Economic Trends to Ignore and to Worry About - The American Spectator | USA News and Politics
Economic Trends to Ignore and to Worry About

In a ThinkMarkets post yesterday, NYU’s Mario Rizzo blew up the Obama administration’s arguments that the stimulus is lifting, not hurting, the economy. Claims that the stimulus is working would seem to contradict the evidence Harvard’s Greg Mankiw presents in graph form, which shows that unemployment has increased even further than the administration’s baseline estimate. In other words, unemployment is worse than the administration predicted it would be without the stimulus:

The light blue line is the administration’s baseline unemployment prediction, the dark blue line is their prediction for unemployment with the stimulus in place, and the red dots are what actually happened.

Of course, without knowing what would have happened to the economy in the absence of the stimulus, the administration can make any claim they want. Thus they can say that they have “created or saved” millions of jobs even when unemployment is worse than they said it would be without their actions because they can also claim that they “misread the economy” when they made their predictions.

As Rizzo shows, that’s nonsense. The argument for the stimulus was a technocratic one: they claimed that their superior forecast showed the necessity for a stimulus. Now they are saying that their models enable them to identify the specific effects of the stimulus but not the underlying trends, which were worse than they anticipated. So which is it? Do they have the expertise required to forecast economic trends and examine the much narrower effects of the stimulus package? Or neither? It can’t be one and not the other if they’re using the same technical model.

Meanwhile, central banks’ quantitative easing programs do seem to be having the results they were supposed to. In the UK, the Bank of England’s quantitative easing program seems to have hit the economy in August, as seen by banks’ increased willingness to lend out funds instead of holding them as reserves at the BofE. Unfortunately, it seems that the increase is all in…mortgage lending.

The author of that blog notes the danger the BofE faces: continue quantitative easing and risk sparking another housing bubble, or withdraw the easy credit and risk a double-dip recession.

And that seems to be exactly the same trade-off that the Fed is navigating right now. Their response, however, has been to begin to draw down the quantitative easing. As one Austrian economist points out, the Fed’s quantitative easing program has lifted stocks and price inflation, but now the Fed is in fact has allowed the money supply to decrease. Is Bernanke less worried about deflation and a double-dip than inflation or a housing bubble?

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