Where Obama Went Wrong on the Stimulus

Daniel Gross has a very good article on Slate that looks at the two sides of the debate on Obama's stimulus. I think he hits the nail on the head with this bit from the piece:

I am not an economist. Still, I am confident in saying that, just as it was absurd to talk about an Obama bear market in March, it's much too soon to be condemning the stimulus package. Last Sunday, Vice President Joe Biden said the administration had misread the severity of the decline. But that's not quite true, either. Rather, the "failure" of the stimulus may have been as much a failure of managing expectations as about managing public works projects.

Perhaps the biggest mistake stimulus proponents made was to suggest that this recession would (and could) end quickly. Modern America is not equipped—financially, socially, or psychologically—to deal with long recessions. We don't have the safety net or the savings to cope with a protracted downturn. And fortunately, we haven't had to. The last two recessions, which ended in 2001 and 1992, respectively, lasted only eight months each. But recessions brought on by financial crises are always deeper and more long-lasting than other recessions, as economists Ken Rogoff and Carmen Reinhardt show in this paper. By February 2009, when the stimulus package was passed, the recession was already the longest in 28 years; now it's the longest contraction since the Great Depression.

What's more, in the spring of 2009, the chore of restoring the economy to growth was a huge task. The economy was in a death spiral. Between the end of 2007 and the first quarter of 2009, Americans' net worth fell by more than $12 trillion, nearly 20 percent. More than 6 million payroll jobs had been lost. The financial sector was essentially bankrupt. In the fourth quarter of 2008, the economy shrank at a 6.3 percent annual rate, and in the first quarter it shrank at a 5.5 percent rate. In a highly leveraged economy with an expanding population and work force, a few quarters of contraction at 6 percent are nigh cataclysmic.

And this bit is very good:

But the truth is that, due either to a misreading of the situation (Biden) or a desire to build confidence (Gross), the stimulus efforts were mislabeled. The Obama team spoke of the patient as if it were merely wounded, when it had flatlined. The big package was dubbed the "American Recovery and Reinvestment Act of 2009" when it should have been called the "American Systemic Failure Aversion Act of 2009."

And this bit tells it like it is (and will be for at least a couple of years):

In Thursday's Financial Times, Bruce Bartlett argues against a second stimulus and counsels patience. A $14 trillion economy doesn't turn around on a dime. The stimulus may not be perfect, he says, "but it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future."

Of course, it's easy for those of us fortunate enough to have jobs to counsel patience. But regardless of the policy implemented and the speed at which new cash enters the economy, this economic recovery will take time. Thanks to the long and sharp downturn, America has a huge amount of unused human and industrial capacity. The present gap between what the economy is capable of producing and what it is actually producing is very large, and no amount of stimulus can fill it instantly and effectively. We now face the prospect of a painful period of rehabilitation—saving, deleveraging, and cleaning up the mess. And then we will have to shift from an economy based on cheap money and consumption to one driven by … something else.

The truth is that the extreme ideology of "the government is the problem" and "markets are all wise, unleash the free market from any restrictions" crowd from 1980-2008 created this huge problem. It will take many years to crawl out of it. Think of the Great Depression. Even at the start of WWII -- twelve years after the crash -- the economy had not fully recovered. Hopefully this time won't be as slow and painful. But to my thinking, if the Right wins the hearts and minds with "the stimulus was a failure", "no more stimulus", and "inflation is at hand" slogans, then we can easily see another twelve year period of very slow recovery.