Sep 1, 2012
Center for Democracy and Civil Society

Far from satisfactory

…That’s how the Fed’s chairman, Ben Bernanke, described the state of the US economy in a speech this Friday: “far from satisfactory”. That was not a surprise, but his signal that there might be new and strong stimulus to come, to many people, was.

We are at least four years past the start of the unequivocally critical state of affairs here in the US, and the debate on how to tackle it is just as fresh now as it was back when Barack Obama first took office. As I was just discussing with Professor Barak Hoffman this past week, the crisis meant the revival of Keynesian models, but along with reinforced belief in Keynes’s ideas came the stringent reaction of the ones who refuse to give up on their faith on the old scheme of things.  Just one look at the current presidential campaigns is enough proof of that. For all its faults, at least the 2012 elections present to voters a clear choice between two different paths to address the economic situation. Stimulus or fiscal consolidation?

By "The Economist"

At least for now, it seems the first option will prevail. The tone of Bernanke’s speech was interpreted by economists as preparation for a new round of stimulus that should be launched in about two weeks, during the next meeting of the Fed’s policy board. To the Washington Post, that could mean “a new round of massive bond purchases, pushing record-low interest rates even lower and making it even cheaper for people to buy homes or refinance mortgages”.

The success of the previous stimulus is still a matter of discussion (as a reminder, I strongly recommend reading this). The Obama team will, of course, argue that unemployment and everything else would be much worse without it, while the other side can say that we spent all that money and we are still “far from satisfactory”. New studies on this topic are released every month. An analysis of a couple such studies by Brookings found a couple months ago that “states that expanded government spending more (due in large part to support from federal stimulus during the recession) experienced smaller increases in their unemployment rates. This conclusion comes from a pair of new academic studies on the American Recovery and Reinvestment Act (ARRA) or the 2009 stimulus plan; both studies find robust evidence that government policy helped reduce the extent of the downturn and improve job growth”. However, even states that increased spending the most experienced a spike in unemployment (3.9 points on average), allowing for the argument that the costs are too high for the benefits they accrue.

Besides, one can find many other studies that conclude that the stimulus did not have a relevant impact. One such study was conducted by John B. Taylor, of Stanford University, and concluded that the stimulus failed because “The tax transfer provisions of the stimulus package, and previous stimulus packages in the 2000s, did not lead to a significant increase in consumption, and the spending provisions, notably including aid to state and local governments, did not lead to a noticeable increase in government purchases”. And so the fighting continues.

I personally tend to agree with the stimulus option for the time being. Maybe that is why I have found at least twice more studies arguing that the stimulus did have a positive impact. But whoever is right, it seems that the Fed will continue to resort to stimulus tools, and that is creating a lot of political pressure over the institution. Republicans are asking more loudly than ever for tighter oversight over the Fed and I have even heard that Congress would consider taking unemployment out of their basket of responsibilities. In any case, this presidential election could prove to have the most profound impact on the future of the Fed in a while.



1 Comment

  • I agree fully. The Republicans in Congress are adamant about not passing any more bills that would increase spending, whether out of ideology or politics. Since they can’t stop the Fed from basically achieving the same outcome through monetary policy, now they want to reduce the Fed’s independence. It’s a very dangerous precedent to set.

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Founded in 2004, Democracy and Society is a biannual print journal published by the Center for Democracy and Civil Society at Georgetown University. The D&S Blog provides web-only content, including special reports and investigative series, on issues relating to democracy and development.

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