Kevin Drum penned a post last night about why people hate deficits so much. He runs through a few options, but settles on the following:
Liberals have done an abysmal job of explaining why deficits are good during periods of high unemployment, so ordinary citizens have no reason to think deficits are anything other than bad.
I think this all hearkens back to the graph from Obama Administration economists Jared Bernstein and Christina Romer in January 2009 showing the expected unemployment rate with and without the stimulus. American Enterprise Institute’s James Pethokoukis has updated the graph with the actual unemployment rate (this is his update from September of last year):
It’s tough to prove that deficit spending in times of high unemployment works when the stimulus seems to have failed so badly. Of course, Bernstein and Romer’s graph was so far off because the economy was much weaker than anyone realized at the time, not because the stimulus failed (it didn’t). But, try telling that to your average person. For most people, that graph is confirmation that deficit spending does not work. That’s a very deep hole for liberals to start in.
Yesterday, Scott Sumner penned a post arguing against liberals’ blind acceptance that the stimulus worked. He presents a counter factual arguing that if Congress hadn’t passed the stimulus, that the Fed would have stepped up and done more to offset the crisis. He argues that under that scenario, the economy would be in better shape now thanks to the Fed. At the very least, he says, liberals cannot claim that the stimulus worked without acknowledging his counter factual.
Fair enough. I’m with Matt Yglesisas here – economists agree that the stimulus worked, but are split on whether the benefits outweighed the costs. I’m not entirely sure how to evaluate Sumner’s counter factual. Is there any way to judge this? Are we forever left to wonder if the stimulus was the most effective policy or if, absent it, the economy would be in better shape due to the Fed? I wish there was an answer and I hesitate to offer one. I’m just a senior in college soon to have a degree in economics – nothing like Sumner or all the other economists who are unable to answer this question. Sumner’s theory is very interesting though and I’d love to hear a response from Paul Krugman, who has argued for quite a while that the stimulus succeeded.
One other point – at the end of his post, Sumner writes, “PS. Remember those Keynesians telling us that higher payroll taxes would slow retail sales in Q1? Looks like they might want to revise their models” and then quotes an article about how retails were way up in February. I’m going to offer a counter factual here: maybe retail sales would have been higher without the rise in payroll taxes and thus the higher payroll taxes did slow retail sails! I have no data or evidence for this – just as Sumner has no evidence that the Fed would’ve have done more and our current economy would be better if there was no stimulus. But both arguments are certainly plausible and worth exploring. Nevertheless, Sumner spends the majority of his post berating liberal economists who don’t consider Sumner’s counter factual only to make the exact same mistake himself. Nevertheless, a fascinating post and worth a read.