The Cost of Convenient Optimism
One of the many things that puzzles me about the Obama administration's economic policy is why they continue to rely upon best case scenarios to set policy. The initial stimulus was not big enough, and part of the reason was an overly optimistic forecast for the trajectory of the economy. The recession turned out to be much worse than forecast, but since policy did not allow any buffer for the forecast to be wrong, the stimulus package -- -- which wasn't big enough to begin with for a variety of reasons -- turned out to be even more inadequate.
Why wasn't more done when it became clear that the initial stimulus package was not as big as needed? Ezra Klein offers the following explanation:
What went wrong with stimulus, by Ezra Klein: The original stimulus package should've been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we'd predicted. ...
This was a mistake, of course. But the mistake may not just have been the size of the stimulus package. I wonder if it wasn't fed by a belief that there'd be other chances. If all we needed was the $700 billion package, then great. But if unemployment remained high and the recovery had trouble taking hold, surely there would be the votes for further stimulus and relief spending. No one in the political system could possibly look at 10 percent unemployment and walk away from it, right?
Wrong. Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.I think that the discrediting by Republicans could have been overcome if the proponents of more stimulus would have fought back. For example, there was evidence that existed showing that the stimulus package was having an effect, but the effect wasn't big enough because the package was too small. There was a case for more stimulus to be made, but the argument was never really given the effort it deserved.
One reason, not the only reason, but a contributing factor is that policymakers who should have led the charge for more stimulus tended to believe the most optimistic scenarios for economic recovery. Under the most optimistic outlook, the one policymakers and administration officials wanted to believe in because it avoided hard choices, the recovery was always just around the corner. There was no need for more stimulus, just a bit more patience. At every step it was easier for fiscal policymakers to take a wait an see approach, to rely upon the most optimistic reading of incoming data rather than to actually seriously engage in an attempt to give the economy more help. The administration joined in pushing the "we are poised for recovery" line because it seemed like good politics and good economics to try to create a sense of optimism. When the economy did start to recover, they could build upon this story of how the stimulus package saved the day.
But what if the economy, and employment in particular, didn't start to recover before the election, what then? The administration suddenly finds itself in a predicament. There's not enough time before the election to actually implement a new stimulus program and expect to see results, so they are stuck with the economy they have, an economy they promised would be boosted by the stimulus programs (my own view is forget about the election and do what's right, an immediate and aggressive job creation package, but that's not going to happen).
So the administration has little choice but to argue that the stimulus programs that it put into place have set the stage for the economy to recover, and, in fact, that recovery is already underway. Thus, we see Timothy Geithner yesterday saying that private sector investment is set to take off, so much so that it can support economic growth on its own. Thus, according to the administration, not only is there no need for more stimulus, there is no danger in allowing the stimulus that is already in place to be withdrawn as programs expire.
This is a very dangerous position to take with the election so close, and as I noted here, this strategy will backfire if the economy continues to stall as I expect it will, or takes a turn for the worse over the next few months (and I'm not alone in thinking this). And it will be difficult to blame Republicans for the lackluster recovery and make it stick. Having adopted a rosy, convenient outlook at every step along the way to avoid the tough public, and potentially politically costly fight for more stimulus, the administration cannot now make a serious case that it fought for more help for the economy, but Republicans stood in the way. I believe Republicans did, in fact, stand in the way of doing more, but the point is that the Democrats did not lay a foundation to make that case now. So they are stuck with an economy that does not appear ready to take off and recover despite the administration's sales job saying that it is. Maybe the administration will get lucky and the economy will take off like they hope, but recent data are not very supportive of that outcome.
The administration's problems began long ago when it made the decision to wait and see based upon hope rather than lay the groundwork for more stimulus. I was examining old posts the other day, and I was surprised to see how similar the reduce the deficit versus job creation debate was a year or more ago to what we are hearing today (e.g.). There was plenty of time to do more, and there was plenty of indication that more help was needed, but the administration never really engaged in the effort to make this happen.
There were other factors involved in all of this and I don't want to overplay the role of convenient optimism and the lack of effort by the administration and its political allies to bring about another stimulus package. Factors such as worries about the deficit and anger and distrust of legislators over bank bailouts were also involved. But, even so, the administration would have been in a much better position today had it made a concerted effort months and months ago, even an unsuccessful one, to give the economy the help it clearly needed.
