or not.

        This is all, I think, totally mainstream and accepted by everyone except possibly for Eugene Fama. There’s a lot of room for debate withing that mainstream over how effective fiscal stimulus is, but unless you think short term government debt is magically illiquid or bridges are magically liquid, its hard to see how it can be very different from monetary stimulus in its effects.

        Even Friedman eventually accepted that the velocity of money varies quite dramatically, and endorsed the inflation & interest rate targeting that dominated during the great moderation in place of targeting monetary aggregates. It turns out that MV grows quite stably (indeed MV is nominal GDP) but that M and V do not, for all values of M that Friedman tried. This is key – if V varies, keeping M on a stable growth path doesn’t work, so recent practice has been to control MV fairly directly through the fed funds rate and not worry too much about which variable was changing. If you accept that – and as I said this is basically the mainstream view – why is fiddling with V by issuing debt and buying bridges less effective than fiddling with it by issuing reserves and buying bonds?

        Of course, Friedman never endorsed the idea that the Fed should buy bridges, but he did endorse the use of automatic stabilizers such as unemployment insurance, and thereby the idea that the government should run a deficit during a recession. This is fiscal stimulus. Its just not discretionary, and it was the discretionary component of fiscal policy which he, along with you and I, objected to.

        I’m now lost as to how fiscal stimulus is supposed to undermine the business climate and produce uncertainty. You cited inflation and government debt in your article. Its clear that fears of inflation and debt are inflation not disinflationary, and yet we’re stuck in a disinflationary situation so they’re not the uncertainty you’e looking for. What is the uncertainty you’re looking for and how does fiscal stimulus create it?Report

        • James Hanley in reply to Simon K says:

          OK, and I get what you’re saying now about Say’s law. Yes, banks hold money. But a) that’s far from saying that Say’s law is obviously wrong, because b) there’s little evidence that banks tend to suddenly ratchet up their savings significantly. If anything, banks historically have tended to loan too much rather than hold onto too much. While the leakage is theoretically possible, you’d have to show empirically that it actually happens, and not to a small degree but to a large enough degree to really set back an economy.

          Pardon me if my first response was a bit pissy. I’m still really struggling with jet lag and am more irritable than usual, and I have a fairly visceral reaction to the representation of Say’s law as “supply creates demand,” as tending to be indicative of vulgar and ignorant supply-siders.Report

          • Simon K in reply to James Hanley says:


            Jet lags sucks. You have my sympathies.

            Actually there are interesting theories that relate the current crisis to a monetary crisis, analogous in one way or another to people choosing to hold more money. Of course this is all speculative and the next generation’s equivalent of Milton Friedman will presumably come along and explain why everyone currently writing is wrong – we are in a unique situation now. Briefly:

            1. Scott Sumner makes quite a persuasive case that the key moment was the Fed meeting in mid-2008 when the economy was already in recession but FOMC decided to slightly tighten policy – if you recall, inflation did appear to be rising at the time even though real GDP was falling. In effect both M and V fell at the same time – the acceleration of the housing crisis and the bank failures followed that event. Of course if nominal expenditures drop overall, its equivalent to people choosing to hold more cash as the value of existing cash balances rises.

            2. Gary Gorton’s work on how the sub-prime contamination spread to the rest of the financial system makes a compelling case that it was equivalent to a run on the shadow banking system. A bank run is, obviously, a mass decision to hold more money. The details are complicated, but in essence sub-prime fixed income securities were being used as collateral on overnight loans – when the value of those instruments dropped, the loans were not renewed.

            3. The numbers also tell the story – interest rates are at all-time lows, the TIPS spread is still under 2%, and the S&P rises whenever the Fed loosens policy. Isn’t this telling us that there isn’t enough money circulating? If not, what would?Report

  14. James Hanley says:


    Fiscal stimulus itself doesn’t produce an uncertain investment climate, but an unsustainable debt load does.Report

    • Simon K in reply to James Hanley says:

      Sure, a truly unsustainable debt load would retard growth because the marginal investment would cease to be worthwhile and therefore not be made. But there is no evidence that this is happening. If there were real doubt about the sustainability of the debt, the market would push rates up – that’s not happening. Similarly, business confidence surveys cite demand, not regulatory uncertainty as the biggest problem (this happens during recessions – during booms they cite regulation, go figure). Although the debt is worrying, the markets expect the consequent tax rises to manageable and most of the cuts to come out of spending once the recovery is sustained.Report

  15. Koz says:

    “Sure, a truly unsustainable debt load would retard growth because the marginal investment would cease to be worthwhile and therefore not be made. But there is no evidence that this is happening.”

    I think that’s exactly what’s happening, and it’s a little puzzling for me to see why you think there’s no evidence for it. David Goldman aka Spengler has been hitting this pretty hard, in particular the angle that growth-producing small business hasn’t recovered at all.Report

    • Simon K in reply to Koz says:

      I already answered that question – interest rates are low. If there were any expectation the debt would not be repaid, we’d be Ireland.Report

  16. Boonton says:

    But there are some real problems with this argument. First, the claim that a second Great Depression was averted is, at best, unprovable. How do you prove that something that didn’t happen would have happened if not for X, unless you can re-run the experiment?

    My father-in-law had pancreatic cancer back in 2001. He had a dangerous and very taxing operation called a whipple to remove the tumor. He is still alive today because the tumor was encapsulated and had not spread, but he has to take pills that replace some of the enzymes that his pancreas was making. Statistically he is in something like 5% or less, most people die from that type of cancer even if they have the operation. BUT I can’t rerun the experiment either. Maybe if he didn’t have the operation the tumor would have suddenly reversed and he would have been spared the operation that laid him up nearly a year and the lifetime of pills since.

