"Stimulus Too Small"

I agree with Brad DeLong:

Stimulus Too Small, by Brad DeLong, WSJ: Fourteen months ago, just after Barack Hussein Obama's election, most of us would have bet that the U.S. unemployment rate today would be something like 7.5%, that it would be heading down, and that the economy would be growing at about 4% per year. ... Well, we have been unlucky. Unemployment is ... not 7.5% but 10%. More important, perhaps, is that the expectation is for 3% real GDP growth in 2010.

That leaves us with two major questions: First, why has the outcome thus far been so much worse than what pretty much everyone expected in the late fall of 2008? And second, why is the forecast ... for growth so much slower than our previous experience with recovery from a deep recession in 1983-84?

I attribute the differences to four factors:

First, the financial collapse of late 2008 did much more damage than we realized... The shock now looks to have been about twice as great as the consensus in the fall of 2008 thought. ...

And that leads us to Factor No. 2. The Obama administration envisioned a $1 trillion short-term deficit-spending..., had the administration known how big the problem would turn out to be, it would have sought a $2 trillion stimulus. And what did we get once Congress got through with it? A $600 billion stimulus—about one-third of what we needed.

Making matters worse: The stimulus was not terribly well targeted. In an attempt to attract Republican votes, roughly two-fifths of it was tax cuts. Such temporary cuts are ineffective... (It also failed to win any extra votes.) Roughly two-fifths ... was infrastructure and other ... direct federal spending. But it is hard to boost federal spending quickly without wasting money, and those projects that are shovel-ready are not terribly labor intensive.

Meanwhile, the most-effective stimulus would have been aid to the states... But senators don't want to hand out money to governors; the governors then tend to run against the senators and take their jobs away.

This problem with both the quantity and quality of the stimulus is tied up with the third factor: that the Obama administration declared victory on fiscal policy with the American Recovery and Reinvestment Act ... and then went home.

There was no intensive lobbying for a bigger program,... no attempts to expand the stimulus programs... The background chatter is that trying for more deficit spending would have been fruitless, given the broken Senate...That background chatter is probably right. But ... there is still the Federal Reserve. And that's where the fourth factor comes in.

It is true that as far as normal monetary policy is concerned, the Federal Reserve was tapped out... But there is more in the way of extraordinary monetary policy that could have been attempted in 2009—including inflation-targeting announcements, the taking of additional risky assets out of the pool to be held by the private sector, larger operations on the long end of the yield curve.

And I must confess that what the Federal Reserve thought and did in 2009 remains largely a mystery to me.