Wolf's conclusion: the stimulus, coupled with the Fed's emergency measures, was effective but inadequate. Notwithstanding Larry Summers' dictum, "when markets overshoot, policymakers must overshoot too," the stimulus undershot. Citing the well-circulated conclusions of the study by Alan Blinder and Mark Zandi, as well as CBO estimates, Wolf consolidates mainstream economists' consensus that the stimulus, bailouts and Fed measures averted catastrophe, boosted GDP, mitigated the plunge in employment -- but, as Wolf himself judged in February 2009 (and happily highlights here), was "too small, too wasteful and too ill-focused." It therefore left the country with a sputtering recovery -- and left the Democrats holding the bag.
Turning his attention to "how much of the surge in unemployment is structural," Wolf offers an ominous warning:
My answer, from European experience, is that one way to ensure it becomes structural is to let it linger.
Scoping out the likely response to that immediate challenge, he delivers a frighteningly plausible forecast:
In the short run, the simplest way to prevent that from happening is to expand demand and so output. Since there is huge slack in the labour market, not the slightest threat of inflation – far more a risk of deflation – and no constraint from bond or foreign exchange markets on further monetary and fiscal stimulus, these are the policies that have to be pursued. Yet, alas, the Fed seems to have decided to fall asleep and the administration has lost the initiative.A few caveats. First, something I've long wondered while soaking up Paul Krugman's repeated laments that the stimulus was too small: if it had been 50% larger, and unemployment were now, say, 8% (with another $400 billion in government debt tacked on), would the political calculus be radically different? Next, while high unemployment is a major social ill that, as Wolf warns, hardens as it lingers, he might have looked more closely at the outsized role that construction plays in the employment picture (he does gesture toward this, briefly). His FT colleague, James Politi, noted yesterday that employment in construction and associated businesses accounted "for about 3m of the 6.6m jobs lost since the housing bubble burst in late 2006" That's incredible. As for the sputtering recovery, Politi notes that "some 61,000 construction jobs were lost between May and July," along with about 56,000 in ancillary areas." That's the aftermath of a piece of stimulus - the housing credit.
So what is going to happen? I assume that, after the midterm elections, resurgent Republicans will offer new tax cuts and ignore the fiscal deficits. They will pretend that this has nothing to do with any reviled stimulus, though it is much the same thing – increasing fiscal deficits, thereby offsetting private frugality. That would put the administration on the spot. It would have to choose between vetoing the tax cuts and accepting them, so allowing the Republicans to get the credit for their “yacht and mansion-led” recovery. Any recovery is better than none. But it could have been much better than this. Those who were cautious when they should have been bold will pay a big price.
The housing market in the U.S. is depressed not only because Americans are overleveraged but because housing is overbuilt. More stimulus spending on infrastructure could take up some of the construction industry slack, but do 3 million lost construction-related jobs not suggest a structural problem? Would a full rebound in new housing starts be a good thing?
Also, Wolf doesn't mention the European sovereign debt crisis, which seems to have arrested recovery in midstream. Again, more stimulus might have mitigated the current pain, but would the overall dynamic have been fundamentally different?
Further: is it not a bit early even now -- let alone in February 2009 -- to judge the stimulus with its gazillion parts "too wasteful and too ill focused"? Do we yet know the medium- or long-term catalyzing effects of money earmarked for green building, alternative energy, high speed rail, and -- most promisingly for the long term, perhaps -- education? While the current slowdown -- triggered in large part, probably, by the European debt crisis -- may write the Democrats' epitaph in the upcoming elections, does it really write the epitaph of the stimulus?
Finally, there is the huge question of what was politically possible in early 2009 -- and again this year, as new efforts at stimulus stalled and squibbed through in dribs and drabs. It seems to be Obama's counterintuitive and often frustrating negotiating style to give much away at the outset. In the case of the stimulus, this entailed keeping the initial price tag well under $1 trillion and earmarking more than one third for tax cuts. But the flip side of that strategy, I believe, is to hold out for his top priorities -- which in the case of the stimulus included a ton of money for education and a surprising kick for high-speed rail. Regarding Obama's alleged "timidity" with respect to the stimulus, the question is whether he could have got a significantly larger overall package through Congress had he pushed hard for, say, $1.2 trillion at the outset. His leverage, here as elsewhere, extended only as far as the 60th Senate vote.
This question also bleeds into whether jobs rather than health care should have been the Democrats' top priority. I would say no. In the long run, a framework for universal health care will have a larger impact that an additional $400 billion in stimulus might have. And while the Democrats may have ended up in better short-term political shape had they postponed healthcare and gotten more stimulus through, it's a real stretch to claim that they could have escaped voters' wrath and electoral history to the extent of increasing their majority in the upcoming elections. In other words, it was now or never for health care reform. And the lack of available healthcare -- the huge risk entailed in quitting or losing a job -- has a paralyzing effect on the economy.
P.S. Has anyone noted that Obama has been in seemingly deep trouble at the end of August/beginning of September for three years running? It's what David Plouffe called bedwetting time back in '08, after McCain surged ahead in the polls in the wake of the Republican convention. Last year this time, health care reform was reeling under the barrage of misinformation unleashed by the ghouls of August. This year, his supporters are on straight catheter -- and the bag is leaking heavily.
UPDATE: Jonathan Cohn gleans some estimates to the effect that a larger stimulus might have had a large multiplier effect, or achieved critical mass to get the economy rolling again - albeit with caveats that it may not have been possible to devise, execute or pass a much larger stimulus. Chait meanwhile promises an argument that a significantly larger stimulus could not have made it through the Senate