Paul Krugman wonders what the vice president is thinking:
Seriously, the economy isn’t doing all that much worse than a number of people warned was probable. And the whole political economy thing was, sadly, predictable:
This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Let’s hope I’ve got this wrong.
Apparently I didn’t.
But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.
Joe Biden Misses the Point..., by Brad DeLong: If the Obama fiscal boost program has its anticipated impact on the economy as its main effects take hold over the next year, it is still half the size of the program it now looks like we need. Only if it magically turns out to be twice as strong as we think--only with simple Keynesian multipliers of 3 rather than 1.5--is it the right size.
And, of course, if the situation deteriorates further we will need an even bigger stimulus, while if the situation improves having too-big a stimulus is not a problem because we can soak up the demand through monetary policy.
So Vice President Joe Biden completely misses the point when he says:
I think it's premature to make that judgment [that we need a larger stimulus]. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase.
Of course, he is paid to miss the point. Which is one reason why being Vice President is a really lousy job.
Sam Stein reports:
Biden Ignores Warnings Of Krugman, Stiglitz, Roubini And Others: During his interview with ABC's This Week on Sunday, Vice President Joe Biden made what will be a much-discussed admission in the week ahead. The Obama administration, he said, had "misread" the extent of the economic catastrophe it inherited. "The truth is, we and everyone else misread the economy," declared Biden. "The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there. We misread how bad the economy was, but we are now only about 120 days into the recovery package," the vice president said later in the interview. "The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."
Certainly, the Obama administration's acknowledgment that it misjudged the crisis it inherited is rife with possibilities for its political opponents. ...
But equally problematic is Biden's assertion that "everyone" - not just the White House - was off in their prognostications. This is simply untrue. Host George Stephanopoulos pointed out that "a lot of people were saying that you needed to do something bigger and bolder" when it came to the stimulus package. He named New York Times columnist Paul Krugman as one example. There are many others. The prize-winning Columbia University economist Joseph Stiglitz not only warned that the stimulus was too small during its construction, the day after Obama signed it into law he predicted how its shortcomings would make themselves apparent. ... Stiglitz was joined by a whole host of liberal economists -- from the University of Texas' James Galbraith to Dean Baker of the Center for Economic and Policy Research -- who warned that the stimulus package inexplicably underestimated the size of the crisis.
Several weeks after the stimulus passed, economist Nouriel Roubini, known affectionately as Dr. Doom, made the case that the administration's approach to stabilizing the economy lacked an effective international component. ...
The day that June's job numbers came out, meanwhile, Nassim Taleb, principal of Universa Investments and author of 'The Black Swan,' offered a far more grim interpretation of what was transpiring, though one relatively consistent with what he had said in the past. "We're in the middle of a crash," said Taleb during an appearance on CNBC. "So if I'm going to forecast something, it is that it's going to get worse, not better." ...
To be fair, the process of economic forecasting is, as Taleb noted in his CNBC segment, an inherently tricky proposition. In October 2008, for instance, Roubini was arguing that the government needed a $400 billion stimulus package, which ended up being just more than half of what the Obama White House settled on.
But among those who were sounding the loudest alarms about the potential inadequacies of the economic recovery plan, the consensus seems to be emerging that more now needs to be done. Later in his ABC segment, Biden - who is responsible for overseeing the stimulus - was asked if a second package was in the offing. No, he replied, without dismissing the possibility outright. "I think it's premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase."
That pretty much covers it, so I will just add that all of this also applies to Bruce Bartlett's commentary today in the Financial Times:
We do not need a second stimulus plan, by Bruce Bartlett, Commentary, Financial Times: As the US unemployment rate has risen to 9.5 per cent from 8.1 per cent since the $787bn fiscal stimulus package was enacted in February, many Democrats have become very nervous. They say that another large stimulus may be needed to keep unemployment from rising well beyond the 10 per cent rate that President Barack Obama has predicted will be reached this year.
Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.
The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately. ...
As for inflation fears, see here for one of the many arguments that have appeared here explaining why those fears are overblown. And, on the claim about the administration's forecast, back to Brad DeLong:
The quotes from the Hon. Christina D. Romer are:
We do not want to repeat the mistake Japan made in the 1990s, when the moment things started to improve they tightened policy...
[Stimulus spending is] going to ramp up strongly through the summer and the fall. We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards...
[Stimulus spending] should make a material contribution to growth in the third quarter...
I am more optimistic that we are getting close to the bottom...
I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario, but it is not as unlikely as many people think. We are going to get some serious oomph from the stimulus, there is the inventory cycle, and I believe there is some pent-up demand by consumers...
As Krugman says above, and as I stressed in a recent interview, if we "wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good." Here's what I said in April in response to talk of green shoots:
...I don’t think we’ve reached the beginning of the end, and caution is in order, particularly for policymakers. It is not at all unusual for the economy to tick upward temporarily during a slowdown, only to have it return to its previous, stagnating state. So policymakers must consider the possibility that this is nothing more than a temporary blip in the data, and continue to plan and set the stage for further action, if necessary.
Did they start setting the stage? Not as far as I can tell.
Update: Paul Krugman:
The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately.
Um, that’s totally false. Did Bartlett even look at the Bernstein-Romer paper? Here’s the key graph [link to graph]... We’re now at the very beginning of 2009Q3; they predicted that the unemployment rate right now would be only a fraction of a percent lower now than it would otherwise be. The impact wasn’t supposed to be really noticeable until late this year, and wasn’t supposed to peak until late 2010.
The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon. The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted. That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.
Bruce Bartlett, in comments:
The chart clearly shows the unemployment lines diverging in the second quarter, suggesting that the stimulus was expected to impact on the economy within two months of enactment. That's a pretty damn fast effect. And needless to say, we haven't seen any impact of the stimulus on unemployment yet. So I don't understand what Paul is disagreeing with me about when I say that the administration was too optimistic. It seems self-evident that it was.