Defending The Wasteland

While I expect this sort of talk that the stimulus was a "complete waste" from Republicans running in 2010, it's another thing entirely to hear it from economists who ought to know better.

Now the economists at UK research company Independent Strategy have waded into the debate and come to the conclusion that stimulus spending by President Barack Obama, Prime Minister Gordon Brown and others has been a complete waste of time and simply saddled future generations with a big bill that will crowd out the private sector for years.

Because the recession never saw deflation take hold and monetary policy was so loose there was no need for further government stimulus and central bank asset buying, Bob McKee, economist at Independent Strategy, said.

With sufficient wealth in the private sector after the financial crisis of 2008-09,  private investors would have simply stepped in at a point where they believed the market was cheap enough to make a return at the loss of only a few years of ‘"excess gains," McKee said in a report.

His key points are:

• Use of government balance sheets to accumulate massive leverage when excessive private sector leverage got us into this mess in the fist place was wrong.
• Borrowing so much at a time when private saving rates were not rising at the same time means US and others are now dependent on foreign buyers of their debt.
• Spending has been the "bad sort" that prevented the clearing of the asset-price bubble.

McKee called on the Keynesian camp to explain how the Scandinavian economies managed to recover so quickly from the much tougher fiscal and regulatory policies they implemented in the wake of the banking crisis of the 1990s. Expect this debate to run and run. 

Two points here. 

One,  while the markets would have eventually reached an equilibrium point, it would have caused a lot of carnage on the way down out there in the real world.

Two, given the massive shortfalls in state and local budgets this year, it's important to remember that they would have been far, far worse if Obama had done nothing, like the vast majority of Republicans wanted him to do.

If there had been no stimulus, that 10.0% unemployment rate would have been significantly higher.  Having said that, that actually brings me to a third point: the "Swedish solution" that McKee goes on about as an example also included major financial reforms for banks, the kind we still have yet to pass.  If those had been passed at the time of the stimulus, things would have been much different.

That's the real issue, not the stimulus itself.