Wednesday, July 28, 2010

New Study Provides Theoretical Cover For Further Stimulus

In lieu of an economic downturn that puts unproductive enterprises out of business, America opted to mortgage its future earnings in perpetuity and possibly even its sovereignty.  Two prominent economists have now provided an empirical gloss for the nation's immaturity:

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

Each of those points is contentious.  TARP's impact may have exceeded that of the fiscal stimulus but it will still probably result in a very large loss for the taxpayer.  It's disingenuous to argue that 8.5mm jobs have been saved when many of those jobs are in sectors that have been partially nationalized - automakers and financial services among them. More government control will make those sectors less productive and more corrupt.  The economy is already experiencing some deflation in asset prices that will permanently crimp consumer spending in a reverse of the "wealth effect."  I could go on and on. 

I don't trust this study.  It can be easily used by proponents of a second fiscal stimulus to accelerate the federal government's rush into insolvency.  A Second Great Depression wouldn't be so bad if it would only bankrupt economists who think we need more stimulus.