A NY Times article points out the biggest problems Obama faced during his first term:
- 1st problem: Underestimated the crisis
- 2nd problem: Complacency resulted from reacting faster than other governments in prior crises
- 3rd problem: Too optimistic about recovery
- 4th problem: Didn’t fill vacant seats at Fed that could have swayed decisions against some incorrect views about inflation being a problem instead of employment
- 5th problem: Too weak on housing
Many of these problems have only come to fruition with the benefit of hindsight. It all boils down to the simple fact that the Obama administration, the CBO, and many public and private sector economists underestimated how bad the economy was. But perhaps one of the best ideas doesn’t necessarily need the benefit of hindsight. It’s something that should have been considered before but hopefully if we ever needed the government to save the economy in the future would be considered.
Why simply limit the stimulus? When the stimulus was first passed a mixture of tax cuts and government spending filled up the hundreds of billions that were ultimately spent. But once the money was gone it was gone. You can see in the chart above what the estimated effect of the stimulus would be. The stimulus didn’t fail. It just wasn’t enough for how bad the economy was. And the political climate did not support further spending.
More innovative policy
But what if the stimulus had been tied to the economy itself? Instead of saying what they think the economy will do, why not just admit no one knows? The stimulus should have simply stated: “We’re going to spend $50 billion a month until the unemployment rate is X%.” The bill could outlay what that spending would look like and a thousand other provisions would create checks and balances. But this would have been what the economy needed.
Did anyone have the political appetite for it? Probably not. But if you keep in mind the spending is a combination of tax cuts and government spending it would have been worth a shot. The article linked below calls it an insurance policy. It would have been a good idea at least to see what the program would eventually look like.
What the article doesn’t acknowledge is the danger to such a plan at least from an economic narrative point of view. Policy is based on making promises (that are never fulfilled). If Congress and Obama had said “we don’t know how bad it is or will get” it could have scared more people. So instead everyone pretended that $X00 billion would be enough. It might have helped stabilize the economy. We’ll never really know.
Obama is getting attacked hard now as a result of the slow recovery. The administration has crafted a narrative that seems plausible. Even if they’d seen things as getting worse Congress wouldn’t have allowed it to happen. We can all speculate about whether or not that’s true. My main interest is in seeing whether or not a better crafted policy would have made that a nonfactor.