Speaking of bad assumptions, Kevin Hassett and Glenn Hubbard, in an op-ed in the Washington Post, make what looks to me a pretty good case that there’s an intrinsic contradiction in the economic case the President Obama is making:
A Keynesian stimulus like the one the Obama administration advanced in 2009 would be appropriate if a recession were expected to be short and deep, followed by a quick and robust recovery. Such a stimulus has three stages: the initial short increase in GDP from the spending, a subsequent phase of approximately equal reductions in GDP after the stimulus runs out, and then an additional reduction in GDP when higher borrowing or taxes are needed to pay for the stimulus. If you expect a recession to be long and drawn out, a Keynesian stimulus is likely to be ineffective, because the hangover from the second two stages could easily push the economy back into recession. In such a world, policies that stimulate long-run growth such as fiscal consolidation and tax reform are clearly preferable to a Keynesian stimulus.
Thus the administration’s economics suggest mistakes of diagnosis or cure, or both. If the Obama administration believes that the Reinhart and Rogoff analysis is correct, then the White House should concede that it was mistaken when it proposed a stimulus that would boost growth for only a short time, and it should stop calling for marginal hikes in tax rates.
If the president wants to continue claiming that the stimulus was the appropriate economic policy and that we can afford the damage from higher taxes because growth is going to be high in the near future, then he should concede that Reinhart and Rogoff’s results do not explain the slow recovery of the U.S. economy — and that the more likely explanation is the failure of his own policies.
I think the mechanics of the Obama Administration’s fiscal policies went something like this in its early days. Very early on the White House, determined not to let a good crisis go to waste, had arrived at a number that they had concluded was the largest stimulus package they could get through the Congress. Its economic advisor, unethically, groomed their reports to conform to that number, providing intellectual cachet for what was, in fact, a political judgment.
Once the details had gone through the Congress it was much what one might expect. It scratched itches that had been festering for years, rewarded friends, punished enemies, and, generally, maximized the political benefit of fiscal stimulus rather than its economic benefit. Whatever you think of fiscal stimulus in theory I think that we should all agree that in practice what actually happened was inadequate to the need.