Monday, August 02, 2010

Mark Zandi, Alan Blinder and John Taylor

The PBS News Hour last week did an excellent segment on the effects of all the stimulus money we have poured into the economy.  It came after a paper issued by Alan Blinder and Mark Zandi on the effects of the stimulus where those two distinguished economists argued that at a minimum all the money the government has spent has stopped the serious decline in the financial sector and in the economy generally.

Taylor argues that the stimulus had in determinant positive effects and probably some negative ones.  He argues that government policy increased uncertainty in the financial markets and thus reduced long term growth and that the way we financed all those uncertain effects portends long term problems for the US economy.

I tend to agree with Taylor's assessment.  The oddity of picking financial winners (Bear versus Lehman for example) or areas (housing and financial services for example) and the indiscriminate assistance to government sponsored entities (Fannie and Freddie and to an extent Chrysler and GM) is likely to produce more negative effects than the momentary positive effects of providing aid.  In addition, the monstrous levels of debt added in this situation (by both Bush and Obama but more by Obama) will produce long term negative effects that are under-estimated by Zandi and Blinder.

The Administration has made a bizarre argument that turns Frederic Bastiat on his head.  Bastiat had the great idea called the "seen and the unseen" where he argued that many governmental policies produce the seen (what we can observe as an immediate effect) but ignore the unseen (what is often not visible on first glance).   Obama and his Administration have argued that their policies have produced jobs "created or saved" - the created notion seems to be completely outside the bounds of rationality as real employment has gone down.  But the "saved" notion produces something which no one can possibly count and yet should be accepted.   Zandi and Blinder argue that had all of the policy levers not been pulled something worse would have happened.    Regardless of your perspective, the discussion between Zandi and Taylor lays out the two perspectives very well.

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