Are You Feeling ‘Stimulated’ Yet?

Sure, Obama & Co. could have been more aggressive in January and February in talking about how bad things were (although the stock and bond markets were doing a pretty good job of communicating the misery). 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 was merely wounded, when it had flatlined. The big package was dubbed the "The American Recovery and Reinvestment Act of 2009," when it should have been called "The American Systemic Failure Aversion Act of 2009."

Of course it's taking time for appropriated funds to trickle down into the economy. (You can follow the progress at recovery.gov, or at my colleague Chadwick Matlin's new Recessionary Road blog.) But even if the administration had infused hundreds of billions of dollars into the economy instantaneously in February and March, it might not have made a significant dent in the unemployment rate. After all, as some of the same folks who have declared the stimulus a failure have told us, unemployment rates aren't the best way to measure the short-term success of economic policies. Bush economists thought the combination of fiscal and monetary policies in 2001 and 2002 were highly successful in pulling the economy out of recession—even though the number of payroll jobs continued to decline for nearly two years after the economy started expanding in November 2001.

In Thursday's Financial Times, Bruce Bartlettargues 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.

© 2009