It’s Not the Stimulus It’s the Regulation

Marco economics is an observational science. It is difficult to construct controlled experiments. There always seems to be enough differences from situation to situation to introduce doubt. Nonetheless, sometimes unfair, or at least unsupported, conclusions can enter the conventional wisdom. The concept of a Keynesian stimulus may suffer this fate.

The Keynesian approach suggests that during a recession the government can stimulate the economy via spending to replace economic demand from private markets. An alternative approach championed by Milton Friedman suggests that monetary policy is more important than fiscal policy.

Democrats have traditionally favored a Keynesian approach, in no small part because it provides an additional excuse for the government to initiate spending programs to address Democratic priorities.

When President Barack Obama came into office, it was natural for the progressive to institute a massive, nearly trillion-dollar stimulus. So confident were Democrats in the efficacy of the stimulus that they promised that unemployment would not exceed 8%. We were warned that if no stimulus were instituted, unemployment would reach 9%. We now know that following the stimulus, unemployment blasted past 10%. Moreover, growth remains anemic and unemployment two-and-half years after the stimulus still exceeds 9%. More disappointing is that the officialunemployment value would be far higher if so many people had not given up hope of finding a job. The lack of growth and employment has reduced revenues exacerbating the deficit.

It is rhetorically convenient to declare in the face of these facts that Keynesism is dead, believe by only those immune to the evidence. I lend far more weight to the Friedman approach and would love to offer our current situation as definitive proof.

However, let me offer a slightly heretical view. While the current situation lends no support to the Keynesian idea of stimulus, the regulatory anchor on growth makes it impossible to tell whether the stimulus has indeed failed. Perhaps It is economic uncertainty that is restraining the economy irrespective of the stimulus.

Companies are uncertain because of a massive influx of regulations. Obamacare has passed, and mountains of rules based on the legislation are still being written. Companies, particularly small ones, are reluctant to hire uncertain of what Obamacare would require of them. The Dodd-Frank bill to regulate financial markets has introduced new banking regulations. Until these are finalized and better understood, there will be a backward tug restraining lending. This is not to mention the new regulatory aggressiveness of the the EPA anxious to implement policies bureaucratically that could never be passed legislatively. The EPA has more regulatory actions pending that the Department of Human Services which is responsible for implementing Obamacare.

Imagine the metaphor of the stimulus package being a foot on the accelerator of the economic car, with a chain of regulations strapped to the bumper. The stimulus accelerator may or may not work, but the regulatory chains make it impossible to diagnose whether the accelerator is functioning properly. The Keynesian approach may deserve death, but the current situation cannot be said to have inflicted the true final blow.

3 Responses to “It’s Not the Stimulus It’s the Regulation”

  1. Buzzcook says:

    Obama and his administration are not liberal. The stimulus was inadequate and poorly managed, much of the funds have yet to be invested.

    While the economy left by Bush jr is much worse than that left by Bush the elder, the challenges are the same. Obama could have passed a sane budget as Clinton did in 93 with 50 votes and Al Gore. Instead he continued the Bush tax cuts and the Bush policy of giving free money to bankers.

    I hope the charts show up.

  2. Frank Monaldo says:

    For the record, the Bush-I left an economy growing at 5% a year, pretty darn good.

    In 2001, the economy was already about to go into mild recession (the bust) and then 9/11 happened. After that we we had solid growth and lower unemployment until the housing bust. That was partially due to too easy money by the fed and gov’t eagerness to encourage home ownership.

    A better comparison is plotting 1981 vs 2009 recession as measured from peak unemployment. During the Reagan years, the peak unemployment was worse 10.8% vs 10.2%, but under the current circumstances unemployment is far more stubborn. To be comparable to the Reagan recovery unemployment would have to be 7.5% now rather than 9.1%. Moreover, the Reagan recovery had to occur under the head winds of extreme high inflation and interest rates.

  3. Frank Monaldo says:

    One other point. Why is the election day the important metric to start counting to measure a presidency. There is a case to be made the any effect of any administration would gradually begin from 6e monts to a year after assuming office. Counting from election day would make Obama responsible for virtually all the unemployment. Is that fair.

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