Wednesday, September 18, 2013

What Economic Recovery?

From the Hoover Institution, a piece (by Lee Ohanian and John B. Taylor) on which I look favorably (because it expresses what I already believe to be true1).
Since the fall of 2008, the U.S. government has adopted dozens of policies that were advertised as being necessary to restore prosperity. These policies impacted many key economic channels, including monetary and fiscal policies, commercial and investment banking, manufacturing, housing, and the environment. But many of these policies have depressed growth by distorting the normal forces of supply and demand that are critical for a market economy to function well and create new jobs. Many of the policies that were implemented were based on old Keynesian models that advocate temporary spending increases and one-time tax rebates, while others created new regulations of economic activity in key sectors. But both of these policy responses misdiagnosed the problems facing the American economy. The spending policies had little impact on the economy other than to increase government debt, and regulatory policies raised business costs and depressed growth.

The centerpiece of the old Keynesian stimulus policies was the 2009 $821 billion American Recovery and Reinvestment Act (ARRA), which combined temporary tax cuts with federal funds for national, state, and local government spending...There are two important reasons why the ARRA failed to restore jobs. One is that attempts to stimulate spending likely had a much smaller impact than was advertised. The second is that the type of spending that was supposed to be undertaken – including investment in government infrastructure – simply did not materialize in any significant way. State and local governments did not use these federal funds to significantly expand infrastructure spending. Instead, these governments increased transfer payments and reduced debt, and the nation’s employment rate continued to decline.

Other spending policies were aimed at propping up the hard-hit auto and residential construction industries. These policies included “Cash for Clunkers”, which provided some new car buyers with payments between $3,500 and $4,500 by turning in an old car that was scrapped, and the Homebuyer Tax Credit, which provided some buyers of houses a tax credit of $7,500. These policies did little to strengthen either industry. Sales of autos and homes temporarily increased while these policies were in place, but then sales declined sharply once the policies ended. These policies were pure subsidies to some auto and home buyers, with little if any impact on the industries that were supposed to be helped.

Not that it required a real prophet to see that coming...

1 - This is called "confirmation bias," and it's a cognitive trap. I know that but believe all of this anyway...

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