I have been avoiding posting on anything serious lately because I promised Mrs. A after seeing all the jaguars we did in Brazil that I would be in a good mood for 6 months!
One thing that I do find interesting is the clash between the supposed urgency of political action and the implementation of policy that is contained inside the action plan.
Consider first the stimulus bill. President O insisted in fast action using semi-apocalyptic rhetoric to help insure very quick passage. Later, as unemployment rose faster than original no-stimulus projections, and people were either labeling the bill a failure or calling for a second stimulus, President O pointed out, correctly, that it was way too early to judge the bill, because the main chunk of spending wouldn't hit the economy until the second quarter of 2010!
Does anyone beside me think that is funny? By then, according to most forecasts, we should be into a recovery. Hey, maybe that's why fiscal policy is often pro-cyclical? So it will seem like it's working?
It seems like the same course is being taken with health care reform. The cause is urgent, action must be taken now, but I am pretty sure that many of the proposals in the bills under consideration do not take effect until years after passage!
It will be interesting to see if "hurry up and wait" works again.
9 comments:
I'm not an economist, so I'm not sure if this makes sense, but is it possible that the urgency to pass the legislation (esp. the stimulus) was designed to have some immediate effect (e.g. improve investor confidence, etc.) even though the actual economic impact will be well in the future?
Well duh. The urgency is associated with passing the legislation, not what the legislation implements. If it doesn't pass now, it won't pass, because the political will won't be there later.
If you have a heart attack, it's important to get treatment quickly, but it takes a long time to recover. Our economy had a heart attack. Now we're recovering.
Oh, right; as long as it's a noble lie. So why can't we scare everyone into really doing something about climate change?!
David C: yes but this is the case that you have a heart attack, you go to the emergency room right away, the doctor immediately prescribes a treatment, and then tells you to start it in 6 months or so!!
well it's always going to be in any politician's interest to act in the short term considering the set time-table to his rule. He needs to appear to be doing something in order to get reelected. Like that fraud FDR, it is in his interest to appear to have fixed things in the short-run even if it means screwing over future generations.
The economy responds very strongly to expectations. If there's an expectation of an effective recovery policy in the works, businesses will respond by making investments that will in turn help the economy recover even sooner. So passing the bill was urgent, to stop the bleeding. Now the economy is trying to figure out how well the stimulus will work, and how soon. If we'd waited to pass the stimulus, the market would continue its horrific slide. A slow stimulus might not be the best, policy uncertainty is worse. No-one invests when they don't know what drastic move the government is going to take next. This was much of the problem over the winter with paulson and co. Pick with something and stick with it, even if it's not perfect. Business will figure out the rest.
Anon 11:45PM,
I totally agree with your last two sentences, and have heard too few people point this out. Uncertainty = risk.
However, I think business is too smart to have "an expectation of an effective recovery policy in the works". The masses may be convinced, but when it comes to executives at individual firms and market analysts, they have to assess the impact of policies to their industries. Very few are better off by way of this recovery plan. However, once firms know the rules of the game, they can devise/communicate a plan for increased future earnings. A policy of "the government's not going to do anything" would have been equally as effective for the majority of firms.
politics, like banking, trades in intertemporal transformation. sell long term debt and fund it with short term debt. nothing new here.
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