The No-Stimulus Economy

From Matthew Yglesias' blog, courtesy of Eschaton:

If fiscal stimulus is so great, then why hasn’t the Obama administration’s massive stimulus program helped improve the economy? Well, via Mark Thoma, the answer is that there hasn’t been any net fiscal stimulus, all the Obama administration’s efforts plus the automatic stabilizers have done is mitigate the contractionary impact of state and local policy...

And

Looked at comprehensively, what the country has been implementing is a mild version of the conservative policy prescription for boosting growth—fire bureaucrats and trim spending. And it’s not working very well.

More here.

That is, all that the "stimulus" has done is to offset state and local spending cuts. And that's about to change for the worse: as the stimulus money runs out, states, which are generally constitutionally bound to keep balanced budgets, are primed to tighten their belts even further, and there will be no more federal offset to cushion the blow. The economy is probably going to get worse.

It is extraordinarily frightening to think that I, just some guy who waits tables in New Orleans, understand macroeconomics better than our leaders, but I'm starting to think it's true. The classic case study in stimulus spending is, of course, the Great Depression and FDR's New Deal programs. Conservatives rightly point out that it wasn't the New Deal that ended the Depression; rather, it was World War II. This thought usually makes conservatives smile, thinking they've just destroyed the philosophical rationale behind Keynesian economics. But the whole "WWII is what actually got us out of the Depression" meme, in reality, proves the utility of stimulus spending. That is, FDR didn't go as far as he should have with the New Deal. Only spending on the scale of what was needed to mobilize the economy in order to fight the massive German and Japanese war machines can thaw a frozen aggregate demand.

If there's anything to learn from the fact that WWII got us out of the Depression, it's that real stimulus spending needs to be much, much bigger than anything people in Congress are willing to consider. Thus, Obama's meek stimulus package was a preordained failure. And now the geniuses in Washington are insisting that we need to cut spending in order to fight an imaginary inflation threat: we should all prepare ourselves, in whatever ways we can, for a decade or more of a shitty economy with sluggish growth.

This is all so fucked up.

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