    As you see you can almost never rerun the experiment, but you should have a logical model. The best understanding of how that cancer works is that if he didn’t have the operation it would have spread and he would have died. Therefore the operation was the right policy and its cost was a trade off that made complete sense.

    Your question then is what model do you have and what how does it work?

    Government action, on the other hand, has at least two clear mechanisms that can delay recovery: crowding out of private investment and creation of an uncertain climate for investment.

    There are two ways for this to happen. Crowding out investment means that interest rates go up because you have people demanding credit versus a limited supply of funds that can be loaned. If the private sector wanted to borrow $1T for investment but the gov’t deficit is $1T then interest rates will rise. We did not observe this, in fact we observed the opposite. The gov’t was able to borrow $1T without a rise in rates *because* private investment fell not only by $1T but by more than $1T. Crowd out did not happen.

    “Uncertain climate for investment” – weasel words. What does this mean? Why was the climate uncertain or more uncertain than it was in the past or will be in the future? Usually when people begin arguments like this they end them with an assertion that their list of pet peeves are what would make the climate ‘certain’.


    I’m think you’re not really clear about stimulus here. First off you say this recession has lasted a long time, which it has. Well then timing isn’t much of a problem. Even if ‘shovel ready’ projects take a year to actually get the money spend, there’s little danger of the economy being at full employment in a year. Don’t worry, we are nowhere near running out of unemployed people to be stimulated. This is a valid argument against stimulus during small scale recessions (such as the one at the end of Bush I’s term). This recession was never small or short.

    Second your focus on ‘shovel ready’ really reveals you don’t understand much about the stimulus other than political talking points. Are you aware that:

    * Most of the stimulus package was not ‘shovel ready’ projects but immediate consumption in the form of payroll tax cuts, social security bonus and increases to unemployment and food stamps?

    * Most stimulus isn’t inside the actual stimulus bill. Probably the biggest amount of stimulus is the income tax system where your tax bill goes down automatically when your income falls (and capital gains losses become deductions that can offset taxable income). Other stimulus impacts are things like unemployment benefits, social security (more people opt for the early option in a slack economy), Medicaid, and so on.

    * Most stimulus spending was offset by anti-stimulus cuts on the state and local level? You are aware that the economy doesn’t care if a dollar is labeled ‘stimulus’ or ‘regular gov’t spending’ on it. If you receive a $500 unemployment check due to the ‘official stimulus package’ but your neighbor loses $400 because he is a state worker and the governor declares they must take 3 ‘unpaid holidays’ to make the budget balance the actual stimulus in your local area is a lot less than $500.

    I think there’s a very good theoretical question in terms of spending timing when it comes to shovel ready projects. Imagine a $300M project to build a bridge which will take 3 years. The contractor wins the contract in January but won’t get the first payment until June and then gets payments every 6 months until the bridge is completed. The timing of the stimulus doesn’t overlap with the timing of the payments. Clearly the company is going to start spending in January when they win the contract. If they expected to win the contract they might have even started spending before to prepare for starting work on the contract. But then it’s not like the cash flow has no importance. But this is something for someone going after their phd to take up…

    Uncertainity Again

    OK let’s get this clear, FDR is a modern poster child for Keynesian wisdom but the historical truth is a lot more complicated. FDR’s history on the Great Depression is mixed. There was some clear Keynesian ideas. There were also clear moneterist ideas (going off the gold standard, for example, was basically increasing the money supply which Milton Friedman said would have stopped the Depression). There were also a lot of other ideas that were basically pretty zany but had a following at the time. For example, to address the problem of falling prices they basically reversed Teddy Roosevelt’s ‘trust busting’ policy, getting the economy to create cartels that would force up prices by preventing ‘ruinous competition’. Making an uncertainty argument about FDR may have some valid merit but not about Keynesian economics.

    Wal-Mart is not afraid to open a new store because extended unemployment checks create ‘uncertainty’. In fact, it is just the opposite. The biggest amount of uncertainty when it comes to investment is not political policy but demand uncertainty. You confuse political rhetoric with actual policy. Yes the rhetoric about the health care bill sounded all very dire. In reality, though, the actual versions being pushed around were all pretty modest in terms of the whole economy. What deters Wal-Mart from opening a new store is not uncertainty about cap-n-trade or the health care bill but uncertainty that 10% unemployment for 5 years straight will result in too few shoppers at the new location.

    How about Ireland?

    This is where your uncertainty argument really falls down. There’s a huge number of countries in the world with different types of policies. Ireland is a nice example because up to now it’s been a very ‘certain’ place. It had low taxes, market friendly policies. It was doing everything right. Yet that hasn’t made it immune to the crises. Why? And countries that are doing better are not paradigms of either free markets or regime certainty (China and Germany). If you don’t believe me ask yourself what would it look like if Obama wanted to introduce a plan to make our economy ‘just like China or Germany’? To look like China nearly half the businesses would have to be owned by the Federal gov’t and the banks would have to cut them special loans. Property rights would only be sporadically enforced by the courts. For Germany, well can you imagine the Chamber of Commerce being happy with a bill that imports Germany’s system of labor law or health system? Hmmmm.

    Look good policies on taxes and regulation are always a good idea. There’s nothing wrong with ‘taking advantage of a crises’ to ‘clean house’ a bit on bad regulations. But there was no sudden shift in taxes or regulations that caused the recession. It’s not the primary problem so it’s not the primary solution. Likewise it’s not an argument against stimulus, at best you have an argument that it should complement stimulus.Report